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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, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-21969
Ciena Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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23-2725311 |
(State or other jurisdiction of
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(I.R.S. Employer |
Incorporation or organization)
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Identification No.) |
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1201 Winterson Road, Linthicum, MD
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21090-2205 |
(Address of principal executive offices)
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(Zip Code) |
(410) 865-8500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value
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The NASDAQ Stock Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. YES þ NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES o NO þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.4-5 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
YES o 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 approximately $929.3 million based on the closing price of the Common Stock on the
NASDAQ Global Select Market on May 2, 2009.
The number of shares of Registrants Common Stock outstanding as of December 11, 2009 was
92,038,629.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the Registrants
definitive proxy statement for its 2010 Annual Meeting of Stockholders to be filed with the
Commission not later than 120 days after the end of the fiscal year covered by this report.
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CIENA CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED OCTOBER 31, 2009
TABLE OF CONTENTS
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PART I
The information in this annual report contains certain forward-looking statements, including
statements related to our business prospects, the 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
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our optical
service delivery and carrier Ethernet service delivery products are used individually, or as part
of an integrated solution, in communications networks operated by service providers, cable
operators, governments and enterprises around the globe.
We are a network specialist targeting the transition of disparate, legacy communications
networks to converged, next-generation architectures, better able to handle increased traffic and
deliver more efficiently a broader mix of high-bandwidth communications services. Our products,
with their embedded, network element software and our unified service and transport management,
enable service providers to efficiently and cost-effectively deliver critical enterprise and
consumer-oriented communication services. Together with our professional support and consulting
services, our product offerings seek to offer solutions that address the business challenges and
network needs of our customers. Our customers face an increasingly challenging and rapidly changing
environment that requires them to quickly adapt their business strategies and deliver new,
revenue-creating services. By improving network productivity, reducing operating costs and
providing the flexibility to enable new and integrated service offerings, our offerings create
business and operational value for our customers.
Pending Acquisition of Optical and Carrier Ethernet Assets of Nortel Metro Ethernet Networks (MEN) Business
Following our emergence as the winning bidder in the bankruptcy auction, we agreed to acquire
substantially all of the optical networking and carrier Ethernet assets of Nortels Metro Ethernet
Networks (MEN) business for $530 million in cash and $239 million in aggregate principal amount of
6% senior convertible notes due June 2017. The terms of the notes to be issued upon closing are set
forth in Note 22 of the Consolidated Financial Statements found under Item 8 of Part II of this
annual report. Nortels product and technology assets to be acquired include:
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long-haul optical transport portfolio; |
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metro optical Ethernet switching and transport solutions; |
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Ethernet transport, aggregation and switching technology; |
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multiservice SONET/SDH product families; and |
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network management software products. |
In addition to these products, the acquired operations also include network implementation and
support services. The assets to be acquired generated approximately $1.36 billion in revenue for
Nortel in fiscal 2008 and approximately $556 million (unaudited) in the first six months of
Nortels fiscal 2009.
The pending acquisition encompasses a business that is a leading provider of next-generation,
40G and 100G optical transport technology with a significant, global installed base. The acquired
transport technology allows network operators to upgrade their existing 10G networks to 40G
capability, quadrupling capacity without the need for new fiber deployments or complex network
re-engineering. In addition to transport capability, the optical platforms acquired include traffic
switching and aggregation capability for traditional protocols such as SONET/SDH as well as newer
packet protocols such as Ethernet. A suite of software products used to manage networks built from
these technologies is also part of the transaction.
We believe that the transaction provides an opportunity to significantly transform Ciena and
strengthen our position as a leader in next-generation, automated optical Ethernet networking. We
believe that the additional resources, expanded geographic reach, new and broader customer
relationships, and deeper portfolio of complementary network solutions derived from the transaction
will augment Cienas growth. We also expect that the transaction will add scale, enable operating
model synergies and provide an opportunity to optimize our research and development investment. We
expect these benefits of the transaction will help Ciena to better compete with traditional, larger
network vendors.
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We expect to make employment offers to at least 2,000 Nortel employees to become part of
Cienas global team of network specialists. The transaction will significantly enhance our existing
Canadian-based development resources, making Ottawa our largest product and development center.
Given the structure of the transaction as an asset carve-out from Nortel, we expect that the
transaction will result in a costly and complex integration with a number of operational risks. We
expect to incur integration-related costs of approximately $180 million, with the majority of these
costs to be incurred in the first 12 months following the completion of the transaction. We also
expect to incur significant transition services expense, and we will rely upon an affiliate of
Nortel to perform certain operational functions during an interim period following closing not to
exceed two years.
We expect this pending transaction to close in the first calendar quarter of 2010. If the
closing does not take place on or before April 30, 2010, the applicable asset sale agreements may
be terminated by either party. Ciena has been granted early termination of the antitrust waiting periods under the
Hart-Scott-Rodino Act and the Canadian Competition Act. On December 2, 2009, the bankruptcy courts
in the U.S. and Canada approved the asset sale agreement relating to Cienas acquisition of
substantially all of the North American, Caribbean and Latin American and Asian optical networking
and carrier Ethernet assets of Nortels MEN business. Completion of the transaction remains subject
to information and consultation with employee representatives and employees in certain
international jurisdictions, an additional regional regulatory clearance and customary closing
conditions.
Financial Overview Fiscal 2009 and Effect of Market Conditions
Our results of operations for fiscal 2009 reflect the weakness, volatility and uncertainty
presented by the global market conditions that we encountered during the year. Our results reflect
cautious spending among our largest customers during fiscal 2009, as they sought to conserve
capital, reduce debt or address uncertainties or changes in their own business models brought on by
broader market challenges. As a result, we experienced lower demand across our customer base in all
geographies, as well as lengthening sales cycles, customer delays in network build-outs and slowing
deployments. We generated revenue of $652.6 million in fiscal 2009, representing a 27.7% decrease
from fiscal 2008 revenue of $902.4 million. Net income decreased from $38.9 million, or $0.42 per
diluted share, in fiscal 2008, to a loss of $581.2 million, or $6.37 per diluted share, in fiscal
2009, reflecting a goodwill impairment charge of $455.7 million in the second quarter of fiscal
2009. We generated $7.4 million in cash from operations during fiscal 2009 compared to
$117.6 million in cash from operations during fiscal 2008. For more information regarding our
results of operations and market conditions, see Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7 of Part II of this annual report.
Business Segment Data and Certain Financial Information
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 and
customers representing greater than 10% of revenue.
Corporate Information and Access to SEC Reports
We were incorporated in Delaware in November 1992, and completed our initial public offering
on February 7, 1997. Our principal executive offices are located at 1201 Winterson Road, Linthicum,
Maryland 21090. Our telephone number is (410) 865-8500, and our web site address is
www.ciena.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of charge on the
Investor Relations page of our web site as soon as reasonably practicable after we file these
reports with the Securities and Exchange Commission (SEC). We routinely post the reports above,
recent news and announcements, financial results and other important information about our business
on our website at www.ciena.com. Information contained on our web site is not a part of this annual
report.
Industry Background
The markets in which we sell our equipment and services have been subject to dynamic changes
in recent years, including increased competition, growth in traffic, expanded service offerings,
and evolving market opportunities and challenges.
Increased Network Capacity Requirements and Multiservice Traffic Driving Increased Transmission
Speeds and Flexible Infrastructures
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Todays networks are experiencing strong traffic growth and new service demands, especially in
the access and metro portions of wireline networks and the backhaul portions of wireless networks.
Increasing use of and reliance upon communications services by consumer and enterprise end users
for a wide range of personal and business tasks, and the expansion of high-bandwidth, wireline and
wireless service offerings, are driving increased network capacity requirements. Business customers
seeking to improve automation, efficiency and productivity have become increasingly dependent upon
enterprise-oriented communications and data services. As their workforces are becoming more mobile,
enterprises are driving demand for seamless access to these business applications. In addition,
enterprise technology trends such as IT virtualization and cloud computing are also placing new
capacity and service requirements on networks. At the same time, with consumer adoption of
broadband technologies, including peer-to-peer Internet applications, video services, online
gaming, music downloads and mobile web and data services, an increasing portion of network traffic
is consumer-driven. This shift presents a challenge to service providers because, historically,
consumers pay a lower price for their bandwidth usage than enterprises, yet they are becoming a
bigger portion of overall traffic demand. All of these factors are requiring networks to be more
flexible, scalable and cost effective.
This traffic growth is driving networks to achieve increased transmission speeds, including
the emergence of 40G and 100G optical transport technology. The growing mix of high-bandwidth
traffic, and an increasing focus on controlling network costs, is also driving a transition from
multiple, disparate networks based on SONET/SDH to more efficient, converged, multi-purpose
Ethernet/IP-based network architectures. As a global standard that is widely deployed, we believe
that Ethernet is an ideal technology for reducing cost and consolidating multiple services on a
single network. The industry has seen network technology transitions like this in the past. These
large investment cycles tend to happen over multi-year periods. For instance, from the mid 1980s to
the mid 1990s, service providers focused network upgrades on the transition required to digitize
voice traffic. From the mid 1990s to the mid 2000s, service providers focused network upgrades on
the transition to SONET/SDH networks designed to reliably handle substantially more network
traffic. We believe that the industry is currently in the early stages of network transition to
multi-purpose Ethernet/IP-based network architectures that more efficiently handle the growing mix
of multiservice traffic. We see opportunities in providing a portfolio of carrier class solutions
that facilitate this transition to automated optical Ethernet networks.
Wireless Networks
Several years ago, data surpassed voice as the dominant traffic on wireline networks. This
transition drove substantial investment as service providers upgraded their wireline infrastructure
to accommodate higher bandwidth requirements and new usage patterns associated with new
applications and service offerings. A similar shift is now occurring in wireless networks. The
emergence of smart mobile devices that deliver integrated voice, audio, photo, video, email and
mobile web capabilities, like Apples iPhone, are rapidly changing the kind of traffic carried by
wireless networks. Like the wireline networks before them, wireless networks initially were
constructed principally to handle voice traffic, not the higher bandwidth, multiservice traffic
that has grown in recent years. As a result, wireless networks are undergoing significant change as
they evolve from todays second and third generation (2G and 3G) networks to include 4th
generation (4G) technologies, such as WiMax and LTE, intended to support data rates in the hundreds
of megabits per second. This evolution, together with growing mobility and expanding wireless
applications, will require upgrades to existing wireless infrastructure, including wireline
backhaul of mobile traffic.
Increased Competition Among Communications Service Providers and Effect on Network Investment
Competition continues to be fierce among communications services providers, particularly as
traditional telecommunications companies and cable operators look to offer a broader mix of
revenue-generating services. Service providers face new competitors, new technologies and intense
price competition while traditional sources of revenue from voice and enterprise data services are
under pressure. These dynamics place increased scrutiny and prioritization of network spending and
heightened focus on the return on investment of enhancing existing infrastructures or building new
communications networks. Service providers need to create and rapidly deliver new, robust service
offerings and dedicated communications at increasing speeds to differentiate from competitors and
grow their business. At the same time, they are increasingly seeking ways to reduce their network
operating and capital costs and create new service offerings profitably. By utilizing scalable
networks that are less complex, less expensive to operate and more adaptable, service providers can
derive increased value from their network investments through the profitable and efficient delivery
of new services.
Changes in Sourcing and Procurement Strategies
Challenging market conditions and the effects of the competitive landscape described above
have only increased efforts among service providers to control network infrastructure costs. These
conditions have resulted in the emergence of new sourcing and procurement strategies among service
providers. Some of our customers have recently undertaken efforts to outsource entirely the
building, operation and maintenance of their networks to suppliers or integrators. Others have
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indicated a procurement strategy to reduce the number of vendors from which they purchase equipment. We
have also experienced customer efforts to seek vendor financing or other purchasing mechanisms
intended to minimize or defer capital expenditures, or address business needs related to inventory
levels, lead times and operating costs. We believe that changes in procurement strategies,
particularly among our largest customers, will present opportunities, as well as significant
challenges, for equipment providers like us. In particular, we see our consultative approach and
expanded professional services offering as a key differentiator to help strengthen the strategic
role we play in our customers networks.
Carrier-Managed Services and Private Networks
Enterprises are increasingly requiring additional bandwidth capacity to support data
interconnection, facilitate global expansion of operations, enable employee mobility and utilize
video services. As information technology and communications services have taken on a strategic
role in operations, enterprises and government agencies have become more concerned about network
reliability and security, business continuity and disaster recovery. Many enterprises have also had
to address industry-specific compliance and regulatory requirements. These changing requirements
have driven service providers to ensure that their network infrastructures and service offerings
can meet the changing needs of their largest customers. As a result, service providers offer a wide
range of enterprise-oriented, carrier-managed services. In addition to this expansion of
carrier-managed services, a number of large enterprises, government agencies and research and
education institutions have decided to forego carrier-managed communications services in favor of
building their own, secure private networks, some on a global scale.
Shift in Value from Networks to Applications
In the past, enterprises and consumers perceived value in network connectivity. These end
users of networks now place a higher value on the services or applications accessed and delivered
over the network. As a result, service providers need to create, market and sell profitable
services as opposed to simply selling connectivity. Some examples of applications causing this
shift in value include:
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Virtualization. Virtualization moves a physical resource from a users desktop into
the network, thereby making more efficient use of information technology resources.
Virtualization has many appealing attributes such as lowering barriers of entry into
new markets, and even adding flexibility to scale certain aspects of a business faster
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Software as a Service. Software as a service involves the sale of an application
hosted as a service provided to end users, replacing standardized applications for
virtualized services and, in some cases, replacing aspects of the traditional IT
infrastructure. By way of example, traditional customer relationship management
applications can be replaced with services such as Salesforce.com. |
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Mobility. The increase in availability and improved ease of use of web-based
applications from mobile devices expands the reach of virtualized services beyond a
wireline connection. For instance, consumer-driven video and gaming are being
virtualized, allowing broad access to these applications, regardless of the device or
the network used. |
We believe these shifts will require communications network infrastructures to be able to be more
automated, robust and flexible.
Strategy
Our strategy has evolved to enable our customers to deal with the challenges and industry
trends discussed above. We started in the 1990s as a provider of intelligent optical transport
solutions. Our focus was on making the transport network scalable, flexible and resilient through
software-enabled automation. We enabled a new generation of mesh networking that allowed for new,
tiered services and reduced network operating expenditures. We then combined the economics of
Ethernet with our heritage of resilient optics, creating connection-oriented Ethernet products and
features with carrier-grade performance. We are entering a new stage of our strategic evolution
with a focus on enabling service delivery. For service providers, new services drive revenue
growth. For enterprises, new services support strategic business needs and improve operational
efficiency.
Our vision is to enable a service-driven network that is automated and programmable remotely
via software. Programmable networks allow our customers to adapt and scale as their business
models, services mix and market demands change. Through our current product portfolio and ongoing
research and development efforts, we seek to provide networking solutions, including hardware,
embedded software and management software, that allow our customers to rapidly and efficiently
introduce and provision new revenue-generating services while enabling operational cost savings. We
believe our innovation will allow tomorrows service-driven network to adapt and scale, manage
unpredictability, and eliminate barriers to new
services. In providing these solutions, we aim to change fundamentally the way our customers
compete.
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Our vision of a service-driven network is based on three key building blocks of our
FlexSelect Architecture:
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Programmable network elements capable of being rapidly reconfigured by software
applications; |
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Embedded and management software that increases automation; and |
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True Carrier Ethernet (TCE) technology to provide reliable, feature-rich and
cost-effective Ethernet to support a wider variety of services. |
Through these technology elements, we seek to offer customers the means to automate delivery and
management of a broad mix of services and enable a software-defined, service-agnostic network that
offers enhanced flexibility and is more cost-effective to deploy, scale and manage.
Incorporating this approach to service-driven networks into our strategy, we are pursuing the
following initiatives:
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Maintain and extend technology leadership in the transition from legacy network
infrastructures to automated optical Ethernet networking; |
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Build upon our consultative approach and expand our professional services offerings
to enhance the strategic value we bring to customer relationships in their design,
deployment and delivery of new services; and |
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Grow and diversify our customer base by expanding our geographic reach, addressing
new network applications and penetrating new market and customer segments. |
Customers and Markets
Our customer base and the markets into which we sell our equipment, software and services have
expanded in recent years as new market opportunities have emerged and our product portfolio has
grown to include additional products in the metro and access portions of communications networks.
The networking equipment needs of our customers vary, depending upon their size, location, the
nature of their end users and the applications or services that they deliver and support. We sell
our products and services through our direct sales force and third party channel partners in the
following markets:
Communications Service Providers
Our communications service provider customers include regional, national and international,
wireline and wireless carriers. These customers include AT&T, BT, Cable & Wireless, CenturyLink,
Clearwire, France Telecom, Korea Telecom, Qwest, Sprint, Tata Communications, Telmex, Verizon and
XO Communications. Traditional telecommunications service providers are our historical customer
base and continue to represent the largest contributor to our revenue. We provide service providers
with products from the network core to the edge to enable access. Our products enable service
providers to rapidly provision new services and reduce network costs by aggregating multiservice
traffic, or additional capacity, over a converged network. Our network offering enables 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 service
providers to support private networks and applications for enterprise users, including
carrier-managed services, wide area network consolidation, inter-site connectivity, storage and
Ethernet services.
Cable Operators
Our customers include leading cable and multiservice operators in the U.S. and
internationally. Our cable and multiservice operator customers rely upon us for carrier-grade,
optical Ethernet transport and switching equipment to support enterprise-oriented services. Our
platforms allow cable operators to integrate voice, video and data applications over a converged
infrastructure. Our products support key cable applications including broadcast and digital video,
voice over IP, video on demand and broadband data services.
Enterprise
Our enterprise customers include large, multi-site commercial organizations, including
participants in the financial, healthcare, transportation and retail industries. Our solutions can
enable enterprises to achieve operational improvements, increased automation and information
technology cost reductions. We offer equipment, software and services that facilitate wide area
network consolidation, and storage extension for business continuity and disaster recovery. Our
products enable inter-site connectivity between data centers, sales offices, manufacturing plants,
retail stores and research and development centers, using an owned or leased private fiber network
or a carrier-managed service. Our products facilitate key enterprise
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applications including data, voice, video, Ethernet services, online collaboration, conferencing
and other business services. Our products also enable our enterprise customers to prevent
unexpected network downtime and ensure the safety, security and availability of their data.
Government, Research and Education
Our government customers include federal and state agencies in the U.S. as well as government
entities outside of the U.S. Our customers also include domestic and international research and
education institutions seeking to take advantage of technology innovation and facilitate increased
collaboration. Our products, software and services enable these customers to improve network
performance, capacity, security, reliability and flexibility. Our products also enable government
agencies and research and education institutions to build their own secure, private networks.
Products and Services
We offer a portfolio of communications networking equipment and management software that form
the building blocks of a service-driven network. Our product portfolio consists of our optical
service delivery products and our carrier Ethernet service delivery products. Together with our
professional services, these offerings provide solutions to address the business needs of our
customers and the tools necessary to face the market and technological challenges described above.
We have focused our product and service offerings on the following critical portions of the
network: core networking, full-service metro, managed services and enterprise, and mobile backhaul.
In the networks core, we deliver transport and switching equipment that creates an automated,
dynamic optical infrastructure supporting a wide variety of network services. In the metro portion
of the network, we deliver a comprehensive, converged transport and switching solution that manages
circuits, wavelengths and packets. In managed services applications and enterprise networks, we
enable services including storage, data connectivity, video and Ethernet services. In wireless and
backhaul networks, we provide wireline and wireless carriers with the tools to migrate their
networks to support mobile data applications and enable Ethernet-based backhaul.
Underpinning our product offerings are some common technology elements, including the key
building blocks of our FlexSelect Architecture described above. These elements appear across our
product portfolio and allow us to create differentiated solutions by combining various products
from the core to the edge of customers networks.
Optical Service Delivery
Our optical service delivery portfolio includes transport and switching platforms that act as
automated optical infrastructures for the delivery of a wide variety of enterprise and
consumer-oriented network services. These products address both the core and metro segments of
communications networks, as well as key managed service and enterprise applications.
Our principal core switching product is our CoreDirector® Multiservice Optical Switch.
CoreDirector is a multiservice, multi-protocol switching system that consolidates the functionality
of an add/drop multiplexer, digital cross-connect and packet aggregator, into a single,
high-capacity intelligent switching system. CoreDirectors mesh capability creates more efficient,
more reliable networks. In addition to its application in core networks, CoreDirector may also be
used in metro networks for aggregation and forwarding of multiple services, including Ethernet/TDM
Private Line, Triple Play and IP services. In 2009, we introduced our CoreDirector-FS, an expansion
of our CoreDirector offering incorporating our FlexSelect technology elements. We also introduced
our 5400 family of reconfigurable switching systems. These multi-terabit Ethernet, OTN and TDM
switching systems with integrated transport functionality can be flexibly configured to implement a
broad range of network elements including a scalable optical cross-connect, feature-rich Carrier
Ethernet switch, or a fully converged packet-optical transport and switching system. These new
platforms provide the capabilities and reliability of CoreDirector, while providing service
providers the ability to scale to higher capacities and transition to packet-based networks.
In nationwide networks, our switching elements are connected by a reliable long-haul transport
infrastructure. Our principal long-haul, core transport product is our CoreStream® Agility Optical
Transport System. CoreStream Agility is a flexible, scalable wavelength division multiplexing (WDM)
solution that enables cost-effective and efficient transport of voice, video and data related to a
variety of services for core networks as well as regional and metro networks.
Our optical service delivery solution in metro and regional networks is our CN 4200®
FlexSelect Advanced Services Platform family. Our CN 4200 family of products provides optical
transport, wavelength switching, TDM switching and packet switching, and includes a reconfigurable
optical add-drop multiplexer (ROADM), several chassis sizes and a comprehensive set of line cards.
Our CN 4200 platform is scalable and can be utilized from the customer premises, where space and
power are critical, to the metropolitan/regional core, where the need for high capacity and
carrier-class performance
are essential.
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Our optical service delivery products also include enterprise-oriented transport and switching
products designed for storage and LAN extension, interconnection of data centers over distance,
which, when used together with CN 4200, enable virtual private networks. These products address key
enterprise applications while reducing bandwidth usage through hardware compression and efficient
bandwidth utilization.
Carrier Ethernet Service Delivery
Our carrier Ethernet service delivery offering primarily consists of service delivery
switching products and service aggregation platforms. This offering also includes our legacy
broadband access products for residential services. These products allow customers to utilize the
automation and capacity created by our optical service delivery products in core and metro networks
and to deliver new, revenue-generating services to consumers and enterprises. Our carrier Ethernet
service delivery products have applications from the edge of the metro/core network to the customer
premises.
Our service delivery and aggregation switches provide True Carrier Ethernet, a more reliable
and feature rich type of Ethernet that can support a wider variety of services. These products
support the access and aggregation tiers of communications networks, and are typically deployed in
metro and access networks. Service delivery products are often used at customer premises locations
while aggregation platforms are used to combine service to improve network resource utilization.
Employing sophisticated carrier Ethernet switching technology, these products deliver quality of
service capabilities, virtual local area networking and switching functions, and carrier-grade
operations, administration, and maintenance features. In 2009, we introduced several additions to
our service delivery and aggregation offering intended to increase capacity for higher bandwidth
user connections and a broader set of aggregation and switching capabilities, such as enterprise
locations, backhaul from wireless cell sites, multi-tenant unit buildings and outside plant
cabinets. Initial deployment of these products have principally been in support of wireless
backhaul deployments, including, in large part, 4G WiMax, and business data services.
Our principal products for consumer broadband are our CNX-5 Broadband DSL System and CNX-5Plus
Modular Broadband Loop Carrier. These broadband access platforms allow service providers to
transition legacy voice networks to support next-generation services such as Internet-based (IP)
telephony, video services and DSL, and enable cost-effective migration to higher bandwidth Ethernet
network infrastructures.
Unified Software and Service Management Tools
Our optical service delivery and carrier Ethernet service delivery products include a shared
suite of embedded operating system software and network management software tools that serve to
unify our product portfolio and provide the underlying automation and management features. Our
embedded operating system is a robust, service aware operating system that improves network
utilization and availability, while delivering enhanced performance monitoring and reliability.
ON-Center® Network & Service Management Suite, our integrated network and service
management software, is designed to simplify network management and operation across our portfolio.
ON-Center can track individual services across multiple product suites, facilitating planned
network maintenance, outage detection and identification of customers or services affected by
network troubles. By increasing network automation, minimizing network downtime and monitoring
network performance and service metrics, our embedded operating system software and network
management software tools enable customers to improve cost effectiveness, while increasing the
performance and functionality of their network operations.
Consulting and Support Services
To complement our product portfolio, we offer a broad range of consulting and support services
that help our customers design, deploy and operationalize their services. We provide these
professional services through our internal services resources as well as through service partners.
Our services portfolio includes:
|
|
|
Network analysis, planning and design; |
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Network optimization and tuning; |
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Project management, including staging, site preparation and installation activities; |
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Deployment services, including turnkey installation and turn-up and test services;
and |
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Maintenance and support services, including helpdesk and technical assistance and
training, spares and logistics management, software updates, engineering dispatch,
advanced technical support and hardware and software warranty extensions. |
10
Product Development
Our industry is subject to rapid technological developments, evolving standards and protocols,
and shifts in customer demand. To remain competitive, we must continually enhance existing product
platforms by adding new features and functionality and introduce new product platforms that address
next-generation technologies and facilitate the transition to automated optical Ethernet
networking. Our current development investments are focused upon:
|
|
|
Data-optimized switching solutions and evolution of our CoreDirector family and 5400
family of reconfigurable switching solutions; |
|
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|
Extending and increasing capacity of our converged optical transport service
delivery portfolio, including 100G transport technologies and capabilities; |
|
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|
Expanding our carrier Ethernet service delivery portfolio, including larger Ethernet
aggregation switches; and |
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|
|
Extending the value of our network management software platform across our product
portfolio. |
Our product development investments are driven by market demand and technological innovation,
involving close collaboration among our product development, sales and marketing organizations and
input from customers. In some cases, we work with third parties pursuant to technology licenses,
OEM arrangements and other strategic technology relationships or investments, to develop new
components or products, modify existing platforms or offer complementary technology to our
customers. In addition, we participate in industry and standards organizations, where appropriate,
and incorporate information from these affiliations throughout the product development process.
We regularly review our product offerings and development projects to determine their fit
within our portfolio and broader strategy. We assess the market demand, prospective return on
investment and growth opportunities, as well as the costs and resources necessary to support these
products or development projects. In recent years, our strategy has been to pursue technology and
product convergence that allows us to consolidate multiple technologies and functionalities on a
single platform, or to control and manage multiple elements throughout the network from a uniform
management system, ultimately creating more robust and cost-effective network tools. We have also
shifted our strategic development approach from delivering point products to comprehensive
hardware, software and service solutions that address the business needs of our customers.
Our research and development expense was $127.3 million, $175.0 million and $190.3 million for
fiscal 2007, 2008 and 2009, respectively. For more information regarding our research and
development expense, see Managements Discussion and Analysis of Financial Condition and Results
of Operations in Item 7 of Part II of this report.
Sales and Marketing
We sell our communications networking equipment, software and services through our direct
sales resources as well as through 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 or facilitate new service offerings throughout our customers network.
We maintain a direct sales presence through which we sell our product and service offerings
into customer markets in the following geographic locations: North America, Central and Latin
America, Europe, Middle East and Africa, and Asia-Pacific. Within each geographic area, we maintain
regional and customer-specific teams, including sales professionals, systems engineers and
marketing, service and commercial management personnel, who ensure we operate closely with and
provide a high level of support to our customers.
We also maintain a channel program that works with resellers, systems integrators and service
providers to market and sell our products 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. Our use of channel partners has been a key component in
our sales to government, research and education and enterprise customers. Some of our service
provider customers also serve as channel partners through which we sell products and services as
part of their managed service offerings. We believe our channel strategy affords us expanded market
opportunities and reduces the financial risk of entering new markets and pursuing new customer
segments.
In support of our sales efforts, we engage in marketing activities intended to position and
promote both our brand and our product, software and service offerings. Our marketing team supports
sales efforts through direct customer interaction, industry events, public relations, general
business publications, tradeshows, our website and other marketing channels for our customers and
channel partners.
11
Manufacturing and Operations
Our manufacturing and operations personnel manage our relationships with our contract
manufacturers, our supply chain, our product testing and quality, and logistics relating to our
sales and distribution efforts. We utilize a global sourcing strategy that focuses on sourcing of
materials in lower cost regions such as Asia. We also rely on contract manufacturers, with
facilities principally in China and Thailand, to perform the majority of the manufacturing for our
products. We believe that this allows us to conserve capital, lower costs of product sales, adjust
quickly to changes in market demand, and operate without dedicating significant resources to
manufacturing-related plant and equipment. We utilize a direct order fulfillment model for certain
products. This allows us to rely on our contract manufacturers to perform final system integration
and test, prior to direct shipment of products from their facilities to our customers. For certain
product lines, we continue to perform a portion of the module assembly, final system integration
and testing.
Our contract manufacturers procure components necessary for assembly and manufacture of our
products based on our specifications, approved vendor lists, bill of materials and testing and
quality standards. Our contract manufacturers activity is based on rolling forecasts that we
provide to them to estimate demand for our products. This build-to-forecast purchase model exposes
us to the risk that our customers will not order those products for which we have forecast sales,
or will purchase less than we have forecast. As a result, we may incur carrying charges or obsolete
material charges for components purchased by our contract manufacturers. 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.
Shortages in components that we rely upon have occurred and are possible. Our products include
some components that are proprietary in nature and only available from one or a small number of
suppliers. Significant time would be required to establish relationships with alternate suppliers
or providers of proprietary components. We do not have long-term contracts with any supplier or
contract manufacturer that guarantees supply of components or manufacturing services. If component
supplies become limited, production at a contract manufacturer is disrupted, or if we experience
difficulty in our relationship with a key supplier or contract manufacturer, we may encounter
manufacturing delays that could adversely affect our business.
Backlog
Generally, we make sales pursuant to purchase orders issued under framework agreements that
govern the general commercial terms and conditions of the sale of our products and services. These
agreements do not obligate customers to purchase any minimum or guaranteed order quantities. At any
given time, we have orders for products that have not been shipped and for services that have not
yet been performed. We also have products that have been delivered and services that have been
performed that are awaiting customer acceptance. Generally, our customers may cancel or change
their orders with limited advance notice, or they may decide not to accept these products and
services. As a result, backlogged orders should not be viewed as an accurate indicator of future
revenue in any particular period. As of October 31, 2008 and 2009, our backlog was approximately
$301 million and $291 million, respectively. Backlog includes product and service orders from
commercial and government customers combined. Backlog at October 31, 2009 includes approximately
$54 million primarily related to orders for maintenance and support services that we do not
reasonably expect to be filled within the next fiscal year. Our presentation of backlog may not be
comparable with figures presented by other companies in our industry.
Seasonality
Like other companies in our industry, we have experienced quarterly fluctuations in customer
activity due to seasonal considerations. We have experienced reductions in customer order volume
toward the end of calendar year and again early in the calendar year as annual capital budgets are
finalized. We have also experienced reductions in order volume, particularly in Europe, during the
late summer months. As a result of these seasonal effects, we have experienced decreases in orders
during our fiscal first quarter, which ends on January 31 of each year, and our fiscal third
quarter, which ends on July 31 of each year. These seasonal effects do not apply consistently and
do not always correlate to our financial results. Accordingly, they should not be considered a
reliable indicator of our future revenue or results of operations.
Competition
Competition among providers of communications networking equipment, software and services is
intense. The markets for our products and services are characterized by rapidly advancing and
converging technologies. Competition in these markets is based on any one or a combination of the
following factors:
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product functionality and performance; |
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|
|
price; |
12
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incumbency and existing business relationships; |
|
|
|
development plans and the ability of products and services to meet customers
immediate and future network requirements; |
|
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flexibility and scalability of products; |
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manufacturing and lead-time capability; and |
|
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installation and support capability. |
Competition for sales of communications networking equipment is dominated by a small number of
very large, multinational companies. Our competitors have included Alcatel-Lucent, Cisco,
Ericsson, Fujitsu, Huawei, Nokia Siemens Networks, Nortel and Tellabs. These competitors have
substantially greater financial, operational and marketing resources than us. Many of our
competitors also have well-established relationships with large service providers. In recent years,
mergers among some of our larger competitors have intensified these advantages. Our industry has
also experienced increased competition from low-cost producers in Asia, which can contribute to
pricing pressure.
We also compete with several smaller, but established, companies that offer one or more
products that compete directly or indirectly with our offerings or whose products address specific
niches within the markets we address. These competitors include ADVA and Infinera. In addition,
there are a variety of earlier-stage companies with products targeted at specific segments of the
communications networking market. These competitors often employ aggressive competitive and
business tactics as they seek to gain entry to certain customers or markets. Due to these practices
and the narrower focus of their development efforts, these competitors may be able to develop and
introduce products more quickly, or offer commercial terms that are more attractive to customers.
Patents, Trademarks and Other Intellectual Property Rights
We rely upon patents, copyrights, trademarks, and trade secret laws to establish and maintain
proprietary rights in our technology. We regularly file applications for patents and trademarks and
have a significant number of patents and trademarks in the United States and other countries where
we do business. As of December 1, 2009, we had received 563 U.S. patents and had pending 189 U.S.
patent applications. Of the patents that have been issued, the earliest any will expire is March
19, 2010. We also rely on non-disclosure agreements and other contracts and policies regarding
confidentiality, with employees, contractors and customers to establish proprietary rights and
protect trade secrets and confidential information. Our practice is to require employees and
consultants to execute non-disclosure and proprietary rights agreements upon commencement of
employment or consulting arrangements with us. These agreements acknowledge our exclusive ownership
of intellectual property developed by the individual during the course of his or her work with us.
