UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended October 31, 2003
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from .......................to................................
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Commission file number
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0-21969
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CIENA CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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23-2725311
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(State or other jurisdiction of
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(I.R.S. Employer
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Incorporation or organization)
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Identification No.)
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1201 Winterson Road, Linthicum, MD
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21090-2205
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(Address of principal executive offices)
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(Zip Code)
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(410) 865-8500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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
x
NO
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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.
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES
x
NO
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The aggregate market value of the Registrants Common Stock held by
non-affiliates of the Registrant was $2,287,132,422, based on the closing price
of the Common Stock on the Nasdaq Stock Market on May 2, 2003.
The number of shares of Registrants Common Stock, par value $0.01 outstanding
as of December 9, 2003 was 473,795,871.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K incorporates by reference certain portions of the
Registrants proxy statement for its 2004 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.
1
PART I
The information in this
Form 10-K
contains certain forward-looking
statements, including statements related to markets for the Companys products
and trends in its business that involve risks and uncertainties. The Companys
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include
those discussed in Managements Discussion and Analysis of Financial Condition
and Results of Operations-Risk Factors and Business as well as those
discussed elsewhere in this
Form 10-K
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Item 1. Business
GENERAL
Overview
CIENA is a leading global provider of innovative network solutions to
telecommunications service providers and enterprises worldwide. Our customers
include long distance carriers, local exchange carriers, cable operators,
Internet service providers, wireless and wholesale carriers, resellers,
governments, large businesses and non-profit institutions.
CIENA was incorporated in Delaware in November 1992, and we completed our
initial public offering on February 7, 1997. CIENAs 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 our web site as soon as reasonably
practicable after we file these reports with the Securities and Exchange
Commission.
In fiscal 2001, CIENAs annual revenue reached $1.6 billion, based largely
on the success of a single product line, long-distance optical transport. In
early 2001, the telecommunications industry began a severe decline, which has
affected almost all of its participants, including equipment suppliers like
CIENA. This decline caused the market for networking equipment to shrink
substantially, with a resulting adverse impact on our revenue and
profitability. In response, we embarked upon a strategy designed to increase
our addressable market through a combination of internal development,
acquisitions and strategic alliances. Since 2001, we have entered new markets
by expanding our network solution offerings and worked to increase our market
share by adding new features to our existing products. We also have taken steps
to expand our sales channels beyond direct sales to service providers,
developing a growing number of partnerships and other strategic relationships
that target enterprise and government customers. We plan to continue this
strategy, with particular emphasis on offering products to enable delivery of
data communications services, because we expect a large portion of capital
spending to occur in this area over the next few years. In general, our intent
is to continue to evolve from a vendor of optical networking equipment into a
strategic provider of networking solutions.
During fiscal 2003, as part of our efforts to implement our strategy, we
completed the acquisitions of WaveSmith Networks, Inc. and Akara Corporation.
WaveSmith was a privately held corporation offering a multi-service switching
product designed to be deployed at the edge of carrier networks. Akara was a
privately held corporation providing SONET/SDH-based extended storage
solutions.
CIENA had revenue of $283 million for its fiscal year ended October 31,
2003, a decrease of 22% when compared with fiscal 2002 revenue of $361 million.
CIENA recorded a net loss of $387 million in fiscal 2003 compared with a net
loss of $1.6 billion for fiscal 2002. For the fiscal year ended October 31,
2003, CIENA recorded revenue from sales to a total of 110 customers. This
represents an increase of more than 42% over 2002s customer base of 77. During
fiscal 2003, AT&T and Qwest each represented more than 10% of CIENAs total
revenue.
Over the last two years, in parallel with the steps to increase our
addressable market, we have also executed a program to reduce and restructure
our costs, aligning them better with our market opportunities and changing
product mix. Since the fourth quarter of fiscal 2001, we have reduced our
quarterly research and development, selling and marketing, and general and
administrative expenses (exclusive of deferred stock compensation) by 37%, from
$127.2 million to $79.9 million. Consistent with our overall strategy, we plan
to reduce these expenses further in fiscal 2004, in order to strike an
appropriate balance between ongoing strategic investment in our business and
careful expense control and prudent cash management.
2
The matters discussed in this section should be read in conjunction with
the Consolidated Financial Statements found under Part II, Item 8 of this
Annual Report on Form 10-K.