The agreements also require that these persons maintain the confidentiality of all proprietary
information disclosed to them.
Enforcing proprietary rights, especially patents, can be costly and uncertain. Moreover,
monitoring unauthorized use of our technology is difficult, and we cannot be certain that the steps
that we are taking will detect or prevent unauthorized use, particularly as we expand our
operations, product development and the manufacturing of our products internationally, into
countries that may not provide the same level of intellectual property protection as the United
States. In recent years, we have filed suit to enforce our intellectual property rights and have
been subject to several claims related to patent infringement. In some cases, resolution of these
claims has resulted in our payment of substantial sums. We believe that the frequency of patent
infringement claims is increasing as patent holders, including entities that are not in our
industry and who purchase patents as an investment or to monetize such rights by obtaining
royalties, use such claims as a competitive tactic and source of additional revenue. Third party
infringement assertions, even those without merit, could cause us to incur substantial costs. If we
are not successful in defending these claims, we could be required to enter into a license
agreement requiring ongoing royalty payments, we may be required to redesign our products, or we
may be prohibited from selling any infringing technology.
Our operating system, network and service management software and other products incorporate
software and components under licenses from third parties. We may be required to license additional
technology from third parties in order to develop new products or product enhancements. There can
be no assurance that these licenses will be available or continue to be available on acceptable
commercial terms. Failure to obtain or maintain such licenses or other rights could affect our
development efforts, require us to re-engineer our products or obtain alternate technologies, which
could harm our business, financial condition and operating results.
Environmental Matters
Our business and operations are subject to environmental laws in various jurisdictions around
the world, including the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain Hazardous
Substances in Electrical and Electronic Equipment (RoHS)
13
regulations adopted by the European Union.
We seek to operate our business in compliance with such laws relating to the materials and content
of our products and product takeback and recycling. Environmental regulation is increasing,
particularly outside of the United States, and we expect that our domestic and international
operations may be subject to additional environmental compliance requirements, which could expose
us to additional costs. To date, our compliance costs relating to environmental regulations have
not resulted in a material adverse effect on our business, results of operations or financial
condition.
Employees
As of October 31, 2009, we had 2,163 employees. None of our employees is represented by labor
unions or covered by a collective bargaining agreement. We have not experienced any work stoppages
and we consider the relationships with our employees to be good. We believe that our future success
depends in critical part on our continued ability to recruit, motivate and retain qualified
personnel.
Directors and Executive Officers
The table below sets forth certain information concerning our directors and executive
officers:
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|
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Name |
|
Age |
|
Position |
Patrick H. Nettles, Ph.D.
|
|
|
66 |
|
|
Executive Chairman of the Board of Directors |
Gary B. Smith
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|
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49 |
|
|
President, Chief Executive Officer and Director |
Stephen B. Alexander
|
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50 |
|
|
Senior Vice President, Chief Technology Officer |
Michael G. Aquino
|
|
|
53 |
|
|
Senior Vice President, Global Field Operations |
James E. Moylan, Jr.
|
|
|
58 |
|
|
Senior Vice President, Finance and Chief Financial Officer |
Andrew C. Petrik
|
|
|
46 |
|
|
Vice President and Controller |
David M. Rothenstein
|
|
|
41 |
|
|
Senior Vice President, General Counsel and Secretary |
Arthur D. Smith, Ph.D.
|
|
|
43 |
|
|
Senior Vice President, Chief Integration Officer |
Stephen P. Bradley, Ph.D. (2)(3)
|
|
|
68 |
|
|
Director |
Harvey B. Cash (1)(3)
|
|
|
71 |
|
|
Director |
Bruce L. Claflin (1)(2)
|
|
|
58 |
|
|
Director |
Lawton W. Fitt (2)
|
|
|
56 |
|
|
Director |
Judith M. OBrien (1)(3)
|
|
|
59 |
|
|
Director |
Michael J. Rowny (2)
|
|
|
59 |
|
|
Director |
Patrick T. Gallagher (2)
|
|
|
54 |
|
|
Director |
|
|
|
(1) |
|
Member of the Compensation Committee |
|
(2) |
|
Member of the Audit Committee |
|
(3) |
|
Member of the Governance and Nominations Committee |
Our Directors hold staggered terms of office, expiring as follows: Ms. Fitt, Dr. Nettles
and Mr. Rowny in 2010; Ms. OBrien and Messrs. Cash and Smith in 2011; and Messrs. Bradley, Claflin
and Gallagher in 2012. In accordance with Cienas bylaws, Mr. Gallagher will stand for election by
shareholders at the 2010 annual meeting to serve the remainder of the term above.
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
Apptrigger, Inc., a privately held company.
Gary B. Smith joined Ciena in 1997 and has served as President and Chief Executive Officer
since May 2001. Mr. Smith has served on Cienas Board of Directors since October 2000. Mr. Smith
also serves on the board of directors for CommVault Systems, Inc. Mr. Smith also serves as a member
of the Global Information Infrastructure Commission.
Stephen B. Alexander joined Ciena in 1994 and has served as Chief Technology Officer since
September 1998 and as a Senior Vice President since January 2000. Mr. Alexander has previously
served as General Manager of Products & Technology and General Manager of Transport and Switching
and Data Networking.
14
Michael G. Aquino joined Ciena in June 2002 and has served as Cienas Senior Vice President,
Global Field Operations
since October 2008. Mr. Aquino served as Senior Vice President of Worldwide Sales from April 2006
to October 2008. Mr. Aquino previously held positions as Cienas Vice President of Americas, with
responsibility for sales activities in the region, and Vice President of Government Solutions,
where he focused on supporting Cienas relationships with the U.S. and Canadian government.
James E. Moylan, Jr. has served as Senior Vice President, Finance and Chief Financial Officer
since December 2007. From June 2006 to December 2007, Mr. Moylan served as Executive Vice President
and Chief Financial Officer of Swett & Crawford, a wholesale insurance broker. From March 2004 to
February 2006, Mr. Moylan served as Executive Vice President and Chief Financial Officer of
PRG-Shultz International, Inc., a publicly held recovery audit and business services firm. From
June 2002 to April 2003, Mr. Moylan served as Executive Vice President in charge of Composite
Panels Distribution and Administration for Georgia-Pacific Corporations building products
business. From November 1999 to May 2002, Mr. Moylan served as Senior Vice President and Chief
Financial Officer of SCI Systems, Inc., an electronics contract manufacturing company.
Andrew C. Petrik joined Ciena in 1996 and has served as Vice President, Controller since
August 1997.
David M. Rothenstein joined Ciena in January 2001 and has served as Senior Vice President,
General Counsel and Secretary since November 2008. Mr. Rothenstein served as Vice President and
Associate General Counsel from July 2004 to October 2008 and previously as Assistant General
Counsel.
Arthur D. Smith, Ph.D. joined Ciena in May 1997 and has served as Chief Integration Officer
since December 2009. Dr. Smith assumed this new role in support of the substantial integration
effort associated with our acquisition of substantially all of the optical networking and carrier
Ethernet assets of Nortels Metro Ethernet Networks (MEN) business. Dr. Smith previously served as
Cienas Chief Operating Officer from October 2005 to December 2009. 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.
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 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 i2 Technologies, Inc. and the Risk Management
Foundation of the Harvard Medical Institutions.
Harvey B. Cash has served as a Director of Ciena since April 1994. Mr. Cash is a general
partner of InterWest Partners, a venture capital firm in Menlo Park, California, that he joined in
1985. Mr. Cash serves on the board of directors of First Acceptance Corp., Silicon Laboratories,
Inc. and Argonaut Group, Inc.
Bruce L. Claflin has served as a Director of Ciena since August 2006. Mr. Claflin served as
President and Chief Executive Officer of 3Com Corporation from January 2001 until his retirement in
February 2006. Mr. Claflin joined 3Com as President and Chief Operating Officer in August 1998.
Prior to 3Com, Mr. Claflin served as Senior Vice President and General Manager, Sales and
Marketing, for Digital Equipment Corporation. Mr. Claflin also worked for 22 years at IBM, where he
held various sales, marketing and management positions, including general manager of IBM PC
Companys worldwide research and development, product and brand management, as well as president of
IBM PC Company Americas. Mr. Claflin also serves on the board of directors of Advanced Micro
Devices (AMD) where he is currently Chairman of the Board.
Lawton W. Fitt has served as a Director of Ciena since November 2000. From October 2002 to
March 2005, Ms. Fitt served as Director of the Royal Academy of Arts in London. From 1979 to
October 2002, Ms. Fitt was an investment banker with Goldman Sachs & Co., where she was a partner
from 1994 to October 2002, and a managing director from 1996 to October 2002. Ms. Fitt serves on
the board of directors of Thomson Reuters Corporation, Frontier Communications Corporation, The
Progressive Corporation and Overture Acquisition Corp.
Judith M. OBrien has served as a Director of Ciena since July 2000. Since November 2006, Ms.
OBrien has served as Executive Vice President and General Counsel of Obopay, Inc., a provider of
mobile payment services. From February 2001 until October 2006, Ms. OBrien served as a Managing
Director at Incubic Venture Fund, a venture capital firm. From February 1984 until February 2001,
Ms. OBrien was a partner with Wilson Sonsini Goodrich & Rosati, where she specialized in corporate
finance, mergers and acquisitions and general corporate matters.
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
15
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.
Patrick T. Gallagher has served as a Director of Ciena since May 2009. Mr. Gallagher currently
serves as Chairman of Ubiquisys Ltd., a leading developer and supplier of femtocells for the global
3G mobile wireless market. From January 2008 until February 2009, Mr. Gallagher was Chairman of
Macro 4 plc, a global software solutions company, and from May 2006 until March 2008, served as
Vice Chairman of Golden Telecom Inc., a leading facilities-based provider of integrated
communications in Russia and the CIS. From 2003 until 2006, Mr. Gallagher was Executive Vice
Chairman and served as Chief Executive Officer of FLAG Telecom Group and, prior to that role, held
various senior management positions at British Telecom. Mr. Gallagher also serves on the board of
directors of Harmonic Inc. and Sollers JSC.
Item 1A. Risk Factors
Risks relating to our pending acquisition of certain Nortel Metro Ethernet Networks (MEN) Assets
Business combinations involve a high degree of risk. In addition to the other information
contained in this report, you should consider the following risk factors related to our pending
acquisition of certain Nortel MEN assets before investing in our securities.
The pending transaction may not be completed, may be delayed or may result in the imposition of
conditions that could have a material adverse effect on Cienas operation of the business following
completion.
In addition to customary closing conditions, completion of the pending transaction is
conditioned upon the receipt of certain governmental clearances or approvals that have not yet been
obtained, including, without limitation, the Investment Canada Act and regional bankruptcy
approvals in France and Israel. Completion of the transaction is also subject to information and
consultation with employee representatives and/or employees in certain international jurisdictions.
Ciena has previously been granted early termination of the antitrust waiting period under the
Hart-Scott-Rodino Act and the Canadian Competition Act. There can be no assurance that these
clearances and approvals will be obtained and that previous clearances will be maintained. Third
parties could petition to have governmental entities reconsider previously granted clearances. In
addition, the governmental entities from which clearances and approvals are required may impose
conditions on the completion of the transaction, require changes to the terms of the transaction or
impose restrictions on the operation of the business following completion of the transaction. If
the transaction is not completed, completion is delayed or Ciena becomes subject to any material
conditions in order to obtain any clearances or approvals required to complete the transaction, its
business and results of operations may be adversely affected and its stock price may suffer.
We may fail to realize the anticipated benefits and operating synergies expected from the
transaction, which could adversely affect our operating results and the market price of our common
stock.
The success of the transaction will depend, in significant part, on our ability to
successfully integrate the acquired business and realize the anticipated benefits and operating
synergies to be derived from the combination of the two businesses. We believe that the additional
resources, expanded geographic reach, new and broader customer relationships, and deeper portfolio
of complementary network solutions derived from the pending transaction will accelerate the
execution of our corporate and product development strategy and provide opportunities to optimize
our product development investment. Actual cost, operating, strategic and sales synergies, if
achieved at all, may be lower than we expect and may take longer to achieve than anticipated. If we
are not able to adequately address the integration challenges above, we may be unable to realize
the anticipated benefits of the transaction. The anticipated benefits of the transaction may not be
realized fully or at all or may take longer to realize than expected. If we are not able to
achieve these objectives, the value of Cienas common stock may be adversely affected.
Our pending acquisition will result in significant integration costs and any material delays or
unanticipated additional expense may harm our business and results of operations.
We expect the magnitude of the integration effort will be significant and that it will require
material capital and operating expense by Ciena. We currently expect that integration expense
associated with equipment and information technology costs, transaction expense, and consulting and
third party service fees associated with integration, will be approximately $180 million over a
two-year period, with a significant portion of such costs anticipated to be incurred in the first
year after completion of the transaction. This amount does not give effect to any expense related
to, among other things, facilities restructuring or inventory obsolescence charges. This amount
also does not give effect to higher operating expense associated with transition services described
below. As a result, the integration expense we incur and recognize for financial statement purposes
could be significantly higher. Any material delays or unanticipated additional expense may harm our
business and results of operations.
16
The integration of the acquired assets will be extremely complex and involve a number of risks.
Failure to successfully integrate our respective operations, including the underlying information
systems, could significantly harm our business and results of operations.
Because of the structure of the transaction, as an asset carve out from Nortel, upon
completion of the transaction we will not be integrating an entire enterprise, with the back-office
systems and processes that make the business run, when we complete this transaction. We must build
the infrastructure and organizations, and retain third party services, to ensure business
continuity and to support and scale our business. Integrating our operations will be extremely
complex and there is no assurance that we will not encounter material delays or unanticipated costs
that would adversely affect our business and results of operations. Successful integration involves
numerous risks, including:
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|
|
assimilating product offerings and sales and marketing operations; |
|
|
|
coordinating research and development efforts; |
|
|
|
retaining and attracting customers following a period of significant uncertainty
associated with the acquired business; |
|
|
|
diversion of management attention from business and operational matters; |
|
|
|
identifying and retaining key personnel; |
|
|
|
maintaining and transitioning relationships with key vendors, including component
providers, manufacturers and service providers; |
|
|
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integrating accounting, information technology, enterprise management and
administrative systems which may be difficult or costly; |
|
|
|
making significant cash expenditures that may be required to retain personnel or
eliminate unnecessary resources; |
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managing tax costs or liabilities; |
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|
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coordinating a broader and more geographically dispersed organization; |
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|
|
maintaining uniform standards, procedures and policies to ensure efficient and
compliant administration of the organizaton; and |
|
|
|
making any necessary modifications to internal control to comply with the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder. |
Delays encountered in the integration process, significant cost overruns and unanticipated
expense could have a material adverse effect on our operating results and financial condition.
Following completion of the transaction we will rely upon an affiliate of Nortel to perform certain
critical transition services during a transition period and there can be no assurance that such
services will be performed timely and effectively.
Following the completion of the transaction, we will rely upon an affiliate of Nortel for
certain transition services related to the operation and continuity of the business following
completion of the transaction. These services include, among others, critical functions relating to
accounting, information technology, maintenance services and facilities. We anticipate that
transition service-related expense will be significant and the administration and oversight of
these services will be complex. The transition service provider will be performing services on
behalf of Ciena as well as certain other purchasers of those businesses that Nortel has divested in
the course of its bankruptcy proceedings. Relying upon this transition services provider to perform
critical operations and services raises a number of significant business and operational risks,
including its ability to become an effective support partner for all of the Nortel purchasers,
segregation of such services, and its ability to retain experienced and knowledgeable personnel.
There can be no assurance such services will be performed timely and effectively. Significant
disruption in these transition services or unanticipated costs related to such services could
adversely affect our business and results of operations.
Upon the closing of the transaction, we will take on substantial additional indebtedness and
materially reduce our cash balance.
In accordance with the applicable asset purchase agreements, upon completion of the
transaction, we will pay the sellers $530 million in cash and issue them $239 million in aggregate
principal of senior convertible notes due in fiscal 2017. This cash expenditure will significantly
reduce our cash balance. In addition, the terms of the notes to be issued provide for an adjustment
of the interest rate up to a maximum of 8% per annum, depending upon the market price of our common
stock
17
upon the completion of the transaction. The lower cash balance and increased indebtedness
resulting from this transaction
could adversely affect our business. In particular, it could increase our vulnerability to
sustained, adverse macroeconomic weakness, limit our ability to obtain further financing and limit
our ability to pursue certain operational and strategic opportunities. Our indebtedness and lower
cash balance may also put us in a competitive disadvantage to other vendors with greater resources.
The transaction may expose us to significant unanticipated liabilities that could adversely affect
our business and results of operations.
Our purchase of the acquired business in connection with Nortels bankruptcy proceedings may
expose us to significant unanticipated liabilities. We may incur unforeseen liabilities relating to
the operation of the business including employment related obligations under applicable law or
benefits arrangements, legal claims, warranty or similar liabilities to customers, and claims by or
amounts owed to vendors, including as a result of any contracts assigned to Ciena in the
transaction. We may also incur liabilities or claims associated with our acquisition or licensing
of Nortels technology and intellectual property including claims of infringement. Our acquisition
of Nortels assets, particularly in international jurisdictions, could also expose us to tax
liabilities and other amounts owed by Nortel. The incurrence of such unforeseen or unanticipated
liabilities, should they be significant, could have a material adverse affect on our business,
results of operations and financial condition.
The transaction may not be accretive and may cause dilution to our earnings per share, which may
harm the market price of our common stock.
We currently anticipate that the transaction will be accretive to earnings per share for
fiscal 2011. This expectation is based on preliminary estimates which may materially change after
the completion of the transaction. We have previously incurred operating expense, on a stand alone
basis, higher than we anticipated for periods during fiscal 2009. The magnitude of the integration
relating to our pending transaction, together with the increased scale of our operations resulting
from the transaction, will make forecasting, managing and constraining our operating expense even
more difficult. We could also encounter additional transaction and integration-related costs or
fail to realize all of the benefits of the transaction that underlie our financial model and
expectations as to profitability. All of these factors could cause dilution to our earnings per
share or decrease or delay the expected accretive effect of the transaction and cause a decrease in
the price of our common stock.
The complexity of the integration and transition associated with our pending transaction, together
with the increased scale of our operations, may challenge our internal control over financial
reporting and our ability to effectively and timely report our financial results.
Following the completion of the pending transaction, we will rely upon a combination of Ciena
information systems and critical transition services that are necessary for us to accurately and
effectively compile and report our financial results. We will also have to train new employees and
third party providers, and assume operations in jurisdictions where we have not previously had
operations. The scale of these operations, together with the complexity of the integration effort,
including changes to or implementation of critical information technology systems, may adversely
affect our ability to report our financial results on a timely basis. We expect that the
transaction may necessitate significant modifications to our internal control systems, processes
and information systems. We cannot be certain that changes to our design for internal control over
financial reporting will be sufficient to enable management or our independent registered public
accounting firm to determine that our internal controls are effective for any period, or on an
ongoing basis. If we are unable to accurately and timely report our financial results, or are
unable to assert that our internal controls over financial reporting are effective, our business
and market perception of our financial condition may be harmed and the trading price of our stock
may be adversely affected.
Following our acquisition of the Nortel assets, the combined company must continue to retain,
motivate and recruit key executives and employees, which may be difficult in light of uncertainty
regarding the pending transaction and the significant integration efforts following closing.
For the pending transaction to be successful, during the period before the transaction is
completed, both Ciena and Nortel must continue to retain, motivate and recruit executives and other
key employees. Moreover, following the completion of the transaction, Ciena must be successful at
retaining and motivating key employees. Experienced employees, particularly with experience in
optical engineering, are in high demand and competition for their talents can be intense. Employees
of both companies may experience uncertainty, real or perceived, about their future role with the
combined company until, or even after, Cienas post-closing strategies are announced or executed.
These potential distractions may adversely affect the ability to retain, motivate and recruit
executives and other key employees and keep them focused on corporate strategies and objectives.
The failure to attract, retain and motivate executives and other key employees before and following
completion of the transaction could have a negative impact on Cienas business.
18
Risks related to our current business and operations
Investing in our securities involves a high degree of risk. In addition to the other
information contained in this report, you should consider the following risk factors before
investing in our securities.
Our business and operating results could be adversely affected by unfavorable macroeconomic and
market conditions and reductions in the level of capital expenditure by our largest customers in
response to these conditions.
Starting in the second half of fiscal 2008, our business began to experience the effects of
worsening macroeconomic conditions and significant disruptions in the financial and credit markets
globally. In the face of these conditions, many companies, including some of our largest
communications service provider customers, significantly reduced their network infrastructure
expenditures as they sought to conserve capital, reduce debt or address uncertainties or changes in
their own business models brought on by broader market challenges. Our business experienced
lengthening sales cycles, customer delays in network buildouts and slowing deployments, resulting
in lower demand across our customer base in all geographies. Our results of operations for fiscal
2009 were materially adversely affected by the weakness, volatility and uncertainty presented by
the global market conditions that we encountered during the year.
Broad macroeconomic weakness, customer financial difficulties, changes in customer business
models and constrained spending on communications networks have previously resulted in sustained
periods of decreased demand for our products and services that have adversely affected our
operating results. Challenging economic and market conditions may also result in:
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difficulty forecasting, budgeting and planning due to limited visibility into the
spending plans of current or prospective customers; |
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increased competition for fewer network projects and sales opportunities; |
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pricing pressure that may adversely affect revenue and gross margin; |
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higher overhead costs as a percentage of revenue; |
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increased risk of charges relating to excess and obsolete inventories and the write
off of other intangible assets; and |
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customer financial difficulty and increased risk of doubtful accounts receivable. |
Our business and financial results are closely tied to the prospects, performance, and
financial condition of our largest communications service provider customers and are significantly
affected by market or industry-wide changes that affect their businesses and their level of
infrastructure-related spending. These factors include the level of enterprise and consumer
spending on communications services, adoption of new communications services or applications and
consumption of available network capacity. We are uncertain as to how long current unfavorable
macroeconomic and industry conditions will persist and the magnitude of their effects on our
business and results of operations.
A small number of communications service providers account for a significant portion of our
revenue. The loss of any of these customers, or a significant reduction in their spending, would
have a material adverse effect on our business and results of operations.
A significant portion of our revenue is concentrated among a relatively small number of
communications service providers. Eight customers accounted for greater than 60% of our revenue in
fiscal 2009. Consequently, our financial results are closely correlated with the spending of a
relatively small number of communications service providers. The terms of our frame contracts
generally do not obligate these customers to purchase any minimum or specific amounts of equipment
or services. Because their spending may be unpredictable and sporadic, our revenue and operating
results can fluctuate on a quarterly basis. Reliance upon a relatively small number of customers
increases our exposure to changes in their network and purchasing strategies. Some of our customers
are pursuing efforts to outsource the management and operation of their networks, or have indicated
a procurement strategy to reduce or rationalize the number of vendors from which they purchase
equipment. These strategies may present challenges to our business and could benefit our larger
competitors. Our concentration in revenue has increased in recent years, in part, as a result of
consolidations among a number of our largest customers. Consolidations may increase the likelihood
of temporary or indefinite reductions in customer spending or changes in network strategy that
could harm our business and operating results. The loss of one or more large service provider
customers, or a significant reduction in their spending, as a result of the factors above or
otherwise, would have a material adverse effect on our business, financial condition and results of
operations.
19
Our revenue and operating results can fluctuate unpredictably from quarter to quarter.
Our revenue and results of operations can fluctuate unpredictably from quarter to quarter. Our
budgeted expense levels
depend in part on our expectations of long-term future revenue and gross margin, and
substantial reductions in expense are difficult and can take time to implement. Uncertainty or lack
of visibility into customer spending, and changes in economic or market conditions, can make it
difficult to prepare reliable estimates of future revenue and corresponding expense levels.
Consequently, our level of operating expense or inventory may be high relative to our revenue,
which could harm our ability to achieve or maintain profitability. Given market conditions and the
effect of cautious spending in recent quarters, lower levels of backlog orders and an increase in
the percentage of quarterly revenue relating to orders placed in that quarter could result in more
variability and less predictability in our quarterly results.
Additional factors that contribute to fluctuations in our revenue and operating results
include:
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broader economic and market conditions affecting us and our customers; |
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changes in capital spending by large communications service providers; |
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the timing and size of orders, including our ability to recognize revenue under
customer contracts; |
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variations in the mix between higher and lower margin products and services; and |
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the level of pricing pressure we encounter. |
Many factors affecting our results of operations are beyond our control, particularly in the
case of large service provider orders and multi-vendor or multi-technology network infrastructure
builds where the achievement of certain thresholds for acceptance is subject to the readiness and
performance of the customer or other providers, and changes in customer requirements or
installation plans. As a consequence, our results for a particular quarter may be difficult to
predict, and our prior results are not necessarily indicative of results likely in future periods.
The factors above may cause our revenue and operating results to fluctuate unpredictably from
quarter to quarter. These fluctuations may cause our operating results to be below the expectations
of securities analysts or investors, which may cause our stock price to decline.
We face intense competition that could hurt our sales and results of operations.
The markets in which we compete for sales of networking equipment, software and services are
extremely competitive, particularly the market for sales to large communications service providers.
The level of competition and pricing pressure that we face increases substantially during periods
of macroeconomic weakness, constrained spending or fewer network projects. As a result of current
market conditions, we have experienced significant competition and increased pricing pressure,
particularly for our optical transport products. We face particularly intense competition in our
efforts to attract additional large carrier customers in new geographies and secure new market
opportunities with existing carrier customers. In an effort to secure attractive long-term
customers or new customers, we may agree to pricing or other terms that that result in negative
gross margins on a particular order or group of orders.
Competition in our markets, generally, is based on any one or a combination of the following
factors: price, product features, functionality and performance, introduction of innovative network
solutions, manufacturing capability and lead-times, incumbency and existing business relationships,
scalability and the flexibility of products to meet the immediate and future network requirements
of customers. A small number of very large companies have historically dominated our industry.
These competitors have substantially greater financial, technical and marketing resources, greater
manufacturing capacity, broader product offerings and more established relationships with service
providers and other potential customers than we do. Because of their scale and resources, they may
be perceived to be better positioned to offer network operating or management service for large
carrier customers. Consolidation activity among large networking equipment providers has caused
some of our competitors to grow even larger, which may increase their strategic advantages and
adversely affect our competitive position.
We also compete with a number of smaller companies that provide significant competition for a
specific product, application, customer segment or geographic market. Due to the narrower focus of
their efforts, these competitors may achieve commercial availability of their products more quickly
or may be more attractive to customers.
Increased competition in our markets has resulted in aggressive business tactics, including:
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significant price competition, particularly from competitors in Asia; |
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customer financing assistance; |
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early announcements of competing products and extensive marketing efforts; |
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competitors offering equity ownership positions to customers; |
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competitors offering to repurchase our equipment from existing customers; |
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marketing and advertising assistance; and |
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intellectual property assertions and disputes. |
The tactics described above can be particularly effective in an increasingly concentrated base
of potential customers such as communications service providers. If competitive pressures increase
or we fail to compete successfully in our markets, our sales and profitability would suffer.
Our reliance upon third party manufacturers exposes us to risks that could negatively affect our
business and operations.
We rely upon third party contract manufacturers to perform the majority of the manufacturing
of our products and components. In recent years we have transitioned a significant portion of our
product manufacturing to overseas suppliers in Asia, with much of the manufacturing taking place in
China and Thailand. Some of our contract manufacturers ship products directly to our customers on
behalf of Ciena. Our reliance upon these manufacturers could expose us to increased risks related
to lead times, continued supply, on-time delivery, quality assurance and compliance with
environmental standards and other regulations. Reliance upon third parties for manufacture of our
products significantly exposes us to risks related to their business, financial position and
continued viability, which may be adversely affected by broader negative macroeconomic conditions
and difficulties in the credit markets. These conditions may disrupt their operations, result in
discontinuation of services, or result in pricing increases that affect our manufacturing
requirements. Disruptions to our business could also arise as a result of ineffective business
continuity and disaster recovery plans by our manufacturers. We do not have contracts in place with
some of our manufacturers and do not have guaranteed supply of components or manufacturing
capacity. We could also experience difficulties as a result of geopolitical events, military
actions or health pandemics in the countries where our products or components thereof are
manufactured. During the first quarter of fiscal 2009, protests resulted in a blockade of
Thailands main international airport, which delayed product shipments from one of our key contract
manufacturers. Significant disruptions or difficulties with our contract manufacturers could
negatively affect our business and results of operations.
Investment of research and development resources in technologies for which there is not a matching
market opportunity, or failure to sufficiently or timely invest in technologies for which there is
market demand, would adversely affect our revenue and profitability.
The market for communications networking equipment is characterized by rapidly evolving
technologies and changes in market demand. We continually invest in research and development to
sustain or enhance our existing products and develop or acquire new products technologies. Our
current development efforts are focused upon the evolution of our CoreDirector Multiservice Optical
Switch family, the expansion of our carrier Ethernet service delivery and aggregation products, and
the extension of our CN 4200 converged optical service delivery portfolio, including 100G
technologies and capabilities. There is often a lengthy period between commencing these development
initiatives and bringing a new or revised product to market. During this time, technology
preferences, customer demand and the market for our products may move in directions we had not
anticipated. There is no guarantee that new products or enhancements will achieve market acceptance
or that the timing of market adoption will be as predicted. There is a significant possibility,
therefore, that some of our development decisions, including our acquisitions or investments in
technologies, will not turn out as anticipated, and that our investment in some projects will be
unprofitable. There is also a possibility that we may miss a market opportunity because we failed
to invest, or invested too late, in a technology, product or enhancement. Changes in market demand
or investment priorities may also cause us to discontinue existing or planned development for new
products or features, which can have a disruptive effect on our relationships with customers. If we
fail to make the right investments or fail to make them at the right time, our competitive position
may suffer and our revenue and profitability could be harmed.
Product performance problems could damage our business reputation and negatively affect our results
of operations.
The development and production of highly technical and complex communications network
equipment is complicated. Some of our products can be fully tested only when deployed in
communications networks or when carrying traffic with other equipment. As a result, product
performance problems are often more acute for initial deployments of new products and product
enhancements. Our products have contained and may contain undetected hardware or software errors or
defects. These defects have resulted in warranty claims and additional costs to remediate.
Unanticipated problems can relate to the design, manufacturing, installation or integration of our
products. Performance problems and product malfunctions can also relate to defects in components,
software or manufacturing services supplied by third parties. Product performance, reliability and
quality problems can negatively affect our business, including:
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increased costs to remediate software or hardware defects or replace products; |
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payment of liquidated damages or similar claims for performance failures or delays; |
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increased inventory obsolescence; |
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increased warranty expense or estimates resulting from higher failure rates,
additional field service obligations or other rework costs related to defects; |
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delays in recognizing revenue or collecting accounts receivable; and |
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declining sales to existing customers and order cancellations. |
Product performance problems could also damage our business reputation and harm our prospects with
potential customers. These consequences of product defects or quality problems could negatively
affect our business 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 terms and the timing of revenue recognition.
Our future success will depend in large part on our ability to maintain and expand our sales
to large communications service providers. These sales typically involve lengthy sales cycles,
protracted and sometimes difficult contract negotiations, and extensive product testing and network
certification. We are sometimes required to agree to contract terms or conditions that negatively
affect pricing, payment terms and the timing of revenue recognition in order to consummate a sale.
As a result of current market conditions, these customers may request extended payment terms,
vendor or third-party financing and other alternative purchase structures. These terms may, in
turn, negatively affect our revenue and results of operations and increase our susceptibility to
quarterly fluctuations in our results. Service providers may ultimately insist upon terms and
conditions that we deem too onerous or not in our best interest. Moreover, our purchase agreements
generally do not require that a customer guarantee any minimum purchase level and customers often
have the right to modify, delay, reduce or cancel previous orders. As a result, we may incur
substantial expense and devote time and resources to potential relationships that never materialize
or result in lower than anticipated sales.
Difficulties with third party component suppliers, including sole and limited source suppliers,
could increase our costs and harm our business and customer relationships.
We depend on third party suppliers for our product components and subsystems, as well as for
equipment used to manufacture and test our products. Our products include key optical and
electronic components for which reliable, high-volume supply is often available from sole or
limited sources. We have previously encountered shortages in availability for important components
that have affected our ability to deliver products in a timely manner. Our business would be
negatively affected if one or more of our suppliers were to experience any significant disruption
in their operations affecting the price, quality, availability or timely delivery of components.
Current unfavorable economic conditions, including a lack of liquidity, may adversely affect the
business of our suppliers or the terms on which we purchase components. We have seen an increased
incidence of component discontinuation as suppliers alter their businesses to adjust to market
conditions. As a result of our reliance on third parties, we may be unable to secure the components
or subsystems that we require in sufficient quantity and quality on reasonable terms. The loss of a
source of supply, or lack of sufficient availability of key components, could require us to
redesign products that use those components, which would increase our costs and negatively affect
our product gross margin and results of operations. Difficulties with suppliers could also result
in lost revenue, additional product costs and deployment delays that could harm our business 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 products into new geographic markets outside of our
traditional markets and to a broader customer base, including other large communications service
providers, enterprises, cable operators, wireless operators and federal, state and local
governments. We have less experience in these markets and, in order to succeed in these markets, we
believe we must develop and manage new sales channels and distribution arrangements. We expect
these relationships to be an increasingly important part of our business. This strategy may not
succeed and we may be exposed to increased expense and legal, business and financial risks
associated with entering new markets and pursuing new customer segments through channel partners.
Part of our strategy is to pursue sales to federal, state and local governments. These sales
require compliance with complex procurement regulations with which we have limited experience. We
may be unable to increase our sales to government contractors if we determine that we cannot comply
with applicable regulations. Our failure to comply with regulations for existing contracts could
result in civil, criminal or administrative proceedings involving fines and suspension, or
exclusion, from participation in federal government contracts. Failure to manage additional sales
channels effectively would limit our ability to succeed in these new markets and could adversely
affect our ability to expand our customer base and grow our business.
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We may experience delays in the development of our products that may negatively affect our
competitive position and business.
Our products are based on complex technology, and we can experience unanticipated delays in
developing, 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 affect the
cost-effective and timely development of our products. Intellectual property disputes, failure of
critical design elements, and other execution risks may delay or even prevent the release of these
products. Delays in product development may affect our reputation with customers and the timing and
level of demand for our products. 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 may be required to write off significant amounts of inventory as a result of our inventory
purchase practices, the convergence of our product lines or unfavorable macroeconomic or industry
conditions.
To avoid delays and meet customer demand for shorter delivery terms, we place orders with our
contract manufacturers and suppliers to manufacture components and complete assemblies based on
forecasts of customer demand. As a result, our inventory purchases expose us to the risk that our
customers either will not order the products we have forecasted or will purchase fewer products
than forecasted. Unfavorable market or industry conditions can limit visibility into customer
spending plans and compound the difficulty of forecasting inventory at appropriate levels.
Moreover, our customer purchase agreements generally do not guarantee any minimum purchase level,
and customers often have the right to modify, reduce or cancel purchase quantities. As a result, we
may purchase inventory in anticipation of sales that do not occur. Historically, our inventory
write-offs have resulted from the circumstances above. As features and functionalities converge
across our product lines, and we introduce new products, however, we face an additional risk that
customers may forego purchases of one product we have inventoried in favor of another product with
similar functionality. If we are required to write off or write down a significant amount of
inventory, our results of operations for the period would be materially adversely affected.
Restructuring activities could disrupt our business and affect our results of operations.
We have previously taken steps, including reductions in force, office closures, and internal
reorganizations to reduce the size and cost of our operations and to better match our resources
with market opportunities. We may take similar steps in the future. These changes could be
disruptive to our business and may result in the recording of accounting charges, including
inventory and technology-related write-offs, workforce reduction costs and charges relating to
consolidation of excess facilities. Substantial charges resulting from any future restructuring
activities could adversely affect our results of operations in the period in which we take such a
charge.
Our failure to manage effectively our relationships with third party service partners could
adversely impact our financial results and relationship with customers.
We rely on a number of third party service partners, both domestic and international, to
complement our global service and support resources. We rely upon these partners for certain
maintenance and support functions, as well as the installation of our equipment in some large
network builds. In order to ensure the proper installation and maintenance of our products, we must
identify, train and certify qualified service partners. Certification can be costly and
time-consuming, and our partners often provide similar services for other companies, including our
competitors. We may not be able to manage effectively our relationships with our service partners
and cannot be certain that they will be able to deliver services in the manner or time required. If
our service partners are unsuccessful in delivering services:
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we may suffer delays in recognizing revenue; |
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our services revenue and gross margin may be adversely affected; and |
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our relationship with customers could suffer. |
Difficulties with service partners could cause us to transition a larger share of deployment and
other services from third parties to internal resources, thereby increasing our services overhead
costs and negatively affecting our services gross margin and results of operations.
We may incur significant costs as a result of our efforts to protect and enforce our intellectual
property rights or respond to claims of infringement from others.
Our business is dependent upon the successful protection of our proprietary technology and
intellectual property. We are subject to the risk that unauthorized parties may attempt to access,
copy or otherwise obtain and use our proprietary technology, particularly as we expand our product
development into India and increase our reliance upon contract manufacturers in Asia. These and
other international operations could expose us to a lower level of intellectual property protection
than in the United States. Monitoring unauthorized use of our technology is difficult, and we
cannot be certain that
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the steps that we are taking will prevent or minimize the risks of unauthorized use. If
competitors are able to use our technology, our ability to compete effectively could be harmed.
From time to time we have been subject to litigation and other third party intellectual
property claims, primarily alleging patent infringement. We have also been subject to third party
claims arising as a result of our indemnification obligations to customers or resellers that
purchase our products or as a result of alleged infringement relating to third party components
that we include in 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, use
infringement assertions as a competitive tactic or as a source of additional revenue. Intellectual
property infringement claims can significantly divert the time and attention of our personnel and
result in costly litigation. These claims can also require us to pay substantial damages or
royalties, enter into costly license agreements or develop non-infringing technology. Accordingly,
the costs associated with intellectual property infringement 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, the Middle East, Latin America and the Asia Pacific
region. We have also established a major development center in India and are increasingly reliant
upon overseas suppliers, particularly in Asia, for sourcing of important components and
manufacturing of our products. Our increasingly global operations may result in increased risk to
our business and could give rise to unanticipated expense, difficulties or other effects that could
adversely affect our financial results.
International operations are subject to inherent risks, including:
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effects of changes in currency exchange rates; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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difficulties and costs of staffing and managing foreign operations; |
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the impact of economic conditions in countries outside the United States; |
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less protection for intellectual property rights in some countries; |
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adverse tax and customs consequences, particularly as related to transfer-pricing
issues; |
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social, political and economic instability; |
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higher incidence of corruption; |
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trade protection measures, export compliance, qualification to transact business and
additional regulatory requirements; and |
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natural disasters, epidemics and acts of war or terrorism. |
We expect that our international activities will be dynamic, and we may enter new markets and
withdraw from or reduce operations in others. These changes to our international operations may
require significant management attention and result in additional expense. In some countries, our
success will depend in part on our ability to form relationships with local partners. Our inability
to identify appropriate partners or reach mutually satisfactory arrangements for international
sales of our products could impact our ability to maintain or increase international market demand
for our products.
Our use and reliance upon development resources in India may expose us to unanticipated costs or
liabilities.
We have a significant development center in India and, in recent years, have increased
headcount and development activity at this facility. There is no assurance that our reliance upon
development resources in India will enable us to achieve meaningful cost reductions or greater
resource efficiency. Further, our development efforts and other operations in India involve
significant risks, including:
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difficulty hiring and retaining appropriate engineering resources due to intense
competition for such resources and resulting wage inflation; |
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the knowledge transfer related to our technology and resulting exposure to
misappropriation of intellectual property or information that is proprietary to us, our
customers and other third parties; |
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heightened exposure to changes in the economic, security and political conditions of
India; and |
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fluctuations in currency exchange rates and tax compliance in India. |
Difficulties resulting from the factors above and other risks related to our operations in
India could expose us to increased expense, impair our development efforts, harm our competitive
position and damage our reputation.
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We may be exposed to unanticipated risks and additional obligations in connection with our resale
of complementary
products or technology of other companies.
We have entered into agreements with strategic partners that permit us to distribute their
products or technology. We rely upon these relationships to add complementary products or
technologies or to fulfill an element of our product portfolio. As part of our strategy to
diversify our product portfolio and customer base, we may enter into additional original equipment
manufacturer (OEM) or resale agreements in the future. We may incur unanticipated costs or
difficulties relating to our resale of third party products. Our third party relationships could
expose us to risks associated with delays in their development, manufacturing or delivery of
products or technology. We may also be required by customers to assume warranty, indemnity, service
and other commercial obligations greater than the commitments, if any, made to us by our technology
partners. Some of our strategic partners are relatively small companies with limited financial
resources. If they are unable to satisfy their obligations to us or our customers, we may have to
expend our own resources to satisfy these obligations. Exposure to the risks above could harm our
reputation with key customers and negatively affect our business and our results of operations.
Our exposure to the credit risks of our customers and resellers may make it difficult to collect
receivables and could adversely affect our revenue and operating results.
In the course of our sales to customers, we may have difficulty collecting receivables and
could be exposed to risks associated with uncollectible accounts. We may be exposed to similar
risks relating to third party resellers and other sales channel partners. A continued lack of
liquidity in the capital markets or a sustained period of unfavorable economic conditions may
increase our exposure to credit risks. While we monitor these situations carefully and attempt to
take appropriate measures to protect ourselves, it is possible that we may have to write down or
write off doubtful accounts. Such write-downs or write-offs could negatively affect our operating
results for the period in which they occur, and, if large, could have a material adverse effect on
our revenue and operating results.
If we are unable to attract and retain qualified personnel, we may be unable to manage our business
effectively.
Competition to attract and retain highly skilled technical and other personnel with experience
in our industry is increasing in intensity, and our employees have been the subject of targeted
hiring by our competitors. With respect to our engineering resources, we may find it particularly
difficult to attract and retain sufficiently skilled personnel in areas including data networking,
Ethernet service delivery and network management software engineering in certain geographic
markets. We may experience difficulty retaining and motivating existing employees and attracting
qualified personnel to fill key positions. Because we rely upon equity awards as a significant
component of compensation, particularly for our executive team, a lack of positive performance in
our stock price, reduced grant levels, or changes to our compensation program may adversely affect
our ability to attract and retain key employees. In addition, none of our executive officers is
bound by an employment agreement for any specific term. It may be difficult to replace members of
our management team or other key personnel, and the loss of such individuals could be disruptive to
our business. Because we generally do not have employment contracts with our employees, we must
rely upon providing competitive compensation packages and a high-quality work environment in order
to retain and motivate employees. If we are unable to attract and retain qualified personnel, we
may be unable to manage our business effectively.
We may be adversely affected by fluctuations in currency exchange rates.
Because a significant portion of our sales is denominated in U.S. dollars, an increase in the
value of the dollar could increase the real cost to our customers of our products in markets
outside the United States. In addition, we face exposure to currency exchange rates as a result of
our non-U.S. dollar denominated operating expense in Europe, Asia and Canada. In recent years, our
international operations and our reliance upon international suppliers have grown considerably. A
weakened dollar could increase the cost of local operating expenses and procurement of raw
materials where we must purchase components in foreign currencies. As a result, we may be
susceptible to negative effects of foreign exchange changes. We have previously hedged against
currency exposure associated with anticipated foreign currency cash flows and may do so in the
future. These hedging activities are intended to offset currency fluctuations on a portion of our
non-U.S. dollar denominated operating expense. There can be no assurance that these hedging
instruments will be effective in all circumstances and losses associated with these instruments may
negatively affect our results of operations.
Our products incorporate software and other technology under license from third parties and our
business would be adversely affected if this technology was no longer available to us on
commercially reasonable terms.
We integrate third-party software and other technology into our embedded operating system,
network management system tools and other products. Licenses for this technology may not be
available or continue to be available to us on commercially reasonable terms. Third party licensors
may insist on unreasonable financial or other terms in connection with our use of such technology.
Difficulties with third party technology licensors could result in termination of such licenses,
25
which may result in significant costs and require us to obtain or develop a substitute technology.
Difficulty obtaining and
maintaining third-party technology licenses may disrupt development of our products and
increase our costs, which could harm our business.
Our business is dependent upon the proper functioning of our internal business processes and
information systems and modifications may disrupt our business, operating processes and internal
controls.
The successful operation of various internal business processes and information systems is
critical to the efficient operation of our business. If these systems fail or are interrupted, our
operations may be adversely affected and operating results could be harmed. In recent years, we
have experienced considerable growth in transaction volume, headcount and reliance upon
international resources in our operations. Our business processes and information systems need to
be sufficiently scalable to support the growth of our business. To improve the efficiency of our
operations and achieve greater automation, we routinely upgrade business processes and information
systems. Significant changes to our processes and systems expose us to a number of operational
risks. These changes may be costly and disruptive, and could impose substantial demands on
management time. These changes may also require the modification of a number of internal control
procedures. Any material disruption, malfunction or similar problems with our business processes or
information systems, or the transition to new processes and systems, could have a negative effect
on the operation of our business and our results of operations.
Strategic acquisitions and investments may expose us to increased costs and unexpected liabilities.
We may acquire or make strategic investments in other companies to expand the markets we
address, diversify our customer base or acquire or accelerate the development of technology or
products. To do so, we may use cash, issue equity that would dilute our current stockholders
ownership, incur debt or assume indebtedness. These transactions involve numerous risks, including:
|
|
|
significant integration costs; |
|
|
|
integration and rationalization of operations, products, technologies and personnel; |
|
|
|
diversion of managements attention; |
|
|
|
difficulty completing projects of the acquired company and costs related to in-process
projects; |
|
|
|
the loss of key employees; |
|
|
|
ineffective internal controls over financial reporting; |
|
|
|
dependence on unfamiliar suppliers or manufacturers; |
|
|
|
exposure to unanticipated liabilities, including intellectual property infringement
claims; and |
|
|
|
adverse tax or accounting effects including amortization expense related to intangible
assets and charges associated with impairment of goodwill. |
As a result of these and other risks, our acquisitions or strategic investments may not reap
the intended benefits and may ultimately have a negative impact on our business, results of
operation and financial condition.
Changes in government regulation affecting the communications industry and the businesses of our
customers could harm our prospects and operating results.
The Federal Communications Commission, or FCC, has jurisdiction over the U.S. communications
industry and similar agencies have jurisdiction over the communication industries in other
countries. Many of our largest customers are subject to the rules and regulations of these
agencies. Changes in regulatory requirements in the United States or other countries could inhibit
service providers from investing in their communications network infrastructures or introducing new
services. These changes could adversely affect the sale of our products and services. Changes in
regulatory tariff requirements or other regulations relating to pricing or terms of carriage on
communications networks could slow the development or expansion of network infrastructures and
adversely affect our business, operating results, and financial condition.
Governmental regulations affecting the import or export of products, and environmental regulations
relating to our products, could negatively affect our revenues.
The United States and various foreign governments have imposed controls, export license
requirements and restrictions on the import or export of some technologies. Governmental regulation
of imports or exports, or our failure to obtain required import or export approval for our
products, could harm our international and domestic sales and adversely affect our revenues.
Failure to comply with such regulations could result in penalties, costs and restrictions on export
privileges. In addition, our operations may be negatively affected by environmental regulations,
such as the Waste Electrical and Electronic Equipment (WEEE) and Restriction of the Use of Certain
Hazardous Substances in Electrical and Electronic
26
Equipment (RoHS) that have been adopted by the
European Union. Compliance with these and similar environmental regulations may increase our cost
of building and selling our products, make it difficult to obtain supply of compliant components or
require
us to write off non-compliant inventory, which could have a material adverse effect on our
business and operating results.
We may be required to write down long-lived assets and a significant impairment charge would
adversely affect our operating results.
At October 31, 2009, we had $154.7 million in long-lived assets, which includes $60.8 million
of intangible assets on our balance sheet. Valuation of our long-lived assets requires us to make
assumptions about future sales prices and sales volumes for our products. Our assumptions are used
to forecast future, undiscounted cash flows. Given the current economic environment, uncertainties
regarding the duration and severity of these conditions, forecasting future business is difficult
and subject to modification. If actual market conditions differ or our forecasts change, we may be
required to reassess long-lived assets and could record an impairment charge. Any impairment
charge relating to long-lived assets would have the effect of decreasing our earnings or
increasing our losses in such period. If we are required to take a substantial impairment charge,
our operating results could be materially adversely affected in such period.
Failure to maintain effective internal controls over financial reporting could have a material
adverse effect on our business, operating results and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we include in our annual report a
report containing managements assessment of the effectiveness of our internal controls over
financial reporting as of the end of our fiscal year and a statement as to whether or not such
internal controls are effective. Compliance with these requirements has resulted in, and is likely
to continue to result in, significant costs and the commitment of time and operational resources.
Changes in our business will necessitate ongoing modifications to our internal control systems,
processes and information systems. Increases in our global operations or expansion into new regions
could pose additional challenges to our internal control systems as these operations become more
significant. We cannot be certain that our current design for internal control over financial
reporting will be sufficient to enable management or our independent registered public accounting
firm to determine that our internal controls are effective for any period, or on an ongoing basis.
If we or our independent registered public accounting firms are unable to assert that our internal
controls over financial reporting are effective, our business may be harmed. Market perception of
our financial condition and the trading price of our stock may be adversely affected, and customer
perception of our business may suffer.
Obligations associated with our outstanding indebtedness on our convertible notes may adversely
affect our business.
At October 31, 2009, indebtedness on our outstanding convertible notes totaled $798.0 million
in aggregate principal. Our indebtedness and repayment obligations could have important negative
consequences, including:
|
|
|
increasing our vulnerability to adverse economic and industry conditions; |
|
|
|
limiting our ability to obtain additional financing, particularly in light of
unfavorable conditions in the credit markets; |
|
|
|
reducing the availability of cash resources for other purposes, including capital
expenditures; |
|
|
|
limiting our flexibility in planning for, or reacting to, changes in our business and
the markets 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 stock price is volatile.
Our common stock price has experienced substantial volatility in the past and may remain
volatile in the future. Volatility in our stock price can arise as a result of a number of the
factors discussed in this Risk Factors section. During fiscal 2009, our stock price ranged from a
high of $16.64 per share to a low of $4.98 per share. The stock market has experienced extreme
price and volume fluctuations that have affected the market price of many technology companies,
with such volatility often unrelated to the operating performance of these companies. Divergence
between our actual or anticipated financial results and published expectations of analysts can
cause significant swings in our stock price. Our stock price can also be affected by announcements
that we, our competitors, or our customers may make, particularly announcements related to
acquisitions or other significant transactions. Our common stock is included in a number of market
indices and any change in the composition of these indices to exclude our company would adversely
affect our stock price. On December 18, 2009, we were removed from the S&P 500, a widely-followed
index. These factors, as well as conditions affecting the general economy or financial markets, may
materially adversely affect the market price of our common stock in the future.
27
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
As of October 31, 2009, all of our properties are leased. Our principal executive offices are
located in Linthicum, Maryland. We lease thirty-eight facilities related to our ongoing operations.
These include five buildings located at various sites near Linthicum, Maryland, including an
engineering facility, two supply chain and logistics facilities, and two administrative and sales facilities. We
have engineering and/or service facilities located in San Jose, California; Alpharetta, Georgia;
Spokane, Washington; Kanata, Canada; and Gurgaon, India. We also maintain a sales and service
facility in London, England. In addition, we lease various small offices in the United States,
Mexico, South America, Europe and Asia to support our sales and services operations. 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 future 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,
2009, our accrued restructuring liability related to these properties was $9.4 million. If actual
market conditions relating to the use of these facilities are less favorable than those projected
by management, additional restructuring costs associated with these facilities may be required. For
additional information regarding our lease obligations, see Note 20 to the Consolidated Financial
Statements in Item 8 of Part II of this annual report.
Item 3. Legal Proceedings
On May 29, 2008, Graywire, LLC filed a complaint in the United States District Court for the
Northern District of Georgia against Ciena and four other defendants, alleging, among other things,
that certain of the parties products infringe U.S. Patent 6,542,673 (the 673 Patent), relating
to an identifier system and components for optical assemblies. The complaint, which seeks
injunctive relief and damages, was served upon Ciena on January 20, 2009. Ciena filed an answer to
the complaint and counterclaims against Graywire on March 26, 2009, and an amended answer and
counterclaims on April 17, 2009. On April 27, 2009, Ciena and certain other defendants filed an
application for inter partes reexamination of the 673 Patent with the U.S. Patent and Trademark
Office (the PTO). On the same date, Ciena and the other defendants filed a motion to stay the
case pending reexamination of all of the patents-in-suit. On July 17, 2009, the district court
granted the defendants motion to stay the case. On July 23, 2009, the PTO granted the defendants
application for reexamination with respect to certain claims of the 673 Patent. 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 June 2002 merger with ONI Systems Corp., we became a defendant in a
securities class action lawsuit filed in the United States District Court for the Southern District
of New York in August 2001. The complaint named ONI, certain former ONI officers, and certain
underwriters of ONIs initial public offering (IPO) as defendants, and 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
ONIs registration statement and by engaging in manipulative practices to artificially inflate
ONIs stock price after the IPO. The complaint also alleges that ONI and the named former officers
violated the securities laws by failing 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. The former ONI officers have been dismissed from the action without prejudice. In July
2004, following mediated settlement negotiations, the plaintiffs, the issuer defendants (including
Ciena), and their insurers entered into a settlement agreement. The settlement agreement did not
require Ciena to pay any amount toward the settlement or to make any other payments. While the
partial settlement was pending approval, the plaintiffs continued to litigate their cases against
the underwriter defendants. 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 for preliminary approval of the settlement agreement, subject to certain modifications, and
on August 31, 2005, the district court issued a preliminary order approving the revised stipulated
settlement agreement. On December 5, 2006, the U.S. Court of Appeals for the Second Circuit vacated
the district courts grant of class certification in the six focus cases. On April 6, 2007, the
Second Circuit denied plaintiffs petition for rehearing. In light of the Second Circuits
decision, the parties agreed that the settlement could not be approved. On June 25, 2007, the
district court approved a stipulation filed by the plaintiffs and the issuer defendants terminating
the proposed
28
settlement. On August 14, 2007, the plaintiffs filed second amended complaints against
the defendants in the six focus cases. On September 27, 2007, the plaintiffs filed a motion for
class certification based on their amended complaints and allegations. On March 26, 2008, the
district court denied motions to dismiss the second amended complaints filed by the defendants in
the six focus
cases, except as to Section 11 claims raised by those plaintiffs who sold their securities for
a price in excess of the initial offering price and those who purchased outside the previously
certified class period. Briefing on the plaintiffs motion for class certification in the focus
cases was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.
On April 2, 2009, a stipulation and agreement of settlement between the plaintiffs, issuer
defendants and underwriter defendants was submitted to the Court for preliminary approval. The
Court granted the plaintiffs motion for preliminary approval and preliminarily certified the
settlement classes on June 10, 2009. The settlement fairness hearing was held on September 10,
2009. On October 6, 2009, the Court entered an opinion granting final approval to the settlement
and directing that the Clerk of the Court close these actions. Notices of appeal of the opinion
granting final approval have been filed. Due to the inherent uncertainties of litigation and
because the settlement remains subject to appeal, the ultimate outcome of the matter is uncertain.
In addition to the matters described above, we are subject to various legal proceedings,
claims and litigation arising in the ordinary course of business. We do not expect that the
ultimate costs to resolve these matters will have a material effect on our results of operations,
financial position or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2009.
PART II
Item 5. Market for Registrants Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Our 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 our common stock, as reported on the
NASDAQ Global Select Market, for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
Price Range of Common Stock |
|
|
High |
|
Low |
Fiscal Year 2008 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
48.82 |
|
|
$ |
21.40 |
|
Second Quarter ended April 30 |
|
$ |
35.82 |
|
|
$ |
24.00 |
|
Third Quarter ended July 31 |
|
$ |
35.14 |
|
|
$ |
19.30 |
|
Fourth Quarter ended October 31 |
|
$ |
20.10 |
|
|
$ |
6.60 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2009 |
|
|
|
|
|
|
|
|
First Quarter ended January 31 |
|
$ |
9.79 |
|
|
$ |
5.07 |
|
Second Quarter ended April 30 |
|
$ |
12.28 |
|
|
$ |
4.98 |
|
Third Quarter ended July 31 |
|
$ |
12.51 |
|
|
$ |
8.45 |
|
Fourth Quarter ended October 31 |
|
$ |
16.64 |
|
|
$ |
11.08 |
|
As of December 11, 2009,
there were
approximately 949 holders of record of our common
stock and 92,038,629 shares of common stock outstanding. We have never paid cash dividends on our
capital stock. We intend to retain earnings for use in our business and we do not anticipate paying
any cash dividends in the foreseeable future.
The following graph shows a comparison of cumulative total returns for an investment in our
common stock, the NASDAQ Telecommunications Index and the S&P 500 Index from October 31, 2004 to
October 31, 2009. The NASDAQ Telecommunications Index contains securities of NASDAQ-listed
companies classified according to the Industry Classification Benchmark as Telecommunications and
Telecommunications Equipment. They include providers of fixed-line and mobile telephone services,
and makers and distributors of high-technology communication products. This graph is not deemed to
be filed with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act
of 1934, and the graph shall not be deemed to be incorporated by reference into any prior or
subsequent filing by us under the Securities Act of 1933 or the Exchange Act.
29
Assumes $100 invested in Ciena Corporation, the NASDAQ Telecommunications Index and the S&P
500 Index on October 31, 2004 with all dividends reinvested at month-end.
(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. We have a 52 or 53 week fiscal year, which ends on the Saturday nearest to
the last day of October in each year. For purposes of financial statement presentation, each fiscal
year is described as having ended on October 31. Fiscal 2005, 2006, 2008 and 2009 consisted of 52
weeks and fiscal 2007 consisted of 53 weeks.
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
(in thousands) |
|
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
Cash and cash equivalents |
|
$ |
358,012 |
|
|
$ |
220,164 |
|
|
$ |
892,061 |
|
|
$ |
550,669 |
|
|
$ |
485,705 |
|
Short-term investments |
|
$ |
579,531 |
|
|
$ |
628,393 |
|
|
$ |
822,185 |
|
|
$ |
366,336 |
|
|
$ |
563,183 |
|
Long-term investments |
|
$ |
155,944 |
|
|
$ |
351,407 |
|
|
$ |
33,946 |
|
|
$ |
156,171 |
|
|
$ |
8,031 |
|
Total assets |
|
$ |
1,675,229 |
|
|
$ |
1,839,713 |
|
|
$ |
2,416,273 |
|
|
$ |
2,024,594 |
|
|
$ |
1,504,383 |
|
Short-term convertible notes payable |
|
$ |
|
|
|
$ |
|
|
|
$ |
542,262 |
|
|
$ |
|
|
|
$ |
|
|
Long-term convertible notes payable |
|
$ |
648,752 |
|
|
$ |
842,262 |
|
|
$ |
800,000 |
|
|
$ |
798,000 |
|
|
$ |
798,000 |
|
Total liabilities |
|
$ |
939,862 |
|
|
$ |
1,086,087 |
|
|
$ |
1,566,119 |
|
|
$ |
1,025,645 |
|
|
$ |
1,048,545 |
|
Stockholders equity |
|
$ |
735,367 |
|
|
$ |
753,626 |
|
|
$ |
850,154 |
|
|
$ |
998,949 |
|
|
$ |
455,838 |
|
30
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
(in thousands, except per share data) |
|
|
|
2005 |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Revenue |
|
$ |
427,257 |
|
|
$ |
564,056 |
|
|
$ |
779,769 |
|
|
$ |
902,448 |
|
|
$ |
652,629 |
|
Cost of goods sold |
|
|
291,067 |
|
|
|
306,275 |
|
|
|
417,500 |
|
|
|
451,521 |
|
|
|
367,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
136,190 |
|
|
|
257,781 |
|
|
|
362,269 |
|
|
|
450,927 |
|
|
|
284,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
137,245 |
|
|
|
111,069 |
|
|
|
127,296 |
|
|
|
175,023 |
|
|
|
190,319 |
|
Selling and marketing |
|
|
115,022 |
|
|
|
104,434 |
|
|
|
118,015 |
|
|
|
152,018 |
|
|
|
134,527 |
|
General and administrative |
|
|
36,317 |
|
|
|
44,445 |
|
|
|
50,248 |
|
|
|
68,639 |
|
|
|
47,509 |
|
Amortization of intangible assets |
|
|
38,782 |
|
|
|
25,181 |
|
|
|
25,350 |
|
|
|
32,264 |
|
|
|
24,826 |
|
Restructuring (recoveries) costs |
|
|
18,018 |
|
|
|
15,671 |
|
|
|
(2,435 |
) |
|
|
1,110 |
|
|
|
11,207 |
|
Goodwill impairment |
|
|
176,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,673 |
|
Long-lived asset impairment |
|
|
45,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on lease settlement |
|
|
|
|
|
|
(11,648 |
) |
|
|
(4,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
567,846 |
|
|
|
289,152 |
|
|
|
313,603 |
|
|
|
429,054 |
|
|
|
864,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(431,656 |
) |
|
|
(31,371 |
) |
|
|
48,666 |
|
|
|
21,873 |
|
|
|
(579,231 |
) |
Interest and other income, net |
|
|
31,294 |
|
|
|
50,245 |
|
|
|
76,483 |
|
|
|
36,762 |
|
|
|
9,487 |
|
Interest expense |
|
|
(28,413 |
) |
|
|
(24,165 |
) |
|
|
(26,996 |
) |
|
|
(12,927 |
) |
|
|
(7,406 |
) |
Realized loss due to impairment of marketable debt investments |
|
|
|
|
|
|
|
|
|
|
(13,013 |
) |
|
|
(5,101 |
) |
|
|
|
|
Gain (loss) on cost method investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,328 |
) |
Gain on extinguishment of debt |
|
|
3,882 |
|
|
|
7,052 |
|
|
|
|
|
|
|
932 |
|
|
|
|
|
Gain (loss) on equity investments, net |
|
|
(9,486 |
) |
|
|
215 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(434,379 |
) |
|
|
1,976 |
|
|
|
85,732 |
|
|
|
41,539 |
|
|
|
(582,478 |
) |
Provision (benefit) for income taxes |
|
|
1,320 |
|
|
|
1,381 |
|
|
|
2,944 |
|
|
|
2,645 |
|
|
|
(1,324 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(435,699 |
) |
|
$ |
595 |
|
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per potential common share |
|
$ |
(5.30 |
) |
|
$ |
0.01 |
|
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
82,170 |
|
|
|
83,840 |
|
|
|
85,525 |
|
|
|
89,146 |
|
|
|
91,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
82,170 |
|
|
|
85,011 |
|
|
|
99,604 |
|
|
|
110,605 |
|
|
|
91,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This section contains statements that discuss future events or expectations, projections of
results of operations or financial condition, changes in the markets for our products and services,
or other forward-looking information. Our forward-looking information is based on various
factors and was derived using numerous assumptions. In some cases, you can identify these
forward-looking statements by words like may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential or continue or the negative of
those words and other comparable words. You should be aware that these statements only reflect our
current predictions and beliefs. These statements are subject to known and unknown risks,
uncertainties and other factors, and actual events or results may differ materially. Important
factors that could cause our actual results to be materially different from the forward-looking
statements are disclosed throughout this report, particularly under the heading Risk Factors in
Item 1A of Part I of this annual report. You should review these risk factors for a more complete
understanding of the risks associated with an investment in our securities. We undertake no
obligation to revise or update any forward-looking statements. The following discussion and
analysis should be read in conjunction with our Selected Consolidated Financial Data and
consolidated financial statements and notes thereto included elsewhere in this annual report.
Overview
We are a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Our optical
service delivery and carrier Ethernet service delivery products are used individually, or as part
of an integrated solution, in communications networks operated by communications service providers,
cable operators, governments and enterprises around the globe.
We are a network specialist targeting the transition of disparate, legacy communications
networks to converged, next-generation architectures, better able to handle increased traffic and
deliver more efficiently a broader mix of high-bandwidth communications services. Our products,
along with their embedded, network element software and unified service and transport management,
enable service providers to efficiently and cost-effectively deliver critical enterprise and
consumer-oriented communication services. Together with our professional support and consulting
services, our product offerings seek to offer solutions that address the business challenges and
network needs of our customers. Our customers face an increasingly challenging and rapidly changing
environment that requires them to quickly adapt their business strategies and deliver new,
revenue-creating services. By improving network productivity, reducing operating costs and
providing the flexibility to enable new and integrated service offerings, our offerings create
business and operational value for our customers.
Effect of Decline in Market Conditions
Our results of operations for fiscal 2009 described in this Managements Discussion and
Analysis of Financial Condition and Results of Operations section reflect the weakness, volatility
and uncertainty presented by the global market conditions that we encountered during the year. Our
fiscal 2009 results reflect cautious spending among our largest customers during fiscal 2009, as
they sought to conserve capital, reduce debt or address uncertainties or changes in their own
business models brought on by broader market challenges. As a result, we experienced lower demand
across our customer base in all geographies. We also experienced lengthening sales cycles, customer
delays in network build-outs, slowing deployments and deferral of new technology adoption. We have
also experienced an increasingly competitive marketplace and a heightened customer focus on pricing
and return on investment. While we have started to see some indications that conditions in North
America may be improving, we remain uncertain as to how long unfavorable macroeconomic and industry
conditions will persist and the magnitude of their effects on our business and results of
operations.
Strategic Initiatives
Despite difficult market conditions, we continue to believe in our longer-term market
opportunities and the potential represented by the underlying drivers of future demand for our
hardware, software and services offerings in our target markets. We believe consumer and enterprise
use of, and increased dependence upon, a growing variety of broadband applications and services
will continue to consume bandwidth, requiring our customers to invest in next-generation network
infrastructures that are more efficient and robust, and better able to handle higher capacity
multiservice traffic and increased transmission rates. As a result, we continued to strategically
invest in our business during fiscal 2009, prioritizing spending on key product and technology
initiatives that we believe will strategically position us for longer-term growth when market
conditions recover. In fact, research and development expense increased year over year despite the
significant reduction in revenue during fiscal 2009 and the restructuring activities described
below. We expect to continue to invest significantly in research and development. Specifically, our
ongoing development is focused upon bringing several new platforms to market during fiscal 2010 and
our broader development investments are focused upon:
32
|
|
|
Data-optimized switching solutions and evolution of our CoreDirector family and 5400
family of reconfigurable switching solutions; |
|
|
|
Extending and increasing capacity of our converged optical transport service delivery
portfolio, including 100G transport technologies and capabilities; |
|
|
|
Expanding our carrier Ethernet service delivery portfolio, including larger Ethernet
aggregation switches; and |
|
|
|
Extending the value of our network management software platform across our product
portfolio. |
These broader development initiatives remain focused on delivering upon our vision of transforming
customer networks to adapt and scale, manage unpredictability and eliminate barriers to new service
offerings. This vision of simplified, highly-automated networks is based on the following
technologies:
|
|
|
Programmable network elements, including software-programmable hardware platforms and
interfaces that use our FlexiPort technology, to enable on-demand and automated support
for multiple services and applications; |
|
|
|
Common service-aware operating system and unified transport and service management
software for an integrated solution ensuring all network elements work seamlessly
together for rapid delivery of services and applications; and |
|
|
|
Optimized carrier Ethernet technology our True Carrier Ethernet for enhanced
management, faster provisioning, higher reliability and support for a wider variety of
services. |
Through these capabilities, we seek to enable customers to automate delivery and management of a
broad mix of services over networks that offer enhanced flexibility and are more cost-effective to
deploy, scale and manage.