INDUSTRY BACKGROUND
General
Deregulation in the United States and privatization in many other
countries during the 1990s began a transition from a telecommunications
industry characterized by a small number of heavily regulated large service
providers to one in which numerous new competitors began to emerge. Rapid
traffic growth and readily available capital further fueled the growth in the
number of service providers, as emerging carriers built networks and fought to
take market share from the incumbent carriers. The rapid adoption of the
Internet prompted service providers and enterprises to construct large-scale
data networks as overlays to existing legacy voice networks. During this time,
CIENAs revenue grew to $1.6 billion in fiscal 2001, predominantly from the
sale of a single product category, long-distance optical transport equipment.
Beginning in late 2000, capital markets tightened. Service providers
responded by curtailing network build-outs and dramatically reducing their
overall capital spending, significantly affecting the revenue and profitability
of equipment providers like CIENA. In addition, many carriers found that they
had built networks in anticipation of demand that failed to materialize, and
the industry, as a whole, faced a market in which there was significant over
capacity. Some carriers, with inadequate revenue and no access to additional
capital, failed. Others reorganized or are still in the process of working
through restructurings, leading to a climate of uncertainty.
After several years of significantly lower capital spending, most service
providers operating costs remain high while their revenue is growing slowly,
if at all. In the United States, the incumbent local exchange carriers (ILECs)
are losing revenue to wireless and cable substitution, and interexchange
carriers (IXCs) are losing long-distance revenue to ILECs and wireless
carriers. Overseas, incumbent carriers, mostly former post, telephone and
telegraph enterprise (PTTs), are experiencing intense price pressure from new
players in the their respective markets. As a result of this environment, we
expect most service providers to strive to hold aggregate capital spending flat
for the next several years and focus on reducing overall network ownership
costs and on generating new, higher margin data services.
The Data Challenge
Currently, the major challenge service providers face is evolving their
networks to process efficiently and deliver profitably a growing range of data
services. The networks of most ILECs, IXCs and PTTs were designed to carry
voice traffic and to deliver voice services. As the demand for data services
grew, these carriers built separate data networks and operated them
concurrently with their existing voice networks. Revenue from data services
continues to grow, but in most cases not nearly as fast as data traffic. It is
estimated that in 1999 data services represented 13% of network traffic and
accounted for 13% of revenue. In contrast, analysts estimate data services will
represent 54% of network traffic in 2004 but will generate only 16% of revenue.
Moreover, data services are, in general, less profitable than traditional voice
services.
With data surpassing voice as the dominant network traffic but lagging in
terms of profitability, carriers are looking for more cost-effective and
efficient ways to deliver the range of voice and data services that their
customers are demanding. Most have concluded that the only way to offer
advanced voice, data, video and other services profitably is to consolidate
their separate voice and data networks onto a single converged network, one
that is capable of delivering multiple services over a single infrastructure.
While this vision of eventual network convergence is widely shared, there
are divergent perceptions regarding how it will come about. Some equipment
vendors envision that the converged network will be based on a completely new
network infrastructure. We believe, however, that the transition to a converged
all-service network will be an evolutionary process, one in which carriers will
leverage their existing network investment. The majority of our strategic
initiatives, partnerships and investments are intended to capitalize on this
evolution.
STRATEGY
In fiscal 2001, nearly 80% of CIENAs revenue came from a single product
category, long-haul optical transport.
3
Since then, through internal development, acquisition and partnerships, we
have significantly diversified our product portfolio and with it, our customer
base. Our strategy is based on leveraging our key strengths to capitalize on
service providers focus on operational savings and on their move toward
converged voice and data networks. We see these strengths as:
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A solid base of major customers;
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A position as an industry technology leader; and
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Our experience in successfully introducing economically-driven network innovation.
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Since the decline in the telecommunications equipment market began, our
strategy has been to enhance our competitive position by continuing to invest
in our business. This strategy entails taking steps to:
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Expand our addressable market by adding new data-focused products to
our portfolio through internal development, acquisition and
partnerships.
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Increase our market share within our existing markets by enhancing the
features and functions of current products and focusing on product
cost reductions.
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Expand our customer base by directing increased sales efforts toward
incumbent carriers, developing new sales channels and increasing our
sales efforts with enterprises and government customers.
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Increase sales to existing customers by leveraging our new features,
products and partnerships to establish CIENA as a strategic and
attractive supplier.
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We believe restoring sustained profitability to CIENA requires
simultaneous revenue growth and an internal transformation of our business and
processes. Our efforts toward this transformation are well underway and will
continue. They include:
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Balancing continued strategic investment with careful cost control and prudent cash management;
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Closely aligning investment with opportunity;
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Reducing costs through outsourcing;
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Improving gross margin by adding products with higher software content to the product portfolio;
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Expanding our service offerings and delivering them more profitably;
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Managing our cash prudently; and
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Modifying our business processes to match the demands of our evolving customer base and product
portfolio.