Pending Acquisition of Nortel Metro Ethernet Networks (MEN) Assets
We believe that our pending acquisition of substantially all of the optical networking and
carrier Ethernet assets of Nortels (MEN) business will accelerate the execution of our corporate
and research and development strategy, and will create a leader in next-generation, automated
optical Ethernet networks.
Following our emergence as the winning bidder in the bankruptcy auction, we agreed to acquire
substantially all of the optical networking and carrier Ethernet assets of Nortels MEN business for $530 million in cash and $239 million in aggregate principal amount of
6% senior convertible notes due June 2017. The terms of the notes to be issued upon closing are set
forth in Note 22 of the Consolidated Financial Statements found under Item 8 of Part II of this
annual report. Nortels product and technology assets to be acquired include:
|
|
|
long-haul optical transport portfolio; |
|
|
|
metro optical Ethernet switching and transport solutions; |
|
|
|
Ethernet transport, aggregation and switching technology; |
|
|
|
multiservice SONET/SDH product families; and |
|
|
|
network management software products. |
In addition to these products, the acquired operations also include network implementation and
support services. The assets to be acquired generated approximately $1.36 billion in revenue for
Nortel in fiscal 2008 and approximately $556 million (unaudited) in the first six months of
Nortels fiscal 2009.
The pending acquisition encompasses a business that is a leading provider of next-generation,
40G and 100G optical transport technology with a significant, global installed base. The acquired
transport technology allows network operators to upgrade their existing 10G networks to 40G
capability, quadrupling capacity without the need for new fiber deployments or complex network
re-engineering. In addition to transport capability, the optical platforms acquired include traffic
switching and aggregation capability for traditional protocols such as SONET/SDH as well as newer
packet protocols such as Ethernet. A suite of software products used to manage networks built from
these technologies is also part of the transaction.
We believe that the transaction provides an opportunity to significantly transform Ciena and
strengthen our position as a leader in next-generation, automated optical Ethernet networking. We
believe that the additional resources, expanded geographic reach, new and broader customer
relationships, and deeper portfolio of complementary network solutions derived from the transaction
will augment Cienas growth. We also expect that the transaction will add scale, enable operating
model synergies and provide an opportunity to optimize our research and development investment. We
expect these benefits of the transaction will help Ciena to better compete with traditional, larger
network vendors.
33
We expect to make employment offers to at least 2,000 Nortel employees to become part of
Cienas global team of network specialists. The transaction will significantly enhance our existing
Canadian-based development resources, making Ottawa our largest product and development center.
Given the structure of the transaction as an asset carve-out from Nortel, we expect that the
transaction will result in a costly and complex integration with a number of operational risks. We
expect to incur integration-related costs of approximately $180 million, with the majority of these
costs to be incurred in the first 12 months following the completion of the transaction. This
estimate principally reflects expense associated with equipment and information technology costs,
transaction expense, and consulting and third party service fees associated with integration. This
amount does not give effect to any expense related to, among other things, facilities restructuring
or inventory obsolescence charges. As a result, the integration expense we incur and recognize for
financial statement purposes could be significantly higher. Any material delays or unanticipated
additional expense may harm our business and results of operations. In addition to these
integration costs, we also expect to incur significant transition services expense, and we will
rely upon an affiliate of Nortel to perform certain operational functions during an interim period
following closing not to exceed two years.
We expect this pending transaction to close in the first calendar quarter of 2010. If the
closing does not take place on or before April 30, 2010, the applicable asset sale agreements may
be terminated by either party. Ciena has been granted early termination of the antitrust waiting periods under the
Hart-Scott-Rodino Act and the Canadian Competition Act. On December 2, 2009, the bankruptcy courts
in the U.S. and Canada approved the asset sale agreement relating to Cienas acquisition of
substantially all of the North American, Caribbean and Latin American and Asian optical networking
and carrier Ethernet assets of Nortels MEN business. Completion of the transaction remains subject
to information and consultation with employee representatives and employees in certain
international jurisdictions, an additional regional regulatory clearance and customary closing
conditions.
As a result of the aggregate consideration to be paid as described above, we will incur
significant additional indebtedness and will materially reduce our existing cash balance. Except
where specifically indicated, the discussion in this Managements Discussion and Analysis of
Financial Condition and Results of Operations does not give effect to the possible consummation of
this pending transaction and the effect on our results of operations.
Goodwill Impairment
Based on a combination of factors, including the macroeconomic conditions described above and
a sustained decline in our common stock price and market capitalization below our net book value,
we conducted an interim impairment assessment of goodwill during the second quarter of fiscal 2009.
The conclusion of this assessment was the write-off of all goodwill remaining on our balance
sheet, resulting in an impairment charge of $455.7 million in the second quarter of fiscal 2009.
This impairment charge significantly affected our operating expense and operating and net loss for
fiscal 2009. It will not result in any current or future cash expenditures. See Critical
Accounting Policies and Estimates below for more information regarding this assessment.
Restructuring Activities
During the second quarter of fiscal 2009, we took action to effect a headcount reduction of
approximately 200 employees or 9% of our global workforce, with headcount reductions implemented
across our organizations and geographies. As part of this action, we closed our Acton,
Massachusetts research and development facility during the third quarter. We expect these steps
will help better align our operating expense with market opportunities and the development strategy
above. We incurred an $11.2 million charge in fiscal 2009, principally consisting of $4.1 million
for employee-related restructuring, $3.4 million for Acton facilities-related restructuring, and
$3.7 million related to the revision of previous estimates.
Financial Results
Revenue for the fourth quarter was $176.3 million, which represented a sequential increase of
7.0% from $164.8 million in the third quarter of fiscal 2009 and a 1.9% decrease from $179.7
million in the fourth quarter of fiscal 2008. The sequential quarterly increase in revenue reflects
a $6.9 million increase in carrier Ethernet service delivery revenue, principally related to sales
of carrier Ethernet switching and aggregation products in support of wireless backhaul deployments,
including, in large part, 4G WiMax. Revenue for the fourth quarter of fiscal 2009 also benefited
from a $2.3 million increase in optical service delivery revenue, primarily reflecting increased
sales of CN4200, and a $2.4 million increase in service revenue.
34
In spite of slight improvements in revenue in the second half of fiscal 2009, and improved
sales of carrier Ethernet switching and aggregation products during fiscal 2009, the unfavorable
market conditions and reductions in customer spending described above resulted in significant declines in annual revenue as compared to
fiscal 2008. Total revenue decreased from $902.4 million in fiscal 2008 to $652.6 million in fiscal
2009.
|
|
|
Fiscal 2009 revenue reflects a $258.9 million decrease in sales of our optical service
delivery products; |
|
|
|
Revenue from the U.S. for fiscal 2009 was $419.4 million, a decrease from $590.9
million in fiscal 2008; |
|
|
|
International revenue for fiscal 2009 was $233.2 million, a decrease from $311.6
million in fiscal 2008; |
|
|
|
As a percentage of revenue, international revenue was 35.7% during the fiscal 2009, a
slight increase from 34.5% in fiscal 2008; and |
|
|
|
For fiscal 2009, one customer AT&T representing 19.6% of revenue accounted for
greater than 10% of revenue. This compares to 2008, when two customers AT&T
representing 25.2%, and BT representing 12.6% of revenue accounted for greater than 10%
of our revenue. |
Gross margin for the fourth quarter of fiscal 2009 was 44.0%, down from 45.3% in the third
quarter of fiscal 2009. Gross margin for fiscal 2009 was 43.6%, as compared to 50.0% in fiscal
2008. Product gross margin was 45.9% in fiscal 2009, a decrease from 53.1% in fiscal 2008. Gross
margin decreases during fiscal 2009 reflect the effect of increased competition, including
increased pricing pressure across our optical transport products, and less favorable product and
geographic mix, including fewer sales of core switching products as a percentage of total revenue.
Gross margin for fiscal 2009 was also negatively affected by increased charges related to losses on
committed customer sales contracts and higher charges relating to warranty. These additional costs
of goods sold were partially offset by product cost reductions.
Operating expense for fiscal 2009 was $864.1 million, which includes a goodwill impairment
charge of $455.7 million, compared to $429.1 million in fiscal 2008. Annual operating expense
related to research and development, sales and marketing and general and administrative decreased
by $23.3 million in fiscal 2009. This decrease reflects our efforts to manage our workforce and
constrain general and administrative and sales and marketing expenses in the face of weaker market
conditions. Exclusive of the goodwill impairment, we expect operating expense to increase from
fiscal 2009, particularly if market conditions improve and we seek to fund and support the growth
of our business.
Our loss from operations for fiscal 2009 was $579.2 million. This compares to income from
operations of $21.9 million in fiscal 2008. Our net loss for fiscal 2009 was $581.2 million, or
$6.37 per share. This compares to net income of $38.9 million, or $0.42 per diluted share, in
fiscal 2008. Net loss and operating loss reflect the effect of market conditions and lower customer
spending during fiscal 2009 and a goodwill impairment charge during the second quarter of fiscal
2009, each as described above.
We generated $7.4 million in cash from operations during fiscal 2009 as compared to
$117.6 million during fiscal 2008. Cash from operations during fiscal 2009 consisted of
$3.8 million in cash from net income (adjusted for non-cash charges) and $3.6 million resulting
from changes in working capital. Cash from operations during fiscal 2008 consisted of
$168.7 million in cash from net income (adjusted for non-cash charges) and a $51.1 million net
decrease in cash resulting from changes in working capital.
At October 31, 2009, we had $485.7 million in cash and cash equivalents and $571.2 million of
short-term and long-term investments in marketable debt securities.
As of October 31, 2009, headcount was 2,163, a decrease from 2,203 at October 31, 2008 and an
increase from 1,797 at October 31, 2007.
Results of Operations
Our results of operations for fiscal 2008 include the operations of World Wide Packets (WWP)
only after the March 3, 2008 acquisition date.
Revenue
We derive revenue from sales of our products and services, which we discuss in the following
three major groupings:
|
1. |
|
Optical Service Delivery. Included in product revenue, this revenue grouping
reflects sales of our transport and switching products and legacy data networking
products and related software. This revenue grouping was previously referred to as our
converged Ethernet infrastructure products. |
35
|
2. |
|
Carrier Ethernet Service Delivery. Included in product revenue, this revenue
grouping reflects sales of our service delivery and aggregation switches, broadband
access products, and the related software. |
|
3. |
|
Global Network Services. Included in services revenue are sales of
installation, deployment, maintenance support, consulting and training activities. |
A sizable portion of our revenue continues to come from sales to a small number of
communications service providers. As a result, our revenues are closely tied to the prospects,
performance, and financial condition of our largest customers and are significantly affected by
market-wide changes, including reductions in enterprise and consumer spending, that affect the
businesses and level of infrastructure-related spending by communications service providers. Our
contracts do not have terms that obligate these customers to purchase any minimum or specific
amounts of equipment or services. Because their spending may be unpredictable and sporadic, and
their purchases may result in the recognition or deferral of significant amounts of revenue in a
given quarter, our revenue can fluctuate on a quarterly basis. Our concentration of revenue
increases the risk of quarterly fluctuations in revenue and operating results and can exacerbate
our exposure to reductions in spending or changes in network strategy involving one or more of our
significant customers. In particular, some of our customers are pursuing efforts to outsource the
management and operation of their networks, or have indicated a procurement strategy to reduce the
number of vendors from which they purchase equipment.
Given current market conditions and the effect of lower demand in fiscal 2009, as well as
changes in the mix of our revenue toward products with shorter customer lead times, the percentage
of our quarterly revenue relating to orders placed in that quarter has increased in comparison to
prior periods. Lower levels of backlog orders and an increase in the percentage of quarterly
revenue relating to orders placed in that quarter could result in more variability and less
predictability in our quarterly results.
Cost of Goods Sold
Product cost of goods sold consists primarily of amounts paid to third-party contract
manufacturers, component costs, direct compensation costs and overhead, shipping and logistics
costs associated with manufacturing-related operations, warranty and other contractual obligations,
royalties, license fees, amortization of intangible assets, cost of excess and obsolete inventory
and, when applicable, estimated losses on committed customer contracts.
Services cost of goods sold consists primarily of direct and third-party costs, including
personnel costs, associated with provision of services including installation, deployment,
maintenance support, consulting and training activities, and, when applicable, estimated losses on
committed customer contracts.
Gross Margin
Gross margin continues to be susceptible to quarterly fluctuation due to a number of factors.
Product gross margin can vary significantly depending upon the mix of products and customers in a
given fiscal quarter. Gross margin can also be affected by volume of orders, our ability to drive
product cost reductions, geographic mix, the level of pricing pressure we encounter, our
introduction of new products or entry into new markets, charges for excess and obsolete inventory
and changes in warranty costs.
Service gross margin can be affected by the mix of customers and services, particularly the
mix between deployment and maintenance services, geographic mix and the timing and extent of any
investments in internal resources to support this business.
Operating Expense
Research and development expense primarily consists of salaries and related employee expense
(including share-based compensation expense), prototype costs relating to design, development,
testing of our products, and third-party consulting costs.
Sales and marketing expense primarily consists of salaries, commissions and related employee
expense (including share-based compensation expense), and sales and marketing support expense,
including travel, demonstration units, trade show expense, and third-party consulting costs.
General and administrative expense primarily consists of salaries and related employee expense
(including share-based compensation expense), and costs for third-party consulting and other
services.
36
Amortization of intangible assets primarily reflects purchased technology and customer
relationships from our acquisitions.
Fiscal 2008 compared to Fiscal 2009
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
791,415 |
|
|
|
87.7 |
|
|
$ |
547,522 |
|
|
|
83.9 |
|
|
$ |
(243,893 |
) |
|
|
(30.8 |
) |
Services |
|
|
111,033 |
|
|
|
12.3 |
|
|
|
105,107 |
|
|
|
16.1 |
|
|
|
(5,926 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
902,448 |
|
|
|
100.0 |
|
|
|
652,629 |
|
|
|
100.0 |
|
|
|
(249,819 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
371,238 |
|
|
|
41.1 |
|
|
|
296,170 |
|
|
|
45.4 |
|
|
|
(75,068 |
) |
|
|
(20.2 |
) |
Services |
|
|
80,283 |
|
|
|
8.9 |
|
|
|
71,629 |
|
|
|
11.0 |
|
|
|
(8,654 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
451,521 |
|
|
|
50.0 |
|
|
|
367,799 |
|
|
|
56.4 |
|
|
|
(83,722 |
) |
|
|
(18.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
450,927 |
|
|
|
50.0 |
|
|
$ |
284,830 |
|
|
|
43.6 |
|
|
$ |
(166,097 |
) |
|
|
(36.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
791,415 |
|
|
|
100.0 |
|
|
$ |
547,522 |
|
|
|
100.0 |
|
|
$ |
(243,893 |
) |
|
|
(30.8 |
) |
Product cost of goods sold |
|
|
371,238 |
|
|
|
46.9 |
|
|
|
296,170 |
|
|
|
54.1 |
|
|
|
(75,068 |
) |
|
|
(20.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
420,177 |
|
|
|
53.1 |
|
|
$ |
251,352 |
|
|
|
45.9 |
|
|
$ |
(168,825 |
) |
|
|
(40.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
111,033 |
|
|
|
100.0 |
|
|
$ |
105,107 |
|
|
|
100.0 |
|
|
$ |
(5,926 |
) |
|
|
(5.3 |
) |
Service cost of goods sold |
|
|
80,283 |
|
|
|
72.3 |
|
|
|
71,629 |
|
|
|
68.1 |
|
|
|
(8,654 |
) |
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
30,750 |
|
|
|
27.7 |
|
|
$ |
33,478 |
|
|
|
31.9 |
|
|
$ |
2,728 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
The table below (in thousands, except percentage data) sets forth the changes in
distribution of revenue for the periods indicated:
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Optical service delivery |
|
$ |
731,260 |
|
|
|
81.0 |
|
|
$ |
472,410 |
|
|
|
72.4 |
|
|
$ |
(258,850 |
) |
|
|
(35.4 |
) |
Carrier Ethernet service delivery |
|
|
60,155 |
|
|
|
6.7 |
|
|
|
75,112 |
|
|
|
11.5 |
|
|
|
14,957 |
|
|
|
24.9 |
|
Global network services |
|
|
111,033 |
|
|
|
12.3 |
|
|
|
105,107 |
|
|
|
16.1 |
|
|
|
(5,926 |
) |
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
(249,819 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
Revenue from sales to customers outside of the United States is reflected as
International in the geographic distribution of revenue below. The table below (in thousands,
except percentage data) sets forth the changes in geographic distribution of revenue for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
590,868 |
|
|
|
65.5 |
|
|
$ |
419,405 |
|
|
|
64.3 |
|
|
$ |
(171,463 |
) |
|
|
(29.0 |
) |
International |
|
|
311,580 |
|
|
|
34.5 |
|
|
|
233,224 |
|
|
|
35.7 |
|
|
|
(78,356 |
) |
|
|
(25.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
652,629 |
|
|
|
100.0 |
|
|
$ |
(249,819 |
) |
|
|
(27.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
Certain customers each accounted for at least 10% of our revenue for the periods
indicated (in thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2008 |
|
|
%* |
|
|
2009 |
|
|
%* |
|
AT&T |
|
$ |
227,737 |
|
|
|
25.2 |
|
|
$ |
128,233 |
|
|
|
19.6 |
|
BT |
|
|
113,981 |
|
|
|
12.6 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
341,718 |
|
|
|
37.8 |
|
|
$ |
128,233 |
|
|
|
19.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue decreased primarily due to a $258.9 million decrease in sales
of our optical service delivery products. Lower optical service delivery revenue reflects
decreases of $108.1 million in sales of core transport products, $104.8 million in sales of
core switching products, and $46.5 million in sales of legacy data networking and metro
transport products. This decline was partially offset by a $15.0 million increase in
revenue from our carrier Ethernet service delivery products, reflecting a $34.7 million
increase in sales of our switching and aggregation products and a $19.7 million decrease in
sales of our broadband access products. |
|
|
|
Services revenue decreased due to a $10.9 million decrease in deployment
services due to lower sales volume and installation activity. This decrease was partially
offset by a $5.0 million increase in maintenance and support services. |
|
|
|
United States revenue decreased primarily due to a $180.8 million decrease in
sales of our optical service delivery products. Lower optical service delivery revenue
reflects decreases of $88.2 million in sales of core transport products, $87.0 million in
sales of core switching products, and $25.2 million in sales of legacy data networking and
metro transport products. These decreases were partially offset by a $19.7 million increase
in sales of CN 4200. Revenue from carrier Ethernet service delivery products increased by
$10.5 million, reflecting a $30.3 million increase in sales of our switching and
aggregation products, partially offset by a $19.8 million decrease in sales of our
broadband access products. |
38
|
|
|
International revenue decreased primarily due to a $78.1 million decrease in
sales of our optical service delivery products. This primarily reflects decreases of $21.3
million in sales of legacy data networking and metro transport products, $19.9 million in
sales of core transport products, $19.2 million in sales of CN 4200, and $17.8 million in
sales of core switching products. This decrease was partially offset by a $4.5 million
increase in revenue from our carrier Ethernet service delivery products, primarily related
to sales of our switching and aggregation products. |
Gross profit
|
|
|
Gross profit as a percentage of revenue decreased due to less favorable product
and geographic mix, including fewer sales of core switching products as a percentage of
total revenue, increased charges related to losses on
committed customer sales contracts and higher charges relating to warranty. Gross profit as
a percentage of revenue for fiscal 2008 reflects a $5.3 million increase in product cost of
goods sold related to the revaluation of the acquired WWP inventory due to purchase
accounting rules. |
|
|
|
Gross profit on products as a percentage of product revenue decreased due to
less favorable product and geographic mix, including fewer sales of core switching products
as a percentage of total revenue, increased charges related to losses on committed customer
sales contracts and higher charges relating to warranty. Gross profit as a percentage of
revenue for fiscal 2008 reflects a $5.3 million increase in product cost of goods sold
related to the revaluation of the acquired WWP inventory due to purchase accounting rules. |
|
|
|
Gross profit on services as a percentage of services revenue increased due to
higher sales of maintenance contracts as a percentage of services revenue. Services gross
margin remains heavily dependent upon the mix of services in a given period and may
fluctuate from quarter to quarter. |
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating
expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2008 |
|
|
*% |
|
|
2009 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
175,023 |
|
|
|
19.4 |
|
|
$ |
190,319 |
|
|
|
29.2 |
|
|
$ |
15,296 |
|
|
|
8.7 |
|
Selling and marketing |
|
|
152,018 |
|
|
|
16.8 |
|
|
|
134,527 |
|
|
|
20.6 |
|
|
|
(17,491 |
) |
|
|
(11.5 |
) |
General and administrative |
|
|
68,639 |
|
|
|
7.6 |
|
|
|
47,509 |
|
|
|
7.3 |
|
|
|
(21,130 |
) |
|
|
(30.8 |
) |
Amortization of intangible assets |
|
|
32,264 |
|
|
|
3.6 |
|
|
|
24,826 |
|
|
|
3.8 |
|
|
|
(7,438 |
) |
|
|
(23.1 |
) |
Restructuring costs |
|
|
1,110 |
|
|
|
0.1 |
|
|
|
11,207 |
|
|
|
1.7 |
|
|
|
10,097 |
|
|
|
909.6 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
455,673 |
|
|
|
69.8 |
|
|
|
455,673 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
429,054 |
|
|
|
47.5 |
|
|
$ |
864,061 |
|
|
|
132.4 |
|
|
$ |
435,007 |
|
|
|
101.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
Research and development expense benefited by $5.3 million in favorable foreign
exchange rates primarily due to the comparative strength of the U.S. dollar in relation to
the previous year. The resulting $15.3 million net increase principally reflects an
increase in prototype expense of $15.4 million. Other increases include $5.4 million in
facilities and information systems expense, $2.8 million in depreciation expense, and
higher employee compensation cost of $0.6 million, including a $2.6 million increase in
share-based compensation expense. These increases were partially offset by decreases of
$4.8 million in consulting services expense, $2.7 million in technology related expenses
and $0.8 million in travel expense. |
|
|
|
Selling and marketing expense benefited by $2.8 million in favorable foreign
exchange rates primarily due to the comparative strength of the U.S. dollar in relation to
the previous year. The resulting $17.5 million net change reflects decreases of $7.8
million in employee compensation cost, $3.0 million in travel-related costs, $2.9 million
in marketing program costs and $2.4 million in consulting services expense. These decreases
were partially offset by a $1.2 million increase in facilities and information systems
expense. |
39
|
|
|
General and administrative expense benefited by $0.5 million in favorable
foreign exchange rates primarily due to the comparative strength of the U.S. dollar in
relation to the previous year. The resulting $21.1 million net
change reflects decreases of
$6.1 million in employee compensation cost, $4.1 million in consulting services expense,
$1.7 million in facilities and information systems expense, and $0.7 million in
technology-related expense. Expense for fiscal 2008 included $7.7 million associated with
the settlement of patent litigation. |
|
|
|
Amortization of intangible assets costs decreased due to certain intangible
assets reaching the end of their useful life and becoming fully amortized during fiscal
2009. |
|
|
|
Restructuring costs during fiscal 2009 was primarily related to a headcount
reduction of approximately 200 employees, the closure of our Acton, Massachusetts research
and development facility and revisions of estimates related to previously restructured
facilities. Restructuring costs for fiscal 2008 principally reflects costs associated with
a workforce reduction of 56 employees during the fourth quarter. |
|
|
|
Goodwill impairment was based on a combination of factors, including the
macroeconomic conditions described above and a sustained decline in our common stock price
and market capitalization below our net book value. These factors required Ciena to conduct
an interim impairment assessment of goodwill during the second quarter of fiscal 2009. The
conclusion of this assessment was the write-off of all goodwill remaining on our balance
sheet, resulting in an impairment charge of $455.7 million in the second quarter of fiscal
2009. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2008 |
|
*% |
|
2009 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
36,762 |
|
|
|
4.1 |
|
|
$ |
9,487 |
|
|
|
1.5 |
|
|
$ |
(27,275 |
) |
|
|
(74.2 |
) |
Interest expense |
|
$ |
12,927 |
|
|
|
1.4 |
|
|
$ |
7,406 |
|
|
|
1.1 |
|
|
$ |
(5,521 |
) |
|
|
(42.7 |
) |
Realized loss due to impairment of marketable debt investments |
|
$ |
5,101 |
|
|
|
0.6 |
|
|
$ |
|
|
|
|
0.0 |
|
|
$ |
(5,101 |
) |
|
|
(100.0 |
) |
Loss on cost method investments |
|
$ |
|
|
|
|
0.0 |
|
|
$ |
5,328 |
|
|
|
0.8 |
|
|
$ |
5,328 |
|
|
|
100.0 |
|
Gain on extinguishment of debt |
|
$ |
932 |
|
|
|
0.1 |
|
|
$ |
|
|
|
|
0.0 |
|
|
$ |
(932 |
) |
|
|
(100.0 |
) |
Provision (benefit) for income taxes |
|
$ |
2,645 |
|
|
|
0.3 |
|
|
$ |
(1,324 |
) |
|
|
(0.2 |
) |
|
$ |
(3,969 |
) |
|
|
(150.1 |
) |
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2008 to 2009 |
|
|
|
Interest and other income, net decreased due to lower average cash and
investment balances and lower interest rates. Lower cash balances primarily relate to the
repayment at maturity of the $542.3 million principal outstanding on our 3.75% convertible
notes during the first quarter of fiscal 2008 and our use of $210.0 million in cash
consideration and related expenses associated with our acquisition of WWP in the second
quarter of fiscal 2008. |
|
|
|
Interest expense decreased primarily due to the repayment of 3.75% convertible
notes at maturity at the end of the first quarter of fiscal 2008. |
|
|
|
Realized loss due to impairment of marketable debt investments for fiscal 2008
reflects a loss related to commercial paper investments in SIV Portfolio plc (formerly
known as Cheyne Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs)
that entered into receivership during the fourth quarter of fiscal 2007 and failed to make
payment at maturity. These SIVs completed their restructuring activities during fiscal 2008
and, as of the end of the fiscal year, we no longer held these investments. |
|
|
|
Loss on cost method investments during fiscal 2009 was due to the decline in
value of our investments in two privately held technology companies that were determined to
be other-than-temporary. |
|
|
|
Gain on extinguishment of debt reflects our repurchase of $2.0 million in
principal amount of our outstanding 0.25% convertible senior notes due May 1, 2013 in an
open market transaction. We used $1.0 million of our cash to effect this repurchase, which
resulted in a gain of approximately $0.9 million. |
|
|
|
Provision for income taxes decreased primarily due to refundable federal tax
credits made available by recent economic stimulus tax law changes. Availability of
refundable credits currently expires on December 31, 2009. We will continue to maintain a
valuation allowance against nearly all net deferred tax assets until sufficient evidence
exists to support a reversal. See Critical Accounting Policies and Estimates Deferred
Tax Valuation Allowance below for information relating to our deferred tax valuation
allowance and the conditions required for its release. |
40
Fiscal 2007 compared to Fiscal 2008
Revenue, cost of goods sold and gross profit
The table below (in thousands, except percentage data) sets forth the changes in revenue, cost
of goods sold and gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
695,289 |
|
|
|
89.2 |
|
|
$ |
791,415 |
|
|
|
87.7 |
|
|
$ |
96,126 |
|
|
|
13.8 |
|
Services |
|
|
84,480 |
|
|
|
10.8 |
|
|
|
111,033 |
|
|
|
12.3 |
|
|
|
26,553 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
779,769 |
|
|
|
100.0 |
|
|
|
902,448 |
|
|
|
100.0 |
|
|
|
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
337,866 |
|
|
|
43.3 |
|
|
|
371,238 |
|
|
|
41.1 |
|
|
|
33,372 |
|
|
|
9.9 |
|
Services |
|
|
79,634 |
|
|
|
10.2 |
|
|
|
80,283 |
|
|
|
8.9 |
|
|
|
649 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
417,500 |
|
|
|
53.5 |
|
|
|
451,521 |
|
|
|
50.0 |
|
|
|
34,021 |
|
|
|
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
$ |
362,269 |
|
|
|
46.5 |
|
|
$ |
450,927 |
|
|
|
50.0 |
|
|
$ |
88,658 |
|
|
|
24.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in product
revenue, product cost of goods sold and product gross profit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Product revenue |
|
$ |
695,289 |
|
|
|
100.0 |
|
|
$ |
791,415 |
|
|
|
100.0 |
|
|
$ |
96,126 |
|
|
|
13.8 |
|
Product cost of goods sold |
|
|
337,866 |
|
|
|
48.6 |
|
|
|
371,238 |
|
|
|
46.9 |
|
|
|
33,372 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product gross profit |
|
$ |
357,423 |
|
|
|
51.4 |
|
|
$ |
420,177 |
|
|
|
53.1 |
|
|
$ |
62,754 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of product revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in service
revenue, service cost of goods sold and service gross profit (loss) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Service revenue |
|
$ |
84,480 |
|
|
|
100.0 |
|
|
$ |
111,033 |
|
|
|
100.0 |
|
|
$ |
26,553 |
|
|
|
31.4 |
|
Service cost of goods sold |
|
|
79,634 |
|
|
|
94.3 |
|
|
|
80,283 |
|
|
|
72.3 |
|
|
|
649 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service gross profit |
|
$ |
4,846 |
|
|
|
5.7 |
|
|
$ |
30,750 |
|
|
|
27.7 |
|
|
$ |
25,904 |
|
|
|
534.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of service revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
The table below (in thousands, except percentage data) sets forth the changes in
distribution of revenue for the periods indicated:
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Optical service delivery |
|
$ |
645,159 |
|
|
|
82.8 |
|
|
$ |
731,260 |
|
|
|
81.0 |
|
|
$ |
86,101 |
|
|
|
13.3 |
|
Carrier Ethernet service delivery |
|
|
50,129 |
|
|
|
6.4 |
|
|
|
60,155 |
|
|
|
6.7 |
|
|
|
10,026 |
|
|
|
20.0 |
|
Global network services |
|
|
84,481 |
|
|
|
10.8 |
|
|
|
111,033 |
|
|
|
12.3 |
|
|
|
26,552 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
Revenue from sales to customers outside of the United States is reflected as
International in the geographic distribution of revenue below. The table below (in thousands,
except percentage data) sets forth the changes in geographic distribution of revenue for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
United States |
|
$ |
553,582 |
|
|
|
71.0 |
|
|
$ |
590,868 |
|
|
|
65.5 |
|
|
$ |
37,286 |
|
|
|
6.7 |
|
International |
|
|
226,187 |
|
|
|
29.0 |
|
|
|
311,580 |
|
|
|
34.5 |
|
|
|
85,393 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
779,769 |
|
|
|
100.0 |
|
|
$ |
902,448 |
|
|
|
100.0 |
|
|
$ |
122,679 |
|
|
|
15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
Certain customers each accounted for at least 10% of our revenue for the periods
indicated (in thousands, except percentage data) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
AT&T |
|
$ |
196,924 |
|
|
|
25.3 |
|
|
$ |
227,737 |
|
|
|
25.2 |
|
BT |
|
|
n/a |
|
|
|
|
|
|
|
113,981 |
|
|
|
12.6 |
|
Sprint |
|
|
100,122 |
|
|
|
12.8 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
297,046 |
|
|
|
38.1 |
|
|
$ |
341,718 |
|
|
|
37.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
n/a |
|
Denotes revenue representing less than 10% of total revenue for the period |
|
* |
|
Denotes % of total revenue |
Revenue
|
|
|
Product revenue increased primarily due to an $86.1 million increase in sales
of our optical service delivery products. Increased optical service delivery revenue
reflects increases of $67.9 million in sales of CN 4200 and $52.6 million in sales of core
switching products. These increases were offset by decreases of $17.7 million in sales of
core transport products and $16.7 million in sales of legacy data networking and metro
transport products. We believe that our optical service delivery revenue during fiscal 2008
benefited from increasing network capacity requirements and customer transition to more
efficient and economical network architectures. In particular, sales of our core switching
products benefited from an expansion in mesh-style optical networks. Revenue from our
carrier Ethernet service delivery products increased by $10.0 million, reflecting the
addition of $24.4 million in sales related to service delivery and aggregation switches
from our acquisition of WWP. This increase offset a $14.6 million reduction in revenue from
our broadband access products. |
|
|
|
Services revenue increased primarily due to a $15.1 million increase in
deployment services and a $9.7 million increase in maintenance and support services,
reflecting higher sales volume and increased installation activity. |
|
|
|
United States revenue increased primarily due to a $15.0 million increase in
sales of optical service delivery products. Increased optical service delivery revenue
reflects a $38.8 million increase in sales of CN 4200 and a $22.5 million increase in sales
of core switching products. These increases were partially offset by a $23.6 million
decrease in sales of core transport products and a $22.7 million decrease in sales of
legacy data networking and metro transport products. Revenue from carrier Ethernet service
delivery products increased by $5.2 million, reflecting the addition of $19.5 million in
sales of products derived from our WWP acquisition. This increase offset a $14.6 million
reduction in revenue from our broadband access products. In addition, U.S. revenue
benefited from a $17.0 million increase in services revenue. |
42
|
|
|
International revenue increased primarily due to a $71.1 million increase in
sales of our optical service delivery products. This primarily reflects increases of $30.1
million in sales of core switching products, $29.1 million in sales of CN 4200 and $5.9
million in sales of core transport products. International revenue also benefited from a
$4.8 million increase in carrier Ethernet service delivery revenue and a $9.6 million
increase in services revenue. |
Gross profit
|
|
|
Gross profit as a percentage of revenue increased due to significant
improvements in services gross margin, product cost reductions and favorable product mix. |
|
|
|
Gross profit on products as a percentage of product revenue increased primarily
due to significant product cost reductions and improved manufacturing efficiencies as a
result of consolidation efforts relating to our supply chain and our increased use of lower
cost contract manufacturers and suppliers in Asia. Improved gross margin also benefited
from a favorable product mix. This improvement was partially offset by the effect on
product costs of goods sold of $5.3 million in costs related to the revaluation of the
acquired WWP inventory. |
|
|
|
Gross profit on services as a percentage of services revenue increased
significantly due to improved deployment
efficiencies. |
Operating expense
The table below (in thousands, except percentage data) sets forth the changes in operating
expense for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
|
Increase |
|
|
|
|
|
|
2007 |
|
|
%* |
|
|
2008 |
|
|
%* |
|
|
(decrease) |
|
|
%** |
|
Research and development |
|
$ |
127,296 |
|
|
|
16.3 |
|
|
$ |
175,023 |
|
|
|
19.4 |
|
|
$ |
47,727 |
|
|
|
37.5 |
|
Selling and marketing |
|
|
118,015 |
|
|
|
15.1 |
|
|
|
152,018 |
|
|
|
16.8 |
|
|
|
34,003 |
|
|
|
28.8 |
|
General and administrative |
|
|
50,248 |
|
|
|
6.4 |
|
|
|
68,639 |
|
|
|
7.6 |
|
|
|
18,391 |
|
|
|
36.6 |
|
Amortization of intangible assets |
|
|
25,350 |
|
|
|
3.3 |
|
|
|
32,264 |
|
|
|
3.6 |
|
|
|
6,914 |
|
|
|
27.3 |
|
Restructuring (recoveries) costs |
|
|
(2,435 |
) |
|
|
(0.3 |
) |
|
|
1,110 |
|
|
|
0.1 |
|
|
|
3,545 |
|
|
|
(145.6 |
) |
Gain on lease settlement |
|
|
(4,871 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
4,871 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
313,603 |
|
|
|
40.2 |
|
|
$ |
429,054 |
|
|
|
47.5 |
|
|
$ |
115,451 |
|
|
|
36.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
|
|
|
Research and development expense increased due to higher employee compensation
cost of $29.5 million, including a $3.6 million increase in share-based compensation
expense, primarily reflecting increased headcount. Other increases included $7.3 million in
consulting expense, $7.0 million in non-capitalized development tools and software
maintenance support, and $2.4 million in depreciation expense. |
|
|
|
Selling and marketing expense increased primarily due a $19.4 million increase
in employee compensation cost, including a $4.1 million increase in share-based
compensation expense, primarily reflecting increased headcount. Other increases included
$3.1 million in travel and entertainment expense, $2.5 million of demonstration equipment,
$2.1 million in marketing programs, $2.1 million in facilities and information systems
expense and $1.7 million in consulting expense. |
|
|
|
General and administrative expense increased due to higher employee
compensation cost of $7.6 million, including a $2.1 million increase in share-based
compensation expense, primarily reflecting increased headcount. In addition, legal expense
increased by $5.8 million, reflecting increased patent litigation settlement costs. Fiscal
2008 expense also reflects a $3.3 million increase in facilities and information systems
expense. |
43
|
|
|
Amortization of intangible assets costs increased due to the purchase of
intangible assets associated with our acquisition of WWP. See Note 2 to the Consolidated
Financial Statements in Item 8 of Part II of this report for additional information related
to purchased intangible assets. |
|
|
|
Restructuring (recoveries) costs for fiscal 2008 principally reflect costs
associated with a workforce reduction of 56 employees during the fourth quarter. For fiscal
2007, recoveries primarily reflect adjustments related to the return to use of previously
restructured facilities. |
|
|
|
Gain on lease settlement for fiscal 2007 was related to the termination of
lease obligations for our former San Jose, CA facilities. During fiscal 2007, we paid $53.0
million in connection with the settlement of these lease obligations. This transaction
resulted in a gain on lease settlement of approximately $4.9 million by eliminating the
remaining unfavorable lease commitment balance of $34.9 million and reducing our
restructuring liabilities by $23.5 million, offset by approximately $0.5 million of other
expenses. |
Other items
The table below (in thousands, except percentage data) sets forth the changes in other items
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year |
|
Increase |
|
|
|
|
2007 |
|
%* |
|
2008 |
|
%* |
|
(decrease) |
|
%** |
Interest and other income, net |
|
$ |
76,483 |
|
|
|
9.8 |
|
|
$ |
36,762 |
|
|
|
4.1 |
|
|
$ |
(39,721 |
) |
|
|
(51.9 |
) |
Interest expense |
|
$ |
26,996 |
|
|
|
3.5 |
|
|
$ |
12,927 |
|
|
|
1.4 |
|
|
$ |
(14,069 |
) |
|
|
(52.1 |
) |
Realized loss due to impairment of
marketable debt investments |
|
$ |
13,013 |
|
|
|
1.7 |
|
|
$ |
5,101 |
|
|
|
0.6 |
|
|
$ |
(7,912 |
) |
|
|
(60.8 |
) |
Gain on extinguishment of debt |
|
$ |
|
|
|
|
|
|
|
$ |
932 |
|
|
|
0.1 |
|
|
$ |
932 |
|
|
|
100.0 |
|
Gain on equity investments, net |
|
$ |
592 |
|
|
|
0.1 |
|
|
$ |
|
|
|
|
|
|
|
$ |
(592 |
) |
|
|
(100.0 |
) |
Provision for income taxes |
|
$ |
2,944 |
|
|
|
0.4 |
|
|
$ |
2,645 |
|
|
|
0.3 |
|
|
$ |
(299 |
) |
|
|
(10.2 |
) |
|
|
|
* |
|
Denotes % of total revenue |
|
** |
|
Denotes % change from 2007 to 2008 |
|
|
|
Interest and other income, net decreased due to lower average cash and
investment balances resulting from the repayment at maturity of the $542.3 million
principal outstanding on our 3.75% convertible notes during the first quarter of fiscal
2008 and use of $210.0 million in cash consideration and acquisition-related expenses
associated with our acquisition of WWP in the second quarter of fiscal 2008. Interest
income was also significantly affected by lower interest rates on investment balances. |
|
|
|
Interest expense decreased primarily due to the repayment of 3.75% convertible
notes at maturity at the end of the first quarter of fiscal 2008. This decrease was
slightly offset by the interest associated with our June 11, 2007 issuance of $500.0
million in 0.875% convertible senior notes. |
|
|
|
Realized loss due to impairment of marketable debt investments reflects losses
related to commercial paper investments in SIV Portfolio plc (formerly known as Cheyne
Finance plc) and Rhinebridge LLC, two structured investment vehicles (SIVs) that entered
into receivership during the fourth quarter of fiscal 2007 and failed to make payment at
maturity. |
|
|
|
Gain on extinguishment of debt reflects our repurchase of $2.0 million in
principal amount of our outstanding 0.25% convertible senior notes due May 1, 2013 in an
open market transaction. We used $1.0 million of our cash to effect this repurchase, which
resulted in a gain of approximately $0.9 million. |
|
|
|
Gain on equity investments, net during fiscal 2007 was related to a final
payment from the sale of a privately held technology company in which we held a minority
equity investment. |
|
|
|
Provision for income taxes was primarily attributable to foreign tax related to
our foreign operations and recognition of domestic deferred tax assets from prior
acquisitions. Federal tax is largely offset, except for any alternative minimum tax, by
recognizing deferred tax assets that were previously reserved against by a valuation
allowance. |
44
Liquidity and Capital Resources
At October 31, 2009, our principal sources of liquidity were cash and cash equivalents, and
short-term investments. During the second quarter of fiscal 2009, we reallocated our previous short
and long-term investments principally into U.S. treasuries. As a result, at October 31, 2009,
short-term and long term investments principally represent U.S. treasuries. The following table
summarizes our cash and cash equivalents and investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Cash and cash equivalents |
|
$ |
550,669 |
|
|
$ |
485,705 |
|
|
$ |
(64,964 |
) |
Short-term investments in marketable debt securities |
|
|
366,336 |
|
|
|
563,183 |
|
|
|
196,847 |
|
Long-term investments in marketable debt securities |
|
|
156,171 |
|
|
|
8,031 |
|
|
|
(148,140 |
) |
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and investments in marketable debt
securities |
|
$ |
1,073,176 |
|
|
$ |
1,056,919 |
|
|
$ |
(16,257 |
) |
|
|
|
|
|
|
|
|
|
|
The decrease in total cash and cash equivalents and investments in marketable debt
securities during fiscal 2009 was primarily related to the purchase of capital assets, slightly
offset by cash generated from operating activities described in Operating Activities below. Based
on past performance and current expectations, we believe that our cash and cash equivalents,
investments in marketable debt securities and cash generated from operations will satisfy our
working capital needs, capital expenditures, payment of the cash consideration for our pending
acquisition of Nortels MEN assets, acquisition-related costs, integration costs, 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 2009.
Operating Activities
The following tables set forth (in thousands) components of our $7.4 million of cash generated
by operating activities for fiscal 2009:
Net loss
|
|
|
|
|
|
|
Year ended |
|
|
|
October 31, |
|
|
|
2009 |
|
Net loss |
|
$ |
(581,154 |
) |
|
|
|
|
Our net loss for fiscal 2009 included the significant non-cash items summarized in the
following table (in thousands):
|
|
|
|
|
|
|
Year Ended |
|
|
|
October 31, |
|
|
|
2009 |
|
Depreciation of equipment, furniture and fixtures, and amortization of leasehold
improvements |
|
$ |
21,933 |
|
Goodwill impairment |
|
|
455,673 |
|
Share-based compensation costs |
|
|
34,438 |
|
Amortization of intangible assets |
|
|
31,429 |
|
Provision for inventory excess and obsolescence |
|
|
15,719 |
|
Provision for warranty |
|
|
19,286 |
|
|
|
|
|
Total significant non-cash charges |
|
$ |
578,478 |
|
|
|
|
|
Accounts Receivable, Net
Cash generated by accounts receivable, net of allowance for doubtful accounts receivable, was
$20.1 million from the end of fiscal 2008 through the end of fiscal 2009. Our days sales
outstanding (DSOs) increased from 55 days for fiscal 2008 to 65 days for fiscal 2009.
The following table sets forth (in thousands) changes to our accounts receivable, net of
allowance for doubtful accounts receivable, from the end of fiscal 2008 through the end of fiscal
2009:
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Accounts receivable,
net |
|
$ |
138,441 |
|
|
$ |
118,251 |
|
|
$ |
(20,190 |
) |
|
|
|
|
|
|
|
|
|
|
Inventory
Cash consumed by inventory for fiscal 2009 was $10.4 million. Our inventory turns decreased
from 4.0 for fiscal 2008 to 3.4 for fiscal 2009.
During fiscal 2009, changes in inventory reflect a $15.7 million reduction related to a
non-cash provision for excess and obsolescence.
The following table sets forth (in thousands) changes to the components of our inventory from
the end of fiscal 2008 through the end of fiscal 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Raw materials |
|
$ |
19,044 |
|
|
$ |
19,694 |
|
|
$ |
650 |
|
Work-in-process |
|
|
1,702 |
|
|
|
1,480 |
|
|
|
(222 |
) |
Finished goods |
|
|
95,963 |
|
|
|
90,914 |
|
|
|
(5,049 |
) |
|
|
|
|
|
|
|
|
|
|
Gross inventory |
|
|
116,709 |
|
|
|
112,088 |
|
|
|
(4,621 |
) |
Provision for inventory excess and obsolescence |
|
|
(23,257 |
) |
|
|
(24,002 |
) |
|
|
(745 |
) |
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
93,452 |
|
|
$ |
88,086 |
|
|
$ |
(5,366 |
) |
|
|
|
|
|
|
|
|
|
|
Accounts payable, accruals and other obligations
Cash generated by accounts payable, accruals and other obligations during fiscal 2009 was $2.9
million. Between 2008 and 2009, the change in unpaid equipment purchases was $0.8 million. Changes
in accrued liabilities in the table below reflect non-cash provisions of $19.3 million related to
warranties.
The following table sets forth (in thousands) changes in our accounts payable, accruals and
other obligations from the end of fiscal 2008 through the end of fiscal 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Accounts payable |
|
$ |
44,761 |
|
|
$ |
53,104 |
|
|
$ |
8,343 |
|
Accrued liabilities |
|
|
96,143 |
|
|
|
103,349 |
|
|
|
7,206 |
|
Restructuring liabilities |
|
|
4,225 |
|
|
|
9,605 |
|
|
|
5,380 |
|
Other long-term obligations |
|
|
8,089 |
|
|
|
8,554 |
|
|
|
465 |
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
accruals |
|
$ |
153,218 |
|
|
$ |
174,612 |
|
|
$ |
21,394 |
|
|
|
|
|
|
|
|
|
|
|
Interest Payable on Convertible Notes
We paid the final $10.2 million interest payment on our 3.75% convertible notes, due February
1, 2008, during fiscal 2008.
Interest on our outstanding 0.25% convertible senior notes, due May 1, 2013, is payable on May
1 and November 1 of each year. We paid $0.4 million in interest on our 0.25% convertible notes
during fiscal 2009.
Interest on our outstanding 0.875% convertible senior notes, due June 15, 2017, is payable on
June 15 and December 15 of each year. We paid $4.3 million in interest on our 0.875% convertible
notes during fiscal 2009.
The indentures governing our outstanding convertible notes do not contain any financial
covenants. The indentures provide for customary events of default, including payment defaults,
breaches of covenants, failure to pay certain judgments and certain events of bankruptcy,
insolvency and reorganization. If an event of default occurs and is continuing, the principal
amount of the notes, plus accrued and unpaid interest, if any, may be declared immediately due and
payable. These amounts automatically become due and payable if an event of default relating to
certain events of bankruptcy, insolvency or reorganization occurs. For additional information about
our convertible notes, see Note 14 to our Consolidated Financial Statements included in Item 8 of
Part II of this report.
46
The following table reflects (in thousands) the balance of interest payable and the change in
this balance from the end of fiscal 2008 through the end of fiscal 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Accrued interest payable |
|
$ |
1,683 |
|
|
$ |
2,045 |
|
|
$ |
362 |
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
Deferred revenue increased by $1.5 million during fiscal 2009. Product deferred revenue
represents payments received in advance of shipment and payments received in advance of our ability
to recognize revenue. Services deferred revenue is related to payment for service contracts that
will be recognized over the contract term. The following table reflects (in thousands) the balance
of deferred revenue and the change in this balance from the end of fiscal 2008 through the end of
fiscal 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
Increase |
|
|
|
2008 |
|
|
2009 |
|
|
(decrease) |
|
Products |
|
$ |
13,061 |
|
|
$ |
11,998 |
|
|
$ |
(1,063 |
) |
Services |
|
|
61,366 |
|
|
|
63,935 |
|
|
|
2,569 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue |
|
$ |
74,427 |
|
|
$ |
75,933 |
|
|
$ |
1,506 |
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
During fiscal 2009, we had purchases, net of sales and maturities, of approximately $46.0
million of available for sale securities. Investing activities also included the purchase of
approximately $24.1 million in equipment. At the end of fiscal 2009, we had outstanding accounts
payable for equipment of $1.5 million, which represents a reduction of $0.8 million from the end of
fiscal 2008.
Contractual Obligations
On November 23, 2009 we announced that we had been selected as the successful bidder in the
auction of substantially all of the optical networking and carrier Ethernet assets of Nortels MEN
business. In accordance with the definitive purchase agreements, as amended, we have agreed to pay
$530 million in cash and issue $239 million in aggregate principal amount of 6% Senior Convertible
notes due in 2017 for a total consideration of $769 million for the assets. See Note 22 to our
Consolidated Financial Statements in Item 8 of Part II of this report for more information
regarding the pending acquisition of substantially all of the optical networking and carrier
Ethernet assets of Nortels MEN business and the terms of the notes.
The following is a summary of our future minimum payments under contractual obligations as of
October 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to three |
|
|
Three to five |
|
|
|
|
|
|
Total |
|
|
year |
|
|
years |
|
|
years |
|
|
Thereafter |
|
Interest due on convertible notes |
|
$ |
37,980 |
|
|
$ |
5,120 |
|
|
$ |
10,240 |
|
|
$ |
9,495 |
|
|
$ |
13,125 |
|
Principal due at maturity on convertible notes |
|
|
798,000 |
|
|
|
|
|
|
|
|
|
|
|
298,000 |
|
|
|
500,000 |
|
Operating leases (1) |
|
|
62,199 |
|
|
|
14,449 |
|
|
|
22,915 |
|
|
|
14,925 |
|
|
|
9,910 |
|
Purchase obligations (2) |
|
|
79,631 |
|
|
|
79,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (3) |
|
$ |
977,810 |
|
|
$ |
99,200 |
|
|
$ |
33,155 |
|
|
$ |
322,420 |
|
|
$ |
523,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount for operating leases above does not include insurance, taxes, maintenance
and other costs required by the applicable operating lease. These costs are variable and are not
expected to have a material impact. |
|
(2) |
|
Purchase obligations relate to purchase order commitments to our contract manufacturers
and component suppliers for inventory. In certain instances, we are permitted to cancel, reschedule
or adjust these orders. Consequently, only a portion of the amount reported above relates to firm,
non-cancelable and unconditional obligations. |
|
(3) |
|
As of October 31, 2009, we had approximately $6.1 million of other long-term obligations
in our consolidated balance sheet for unrecognized tax positions that are not included in this
table because the periods of cash settlement with the respective tax authority cannot be reasonably
estimated. |
47
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,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than one |
|
|
One to |
|
|
Three to |
|
|
|
|
|
|
Total |
|
|
year |
|
|
three years |
|
|
five years |
|
|
Thereafter |
|
Standby letters of
credit |
|
$ |
24,762 |
|
|
$ |
22,600 |
|
|
$ |
1,458 |
|
|
$ |
704 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements. In particular, we do not
have any equity interests in so-called limited purpose entities, which include special purpose
entities (SPEs) and structured finance entities.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements requires that we make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related
disclosure of contingent assets and liabilities. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. On an ongoing basis, we reevaluate our estimates,
including those related to bad debts, inventories, investments, intangible assets, goodwill, income
taxes, warranty obligations, restructuring, and contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under
the circumstances. Among other things, these estimates form the basis for judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. To the extent
that there are material differences between our estimates and actual results, our consolidated
financial statements will be affected.
We believe that the following critical accounting policies reflect those areas where
significant judgments and estimates are used in the preparation of our consolidated financial
statements.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue to be
realized or realizable and earned when all of the following criteria are met: persuasive evidence
of an arrangement exists; delivery has occurred or services have been rendered; the price to the
buyer is fixed or determinable; and collectibility is reasonably assured. Customer purchase
agreements and customer purchase orders are generally used to determine the existence of an
arrangement. Shipping documents and customer acceptance, when applicable, are used to verify
delivery. We assess whether the price is fixed or determinable based on the payment terms
associated with the transaction and whether the sales price is subject to refund or adjustment. We
assess collectibility based primarily on the creditworthiness of the customer as determined by
credit checks and analysis, as well as the customers payment history. In instances where final
acceptance of the product, system, or solution is specified by the customer, revenue is deferred
until all acceptance criteria have been met. Revenue for maintenance services is generally deferred
and recognized ratably over the period during which the services are to be performed.
Some of our communications networking equipment is integrated with software that is essential
to the functionality of the
equipment. Software revenue is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collectibility is probable. In
instances where final acceptance of the product is specified by the customer, revenue is deferred
until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, we allocate the arrangement fee to
those separate units of accounting. Multiple element arrangements that include software are
separated into more than one unit of accounting if the functionality of the delivered element(s) is
not dependent on the undelivered element(s), there is vendor-specific objective evidence of the
fair value of the undelivered element(s), and general revenue recognition criteria related to the
delivered element(s) have been met. The amount of product and services revenue recognized is
affected by our judgments as to whether an arrangement includes multiple elements and, if so,
whether vendor-specific objective evidence of fair value exists. Changes to the elements in an
arrangement and our ability to establish vendor-specific objective evidence for those elements
could affect the timing of revenue recognition. For all other deliverables, we separate the
elements into more than one unit of accounting if the delivered element(s) have value to the
customer on a stand-alone basis, objective and reliable evidence of fair value exists for the
undelivered element(s), and delivery of the undelivered element(s) is probable and substantially
within our control. Revenue is allocated to each unit of
48
accounting based on the relative fair
value of each accounting unit or using the residual method if objective evidence of fair value does
not exist for the delivered element(s). The revenue recognition criteria described above are
applied to each separate unit of accounting. If these criteria are not met, revenue is deferred
until the criteria are met or the last element has been delivered.
Our total deferred revenue for products was $13.0 million and $12.0 million as of October 31,
2008 and October 31, 2009, respectively. Our services revenue is deferred and recognized ratably
over the period during which the services are to be performed. Our total deferred revenue for
services was $61.4 million and $63.9 million as of October 31, 2008 and October 31, 2009,
respectively.
Share-Based Compensation
We measure and recognize compensation expense for share-based awards based on estimated fair
values on the date of grant. We estimate the fair value of each option-based award on the date of
grant using the Black-Scholes option-pricing model. This option pricing model requires that we make
several estimates, including the options expected life and the price volatility of the underlying
stock. The expected life of employee stock options represents the weighted-average period the stock
options are expected to remain outstanding. Because we considered our options to be plain
vanilla, we calculated the expected term using the simplified method for fiscal 2007. Options are
considered to be plain vanilla if they have the following basic characteristics: they are
granted at-the-money; exercisability is conditioned upon service through the vesting date;
termination of service prior to vesting results in forfeiture; there is a limited exercise period
following termination of service; and the options are non-transferable and non-hedgeable. Beginning
in fiscal 2008 we gathered more detailed historical information about specific exercise behavior of
our grantees, which we used to determine expected term. We considered the implied volatility and
historical volatility of our stock price in determining our expected volatility, and, finding both
to be equally reliable, determined that a combination of both measures would result in the best
estimate of expected volatility. We recognize the estimated fair value of option-based awards, net
of estimated forfeitures, as share-based compensation expense on a straight-line basis over the
requisite service period.
We estimate the fair value of our restricted stock unit awards based on the fair value of our
common stock on the date of grant. Our outstanding restricted stock unit awards are subject to
service-based vesting conditions and/or performance-based vesting conditions. We recognize the
estimated fair value of service-based awards, net of estimated forfeitures, as share-based expense
ratably over the vesting period on a straight-line basis. Awards with performance-based vesting
conditions require the achievement of certain financial or other performance criteria or targets as
a condition to the vesting, or acceleration of vesting. We recognize the estimated fair value of
performance-based awards, net of estimated forfeitures, as share-based expense over the performance
period, using graded vesting, which considers each performance period or tranche separately, based
upon our determination of whether it is probable that the performance targets will be achieved. At
each reporting period, we reassess the probability of achieving the performance targets and the
performance period required to meet those targets. Determining whether the performance targets will
be achieved involves judgment, and the estimate of expense may be revised periodically based on
changes in the probability of achieving the performance targets. Revisions are reflected in the
period in which the estimate is changed. If any performance goals are not met, no compensation cost
is ultimately recognized against that goal, and, to the extent previously recognized, compensation
cost is reversed.
Because share-based compensation expense is based on awards that are ultimately expected to
vest, the amount of expense takes into account estimated forfeitures. We estimate forfeitures at
the time of grant and revise, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Changes in these estimates and assumptions can materially affect the measure of
estimated fair value of our share-based compensation. See Note 18 to our Consolidated Financial
Statements in Item 8 of Part II of this report for information regarding our assumptions related to
share-based compensation
and the amount of share-based compensation expense we incurred for the periods covered in this
report. As of October 31, 2009, total unrecognized compensation expense was: (i) $11.9 million,
which relates to unvested stock options and is expected to be recognized over a weighted-average
period of 1.0 year; and (ii) $42.1 million, which relates to unvested restricted stock units and is
expected to be recognized over a weighted-average period of 1.2 years.
We recognize windfall tax benefits associated with the exercise of stock options or release of
restricted stock units directly to stockholders equity only when realized. A windfall tax benefit
occurs when the actual tax benefit realized by us upon an employees disposition of a share-based
award exceeds the deferred tax asset, if any, associated with the award that we had recorded. When
assessing whether a tax benefit relating to share-based compensation has been realized, we follow
the tax law with-and-without method. Under the with-and-without method, the windfall is
considered realized and recognized for financial statement purposes only when an incremental
benefit is provided after considering all other tax benefits including our net operating losses.
The with-and-without method results in the windfall from share-based compensation awards always
being effectively the last tax benefit to be considered. Consequently, the windfall attributable to
share-based compensation will not be considered realized in instances where our net operating loss
carryover (that is unrelated to windfalls) is sufficient to offset the current years taxable
income before considering the effects of current-year windfalls.
49
Reserve for Inventory Obsolescence
We make estimates about future customer demand for our products when establishing the
appropriate reserve for excess and obsolete inventory. We write down inventory that has become
obsolete or unmarketable by an amount equal to the difference between the cost of inventory and the
estimated market value based on assumptions about future demand and market conditions. Inventory
write downs are a component of our product cost of goods sold. Upon recognition of the write down,
a new lower cost basis for that inventory is established, and subsequent changes in facts and
circumstances do not result in the restoration or increase in that newly established cost basis. We
recorded charges for excess and obsolete inventory of $18.3 million and $15.7 million in fiscal
2008 and 2009, respectively. These charges were primarily related to excess inventory due to a
change in forecasted product sales. In an effort to limit our exposure to delivery delays and to
satisfy customer needs we purchase inventory based on forecasted sales across our product lines. In
addition, part of our research and development strategy is to promote the convergence of similar
features and functionalities across our product lines. Each of these practices exposes us to the
risk that our customers will not order products for which we have forecasted sales, or will
purchase less than we have forecasted. Historically, we have experienced write downs due to changes
in strategic direction, discontinuance of a product and declines in market conditions. If actual
market conditions worsen or differ from those we have assumed, if there is a sudden and significant
decrease in demand for our products, or if there is a higher incidence of inventory obsolescence
due to a rapid change in technology, we may be required to take additional inventory write-downs,
and our gross margin could be adversely affected. Our inventory net of allowance for excess and
obsolete was $93.5 million and $88.1 as of October 31, 2008 and October 31, 2009, respectively.
Restructuring
As part of our restructuring costs, we provide for the estimated cost of the net lease expense
for facilities that are no longer being used. The provision is equal to the fair value of the
minimum future lease payments under our contracted lease obligations, offset by the fair value of
the estimated sublease payments that we may receive. As of October 31, 2009, our accrued
restructuring liability related to net lease expense and other related charges was $9.4 million.
The total minimum lease payments for these restructured facilities are $14.5 million. These lease
payments will be made over the remaining lives of our leases, which range from sixteen months to
ten years. If actual market conditions are different than those we have projected, we will be
required to recognize additional restructuring costs or benefits associated with these facilities.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts receivable is based on managements assessment, on a
specific identification basis, of the collectibility of customer accounts. We perform ongoing
credit evaluations of our customers and generally have not required collateral or other forms of
security from customers. In determining the appropriate balance for our allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine collectibility. In doing so, we consider creditworthiness, payment history, account
activity and communication with such customer. If a customers financial condition changes, or if
actual defaults are higher than our historical experience, we may be required to take a charge for
an allowance for doubtful accounts receivable which could have an adverse impact on our results of
operations. Our accounts receivable net of allowance for doubtful accounts was $138.4 million and
$118.3 as of October 31, 2008 and October 31, 2009, respectively. Our allowance for doubtful
accounts as of October 31, 2008 and October 31, 2009 was $0.1 million.
Goodwill
As discussed in Overview above, during the second quarter of fiscal 2009, we conducted an
interim impairment assessment that resulted in the write-off of all goodwill remaining on our
balance sheet. As a result, as of October 31, 2008 and October 31, 2009, our consolidated balance
sheet included $455.7 million and $0 in goodwill, respectively.
Goodwill represents the excess purchase price over amounts assigned to tangible or
identifiable intangible assets acquired and liabilities assumed from our acquisitions. We test
goodwill for impairment on an annual basis, which we have determined to be the last business day
of fiscal September each year. We also test goodwill for impairment 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. The first step is to compare the fair value of the
reporting unit with the units carrying amount, including goodwill. If this test indicates that
the fair value is less than the carrying value, then step two is required to compare the implied
fair value of the reporting units goodwill with the carrying amount of the reporting units
goodwill. A non-cash goodwill impairment charge would have the effect of decreasing our earnings
or increasing our losses in such period. If we are required to take a substantial impairment
charge, our operating results would be materially adversely affected in such period.
50
We determine the fair value of our single reporting unit to be equal to our market
capitalization plus a control premium. Market capitalization is determined by multiplying the
shares outstanding on the assessment date by the average market price of our common stock over a
10-day period before and a 10-day period after each assessment date. We use this 20-day duration
to consider inherent market fluctuations that may affect any individual closing price. We believe
that our market capitalization alone does not fully capture the fair value of our business as a
whole, or the substantial value that an acquirer would obtain from its ability to obtain control
of our business. As such, in determining fair value, we add a control premium which seeks to
give effect to the increased consideration a potential acquirer would be required to pay in order
to gain sufficient ownership to set policies, direct operations and make decisions related to our
company to our market capitalization.
Interim Impairment Assessment Fiscal 2009
Based on a combination of factors, including the macroeconomic conditions described above and
a sustained decline in our common stock price and market capitalization below our net book value,
we conducted an interim impairment assessment of goodwill during the second quarter of fiscal 2009.
When we performed the step one fair value comparison during the second quarter of fiscal 2009, our
market capitalization was $721.8 million and our carrying value, including goodwill, was $949.0
million. We applied a 25% control premium to market capitalization to determine a fair value of
$902.2 million. Because step one indicated that the fair value was less than our carrying value, we
performed the step two analysis. Under the step two analysis, the implied fair value of goodwill
requires valuation of a reporting units tangible and intangible assets and liabilities in a manner
similar to the allocation of purchase price in a business combination. If the carrying value of a
reporting units goodwill exceeds its implied fair value, goodwill is deemed impaired and is
written down to the extent of the difference. The implied fair value of the reporting units
goodwill was determined to be $0, and, as a result, we recorded a goodwill impairment of $455.7
million, representing the full carrying value of the goodwill.
Long-lived Assets (excluding goodwill)
Our long-lived assets, excluding goodwill, include: equipment, furniture and fixtures;
finite-lived intangible assets; and maintenance spares. As of October 31, 2008 and 2009 these
assets totaled $182.3 million and $154.7 million, net, respectively. We test long-lived assets for
impairment whenever events or changes in circumstances indicate that the assets carrying amount is
not recoverable from its undiscounted cash flows. Our long-lived assets are part of a single
reporting unit which represents the lowest level for which we identify cash flows.
Due to effects on our business of difficult macroeconomic conditions, during fiscal 2009 we
experienced order delays, lengthening sales cycles and slowing deployments. As a result of these
conditions, we performed an impairment analysis of all our long-lived assets during the second
quarter of fiscal 2009. Valuation of our long-lived assets requires us to make assumptions about
future sales prices and sales volumes for our products that involve new technologies and
uncertainties around customer acceptance of new products. These and other assumptions are used to
forecast future, undiscounted cash flows. Based on our estimate of future, undiscounted cash flows
as of April 30, 2009, no impairment was required. If actual market conditions differ or our
forecasts change, we may be required to record a non-cash impairment charge related to long-lived
assets in future periods. Such charges would have the effect of decreasing our earnings or
increasing our losses in such period.
Investments
We have an investment portfolio comprised of marketable debt securities which are comprised of
U.S. government obligations. The value of these securities is subject to market volatility for the
period we hold these investments and until their sale or maturity. We recognize losses when we
determine that declines in the fair value of our investments, below their cost basis, are
other-than-temporary. In determining whether a decline in fair value is other-than-temporary, we
consider various factors including market price (when available), investment ratings, the financial
condition and near-term prospects of the investee, the length of time and the extent to which the
fair value has been less than our cost basis, and our intent and ability to hold the investment
until maturity or for a period of time sufficient to allow for any anticipated recovery in market
value. We make significant judgments in considering these factors. If we judge that a decline in
fair value is other-than-temporary, the investment is valued at the current fair value, and we
would incur a loss equal to the decline, which could materially adversely affect our profitability
and results of operations.
As of October 31, 2009, we held a minority investment of $0.9 million in a privately held
technology company that is reported in other assets. The market for technologies or products
manufactured by this company is in the early stage and markets may never materialize or become
significant. This investment is inherently high risk and we could lose our entire investment. We
monitor this investment for impairment and make appropriate reductions in carrying value when
necessary. If market conditions, the expected financial performance, or the competitive position of
this company deteriorates, we may be required to record a non-cash charge in future periods due to
an impairment of the value of our investment.
51
During fiscal 2009, we recorded losses of $5.3 million related to a decline in value,
determined to be other-than temporary, associated with two of our investments in privately held
technology companies. One of the privately held companies was purchased by a publicly traded
entity. As a result, this investment is now recorded as a trading security.
Deferred Tax Valuation Allowance
As of October 31, 2009, we have recorded a valuation allowance offsetting nearly all our net
deferred tax assets of $1.2 billion. When measuring the need for a valuation allowance, we assess
both positive and negative evidence regarding the realizability of these deferred tax assets. We
record a valuation allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. In determining net deferred tax assets and valuation allowances,
management is required to make judgments and estimates related to projections of profitability, the
timing and extent of the utilization of net operating loss carryforwards, applicable tax rates,
transfer pricing methodologies and tax planning strategies. The valuation allowance is reviewed
quarterly and is maintained until sufficient positive evidence exists to support a reversal.
Because evidence such as our operating results during the most recent three-year period is afforded
more weight than forecasted results for future periods, our cumulative loss during this three-year
period represents sufficient negative evidence regarding the need for nearly a full valuation
allowance. We will release this valuation allowance when management determines that it is more
likely than not that our deferred tax assets will be realized. Any future release of valuation
allowance may be recorded as a tax benefit increasing net income or as an adjustment to paid-in
capital, based on tax ordering requirements.
Uncertain Tax Positions
Ciena accounts for uncertainty in income tax positions using a two-step approach. The first
step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely of being realized upon
settlement. Significant judgment is required in evaluating our uncertain tax positions and
determining our provision for income taxes. Although we believe our reserves are reasonable, no
assurance can be given that the final tax outcome of these matters will not be different from that
which is reflected in our historical income tax provisions and accruals. We adjust these reserves
in light of changing facts and circumstances, such as the closing of a tax audit or the refinement
of an estimate. To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences will affect the provision for income taxes in the period in
which such determination is made. As of October 31, 2009, we had $1.3 million and $6.1 million
recorded as current and long-term obligations, respectively, related to uncertain tax positions.
The provision for income taxes includes the effect of reserve provisions and changes to reserves
that are considered appropriate, as well as the related net interest.
Warranty
Our liability for product warranties, included in other accrued liabilities, was $37.3 million
and $40.2 million as of October 31, 2008 and October 31, 2009, respectively. Our products are
generally covered by a warranty for periods ranging from one to five years. We accrue for warranty
costs as part of our cost of goods sold based on associated material costs, technical support labor
costs, and associated overhead. Material cost is estimated based primarily upon historical trends
in the volume of product returns within the warranty period and the cost to repair or replace the
equipment. Technical support labor cost is estimated based primarily upon historical trends and the
cost to support the customer cases within the warranty period.
The provision for product warranties was $15.3 million and $19.3 million for fiscal 2008 and
2009, respectively. The provision for warranty claims may fluctuate on a quarterly basis depending
upon the mix of products and customers in that period. If actual product failure rates, material
replacement costs, service or labor costs differ from our estimates, revisions to the estimated
warranty provision would be required. An increase in warranty claims or the related costs
associated with satisfying these warranty obligations could increase our cost of sales and
negatively affect our gross margin.
Loss Contingencies
We are subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. We consider the
likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate
the amount of loss, in determining loss contingencies. A loss is accrued when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated. We regularly
evaluate current information available to us to determine whether any accruals should be adjusted
and whether new accruals are required.
52
Effects of Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements in Item 8 of Part II of this report for
information relating to our discussion of the effects of recent accounting pronouncements.
Unaudited Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the operating results
represented by certain items in our consolidated statements of operations for each of the eight
quarters in the period ended October 31, 2009. 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, |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
201,790 |
|
|
$ |
216,181 |
|
|
$ |
223,661 |
|
|
$ |
149,783 |
|
|
$ |
139,717 |
|
|
$ |
118,849 |
|
|
$ |
139,903 |
|
|
$ |
149,053 |
|
Services |
|
|
25,626 |
|
|
|
26,018 |
|
|
|
29,518 |
|
|
|
29,871 |
|
|
|
27,683 |
|
|
|
25,352 |
|
|
|
24,855 |
|
|
|
27,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
227,416 |
|
|
|
242,199 |
|
|
|
253,179 |
|
|
|
179,654 |
|
|
|
167,400 |
|
|
|
144,201 |
|
|
|
164,758 |
|
|
|
176,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
91,387 |
|
|
|
96,041 |
|
|
|
107,953 |
|
|
|
75,857 |
|
|
|
76,367 |
|
|
|
65,419 |
|
|
|
72,842 |
|
|
|
81,542 |
|
Services |
|
|
19,460 |
|
|
|
18,562 |
|
|
|
19,595 |
|
|
|
22,666 |
|
|
|
19,190 |
|
|
|
18,062 |
|
|
|
17,251 |
|
|
|
17,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs of goods sold |
|
|
110,847 |
|
|
|
114,603 |
|
|
|
127,548 |
|
|
|
98,523 |
|
|
|
95,557 |
|
|
|
83,481 |
|
|
|
90,093 |
|
|
|
98,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
116,569 |
|
|
|
127,596 |
|
|
|
125,631 |
|
|
|
81,131 |
|
|
|
71,843 |
|
|
|
60,720 |
|
|
|
74,665 |
|
|
|
77,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
35,444 |
|
|
|
44,628 |
|
|
|
47,809 |
|
|
|
47,142 |
|
|
|
46,700 |
|
|
|
49,482 |
|
|
|
44,442 |
|
|
|
49,695 |
|
Selling and marketing |
|
|
33,608 |
|
|
|
38,591 |
|
|
|
39,440 |
|
|
|
40,379 |
|
|
|
33,819 |
|
|
|
33,295 |
|
|
|
31,468 |
|
|
|
35,945 |
|
General and administrative |
|
|
22,628 |
|
|
|
16,650 |
|
|
|
14,758 |
|
|
|
14,603 |
|
|
|
11,585 |
|
|
|
12,615 |
|
|
|
11,524 |
|
|
|
11,785 |
|
Amortization of intangible assets |
|
|
6,470 |
|
|
|
8,760 |
|
|
|
8,671 |
|
|
|
8,363 |
|
|
|
6,404 |
|
|
|
6,224 |
|
|
|
6,224 |
|
|
|
5,974 |
|
Restructuring costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,110 |
|
|
|
76 |
|
|
|
6,399 |
|
|
|
3,941 |
|
|
|
791 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
455,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
98,150 |
|
|
|
108,629 |
|
|
|
110,678 |
|
|
|
111,597 |
|
|
|
98,584 |
|
|
|
563,688 |
|
|
|
97,599 |
|
|
|
104,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
18,419 |
|
|
|
18,967 |
|
|
|
14,953 |
|
|
|
(30,466 |
) |
|
|
(26,741 |
) |
|
|
(502,968 |
) |
|
|
(22,934 |
) |
|
|
(26,588 |
) |
Interest and other income, net |
|
|
19,082 |
|
|
|
8,487 |
|
|
|
5,342 |
|
|
|
3,851 |
|
|
|
4,660 |
|
|
|
3,508 |
|
|
|
999 |
|
|
|
320 |
|
Interest expense |
|
|
(7,358 |
) |
|
|
(1,861 |
) |
|
|
(1,855 |
) |
|
|
(1,853 |
) |
|
|
(1,844 |
) |
|
|
(1,852 |
) |
|
|
(1,856 |
) |
|
|
(1,854 |
) |
Realized
gain (loss) due to impairment of marketable debt investments |
|
|
|
|
|
|
|
|
|
|
(5,114 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(565 |
) |
|
|
(2,570 |
) |
|
|
(2,193 |
) |
|
|
|
|
Gain on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
30,143 |
|
|
|
25,593 |
|
|
|
13,326 |
|
|
|
(27,523 |
) |
|
|
(24,490 |
) |
|
|
(503,882 |
) |
|
|
(25,984 |
) |
|
|
(28,122 |
) |
Provision (benefit) for income tax |
|
|
1,336 |
|
|
|
1,833 |
|
|
|
1,603 |
|
|
|
(2,127 |
) |
|
|
341 |
|
|
|
(672 |
) |
|
|
470 |
|
|
|
(1,463 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
28,807 |
|
|
$ |
23,760 |
|
|
$ |
11,723 |
|
|
$ |
(25,396 |
) |
|
$ |
(24,831 |
) |
|
$ |
(503,210 |
) |
|
$ |
(26,454 |
) |
|
$ |
(26,659 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.33 |
|
|
$ |
0.27 |
|
|
$ |
0.13 |
|
|
$ |
(0.28 |
) |
|
$ |
(0.27 |
) |
|
$ |
(5.53 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per potential common share |
|
$ |
0.28 |
|
|
$ |
0.23 |
|
|
$ |
0.12 |
|
|
$ |
(0.28 |
) |
|
$ |
(0.27 |
) |
|
$ |
(5.53 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
86,910 |
|
|
|
89,102 |
|
|
|
90,216 |
|
|
|
90,413 |
|
|
|
90,620 |
|
|
|
90,932 |
|
|
|
91,364 |
|
|
|
91,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
109,009 |
|
|
|
110,770 |
|
|
|
111,681 |
|
|
|
90,413 |
|
|
|
90,620 |
|
|
|
90,932 |
|
|
|
91,364 |
|
|
|
91,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those projected in the forward-looking
statements. We are exposed to market risk related to changes in interest rates and foreign currency
exchange rates.
Interest Rate Sensitivity. We maintain a short-term and long-term investment portfolio. See
Notes 5 and 6 to the Consolidated Financial Statements in Item 8 of Part II of this report for
information relating to these investments and their fair value. 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 percentage points from
current levels, the fair value of the portfolio would decline by approximately $20.5 million.
Foreign Currency Exchange Risk. As a global concern, we face exposure to adverse movements in
foreign currency exchange rates. Because our sales are primarily denominated in U.S. dollars, the
impact of foreign currency fluctuations on revenue has not been material. Our primary exposures to
foreign currency exchange risk are related to non-U.S. dollar denominated operating expense in
Canadian Dollars (CAD), British Pounds (GBP), Euros (EUR) and Indian Rupees (INR). During
fiscal 2009, approximately 79% of our operating expense, exclusive of our goodwill impairment and
restructuring costs, was U.S. dollar denominated.
To reduce variability in non-U.S. dollar denominated operating expense, we have previously
entered into foreign currency forward contracts and may do so in the future. We utilize these
derivatives to partially offset our market exposure to fluctuations in certain foreign currencies.
These derivatives are designated as cash flow hedges and typically have maturities of less than one
year. Cienas foreign currency forward contracts were fully matured as of October 31, 2009. The
effective portion of the derivatives gain or loss was initially reported as a component of
accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction,
was subsequently reclassified into the operating expense line item to which the hedged transaction
related. We recorded the ineffectiveness of the hedging instruments in interest and other income,
net on our consolidated statements of operations.
Favorable foreign exchange translations, net of hedging, benefited total research and
development, sales and marketing, and general and administrative expenses by approximately $9.9
million for fiscal 2009 compared to fiscal 2008. This favorable foreign exchange translation was
due to the relative strength of the U.S. dollar in relation to the previous year. These foreign
currency forward contracts were not designed to provide foreign currency protection over the
long-term. In designing a specific approach, we considered several factors, including offsetting
exposures, significance of exposures, costs associated with entering into a particular instrument,
and potential effectiveness. As of October 31, 2009, there were no outstanding foreign currency
forward contracts.
As of October 31, 2009, our assets and liabilities related to non-dollar denominated
currencies were primarily related to intercompany payables and receivables. We do not enter into
foreign exchange forward or option contracts for speculative or trading purposes.
Item 8. Financial Statements and Supplementary Data
The following is an index to the consolidated financial statements:
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
55 |
|
|
|
|
56 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
54
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Ciena Corporation
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
(the Company) at October 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the three years in the period ended October 31, 2009 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting
as of October 31, 2009, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Report of Management on Internal
Control over Financial Reporting. Our responsibility is to express opinions on these financial
statements and on the Companys internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the
manner in which it accounts for uncertain tax positions in 2008.
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
Baltimore, Maryland
December 21, 2009
55
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
550,669 |
|
|
$ |
485,705 |
|
Short-term investments |
|
|
366,336 |
|
|
|
563,183 |
|
Accounts receivable, net |
|
|
138,441 |
|
|
|
118,251 |
|
Inventories |
|
|
93,452 |
|
|
|
88,086 |
|
Prepaid expenses and other |
|
|
35,888 |
|
|
|
50,537 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,184,786 |
|
|
|
1,305,762 |
|
Long-term investments |
|
|
156,171 |
|
|
|
8,031 |
|
Equipment, furniture and fixtures, net |
|
|
59,967 |
|
|
|
61,868 |
|
Goodwill |
|
|
455,673 |
|
|
|
|
|
Other intangible assets, net |
|
|
92,249 |
|
|
|
60,820 |
|
Other long-term assets |
|
|
75,748 |
|
|
|
67,902 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,024,594 |
|
|
$ |
1,504,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
44,761 |
|
|
$ |
53,104 |
|
Accrued liabilities |
|
|
96,143 |
|
|
|
103,349 |
|
Restructuring liabilities |
|
|
1,668 |
|
|
|
1,811 |
|
Deferred revenue |
|
|
36,767 |
|
|
|
40,565 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
179,339 |
|
|
|
198,829 |
|
Long-term deferred revenue |
|
|
37,660 |
|
|
|
35,368 |
|
Long-term restructuring liabilities |
|
|
2,557 |
|
|
|
7,794 |
|
Other long-term obligations |
|
|
8,089 |
|
|
|
8,554 |
|
Convertible notes payable |
|
|
798,000 |
|
|
|
798,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,025,645 |
|
|
|
1,048,545 |
|
|
|
|
|
|
|
|
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; 290,000,000 shares authorized; 90,470,803 and 92,038,360 shares issued and outstanding |
|
|
905 |
|
|
|
920 |
|
Additional paid-in capital |
|
|
5,629,498 |
|
|
|
5,665,028 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,275 |
) |
|
|
1,223 |
|
Accumulated deficit |
|
|
(4,630,179 |
) |
|
|
(5,211,333 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
998,949 |
|
|
|
455,838 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,024,594 |
|
|
$ |
1,504,383 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
56
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
695,289 |
|
|
$ |
791,415 |
|
|
$ |
547,522 |
|
Services |
|
|
84,480 |
|
|
|
111,033 |
|
|
|
105,107 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
779,769 |
|
|
|
902,448 |
|
|
|
652,629 |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
337,866 |
|
|
|
371,238 |
|
|
|
296,170 |
|
Services |
|
|
79,634 |
|
|
|
80,283 |
|
|
|
71,629 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold |
|
|
417,500 |
|
|
|
451,521 |
|
|
|
367,799 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
362,269 |
|
|
|
450,927 |
|
|
|
284,830 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
127,296 |
|
|
|
175,023 |
|
|
|
190,319 |
|
Selling and marketing |
|
|
118,015 |
|
|
|
152,018 |
|
|
|
134,527 |
|
General and administrative |
|
|
50,248 |
|
|
|
68,639 |
|
|
|
47,509 |
|
Amortization of intangible assets |
|
|
25,350 |
|
|
|
32,264 |
|
|
|
24,826 |
|
Restructuring (recoveries) costs |
|
|
(2,435 |
) |
|
|
1,110 |
|
|
|
11,207 |
|
Gain on lease settlement |
|
|
(4,871 |
) |
|
|
|
|
|
|
|
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
455,673 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
313,603 |
|
|
|
429,054 |
|
|
|
864,061 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
48,666 |
|
|
|
21,873 |
|
|
|
(579,231 |
) |
Interest and other income, net |
|
|
76,483 |
|
|
|
36,762 |
|
|
|
9,487 |
|
Interest expense |
|
|
(26,996 |
) |
|
|
(12,927 |
) |
|
|
(7,406 |
) |
Realized loss due to impairment of marketable debt investments |
|
|
(13,013 |
) |
|
|
(5,101 |
) |
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
|
|
|
|
(5,328 |
) |
Gain on extinguishment of debt |
|
|
|
|
|
|
932 |
|
|
|
|
|
Gain on equity investments, net |
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
85,732 |
|
|
|
41,539 |
|
|
|
(582,478 |
) |
Provision (benefit) for income taxes |
|
|
2,944 |
|
|
|
2,645 |
|
|
|
(1,324 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share |
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per potential common share |
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
85,525 |
|
|
|
89,146 |
|
|
|
91,167 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average dilutive potential common shares outstanding |
|
|
99,604 |
|
|
|
110,605 |
|
|
|
91,167 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
57
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
|
|
|
|
Additional Paid- |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
in- Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
Balance at October 31, 2006 |
|
|
84,891,656 |
|
|
$ |
849 |
|
|
$ |
5,505,853 |
|
|
$ |
(1,076 |
) |
|
$ |
(4,752,000 |
) |
|
$ |
753,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,788 |
|
|
|
82,788 |
|
Changes in unrealized losses on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846 |
|
|
|
|
|
|
|
846 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
(1,013 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,621 |
|
Exercise of stock options, net |
|
|
1,847,455 |
|
|
|
19 |
|
|
|
36,816 |
|
|
|
|
|
|
|
|
|
|
|
36,835 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
19,572 |
|
|
|
|
|
|
|
|
|
|
|
19,572 |
|
Exercise of warrant |
|
|
12,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
|
86,752,069 |
|
|
|
868 |
|
|
|
5,519,741 |
|
|
|
(1,243 |
) |
|
|
(4,669,212 |
) |
|
|
850,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummulative effect of adopting FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,894 |
|
|
|
38,894 |
|
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,479 |
) |
|
|
|
|
|
|
(1,479 |
) |
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,862 |
|
Exercise of stock options, net |
|
|
1,253,350 |
|
|
|
12 |
|
|
|
5,764 |
|
|
|
|
|
|
|
|
|
|
|
5,776 |
|
Tax benefit from employee stock option plans |
|
|
|
|
|
|
|
|
|
|
318 |
|
|
|
|
|
|
|
|
|
|
|
318 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
31,428 |
|
|
|
|
|
|
|
|
|
|
|
31,428 |
|
Issuance of common stock for acquisitions, net of issuance costs |
|
|
2,465,384 |
|
|
|
25 |
|
|
|
72,247 |
|
|
|
|
|
|
|
|
|
|
|
72,272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
|
90,470,803 |
|
|
|
905 |
|
|
|
5,629,498 |
|
|
|
(1,275 |
) |
|
|
(4,630,179 |
) |
|
|
998,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(581,154 |
) |
|
|
(581,154 |
) |
Changes in unrealized gains on investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,404 |
|
|
|
|
|
|
|
1,404 |
|
Translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
1,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(578,656 |
) |
Exercise of stock options, net |
|
|
1,567,557 |
|
|
|
15 |
|
|
|
1,092 |
|
|
|
|
|
|
|
|
|
|
|
1,107 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
34,438 |
|
|
|
|
|
|
|
|
|
|
|
34,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2009 |
|
|
92,038,360 |
|
|
$ |
920 |
|
|
$ |
5,665,028 |
|
|
$ |
1,223 |
|
|
$ |
(5,211,333 |
) |
|
$ |
455,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
58
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishment of debt |
|
|
|
|
|
|
(932 |
) |
|
|
|
|
Amortization of discount on marketable debt securities |
|
|
(14,191 |
) |
|
|
(2,878 |
) |
|
|
(907 |
) |
Realized loss due to impairment of marketable debt investments |
|
|
13,013 |
|
|
|
5,101 |
|
|
|
|
|
Loss on cost method investments |
|
|
|
|
|
|
|
|
|
|
5,328 |
|
Depreciation of equipment, furniture and fixtures, and amortization of leasehold improvements |
|
|
12,833 |
|
|
|
18,599 |
|
|
|
21,933 |
|
Goodwill impairment |
|
|
|
|
|
|
|
|
|
|
455,673 |
|
Share-based compensation costs |
|
|
19,572 |
|
|
|
31,428 |
|
|
|
34,438 |
|
Amortization of intangible assets |
|
|
29,220 |
|
|
|
37,956 |
|
|
|
31,429 |
|
Deferred tax provision |
|
|
|
|
|
|
1,640 |
|
|
|
(883 |
) |
Provision for inventory excess and obsolescence |
|
|
12,180 |
|
|
|
18,325 |
|
|
|
15,719 |
|
Provision for warranty |
|
|
12,743 |
|
|
|
15,336 |
|
|
|
19,286 |
|
Other |
|
|
2,544 |
|
|
|
5,243 |
|
|
|
2,044 |
|
Changes in assets and liabilities, net of effect of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,094 |
|
|
|
(32,471 |
) |
|
|
20,097 |
|
Inventories |
|
|
(8,713 |
) |
|
|
3,713 |
|
|
|
(10,353 |
) |
Prepaid expenses and other |
|
|
(20,568 |
) |
|
|
1,649 |
|
|
|
(9,678 |
) |
Accounts payable, accruals and other obligations |
|
|
(60,524 |
) |
|
|
(23,945 |
) |
|
|
2,943 |
|
Income taxes payable |
|
|
1,787 |
|
|
|
(7,655 |
) |
|
|
|
|
Deferred revenue |
|
|
22,964 |
|
|
|
7,616 |
|
|
|
1,506 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
108,742 |
|
|
|
117,619 |
|
|
|
7,421 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for equipment, furniture, fixtures and intellectual property |
|
|
(32,105 |
) |
|
|
(29,998 |
) |
|
|
(24,114 |
) |
Restricted cash |
|
|
(13,277 |
) |
|
|
1,340 |
|
|
|
(4,116 |
) |
Purchase of available for sale securities |
|
|
(864,012 |
) |
|
|
(571,511 |
) |
|
|
(1,214,218 |
) |
Proceeds from maturities of available for sale securities |
|
|
989,705 |
|
|
|
901,433 |
|
|
|
645,119 |
|
Proceeds from sales of available for sale securities |
|
|
|
|
|
|
|
|
|
|
523,137 |
|
Minority equity investments, net |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired |
|
|
|
|
|
|
(210,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
80,130 |
|
|
|
91,248 |
|
|
|
(74,192 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible notes payable |
|
|
500,000 |
|
|
|
|
|
|
|
|
|
Repayment of 3.75% convertible notes payable |
|
|
|
|
|
|
(542,262 |
) |
|
|
|
|
Repurchase of 0.25% convertible notes payable |
|
|
|
|
|
|
(1,034 |
) |
|
|
|
|
Debt issuance costs |
|
|
(11,750 |
) |
|
|
|
|
|
|
|
|
Purchase of call spread option |
|
|
(42,500 |
) |
|
|
|
|
|
|
|
|
Repayment of indebtedness of acquired business |
|
|
|
|
|
|
(12,363 |
) |
|
|
|
|
Excess tax benefit from employee stock option plans |
|
|
|
|
|
|
318 |
|
|
|
|
|
Proceeds from issuance of common stock and warrants |
|
|
36,835 |
|
|
|
5,776 |
|
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
482,585 |
|
|
|
(549,565 |
) |
|
|
1,107 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
440 |
|
|
|
(694 |
) |
|
|
700 |
|
Net increase (decrease) in cash and cash equivalents |
|
|
671,897 |
|
|
|
(341,392 |
) |
|
|
(64,964 |
) |
Cash and cash equivalents at beginning of period |
|
|
220,164 |
|
|
|
892,061 |
|
|
|
550,669 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
892,061 |
|
|
$ |
550,669 |
|
|
$ |
485,705 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
21,504 |
|
|
$ |
15,339 |
|
|
$ |
4,748 |
|
Income taxes, net |
|
$ |
1,157 |
|
|
$ |
3,120 |
|
|
$ |
584 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment in accounts payable |
|
$ |
3,062 |
|
|
$ |
2,316 |
|
|
$ |
1,481 |
|
Value of common stock issued in acquisition |
|
$ |
|
|
|
$ |
62,360 |
|
|
$ |
|
|
Fair value of vested options assumed in acquisition |
|
$ |
|
|
|
$ |
9,912 |
|
|
$ |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
59
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CIENA CORPORATION AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
Ciena is a provider of communications networking equipment, software and services that support
the transport, switching, aggregation and management of voice, video and data traffic. Cienas
optical service delivery and carrier Ethernet service delivery products are used individually, or
as part of an integrated solution, in communications networks operated by service providers, cable
operators, governments and enterprises around the globe. Ciena is a network specialist targeting
the transition of disparate, legacy communications networks to converged, next-generation
architectures, better able to handle increased traffic and deliver more efficiently a broader mix
of high-bandwidth communications services. Cienas products, along with its embedded, network
element software and unified service and transport management, enable service providers to
efficiently and cost-effectively deliver critical enterprise and consumer-oriented communication
services. Cienas principal executive offices are located at
1201 Winterson Road, Linthicum,
Maryland 21090.
Principles of Consolidation
Ciena has 13 wholly owned U.S. and international subsidiaries, which have been consolidated in
the accompanying financial statements.
The accompanying consolidated financial statements include the accounts of Ciena and its
wholly owned subsidiaries. All material inter-company accounts and transactions have been
eliminated in consolidation.
Pending Acquisition of Nortel Metro Ethernet Networks (MEN) Assets
Ciena has entered into definitive asset purchase agreements, as amended, relating to the
acquisition of substantially all of the optical networking and carrier Ethernet assets of Nortels
MEN business. In accordance with these agreements, Ciena will pay the sellers a purchase price of
$530 million in cash and issue them $239 million in aggregate principal amount of 6% senior
convertible notes due June 2017. Additional details regarding this pending transaction and the
terms of the notes to be issued are set forth in Note 22 below.
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 (November 3, 2007, November 1, 2008 and October 31, 2009 for the periods
reported). For purposes of financial statement presentation, each fiscal year is described as
having ended on October 31. Fiscal 2008 and fiscal 2009 consisted of 52 weeks and fiscal 2007
consisted of 53 weeks.
Use of Estimates
The preparation of the financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires management to make estimates
and judgments that affect the amounts reported in the consolidated financial statements and
accompanying notes. Estimates are used for bad debts, valuation of inventories and investments,
recoverability of intangible assets, other long-lived assets and goodwill, income taxes, warranty
obligations, restructuring liabilities and contingencies and litigation. Ciena bases its estimates
on historical experience and assumptions that it believes are reasonable. Actual results may differ
materially from managements estimates.
Cash and Cash Equivalents
Ciena considers all highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. Restricted cash collateralizing letters of credits are
included in other current assets and other long-term assets depending upon the duration of the
restriction.
Investments
Cienas investments are principally in marketable debt securities that are classified as
available-for-sale and are reported at fair value, with unrealized gains and losses recorded in
accumulated other comprehensive income. Realized gains or losses and declines in value on
available-for-sale securities determined to be other-than-temporary
are reported in other income or expensed as incurred. Ciena considers all marketable debt securities that it expects to
convert to cash within one year or less to be classified as short-term investments. All others are
considered long-term investments.
60
Inventories
Inventories are stated at the lower of cost or market, with cost computed using standard cost,
which approximates actual cost on a first-in, first-out basis. Ciena records a provision for excess
and obsolete inventory when an impairment has been identified.
Equipment, Furniture and Fixtures
Equipment, furniture and fixtures are recorded at cost. Depreciation and amortization are
computed using the straight-line method over useful lives of two years to five years for equipment,
furniture and fixtures and the shorter of useful life or lease term for leasehold improvements.
Upon a triggering event or changes in circumstances, a review of the fair value of our equipment,
furniture and fixtures is performed and an impairment loss is recognized only if the carrying
amount of the asset or asset group is determined to not be recoverable and exceeds its fair value.
An impairment loss is measured as the amount by which the carrying amount of the asset or asset
group exceeds its fair value.
Qualifying internal use software and website development costs incurred during the application
development stage that consist primarily of outside services and purchased software license costs,
are capitalized and amortized straight-line over the estimated useful life.
Goodwill and Other Intangible Assets
Ciena has recorded goodwill and intangible assets as a result of several acquisitions. Ciena
tests the reporting units goodwill for impairment on an annual basis, which Ciena has determined
to be the last business day of its 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. Ciena operates its business and tests its
goodwill for impairment as a single reporting unit. See Note 4 below.
Finite-lived 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, which approximates the use of intangible assets. Upon a triggering
event or changes in circumstances, a review of the fair value of our finite-lived intangible assets
is performed. Impairments of finite-lived intangible assets are recognized only if the carrying
amount of the asset or asset group is determined to not be recoverable and exceeds its fair value.
Upon a triggering event or changes in circumstances, a review of the fair value of our finite-lived
intangible assets is performed and an impairment loss is measured as the amount by which the
carrying amount of the asset or asset group exceeds its fair value.
Minority Equity Investments
Ciena has certain minority equity investments in privately held technology companies that are
classified as other assets. These investments are carried at cost because Ciena owns less than 20%
of the voting equity and does not have the ability to exercise significant influence over these
companies. These investments involve a high degree of risk as the markets for the technologies or
products manufactured by these companies are usually early stage at the time of Cienas investment
and such markets may never be significant. Ciena could lose its entire investment in some or all of
these companies. Ciena monitors these investments for impairment and makes appropriate reductions
in carrying values when necessary.
Concentrations
Substantially all of Cienas cash and cash equivalents and short-term and long-term
investments in marketable debt securities are maintained at three major U.S. financial
institutions. The majority of Cienas cash equivalents consist of money market funds. Deposits held
with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits
may be redeemed upon demand and, therefore, management believes that they bear minimal risk.
Historically, a large percentage of Cienas revenue has been the result of sales to a small
number of communications service providers. Consolidation among Cienas customers has further
increased this concentration. Consequently, Cienas accounts receivable are concentrated among
these customers. See Notes 7 and 21 below.
Additionally, Cienas access to certain materials or components is dependent upon sole or
limited source suppliers. The inability of any supplier to fulfill Cienas supply requirements
could affect future results. Ciena relies on a small number of
contract manufacturers, principally in China and Thailand, to perform the majority of the
manufacturing for its products. If Ciena cannot effectively manage these manufacturers and forecast
future demand, or if they fail to deliver products or components on time, Cienas business and
results of operations may suffer.
61
Revenue Recognition
Ciena recognizes revenue when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the price to the buyer is
fixed or determinable; and collectibility is reasonably assured. Customer purchase agreements and
customer purchase orders are generally used to determine the existence of an arrangement. Shipping
documents and evidence of customer acceptance, when applicable, are used to verify delivery. Ciena
assesses whether the price is fixed or determinable based on the payment terms associated with the
transaction and whether the sales price is subject to refund or adjustment. Ciena assesses
collectibility based primarily on the creditworthiness of the customer as determined by credit
checks and analysis, as well as the customers payment history. In instances where final acceptance
of the product, system, or solution is specified by the customer, revenue is deferred until all
acceptance criteria have been met. Revenue for maintenance services is generally deferred and
recognized ratably over the period during which the services are to be performed.
Some of Cienas communications networking equipment is integrated with software that is
essential to the functionality of the equipment. Software revenue is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. In instances where final acceptance of the product is specified by the
customer, revenue is deferred until all acceptance criteria have been met.
Arrangements with customers may include multiple deliverables, including any combination of
equipment, services and software. If multiple element arrangements include software or
software-related elements that are essential to the equipment, Ciena allocates the arrangement fee
to be allocated to those separate units of accounting. Multiple element arrangements that include
software are separated into more than one unit of accounting if the functionality of the delivered
element(s) is not dependent on the undelivered element(s), there is vendor-specific objective
evidence of the fair value of the undelivered element(s), and general revenue recognition criteria
related to the delivered element(s) have been met. The amount of product and services revenue
recognized is affected by Cienas judgments as to whether an arrangement includes multiple elements
and, if so, whether vendor-specific objective evidence of fair value exists. Changes to the
elements in an arrangement and Cienas ability to establish vendor-specific objective evidence for
those elements could affect the timing of revenue recognition. For all other deliverables, Ciena
separates the elements into more than one unit of accounting if the delivered element(s) have value
to the customer on a stand-alone basis, objective and reliable evidence of fair value exists for
the undelivered element(s), and delivery of the undelivered element(s) is probable and
substantially in Cienas control. Revenue is allocated to each unit of accounting based on the
relative fair value of each accounting unit or using the residual method if objective evidence of
fair value does not exist for the delivered element(s). The revenue recognition criteria described
above are applied to each separate unit of accounting. If these criteria are not met, revenue is
deferred until the criteria are met or the last element has been delivered.
Warranty Accruals
Ciena provides for the estimated costs to fulfill customer warranty obligations upon the
recognition of the related revenue. Estimated warranty costs include material costs, technical
support labor costs and associated overhead. The warranty liability is included in cost of goods
sold and determined based upon actual warranty cost experience, estimates of 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, Net
Cienas allowance for doubtful accounts receivable is based on its assessment, on a specific
identification basis, of the collectibility of customer accounts. Ciena performs ongoing credit
evaluations of its customers and generally has not required collateral or other forms of security
from its customers. In determining the appropriate balance for Cienas allowance for doubtful
accounts receivable, management considers each individual customer account receivable in order to
determine 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 receivable.
Research and Development
Ciena charges all research and development costs to expense as incurred. Research and
development expense includes costs related to employee compensation, prototypes, consulting,
depreciation, facilities and information technologies.
62
Advertising Costs
Ciena expenses all advertising costs as incurred.
Legal Costs
Ciena expenses legal costs associated with litigation defense as incurred.
Share-Based Compensation Expense
Ciena measures and recognizes compensation expense for share-based awards based on estimated
fair values on the date of grant. Ciena estimates the fair value of each option-based award on the
date of grant using the Black-Scholes option-pricing model. This model is affected by Cienas stock
price as well as estimates regarding a number of variables including expected stock price
volatility over the expected term of the award and projected employee stock option exercise
behaviors. Ciena estimates the fair value of each share-based award based on the fair value of the
underlying common stock on the date of grant. In each case, Ciena only recognizes expense to its
consolidated statement of operations for those options or shares that are expected ultimately to
vest. Ciena uses two attribution methods to record expense, the straight-line method for grants
with service-based vesting and the graded-vesting method, which considers each performance period
or tranche separately, for all other awards. See Note 18 below.
Income Taxes
Ciena accounts for income taxes using an asset and liability approach that recognizes 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, Ciena considers all expected future events other than the enactment of changes in
tax laws or rates. Valuation allowances are provided, if, based upon the weight of the available
evidence, it is more likely than not that some or all of the deferred tax assets will not be
realized.
Ciena adopted the accounting guidance on uncertainty related to income tax positions at the
beginning of fiscal 2008. The total amount of unrecognized tax benefits increased by $1.8 million
during fiscal 2009 to $7.4 million, which includes $1.2 million of interest and some minor
penalties. Ciena classified interest and penalties related to uncertain tax positions as a
component of income tax expense. All of the uncertain tax positions, if recognized, would decrease
the effective income tax rate.
In the ordinary course of business, transactions occur for which the ultimate outcome may be
uncertain. In addition, tax authorities periodically audit Cienas income tax returns. These audits
examine significant tax filing positions, including the timing and amounts of deductions and the
allocation of income tax expenses among tax jurisdictions. Cienas major tax jurisdictions include
the United States, United Kingdom, Canada and India, with open tax years beginning with fiscal
years 2006, 2004, 2005 and 2006, respectively. However, limited adjustments can be made to Federal
tax returns in earlier years in order to reduce net operating loss carryforwards.
Ciena has not provided U.S. deferred income taxes on the cumulative unremitted earnings of its
non-U.S. affiliates as it plans to permanently reinvest cumulative unremitted foreign earnings
outside the U.S. and it is not practicable to determine the unrecognized deferred income taxes.
These cumulative unremitted foreign earnings relate to ongoing operations in foreign jurisdictions
and are required to fund foreign operations, capital expenditures, and any expansion requirements.
Ciena recognizes windfall tax benefits associated with the exercise of stock options or
release of restricted stock units directly to stockholders equity only when realized. A windfall
tax benefit occurs when the actual tax benefit realized by Ciena upon an employees disposition of
a share-based award exceeds the deferred tax asset, if any, associated with the award that Ciena
had recorded. When assessing whether a tax benefit relating to share-based compensation has been
realized, Ciena follows the tax law with-and-without method. Under the with-and-without method,
the windfall is considered realized and recognized for financial statement purposes only when an
incremental benefit is provided after considering all other tax benefits including Cienas net
operating losses. The with-and-without method results in the windfall from share-based compensation
awards always being effectively the last tax benefit to be considered. Consequently, the windfall
attributable to share-based compensation will not be considered realized in instances where Cienas
net operating loss carryover (that is unrelated to windfalls) is sufficient to offset the current
years taxable income before considering the effects of current-year
windfalls.
63
Loss Contingencies
Ciena is subject to the possibility of various losses arising in the ordinary course of
business. These may relate to disputes, litigation and other legal actions. Ciena considers the
likelihood of loss or the incurrence of a liability, as well as Cienas ability to reasonably
estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is
accrued when it is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. Ciena regularly evaluates current information available to it to determine
whether any accruals should be adjusted and whether new accruals are required.
Fair Value of Financial Instruments
The carrying value of Cienas cash and cash equivalents, accounts receivable, accounts
payable, and accrued liabilities, approximates fair market value due to the relatively short period
of time to maturity. The fair value of investments in marketable debt securities is determined
using quoted market prices for those securities or similar financial instruments. For information
related to the fair value of Cienas convertible notes, see Note 6 below.
Fair value for the measurement of financial assets and liabilities is defined as the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in
pricing an asset or liability. Ciena utilizes a valuation hierarchy for disclosure of the inputs
for fair value measurement. This hierarchy prioritizes the inputs into three broad levels as
follows:
|
|
|
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or
liabilities; |
|
|
|
|
Level 2 inputs are quoted prices for identical or similar assets or liabilities in less
active markets or model-derived valuations in which significant inputs are observable for
the asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument; |
|
|
|
|
Level 3 inputs are unobservable inputs based on Cienas assumptions used to measure
assets and liabilities at fair value. |
By distinguishing between inputs that are observable in the marketplace, and therefore more
objective, and those that are unobservable and therefore more subjective, the hierarchy is designed
to indicate the relative reliability of the fair value measurements. A financial asset or
liabilitys classification within the hierarchy is determined based on the lowest level input that
is significant to the fair value measurement.
Restructuring
Ciena has previously taken actions to align its workforce, facilities and operating costs with
perceived market opportunities and business conditions. Ciena implements these restructuring plans
and incurs the associated liability concurrently. Generally accepted accounting principles require
that a liability for the cost associated with an exit or disposal activity be recognized in the
period in which the liability is incurred, except for one-time employee termination benefits
related to a service period of more than 60 days, which are accrued over the service period.
Foreign Currency
Some of Cienas foreign branch offices and subsidiaries use the U.S. dollar as their
functional currency because Ciena, as the U.S. parent entity, exclusively funds the operations of
these branch offices and subsidiaries with U.S. dollars. For those subsidiaries using the local
currency as their functional currency, assets and liabilities are translated at exchange rates in
effect at the balance sheet date, and the statement of operations is translated at a monthly
average rate. Resulting translation adjustments are recorded directly to a separate component of
stockholders equity. Where the U.S. dollar is the functional currency of foreign branch offices or
subsidiaries, re-measurement adjustments are recorded in other income. The net gain (loss) on
foreign currency re-measurement and exchange rate changes is immaterial for separate financial
statement presentation.
Derivatives
Occasionally, Ciena uses foreign currency forward contracts to hedge certain forecasted
foreign currency transactions relating to operating expenses. These derivatives, designated as cash
flow hedges, have maturities of less than one year and permit net settlement.
At the inception of the cash flow hedge and on an ongoing basis, Ciena assesses the hedging
relationship to determine its effectiveness in offsetting changes in cash flows attributable to the
hedged risk during the hedge period. The effective portion of the hedging instruments net gain or
loss is initially reported as a component of accumulated other comprehensive income (loss), and
upon occurrence of the forecasted transaction, is subsequently reclassified into the operating
expense line item to which the hedged transaction relates. Any net gain or loss associated with the
ineffectiveness of the hedging instrument is reported in interest and other income, net. See Note
13 below.
64
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income (Loss) per Potential Common Share
Ciena calculates basic earnings per share (EPS) by dividing earnings attributable to common
stock by the weighted-average number of common shares outstanding for the period. Diluted EPS
includes the potential dilution of common stock equivalent shares that would occur if securities or
other contracts to issue common stock were exercised or converted into common stock. Ciena uses a
dual presentation of basic and diluted EPS on the face of its income statement. A reconciliation
of the numerator and denominator used for the basic and diluted EPS computations is set forth in
Note 15.
Software Development Costs
Generally accepted accounting principles require the capitalization of certain software
development costs incurred subsequent to the date technological feasibility is established and
prior to the date the product is generally available for sale. The capitalized cost is then
amortized straight-line over the estimated life of the product. Ciena defines technological
feasibility as being attained at the time a working model is completed. To date, the period between
Ciena 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
Operating segments are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating decision maker, or
decision making group, in deciding how to allocate resources and in assessing performance. Cienas
chief operating decision maker is its chief executive officer, who reviews financial information
presented on a consolidated basis for purposes of allocating resources and evaluating financial
performance. Ciena has one business activity, and there are no segment managers who are held
accountable for operations, operating results and plans for levels or components below the
consolidated unit level. Accordingly, Ciena considers its business to be in a single reportable
segment.
Newly Issued Accounting Standards
In October 2009, the FASB amended the accounting standards for revenue recognition with
multiple deliverables. The amended guidance allows the use of managements best estimate of
selling price for individual elements of an arrangement when vendor specific objective evidence or
third-party evidence is unavailable. Additionally, it eliminates the residual method of revenue
recognition in accounting for multiple deliverable arrangements. The guidance is effective for
fiscal years beginning on or after June 15, 2010, early adoption is permitted. Ciena is currently
evaluating the impact this new guidance could have on its financial condition, results of
operations and cash flows.
In October 2009, the FASB amended the accounting standards for revenue arrangements with
software elements. The amended guidance modifies the scope of the software revenue recognition
guidance to exclude tangible products that contain both software and non-software components that
function together to deliver the products essential functionality. The pronouncement is effective
for fiscal years beginning on or after June 15, 2010, early adoption is permitted. This guidance
must be adopted in the same period an entity adopts the amended revenue arrangements with multiple
deliverables guidance described above. Ciena is currently evaluating the impact this new guidance
could have on its financial condition, results of operations and cash flows.
In May 2008, the FASB issued new guidance on accounting for convertible debt instruments. This
new guidance requires that the liability and equity components of convertible debt instruments that
may be settled in cash upon conversion (including partial cash settlement) be separately accounted
for in a manner that reflects an issuers nonconvertible debt borrowing rate. The resulting debt
discount is amortized over the period the convertible debt is expected to be outstanding as
additional non-cash interest expense. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
Retrospective application to all periods presented is required except for instruments that were not
outstanding during any of the periods that will be presented in the annual financial statements for
the period of adoption but were outstanding during an earlier period. Cienas existing convertible
notes payable do not provide for settlement in cash upon conversion and Ciena believes this new
guidance will not have a material effect on its financial condition, results of operations and cash
flows.
65
In April 2008, the FASB issued new guidance which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. This guidance requires enhanced disclosures concerning a companys treatment of costs incurred to renew or extend the term
of a recognized intangible asset. This new guidance is effective for fiscal years beginning after
December 15, 2008. Ciena is currently evaluating the impact this new guidance could have on its
financial condition, results of operations and cash flows.
In February 2008, the FASB issued new guidance on fair value measurements related to lease
transactions. This guidance removes certain leasing transactions from its scope. Also, in February
2008 the FASB delayed the effective date of fair value measurements for all non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually), until fiscal years beginning
after November 15, 2008. In October 2008, the FASB clarified the application of fair value in a
market that is not active, and provided guidance on the key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. Ciena is
currently evaluating the impact this new guidance could have on its financial condition, results of
operations and cash flows.
In December 2007, the FASB issued new guidance which requires all entities to report
noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial
statements. This guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Ciena believes this
new guidance will not have a material impact on its financial condition, results of operations and
cash flows.
In December 2007, the FASB issued new guidance on business combinations. The new guidance is
intended to simplify existing guidance and converge rulemaking under U.S. generally accepted
accounting principles with international accounting rules. This guidance applies prospectively to
business combinations where the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not apply this guidance
before that date. As of October 31, 2009, Cienas consolidated balance sheet includes $12.5 million
of capitalized acquisition costs which include direct costs related to its pending acquisition of
substantially all of the optical networking and carrier Ethernet assets of Nortels MEN business.
Upon the adoption of this newly issued accounting guidance, Ciena will expense these acquisition
costs in the first quarter of fiscal 2010. Future acquisition costs will be expensed as incurred.
See Notes 9 and 22 below for further discussion of Cienas pending business combination. Ciena is
currently evaluating any additional impacts this guidance could have on its financial condition,
results of operations and cash flows.
(2) BUSINESS COMBINATIONS
On March 3, 2008, Ciena acquired World Wide Packets, Inc. (World Wide Packets or WWP)
pursuant to the terms of an Agreement and Plan of Merger dated January 22, 2008 (the Merger
Agreement) by and among Ciena, World Wide Packets, Wolverine Acquisition Subsidiary, Inc., a
wholly owned subsidiary of Ciena (Merger Sub), and Daniel Reiner, as stockholders
representative. Pursuant to the Merger Agreement, on March 3, 2008, Merger Sub was merged with and
into World Wide Packets, with World Wide Packets continuing as the surviving corporation and a
wholly owned subsidiary of Ciena. World Wide Packets is a supplier of communications networking
equipment that enables the cost-effective delivery of a wide variety of carrier Ethernet-based
services. Prior to the acquisition, World Wide Packets was a privately held company. Cienas
results of operations for fiscal 2008 in these financial statements include the operations of World
Wide Packets beginning on March 3, 2008, the effective date of the acquisition.
Upon the closing of the acquisition, all of the outstanding shares of World Wide Packets
common stock and preferred stock were exchanged for approximately 2.5 million shares of Ciena
common stock and approximately $196.7 million in cash. Of this amount, $20.0 million in cash and
340,000 shares of Ciena common stock were placed into escrow for a period of one year as security
for the indemnification obligations of World Wide Packets stockholders under the Merger Agreement.
Upon the closing, Ciena also assumed all then outstanding World Wide Packets options and exchanged
them for options to acquire approximately 0.9 million shares of Ciena common stock. Under the
Merger Agreement, Ciena also agreed to indemnify certain officers and directors of World Wide
Packets against third-party claims arising out of their employment relationship. Ciena has
determined the fair value of this indemnification obligation to be insignificant.
The following table summarizes the purchase price for the acquisition (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
196,668 |
|
Acquisition-related costs |
|
|
14,183 |
|
Value of common stock issued |
|
|
62,360 |
|
Fair value of vested options assumed |
|
|
9,912 |
|
|
|
|
|
Total purchase price |
|
$ |
283,123 |
|
|
|
|
|
66
The value of Cienas common stock issued in the acquisition was based on the average closing
price of Cienas common stock for the two trading days prior to, the date of, and the two trading
days after the announcement of the acquisition. The fair value of the vested options assumed was
determined using the Black-Scholes option-pricing model.
The acquisition was accounted for under the purchase method of accounting, which requires the
total purchase price to be allocated to the acquired assets and assumed liabilities based on their
estimated fair values. The amount of the purchase price in excess of the amounts assigned to
acquired tangible or intangible assets and assumed liabilities is recognized as goodwill. Amounts
allocated to goodwill are not tax deductible. As set forth below, Ciena recorded acquired,
finite-lived intangible assets related to developed technology, covenants not to compete, and
customer relationships, outstanding purchase orders and contracts. The following table summarizes
the allocation of the acquisition purchase price based on the estimated fair value of the acquired
assets and assumed liabilities (in thousands):
|
|
|
|
|
|
|
Amount |
|
Cash |
|
$ |
835 |
|
Accounts receivable |
|
|
2,049 |
|
Inventory |
|
|
12,872 |
|
Equipment, furniture and fixtures |
|
|
2,691 |
|
Other tangible assets |
|
|
2,003 |
|
Developed technology |
|
|
42,400 |
|
Covenants not to compete |
|
|
3,200 |
|
Customer relationships, outstanding purchase orders and contracts |
|
|
19,100 |
|
Goodwill |
|
|
223,658 |
|
Accounts payable, accrued liabilities and deferred revenue |
|
|
(13,322 |
) |
Promissory notes and loans payable |
|
|
(12,363 |
) |
|
|
|
|
Total purchase price allocation |
|
$ |
283,123 |
|
|
|
|
|
Under purchase accounting rules, Ciena revalued the acquired finished goods inventory to fair
value, which is defined as the estimated selling price less the sum of (a) costs of disposal, and
(b) a reasonable profit allowance for Cienas selling effort. This revaluation resulted in an
increase in inventory carrying value of approximately $5.3 million for marketable inventory,
slightly offset by a decrease of $0.7 million for unmarketable inventory.
Developed technology represents purchased technology which had reached technological
feasibility and for which World Wide Packets had substantially completed development as of the date
of acquisition. Fair value was determined using future discounted cash flows related to the
projected income stream of the developed technology for a discrete projection period. Cash flows
were discounted to their present value as of the closing date. Developed technology is amortized on
a straight line basis over its estimated useful life of 4 years to 6 years.
Covenants not to compete represent agreements entered into with key employees of World Wide
Packets. Covenants not to compete are amortized on a straight line basis over estimated useful
lives of 3.5 years.
Customer relationships, outstanding purchase orders and contracts represent agreements with
existing World Wide Packets customers and have estimated useful lives of 4 months to 6 years.
The following unaudited pro forma financial information summarizes the results of operations
for the periods indicated as if Cienas acquisition of World Wide Packets had been completed as of
the beginning of each of the periods presented. 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 occurred as of the beginning of the periods presented or that may be obtained in
the future.
|
|
|
|
|
|
|
|
|
|
|
Years Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
Pro forma revenue |
|
$ |
802,323 |
|
|
$ |
909,098 |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
39,721 |
|
|
$ |
22,179 |
|
|
|
|
|
|
|
|
Pro forma basic net income per common share |
|
$ |
0.45 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
Pro forma diluted net income per potential common share |
|
$ |
0.43 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
(3) RESTRUCTURING COSTS
The following table displays the activity and balances of the historical restructuring
liability accounts for the fiscal years indicated (in thousands):
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidation |
|
|
|
|
|
|
Workforce |
|
|
of excess |
|
|
|
|
|
|
reduction |
|
|
facilities |
|
|
Total |
|
Balance at October 31, 2006 |
|
$ |
|
|
|
$ |
35,634 |
|
|
$ |
35,634 |
|
Additional liability recorded |
|
|
72 |
(a) |
|
|
1 |
(a) |
|
|
73 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
(2,508 |
)(a) |
|
|
(2,508 |
) |
Lease settlements |
|
|
|
|
|
|
(4,871 |
)(a) |
|
|
(4,871 |
) |
Cash payments |
|
|
(72 |
) |
|
|
(23,568 |
) |
|
|
(23,640 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007 |
|
|
|
|
|
|
4,688 |
|
|
|
4,688 |
|
Additional liability recorded |
|
|
1,057 |
(b) |
|
|
53 |
(b) |
|
|
1,110 |
|
Cash payments |
|
|
(75 |
) |
|
|
(1,498 |
) |
|
|
(1,573 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2008 |
|
|
982 |
|
|
|
3,243 |
|
|
|
4,225 |
|
Additional liability recorded |
|
|
4,117 |
(c) |
|
|
3,419 |
(c) |
|
|
7,536 |
|
Adjustment to previous estimates |
|
|
|
|
|
|
3,670 |
(c) |
|
|
3,670 |
|
Cash payments |
|
|
(4,929 |
) |
|
|
(897 |
) |
|
|
(5,826 |
) |
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2009 |
|
$ |
170 |
|
|
$ |
9,435 |
|
|
$ |
9,605 |
|
|
|
|
|
|
|
|
|
|
|
Current restructuring liabilities |
|
$ |
170 |
|
|
$ |
1,641 |
|
|
$ |
1,811 |
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring liabilities |
|
$ |
|
|
|
$ |
7,794 |
|
|
$ |
7,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
During the first quarter of fiscal 2007, Ciena recorded a charge of $0.1 million
related to other costs associated with a previous workforce reduction and an adjustment of
$0.5 million related to costs associated with previously restructured facilities. |
|
|
|
During the second quarter of fiscal 2007, Ciena recorded an adjustment of $0.8 million
related to its return to use of a facility that had been previously restructured. |
|
|
|
During the third quarter of fiscal 2007, Ciena recorded an adjustment of $1.2 million
primarily related to its return to use of a facility that had been previously restructured. |
|
|
|
During the fourth quarter of fiscal 2007, Ciena recorded a gain on lease settlement of $4.9
million related to the termination of lease obligations for our former San Jose, CA
facilities. Ciena paid $53.0 million in connection with the settlement of this lease
obligation. This transaction eliminated Cienas remaining unfavorable lease commitment
balance of $34.9 million and reduced Cienas restructuring liabilities by $23.5 million,
offset by approximately $0.5 million of other expenses. |
|
(b) |
|
During the fourth quarter of fiscal 2008, Ciena recorded a charge of $1.0 million
related to a workforce reduction of 56 employees and a charge of approximately $0.1 million
related to the closure of a facility located in San Antonio, Texas. |
|
(c) |
|
During the first quarter of fiscal 2009, Ciena recorded a charge of $0.1 million
in other costs associated with a previous workforce reduction. |
|
|
|
During the second quarter of fiscal 2009, Ciena recorded a charge of $3.5 million of
severance and other employee-related costs associated with a workforce reduction of 200
employees and an adjustment of $2.9 million associated with previously restructured
facilities. |
|
|
|
During the third quarter of fiscal 2009, Ciena recorded a charge of $0.5 million of
severance and other employee-related costs and a charge of $3.4 million related to the
Acton, MA facility closure. |
|
|
|
During the fourth quarter of fiscal 2009, Ciena recorded an adjustment of $0.8 million
associated with previously restructured facilities. |
(4) GOODWILL AND LONG-LIVED ASSET ASSESSMENT
Goodwill
The table below sets forth changes in carrying amount of goodwill during the fiscal years
indicated (in thousands):
|
|
|
|
|
|
|
Total |
|
Balance as October 31, 2006 |
|
$ |
232,015 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2007 |
|
|
232,015 |
|
Goodwill acquired |
|
|
223,658 |
|
Impairment losses |
|
|
|
|
|
|
|
|
Balance as October 31, 2008 |
|
|
455,673 |
|
Goodwill acquired |
|
|
|
|
Impairment losses |
|
|
(455,673 |
) |
|
|
|
|
Balance as October 31, 2009 |
|
$ |
|
|
|
|
|
|
68
Ciena determines the fair value of its single reporting unit to be equal to its market
capitalization plus a control premium. Market capitalization is determined by multiplying the
shares outstanding on the assessment date by the average market price of Cienas common stock over
a 10-day period before and a 10-day period after each assessment date. Ciena uses this 20-day
duration to consider inherent market fluctuations that may affect any individual closing price.
Ciena believes that its market capitalization alone does not fully capture the fair value of its
business as a whole, or the substantial value that an acquirer would obtain from its ability to
obtain control of Cienas business. As such, in determining fair value, Ciena added a control
premium which seeks to give effect to the increased consideration a potential acquirer would be
required to pay in order to gain sufficient ownership to set policies, direct operations and make
decisions related to Ciena to its market capitalization. In determining an appropriate control
premium, Ciena looked to recent transaction data in its industry. For fiscal 2007, 2008 and 2009,
Ciena used a 25% control premium in its goodwill assessment.
Based on a combination of factors, including macroeconomic conditions and a sustained decline
in Cienas common stock price and market capitalization below net book value, Ciena conducted an
interim impairment assessment of goodwill during the second quarter of fiscal 2009. Ciena performed
the step one fair value comparison, and its market capitalization was $721.8 million and its
carrying value, including goodwill, was $949.0 million. Ciena applied a 25% control premium to its
market capitalization to determine a fair value of $902.2 million. Because step one indicated that
Cienas fair value was less than its carrying value, Ciena performed the step two analysis. Under
the step two analysis, the implied fair value of goodwill requires valuation of a reporting units
tangible and intangible assets and liabilities in a manner similar to the allocation of purchase
price in a business combination. If the carrying value of a reporting units goodwill exceeds its
implied fair value, goodwill is deemed impaired and is written down to the extent of the
difference. The implied fair value of the reporting units goodwill was determined to be $0, and,
as a result, Ciena recorded a goodwill impairment of $455.7 million, representing the full carrying
value of the goodwill.
Ciena also performed assessments of the fair value of its single reporting unit as of
September 27, 2008 and September 29, 2007. Ciena compared its fair value on each assessment date to
its carrying value, including goodwill, and determined that the carrying value, including goodwill,
did not exceed fair value. Because the carrying amount was less than its fair value, no impairment
loss was recorded.
Long-Lived Assets
Cienas long-lived assets, excluding goodwill, include: equipment, furniture and fixtures;
finite-lived intangible assets; and maintenance spares. Ciena tests long-lived assets for
impairment whenever triggering events or changes in circumstances indicate that the assets
carrying amount is not recoverable from its undiscounted cash flows. Cienas long-lived assets are
part of a single reporting unit which represents the lowest level for which it can identify cash
flows.
Due to effects of difficult macroeconomic conditions on Cienas business, including
lengthening sales cycles and slowing deployments resulting in lower demand, Ciena performed an
impairment analysis of its long-lived assets during the fourth quarter of fiscal 2008 and the
second quarter of fiscal 2009. Based on Cienas estimate of future, undiscounted cash flows as of
October 31, 2008 and April 30, 2009, respectively, no impairment was required. There were no
triggering events or changes in circumstances that required a reassessment as of October 31, 2009.
If actual market conditions differ or forecasts change, Ciena may be required to record a non-cash
impairment charge related to long-lived assets in future periods. Such charges would have the
effect of decreasing Cienas earnings or increasing its losses in such period.
(5) MARKETABLE DEBT SECURITIES
As of the dates indicated, short-term and long-term investments in marketable debt securities
are comprised of the following (in thousands):
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
US government obligations |
|
$ |
570,505 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
570,963 |
|
Publicly traded equity securities |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
570,756 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
562,781 |
|
|
|
404 |
|
|
|
2 |
|
|
|
563,183 |
|
Included in long-term investments |
|
|
7,975 |
|
|
|
56 |
|
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
570,756 |
|
|
$ |
460 |
|
|
$ |
2 |
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
|
Gross Unrealized |
|
|
Gross Unrealized |
|
|
Estimated Fair |
|
|
|
Amortized Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Corporate bonds |
|
$ |
116,531 |
|
|
$ |
81 |
|
|
$ |
2,260 |
|
|
$ |
114,352 |
|
Asset backed obligations |
|
|
10,188 |
|
|
|
|
|
|
|
7 |
|
|
|
10,181 |
|
Commercial paper |
|
|
49,871 |
|
|
|
7 |
|
|
|
8 |
|
|
|
49,870 |
|
US government obligations |
|
|
334,195 |
|
|
|
949 |
|
|
|
40 |
|
|
|
335,104 |
|
Certificate of deposit |
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
523,785 |
|
|
$ |
1,037 |
|
|
$ |
2,315 |
|
|
$ |
522,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in short-term investments |
|
|
366,054 |
|
|
|
812 |
|
|
|
530 |
|
|
|
366,336 |
|
Included in long-term investments |
|
|
157,731 |
|
|
|
225 |
|
|
|
1,785 |
|
|
|
156,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
523,785 |
|
|
$ |
1,037 |
|
|
$ |
2,315 |
|
|
$ |
522,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2007 the estimated fair value of commercial paper included investments
in SIV Portfolio plc (formerly known as Cheyne Finance plc) and Rhinebridge LLC, two structured
investment vehicles (SIVs) that entered into receivership during the fourth quarter of fiscal 2007
and failed to make payment at maturity. Due to their mortgage-related assets, each of these
entities was exposed to adverse market conditions that affected its collateral and its ability to
access short-term funding. Ciena purchased these investments in the third quarter of fiscal 2007
and, at the time of purchase, each investment had a rating of A1+ by Standard and Poors and P-1 by
Moodys, their highest ratings respectively. In estimating fair value, Ciena used a valuation
approach based on a liquidation of assets held by each SIV and their subsequent distribution of
cash. Ciena utilized assessments of the underlying collateral from multiple indicators of value
which were then discounted to reflect the expected timing of disposition and market risks. Based on
this assessment of fair value, as of October 31, 2007, Ciena recognized realized losses of $13.0
million related to these investments. Giving effect to these losses, our investment portfolio at
October 31, 2007 included an estimated fair value of $33.9 million in commercial paper issued by
these entities. During fiscal 2008, Ciena recognized additional losses of $5.1 million related to
these investments, received payments of $28.8 million in connection with the restructuring of these
SIVs, and, as of October 31, 2008, no longer held these investments.
Gross unrealized losses related to marketable debt investments, included in short-term and
long-term investments, were primarily due to changes in interest rates. Cienas management has
determined that the gross unrealized losses at October 31, 2009 and October 31, 2008 are temporary
in nature because Ciena has the ability and intent to hold these investments until a recovery of
fair value, which may be maturity. As of the dates indicated, gross unrealized losses were as
follows (in thousands):
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Unrealized Losses Less Than 12 |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
US government obligations |
|
$ |
2 |
|
|
$ |
37,744 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
37,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2 |
|
|
$ |
37,744 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2 |
|
|
$ |
37,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
Unrealized Losses Less Than 12 |
|
|
Unrealized Losses 12 |
|
|
|
|
|
|
Months |
|
|
Months or Greater |
|
|
Total |
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
Corporate bonds |
|
$ |
2,260 |
|
|
$ |
88,176 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,260 |
|
|
$ |
88,176 |
|
Asset backed obligations |
|
|
7 |
|
|
|
10,181 |
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
10,181 |
|
Commercial paper |
|
|
8 |
|
|
|
29,709 |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
29,709 |
|
US government obligations |
|
|
40 |
|
|
|
23,438 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
23,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,315 |
|
|
$ |
151,504 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,315 |
|
|
$ |
151,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes legal maturities of marketable debt investments at October 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost |
|
|
Estimated Fair Value |
|
Less than one year |
|
$ |
562,530 |
|
|
$ |
562,932 |
|
Due in 1-2 years |
|
|
7,975 |
|
|
|
8,031 |
|
|
|
|
|
|
|
|
|
|
$ |
570,505 |
|
|
$ |
570,963 |
|
|
|
|
|
|
|
|
(6) FAIR VALUE MEASUREMENTS
As of the dates indicated, the following table summarizes the fair value of assets that are
recorded at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US government obligations |
|
$ |
|
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
570,963 |
|
Publicly traded equity securities |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
251 |
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cienas Level 1 assets include corporate equity securities publicly traded on major exchanges
that are valued using quoted prices in active markets. Cienas Level 2 investments include U.S.
government obligations. These investments are valued using observable inputs such as quoted market
prices, benchmark yields, reported trades, broker/dealer quotes or alternative pricing sources with
reasonable levels of price transparency. Investments are held by a custodian who obtains
investment prices from a third party pricing provider that uses standard inputs to models which
vary by asset class.
As of October 31, 2009, Ciena did not hold financial assets or liabilities recorded at fair
value based on Level 3 inputs.
As of the dates indicated, the assets and liabilities above were presented on Cienas
Consolidated Balance Sheet as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
251 |
|
|
$ |
562,932 |
|
|
$ |
|
|
|
$ |
563,183 |
|
Long-term investments |
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
8,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets measured at fair value |
|
$ |
251 |
|
|
$ |
570,963 |
|
|
$ |
|
|
|
$ |
571,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
During fiscal 2009, a private technology company in which Ciena holds a minority equity
investment completed a round of equity financing and merged with another private technology
company. These events required Ciena to perform an impairment analysis and measure the investment
at fair value. In determining fair value, Ciena utilized Level 3 inputs including the
recapitalization resulting from both the completion of the merger and the equity financing. Also,
during fiscal 2009, a separate private technology company in which Ciena held a minority equity
investment was acquired by a publicly-traded company. This event required Ciena to perform an
impairment analysis and measure the investment at fair value. In determining fair value, Ciena
utilized Level 2 inputs including the relevant exchange ratio for the acquisition transaction and
the market price of the acquirers common stock. Based on Cienas ownership interest and the value
of its investment following these events, Ciena recorded a non-cash loss on cost method investments
of $5.3 million.
At
October 31, 2009, the fair value of the outstanding $500.0 million of 0.875% convertible
senior notes and $298.0 million of 0.25% convertible senior notes was $299.1 million and $231.1
million, respectively. Fair value is based on the quoted market price for the notes on the dates
above.
(7) ACCOUNTS RECEIVABLE
As of October 31, 2009, one customer accounted for 10.7% of net trade accounts receivable. As
of October 31, 2008, three customers each accounted for 10% or more of net trade accounts
receivable and 59.0% in the aggregate. Cienas allowance for doubtful accounts as of October 31,
2007, 2008 and 2009 was $0.1 million.
The following table summarizes the activity in Cienas allowance for doubtful accounts for
the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
Provisions |
|
|
|
|
|
Balance at end of |
|
|
October 31, |
|
of period |
|
(Recovery) |
|
Deductions |
|
period |
|
|
2007 |
|
$ |
146 |
|
|
$ |
(14 |
) |
|
$ |
|
|
|
$ |
132 |
|
|
|
2008 |
|
$ |
132 |
|
|
$ |
157 |
|
|
$ |
165 |
|
|
$ |
124 |
|
|
|
2009 |
|
$ |
124 |
|
|
$ |
93 |
|
|
$ |
101 |
|
|
$ |
116 |
|
(8) INVENTORIES
As of the dates indicated, inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Raw materials |
|
$ |
19,044 |
|
|
$ |
19,694 |
|
Work-in-process |
|
|
1,702 |
|
|
|
1,480 |
|
Finished goods |
|
|
95,963 |
|
|
|
90,914 |
|
|
|
|
|
|
|
|
|
|
|
116,709 |
|
|
|
112,088 |
|
Provision for excess and obsolescence |
|
|
(23,257 |
) |
|
|
(24,002 |
) |
|
|
|
|
|
|
|
|
|
$ |
93,452 |
|
|
$ |
88,086 |
|
|
|
|
|
|
|
|
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 2007, fiscal 2008 and fiscal 2009, Ciena
recorded provisions for inventory reserves of $12.2 million, $18.3 million and $15.7 million,
respectively, primarily related to changes in forecasted sales for certain products. Deductions
from the reserve for excess and obsolete inventory relate to disposal activities.
The following table summarizes the activity in Cienas reserve for excess and obsolete
inventory for the fiscal years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
beginning of |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
October 31, |
|
period |
|
Provisions |
|
Disposals |
|
end of period |
|
|
2007 |
|
$ |
22,326 |
|
|
$ |
12,180 |
|
|
$ |
8,336 |
|
|
$ |
26,170 |
|
|
|
2008 |
|
$ |
26,170 |
|
|
$ |
18,325 |
|
|
$ |
21,238 |
|
|
$ |
23,257 |
|
|
|
2009 |
|
$ |
23,257 |
|
|
$ |
15,719 |
|
|
$ |
14,974 |
|
|
$ |
24,002 |
|
(9) PREPAID EXPENSES AND OTHER
As of the dates indicated, prepaid expenses and other are comprised of the following (in
thousands):
72
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Interest receivable |
|
$ |
2,082 |
|
|
$ |
993 |
|
Prepaid VAT and other taxes |
|
|
15,160 |
|
|
|
14,527 |
|
Deferred deployment expense |
|
|
4,481 |
|
|
|
4,242 |
|
Prepaid expenses |
|
|
10,557 |
|
|
|
8,869 |
|
Capitalized acquisition costs |
|
|
|
|
|
|
12,473 |
|
Restricted cash |
|
|
1,717 |
|
|
|
7,477 |
|
Other non-trade receivables |
|
|
1,891 |
|
|
|
1,956 |
|
|
|
|
|
|
|
|
|
|
$ |
35,888 |
|
|
$ |
50,537 |
|
|
|
|
|
|
|
|
Capitalized acquisition costs include direct costs related to Cienas pending acquisition of
the optical networking and carrier Ethernet assets of Nortels MEN business. See Note 22 below. In
the first quarter of fiscal 2010, Ciena will adopt newly issued accounting guidance related to
business combinations, which will require the full amount of these capitalized acquisition costs to
be expensed in the consolidated statement of operations.
(10) EQUIPMENT, FURNITURE AND FIXTURES
As of the dates indicated, equipment, furniture and fixtures are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Equipment, furniture and fixtures |
|
$ |
286,940 |
|
|
$ |
293,093 |
|
Leasehold improvements |
|
|
40,574 |
|
|
|
45,761 |
|
|
|
|
|
|
|
|
|
|
|
327,514 |
|
|
|
338,854 |
|
Accumulated depreciation and amortization |
|
|
(267,547 |
) |
|
|
(276,986 |
) |
|
|
|
|
|
|
|
|
|
$ |
59,967 |
|
|
$ |
61,868 |
|
|
|
|
|
|
|
|
During fiscal 2007, fiscal 2008 and fiscal 2009, Ciena recorded depreciation of equipment,
furniture and fixtures, and amortization of leasehold improvements of $12.8 million, $18.6 million
and $21.9 million, respectively.
(11) OTHER INTANGIBLE ASSETS
As of the dates indicated, other intangible assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
Gross |
|
|
Accumulated |
|
|
Net |
|
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
|
Intangible |
|
|
Amortization |
|
|
Intangible |
|
Developed technology |
|
$ |
185,833 |
|
|
$ |
(128,255 |
) |
|
$ |
57,578 |
|
|
$ |
185,833 |
|
|
$ |
(147,504 |
) |
|
$ |
38,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses |
|
|
47,370 |
|
|
|
(37,952 |
) |
|
|
9,418 |
|
|
|
47,370 |
|
|
|
(42,811 |
) |
|
|
4,559 |
|
Customer
relationships,
covenants not to
compete,
outstanding
purchase orders and
contracts |
|
|
68,281 |
|
|
|
(43,028 |
) |
|
|
25,253 |
|
|
|
60,981 |
|
|
|
(43,049 |
) |
|
|
17,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
301,484 |
|
|
|
|
|
|
$ |
92,249 |
|
|
$ |
294,184 |
|
|
|
|
|
|
$ |
60,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate amortization expense of other intangible assets was $29.2 million, $38.0 million
and $31.4 million for fiscal 2007, fiscal 2008 and fiscal 2009, respectively. During fiscal 2009,
gross intangibles and the corresponding accumulated amortization related to covenants not to
compete, outstanding purchase orders and contracts decreased by $7.3 million due to their
expiration. Expected future amortization of other intangible assets for the fiscal years indicated
is as follows (in thousands):
73
|
|
|
|
|
Year ended October 31, |
|
|
|
|
2010 |
|
$ |
27,873 |
|
2011 |
|
|
13,852 |
|
2012 |
|
|
9,473 |
|
2013 |
|
|
7,217 |
|
Thereafter |
|
|
2,405 |
|
|
|
|
|
|
|
$ |
60,820 |
|
|
|
|
|
(12) OTHER BALANCE SHEET DETAILS
As of the dates indicated, other long-term assets are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Maintenance spares inventory, net |
|
$ |
30,038 |
|
|
$ |
31,994 |
|
Deferred debt issuance costs, net |
|
|
15,127 |
|
|
|
12,832 |
|
Investments in privately held companies |
|
|
6,671 |
|
|
|
907 |
|
Restricted cash |
|
|
20,436 |
|
|
|
18,792 |
|
Other |
|
|
3,476 |
|
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
$ |
75,748 |
|
|
$ |
67,902 |
|
|
|
|
|
|
|
|
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 deferred debt issuance costs, which is included in interest expense, were $4.0 million, $2.9
million and $2.3 million for fiscal 2007, fiscal 2008 and fiscal 2009, respectively.
As of the dates indicated, accrued liabilities are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Warranty |
|
$ |
37,258 |
|
|
$ |
40,196 |
|
Compensation, payroll related tax and benefits |
|
|
23,253 |
|
|
|
20,025 |
|
Vacation |
|
|
11,947 |
|
|
|
11,508 |
|
Interest payable |
|
|
1,683 |
|
|
|
2,045 |
|
Other |
|
|
22,002 |
|
|
|
29,575 |
|
|
|
|
|
|
|
|
|
|
$ |
96,143 |
|
|
$ |
103,349 |
|
|
|
|
|
|
|
|
The following table summarizes the activity in Cienas accrued warranty for the fiscal years
indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
|
|
October 31, |
|
of period |
|
Provisions |
|
Settlements |
|
of period |
|
|
2007 |
|
$ |
31,751 |
|
|
$ |
12,743 |
|
|
$ |
10,914 |
|
|
$ |
33,580 |
|
|
|
2008 |
|
$ |
33,580 |
|
|
$ |
15,336 |
|
|
$ |
11,658 |
|
|
$ |
37,258 |
|
|
|
2009 |
|
$ |
37,258 |
|
|
$ |
19,286 |
|
|
$ |
16,348 |
|
|
$ |
40,196 |
|
As of the dates indicated, deferred revenue is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Products |
|
$ |
13,061 |
|
|
$ |
11,998 |
|
Services |
|
|
61,366 |
|
|
|
63,935 |
|
|
|
|
|
|
|
|
|
|
|
74,427 |
|
|
|
75,933 |
|
Less current portion |
|
|
(36,767 |
) |
|
|
(40,565 |
) |
|
|
|
|
|
|
|
Long-term deferred revenue |
|
$ |
37,660 |
|
|
$ |
35,368 |
|
|
|
|
|
|
|
|
74
(13) DERIVATIVES
Ciena uses foreign currency forward contracts to reduce variability in non-U.S. dollar
denominated operating expenses. Ciena uses these derivatives to partially offset its market
exposure to fluctuations in certain foreign currencies. These derivatives are designated as cash
flow hedges and have maturities of less than one year. These forward contracts are not designed to
provide foreign currency protection over the long-term. Ciena considers several factors, including
offsetting exposures, significance of exposures, costs associated with entering into a particular
instrument, and potential effectiveness when designing its hedging activities.
The effective portion of the derivatives gain or loss is initially reported as a component of
accumulated other comprehensive income (loss) and, upon occurrence of the forecasted transaction,
is subsequently reclassified into the operating expense line item to which the hedged transaction
relates. Ciena records the ineffective portion of the hedging instruments in interest and other
income, net. As of October 31, 2009, there were no foreign currency forward contracts outstanding.
Cienas foreign currency forward contracts are classified as follows:
|
|
|
|
|
|
|
|
|
|
|
Reclassified to Consolidated |
|
|
|
Statement of Operations |
|
|
|
(Effective Portion) |
|
|
|
Year Ended October 31, |
|
Line Item in Consolidated Statement of Operations |
|
2008 |
|
|
2009 |
|
Research and development |
|
$ |
|
|
|
$ |
(533 |
) |
Selling and marketing |
|
|
|
|
|
|
(804 |
) |
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
(1,337 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in Other |
|
|
|
Comprehensive Income (Loss) |
|
|
|
Year Ended October 31, |
|
Line Item in Consolidated Balance Sheet |
|
2008 |
|
|
2009 |
|
Accumulated other comprehensive income (loss) |
|
$ |
|
|
|
$ |
1,337 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
1,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective Portion |
|
|
|
Year Ended October 31, |
|
Line Item in Consolidated Statement of Operations |
|
2008 |
|
|
2009 |
|
Interest and other income, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
(14) CONVERTIBLE NOTES PAYABLE
Ciena 3.75% Convertible Notes, due February 1, 2008
During fiscal 2008, Ciena paid at maturity the remaining $542.3 million in aggregate principal
amount on its 3.75% convertible notes. All of the notes were retired without conversion into common
stock.
0.25% Convertible Senior Notes due May 1, 2013
On April 10, 2006, Ciena completed a public offering of 0.25% Convertible Senior Notes due May
1, 2013, in aggregate principal amount of $300.0 million. Interest is payable on May 1 and November
1 of each year. The notes are senior unsecured obligations of Ciena and rank equally with all of
Cienas other existing and future senior unsecured debt.
During the fourth quarter of fiscal 2008, Ciena repurchased $2.0 million in principal amount
of its outstanding 0.25% convertible senior notes in an open market transaction. Ciena used
$1.0 million of cash to effect these repurchases during the quarter, which resulted in a gain of
approximately $0.9 million relating to this repurchase.
75
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 25.3001 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of $39.5255 per share. The notes may be redeemed by
Ciena if the closing sale price of Cienas common stock for at least 20 trading days in any 30
consecutive trading day period ending on the date one day prior to the date of the notice of
redemption exceeds 130% of the conversion price. Ciena may redeem the notes in whole or in part, at
a redemption price in cash equal to the principal amount to be redeemed, plus accrued and unpaid
interest.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $28.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from the
conversion of the notes. See Note 16 below for a description of this call spread option.
0.875% Convertible Senior Notes due June 15, 2017
On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due
June 15, 2017, in aggregate principal amount of $500.0 million. Interest is payable on June 15 and
December 15 of each year, beginning on December 15, 2007. The notes are senior unsecured
obligations of Ciena and rank equally with all of Cienas other existing and future senior
unsecured debt.
At the election of the holder, notes may be converted prior to maturity into shares of Ciena
common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which
is equivalent to an initial conversion price of approximately $38.15 per share. The notes are not
redeemable by Ciena prior to maturity.
If Ciena undergoes a fundamental change (as that term is defined in the indenture governing
the notes to include certain change in control transactions), holders of notes will have the right,
subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a
price equal to the principal amount, plus accrued and unpaid interest. If the holder elects to
convert his or her notes in connection with a specified fundamental change, in certain
circumstances, Ciena will be required to increase the applicable conversion rate, depending on the
price paid per share for Ciena common stock and the effective date of the fundamental change
transaction.
Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call
spread option on its common stock that is intended to limit exposure to potential dilution from
conversion of the notes. See Note 16 below for a description of this call spread option.
(15) EARNINGS 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 potential common share (Diluted EPS). Basic EPS is computed using
the weighted average number of common shares outstanding. Diluted EPS is computed using the
weighted average number of (i) common shares outstanding, (ii) shares issuable upon vesting of
restricted stock units, (iii) shares issuable upon exercise of outstanding stock options, employee
stock purchase plan options and warrants using the treasury stock method; and (iv) shares
underlying the 0.25% and 0.875% convertible senior notes. Diluted EPS for fiscal 2007 reflects only
a portion of the shares underlying the 0.875% convertible notes because they were issued on June
11, 2007.
76
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Net income (loss) |
|
$ |
82,788 |
|
|
$ |
38,894 |
|
|
$ |
(581,154 |
) |
Add: Interest expense for 0.25% convertible senior notes |
|
|
1,882 |
|
|
|
1,874 |
|
|
|
|
|
Add: Interest expense for 0.875% convertible senior notes |
|
|
2,261 |
|
|
|
5,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used to calculate Diluted EPS |
|
$ |
86,931 |
|
|
$ |
46,278 |
|
|
$ |
(581,154 |
) |
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2007 |
|
2008 |
|
2009 |
Basic weighted average shares outstanding |
|
|
85,525 |
|
|
|
89,146 |
|
|
|
91,167 |
|
Add: Shares underlying outstanding stock options,
employees stock purchase plan options, warrants and
restricted stock units |
|
|
1,352 |
|
|
|
761 |
|
|
|
|
|
Add: Shares underlying 0.25% convertible senior notes |
|
|
7,590 |
|
|
|
7,590 |
|
|
|
|
|
Add: Shares underlying 0.875% convertible senior notes |
|
|
5,137 |
|
|
|
13,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive weighted average shares outstanding |
|
|
99,604 |
|
|
|
110,605 |
|
|
|
91,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Basic EPS |
|
$ |
0.97 |
|
|
$ |
0.44 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted EPS |
|
$ |
0.87 |
|
|
$ |
0.42 |
|
|
$ |
(6.37 |
) |
|
|
|
|
|
|
|
|
|
|
Explanation of Shares Excluded due to Anti-Dilutive Effect
For fiscal 2009, the weighted average number of certain shares underlying outstanding stock
options, employee stock purchase plan options, restricted stock units and warrants in the table
below are considered anti-dilutive because the exercise price of these awards is greater than the
average closing price per share on the NASDAQ Stock Market during this period. In addition, the
weighted average number of shares issuable upon conversion of Cienas 0.25% convertible senior
notes and 0.875% convertible senior notes are considered anti-dilutive because the related interest
expense on a per common share if converted basis exceeds Basic EPS for the period.
For fiscal 2007 and fiscal 2008, the weighted average number of certain shares underlying
outstanding stock options, employee stock purchase plan options, restricted stock units, and
warrants, is considered anti-dilutive because the exercise price of these equity awards is greater
than the average closing price per share on the NASDAQ Stock Market during these periods. In
addition, the weighted average number of shares underlying Cienas previously outstanding 3.75%
convertible notes are considered anti-dilutive because the related interest expense on a per common
share if converted basis exceeds Basic EPS for the periods.
The following table summarizes the shares excluded from the calculation of the denominator for
Basic and Diluted EPS due to their anti-dilutive effect for the fiscal years indicated (in
thousands):
Shares excluded from EPS Denominator due to anti-dilutive effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2007 |
|
2008 |
|
2009 |
Shares underlying stock options, restricted stock units and warrants |
|
|
3,041 |
|
|
|
5,311 |
|
|
|
8,302 |
|
3.750% convertible notes |
|
|
742 |
|
|
|
182 |
|
|
|
|
|
0.250% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
7,539 |
|
0.875% convertible senior notes |
|
|
|
|
|
|
|
|
|
|
13,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluded due to anti-dilutive effect |
|
|
3,783 |
|
|
|
5,493 |
|
|
|
28,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16) STOCKHOLDERS EQUITY
Call Spread Option
Ciena holds two call spread options on its common stock relating to the shares issuable upon
conversion of its two issues of convertible notes. These call spread options are designed to
mitigate exposure to potential dilution from the conversion of the notes. Ciena purchased a call
spread option relating to the 0.25% Convertible Senior Notes due May 1, 2013 for $28.5 million
during the second quarter of fiscal 2006. Ciena purchased a call spread option relating to the
0.875% Convertible Senior Notes due June 15, 2017 for $42.5 million during the third quarter of
fiscal 2007. In each case, the call spread options
were purchased at the time of the notes offering from an affiliate of the underwriter. The
cost of each call spread option was recorded as a reduction in paid-in capital.
77
Each call spread option is exercisable, upon maturity of the relevant issue of convertible
notes, for such number of shares of Ciena common stock issuable upon conversion of that series of
notes in full. Each call spread option has a lower strike price equal to the conversion price for
the notes and a higher strike price that serves to cap the amount of dilution protection
provided. At its election, Ciena can exercise the call spread options on a net cash basis or a net
share basis. The value of the consideration of a net share settlement will be equal to the value
upon a net cash settlement and can range from $0, if the market price per share of Ciena common
stock upon exercise is equal to or below the lower strike price, to approximately $45.7 million (in
the case of the April 2006 call spread option) or approximately $76.1 million (in the case of the
June 2007 call spread), if the market price per share of Ciena common stock upon exercise is at or
above the higher strike price. If the market price on the date of exercise is between the lower
strike price and the higher strike price, in lieu of a net settlement, Ciena may elect to receive
the full number of shares underlying the call spread option by paying the aggregate option exercise
price, which is equal to the original principal outstanding on that series of notes. Should there
be an early unwind of the call spread option, the amount of cash or shares to be received by Ciena
will depend upon the existing overall market conditions, and on Cienas stock price, the volatility
of Cienas stock and the remaining term of the call spread option. The number of shares subject to
the call spread options, and the lower and higher strike prices, are subject to customary
adjustments.
(17) INCOME TAXES
For the periods indicated, the provision (benefit) for income taxes consists of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
(712 |
) |
|
$ |
(3,488 |
) |
State |
|
|
309 |
|
|
|
209 |
|
|
|
122 |
|
Foreign |
|
|
2,635 |
|
|
|
1,508 |
|
|
|
2,925 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
2,944 |
|
|
|
1,005 |
|
|
|
(441 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
1,640 |
|
|
|
(860 |
) |
State |
|
|
|
|
|
|
|
|
|
|
(23 |
) |
Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
|
|
|
|
1,640 |
|
|
|
(883 |
) |
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes |
|
$ |
2,944 |
|
|
$ |
2,645 |
|
|
$ |
(1,324 |
) |
|
|
|
|
|
|
|
|
|
|
For the periods indicated, income (loss) before provision (benefit) for income taxes consists
of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
United States |
|
$ |
77,150 |
|
|
$ |
32,868 |
|
|
$ |
(591,637 |
) |
Foreign |
|
|
8,582 |
|
|
|
8,671 |
|
|
|
9,159 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
85,732 |
|
|
$ |
41,539 |
|
|
$ |
(582,478 |
) |
|
|
|
|
|
|
|
|
|
|
For the periods indicated, the tax provision (benefit) reconciles to the amount computed by
multiplying income or loss before income taxes by the U.S. federal statutory rate of 35% as
follows:
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2007 |
|
2008 |
|
2009 |
Provision at statutory rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Federal AMT |
|
|
0.00 |
% |
|
|
0.89 |
% |
|
|
0.00 |
% |
State taxes |
|
|
0.36 |
% |
|
|
0.50 |
% |
|
|
(0.02 |
%) |
Foreign taxes |
|
|
0.11 |
% |
|
|
(3.67 |
%) |
|
|
0.05 |
% |
Research and development credit |
|
|
(2.47 |
%) |
|
|
(2.60 |
%) |
|
|
0.60 |
% |
Goodwill impairment |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
(27.38 |
%) |
Non-deductible compensation and other |
|
|
0.99 |
% |
|
|
10.31 |
% |
|
|
(1.45 |
%) |
Tax benefit attributable to other comprehensive income |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.03 |
% |
Valuation allowance |
|
|
(30.55 |
%) |
|
|
(34.06 |
%) |
|
|
(6.60 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
3.44 |
% |
|
|
6.37 |
% |
|
|
0.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2008 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Reserves and accrued liabilities |
|
$ |
27,795 |
|
|
$ |
31,088 |
|
Depreciation and amortization |
|
|
130,617 |
|
|
|
159,858 |
|
NOL and credit carry forward |
|
|
960,632 |
|
|
|
965,529 |
|
Other |
|
|
45,340 |
|
|
|
42,292 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
1,164,384 |
|
|
|
1,198,767 |
|
Valuation allowance |
|
|
(1,164,384 |
) |
|
|
(1,198,067 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
|
|
|
$ |
700 |
|
|
|
|
|
|
|
|
A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding
interest and penalties, is as follows (in thousands):
|
|
|
|
|
Unrecognized tax benefits at October 31, 2007 |
|
$ |
4,924 |
|
|
|
|
|
Increase (decrease) related to positions taken in prior period |
|
|
(724 |
) |
Increase (decrease) related to positions taken in current period |
|
|
734 |
|
Reductions related to expiration of statute of limitations |
|
|
(498 |
) |
|
|
|
|
Unrecognized tax benefits at October 31, 2008 |
|
|
4,436 |
|
Increase (decrease) related to positions taken in prior period |
|
|
106 |
|
Increase (decrease) related to positions taken in current period |
|
|
1,947 |
|
Reductions related to expiration of statute of limitations |
|
|
(300 |
) |
|
|
|
|
Unrecognized tax benefits at October 31, 2009 |
|
$ |
6,189 |
|
|
|
|
|
As of October 31, 2008 and 2009, Ciena had accrued $1.1 million and $1.2 million of interest,
respectively, and some minor penalties related to unrecognized tax benefits within other long-term
liabilities in the Consolidated Balance Sheets, of which
$0.1 million and $0.1 million of interest was
recorded to the provision for income taxes during fiscal 2008 and 2009, respectively. If
recognized, the entire balance of unrecognized tax benefits would impact the effective tax rate.
Over the next 12 months, Ciena does not estimate any material changes in the unrecognized income
tax benefits.
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 a reversal. Any future release of valuation allowance may be recorded as a tax benefit
increasing net income or as an adjustment to paid-in capital, based on tax ordering requirements. The
following table summarizes the activity in Cienas valuation allowance against its gross deferred
tax assets (in thousands):
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Balance at beginning |
|
|
|
|
|
|
|
|
|
Balance at end |
|
|
October 31, |
|
of period |
|
Additions |
|
Deductions |
|
of period |
|
|
2007 |
|
$ |
1,189,522 |
|
|
$ |
|
|
|
$ |
9,399 |
|
|
$ |
1,180,123 |
|
|
|
2008 |
|
$ |
1,180,123 |
|
|
$ |
|
|
|
$ |
15,739 |
|
|
$ |
1,164,384 |
|
|
|
2009 |
|
$ |
1,164,384 |
|
|
$ |
33,683 |
|
|
$ |
|
|
|
$ |
1,198,067 |
|
As of October 31, 2009, Ciena had a $2.4 billion net operating loss carry forward and an $84
million income tax credit carry forward which begin to expire in fiscal year 2018 and 2013,
respectively. Cienas ability to use net operating losses and credit carry forwards is 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 cumulative tax benefit through October
31, 2009 of approximately $77.3 million will be credited to additional paid-in capital when
realized. For deductions associated with Cienas equity compensation, credits to paid-in capital
will be recorded when those tax benefits are used to reduce taxes payable.
Approximately $20.7 million of the valuation allowance as of October 31, 2009 was attributable
to deferred tax assets associated with the acquisitions of WaveSmith, Catena, IPI and WWP.
(18) SHARE-BASED COMPENSATION EXPENSE
Ciena has outstanding equity awards issued under its legacy equity plans and equity plans
assumed as a result of previous acquisitions. While Ciena maintains a number of legacy and acquired
equity incentive plans that have awards outstanding, equity awards are currently made only from the
2008 Omnibus Incentive Plan and the 2003 Employee Stock Purchase Plan, each as described below.
Ciena Corporation 2008 Omnibus Incentive Plan
The 2008 Omnibus Incentive Plan (the 2008 Plan) was approved by Cienas Board of Directors
on December 12, 2007 and became effective upon the approval of Cienas stockholders on March 26,
2008. The 2008 Plan has a ten year term. The 2008 Plan reserves eight million shares of common
stock for issuance, subject to increase from time to time by the number of shares: (i) subject to
outstanding awards granted under Cienas prior equity compensation plans that terminate without
delivery of any stock (to the extent such shares would have been available for issuance under such
prior plan), and (ii) subject to awards assumed or substituted in connection with the acquisition
of another company.
The 2008 Plan authorizes the issuance of awards including stock options, restricted stock
units (RSUs), restricted stock, unrestricted stock, stock appreciation rights (SARs) and other
equity and/or cash performance incentive awards to employees, directors, and consultants of Ciena.
Subject to certain restrictions, the Compensation Committee of the Board of Directors has broad
discretion to establish the terms and conditions for awards under the 2008 Plan, including the
number of shares, vesting conditions and the required service or performance criteria. Options and
SARs have a maximum term of ten years, and their exercise price may not be less than 100% of fair
market value on the date of grant. Repricing of stock options and SARs is prohibited without
stockholder approval. Each share subject to an award other than stock options or SARs will reduce
the number of shares available for issuance under the 2008 Plan by 1.6 shares. Certain change in
control transactions may cause awards granted under the 2008 Plan to vest, unless the awards are
continued or substituted for in connection with the transaction. As of October 31, 2009, there were
3.3 million shares authorized and available for issuance under the 2008 Plan.
Stock Options
Outstanding stock option awards to employees are generally subject to service-based vesting
restrictions and vest incrementally over a four-year period. The following table is a summary of
Cienas stock option activity for the periods indicated (shares in thousands):
80
|
|
|
|
|
|
|
|
|
|
|
Shares Underlying |
|
Weighted |
|
|
Options |
|
Average |
|
|
Outstanding |
|
Exercise Price |
Balance as of October 31, 2006 |
|
|
7,110 |
|
|
$ |
48.52 |
|
Granted |
|
|
695 |
|
|
|
32.47 |
|
Exercised |
|
|
(1,507 |
) |
|
|
23.04 |
|
Canceled |
|
|
(427 |
) |
|
|
41.52 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
5,871 |
|
|
|
53.67 |
|
Granted |
|
|
760 |
|
|
|
28.92 |
|
Granted in exchange for WWP options |
|
|
934 |
|
|
|
7.50 |
|
Exercised |
|
|
(658 |
) |
|
|
7.12 |
|
Canceled |
|
|
(508 |
) |
|
|
52.79 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
6,399 |
|
|
|
48.84 |
|
Granted |
|
|
234 |
|
|
|
8.63 |
|
Exercised |
|
|
(107 |
) |
|
|
2.33 |
|
Canceled |
|
|
(988 |
) |
|
|
61.40 |
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009 |
|
|
5,538 |
|
|
$ |
45.80 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during fiscal 2007, fiscal 2008 and fiscal
2009 was $21.6 million, $14.7 million and $0.7 million, respectively. The weighted average fair
value of each stock option granted by Ciena during fiscal 2007, fiscal 2008 and fiscal 2009 was
$18.68, $14.52 and $4.94, respectively.
The following table summarizes information with respect to stock options outstanding at
October 31, 2009, based on Cienas closing stock price of $11.73 per share on the last trading day
of Cienas fiscal 2009 (shares and intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding at October 31, 2009 |
|
|
Vested Options at October 31, 2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Weighted |
|
|
|
|
Range of |
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
|
of |
|
|
Contractual |
|
|
Average |
|
|
Aggregate |
|
Exercise |
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
|
Underlying |
|
|
Life |
|
|
Exercise |
|
|
Intrinsic |
|
Price |
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
|
Shares |
|
|
(Years) |
|
|
Price |
|
|
Value |
|
$ 0.01 $ 16.52 |
|
|
929 |
|
|
|
6.89 |
|
|
$ |
10.51 |
|
|
$ |
3,029 |
|
|
|
650 |
|
|
|
5.95 |
|
|
$ |
11.46 |
|
|
$ |
2,009 |
|
$16.53 $ 17.43 |
|
|
552 |
|
|
|
6.00 |
|
|
|
17.21 |
|
|
|
|
|
|
|
500 |
|
|
|
5.70 |
|
|
|
17.21 |
|
|
|
|
|
$17.44 $ 22.96 |
|
|
460 |
|
|
|
5.38 |
|
|
|
21.77 |
|
|
|
|
|
|
|
405 |
|
|
|
4.97 |
|
|
|
21.90 |
|
|
|
|
|
$22.97 $ 31.71 |
|
|
1,539 |
|
|
|
5.14 |
|
|
|
29.47 |
|
|
|
|
|
|
|
1,285 |
|
|
|
4.62 |
|
|
|
29.73 |
|
|
|
|
|
$31.72 $ 46.90 |
|
|
904 |
|
|
|
6.47 |
|
|
|
39.45 |
|
|
|
|
|
|
|
617 |
|
|
|
5.72 |
|
|
|
40.21 |
|
|
|
|
|
$46.91 $ 73.78 |
|
|
527 |
|
|
|
3.05 |
|
|
|
60.13 |
|
|
|
|
|
|
|
527 |
|
|
|
3.05 |
|
|
|
60.13 |
|
|
|
|
|
$73.79 $1,046.50 |
|
|
627 |
|
|
|
1.77 |
|
|
|
178.12 |
|
|
|
|
|
|
|
627 |
|
|
|
1.77 |
|
|
|
178.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.01 $1,046.50 |
|
|
5,538 |
|
|
|
5.18 |
|
|
$ |
45.80 |
|
|
$ |
3,029 |
|
|
|
4,611 |
|
|
|
4.54 |
|
|
$ |
50.16 |
|
|
$ |
2,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions for Option-Based Awards
Ciena recognizes the fair value of service-based options as share-based compensation expense
on a straight-line basis over the requisite service period. Ciena estimates the fair value of each
option award on the date of grant using the Black-Scholes option-pricing model, with the following
weighted average assumptions:
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
2007 |
|
2008 |
|
2009 |
Expected volatility |
|
55.8% |
|
53.0% |
|
65.0% |
Risk-free interest rate |
|
4.2%-5.1% |
|
2.7%-3.6% |
|
1.7%-3.1% |
Expected
term (years) |
|
6.0-6.4 |
|
5.1-5.3 |
|
5.2-5.3 |
Expected dividend yield |
|
0.0% |
|
0.0% |
|
0.0% |
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.
81
The risk-free interest rate assumption is based upon observed interest rates appropriate for
the expected 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 considered its options to be plain
vanilla, it calculated the expected term using the simplified method for fiscal 2007. Options are
considered to be plain vanilla if they have the following basic characteristics: they are granted
at-the-money; exercisability is conditioned upon service through the vesting date; termination of
service prior to vesting results in forfeiture; there is a limited exercise period following
termination of service; and the options are non-transferable and non-hedgeable. Beginning in fiscal
2008, Ciena gathered more detailed historical information about specific exercise behavior of its
grantees, which it used to determine the expected term.
The dividend yield assumption is based on Cienas history and expectation of dividend payouts.
Because share-based compensation expense is recognized only for those awards that are
ultimately expected to vest, the amount of share-based compensation expense recognized reflects a
reduction for estimated forfeitures. Ciena estimates forfeitures at the time of grant and revises
those estimates in subsequent periods based upon new or changed information. Ciena relies upon
historical experience in establishing forfeiture rates. If actual forfeitures differ from current
estimates, total unrecognized share-based compensation expense will be adjusted for future changes
in estimated forfeitures.
Restricted Stock Units
A restricted stock unit is a stock award that entitles the holder to receive shares of Ciena
common stock as the unit vests. Cienas outstanding restricted stock unit awards are subject to
service-based vesting conditions and/or performance-based vesting conditions. Awards subject to
service-based conditions typically vest in increments over a three to four-year period. Awards with
performance-based vesting conditions require the achievement of certain operational, financial or
other performance criteria or targets as a condition of vesting, or acceleration of vesting, of
such awards.
Cienas outstanding restricted stock units include performance-accelerated restricted stock
units (PARS), which vest in full four years after the date of grant (assuming that the grantee is
still employed by Ciena at that time). At the beginning of each of the first three fiscal years
following the date of grant, the Compensation Committee establishes one-year performance targets
which, if satisfied, provide for the acceleration of vesting of one-third of the award. As a
result, the recipient has the opportunity, subject to satisfaction of performance conditions, to
vest as to the entire award in three years. Ciena recognizes the estimated fair value of
performance-based awards, net of estimated forfeitures, as share-based expense over the performance
period, using graded vesting, which considers each performance period or tranche separately, based
upon Cienas determination of whether it is probable that the performance targets will be achieved.
At each reporting period, Ciena reassess the probability of achieving the performance targets and
the performance period required to meet those targets.
The aggregate intrinsic value of Cienas restricted stock units is based on Cienas closing
stock price on the last trading day of each period as indicated. The following table is a summary
of Cienas restricted stock unit activity for the periods indicated, with the aggregate intrinsic
value of the balance outstanding at the end of each period, based on Cienas closing stock price on
the last trading day of the relevant period (shares and aggregate intrinsic value in
thousands):
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
Restricted |
|
Grant Date |
|
Aggregate |
|
|
Stock Units |
|
Fair Value |
|
Intrinsic |
|
|
Outstanding |
|
Per Share |
|
Value |
Balance as of October 31, 2006 |
|
|
162 |
|
|
$ |
22.99 |
|
|
$ |
3,829 |
|
Granted |
|
|
1,216 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(176 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2007 |
|
|
1,135 |
|
|
|
27.94 |
|
|
|
53,236 |
|
Granted |
|
|
1,411 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2008 |
|
|
1,849 |
|
|
|
30.85 |
|
|
|
17,773 |
|
Granted |
|
|
3,364 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(1,358 |
) |
|
|
|
|
|
|
|
|
Canceled or forfeited |
|
|
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2009 |
|
|
3,716 |
|
|
$ |
14.67 |
|
|
$ |
43,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total fair value of restricted stock units that vested and were converted into common
stock during fiscal 2007, fiscal 2008 and fiscal 2009 was $6.5 million, $14.6 million and $14.7
million, respectively. The weighted average fair value of each restricted stock unit granted by
Ciena during fiscal 2007, fiscal 2008 and fiscal 2009 was $28.36, $32.38 and $7.02, respectively.
Assumptions for Restricted Stock Unit Awards
The fair value of each restricted stock unit award is estimated using the intrinsic value
method, which is based on the closing price on the date of grant. Share-based expense for
service-based restricted stock unit awards is recognized, net of estimated forfeitures, ratably
over the vesting period on a straight-line basis.
Share-based expense for performance-based restricted stock unit awards, net of estimated
forfeitures, is recognized ratably over the performance period based upon Cienas determination of
whether it is probable that the performance targets will be achieved. At each reporting period,
Ciena reassesses the probability of achieving the performance targets and the performance period
required to meet those targets. The estimation of whether the performance targets will be achieved
involves judgment, and the estimate of expense is revised periodically based on the probability of
achieving the performance targets. Revisions are reflected in the period in which the estimate is
changed. If any performance goals are not met, no compensation cost is ultimately recognized
against that goal and, to the extent previously recognized, compensation cost is reversed.
2003 Employee Stock Purchase Plan
In March 2003, Ciena stockholders approved the 2003 Employee Stock Purchase Plan (the ESPP),
which has a ten-year term. Ciena stockholders subsequently approved an amendment increasing the
number of shares available to 3.6 million and adopting an evergreen provision. On December 31 of
each year, the number of shares available under the ESPP will increase by up to 0.6 million shares,
provided that the total number of shares available at that time 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 2.4 million.
Under the ESPP, eligible employees may enroll in a six-month offer period during certain open
enrollment periods. New offer periods begin March 16 and September 16 of each year. The purchase
price equals 95% of the fair market value of Ciena common stock on the last day of each purchase
period. As current