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CIENAS SOLUTIONS
CIENAs solutions harness innovation to deliver improved network
economics. Our intelligent networking solutions are designed to enable service
providers to transition from inefficient, legacy, voice-centric networks to
more efficient, data-friendly networks. CIENAs systems and their intelligent
networking software address the network scalability and capital spending
challenges and the escalating operational costs faced by service providers.
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CIENAs equipment can replace multiple legacy network elements with
fewer, more intelligent network elements, thereby simplifying the
network and lowering carriers initial capital costs and ongoing
operating expenses.
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The software functionality of CIENAs equipment creates a network
environment in which distributed intelligence intelligence at the
network element level takes the place of centralized network
intelligence. As a result, CIENA networks can think for themselves,
making dynamic decisions without human intervention thereby
facilitating provisioning and protection capabilities and lowering
associated operating costs.
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4
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CIENAs equipment is designed to reduce network operating costs by
enabling carriers to manage network traffic and network bandwidth more
efficiently.
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CIENAs equipment is designed to enable carriers to shorten the time
it takes to provision services, in some cases from months to nearly
real-time, thereby accelerating revenue generation.
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In addition to capital and operational cost savings, CIENAs equipment
and network management software is designed to enable carriers to
offer new, revenue-generating and service-differentiating services.
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Our networking product portfolio, which is targeted at the critical areas
of our customers networks, includes the following solutions:
Core Networking
CIENAs suite of core networking systems helps service providers extract
maximum value from their current SONET/SDH network architectures, while
minimizing the risk and cost of integrating new services. Our solutions offer
the switching functionality and long-haul transport capabilities service
providers need to enable the creation of new carrier-class data services.
Core Transport
CIENAs core transport solutions provide a flexible platform with a menu
of options that allows service providers to cost-effectively implement
long-haul and ultra long-haul dense wavelength division multiplexing (DWDM)
applications within a single platform. The core transport family features the
following products:
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CoreStream Long-Haul Optical Transmission System
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MultiWave Sentry® 4000 Transport System
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MultiWave Sentry® 1600 Transport System
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CoreStream System Optical Add/Drop Multiplexers (OADMs)
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Core Switching
CIENAs core switching solutions support differentiable carrier service
offerings by combining, in a single combined switching and transport platform,
many different protection options and flexible bandwidth management
capabilities. The core switching family features the CoreDirector® family of
intelligent optical core switches.
Metropolitan Networking
CIENAs suite of metropolitan networking systems helps service providers
and enterprises collapse and streamline multiple layers of the network to
deliver efficient networking across the metropolitan area for data voice and
video services.
Metropolitan Transport
CIENAs metropolitan transport solutions target both service provider and enterprise requirements.
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ONLINE Metro Multiservice DWDM Transport Platform
provides customers a variety of managed services over a single optical infrastructure
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ONLINE Edge Multiservice CWDM Platform
provides a platform to offer high-bandwidth services over a single optical infrastructure
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CN 2000 Storage Extension Platform
Customer premise device for extending data and storage applications
over distance to meet business continuance/disaster recovery goals
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MultiWave Metro® Transmission System
DWDM optical transport system designed for use in metropolitan ring applications
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MultiWave Metro One Transmission
System
Part of the MultiWave Metro family of DWDM optical
networking systems designed for customer premise applications
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5
Metropolitan Switching
CIENAs metropolitan switching solution, the MetroDirector K2
Multiservice Platform, provides a platform to aggregate, groom and add or drop
services to maximize bandwidth efficiency throughout a carriers metro network
- from access to core. The MetroDirector K2 offers a comprehensive package of
options to support TDM, ATM, and Ethernet switching capabilities, which help
enterprise and service providers generate revenue from traditional private line
services. It also enables new revenue streams from emerging switched data
services.
Multiservice Networking
CIENA delivers market-leading platforms for metropolitan network
multiservice aggregation. CIENAs DN multiservice edge switching platform
enhances bandwidth efficiency, provisioning, and scalability by converging
traditional and emerging data services such as ATM, DSL, Frame Relay, TDM/CES,
and IP/MPLS in the network core and at the edge. The platform also offers a
safe migration path to IP/MPLS, while simultaneously supporting existing legacy
services.
LightWorks ON-Center® Management Suite
CIENAs next-generation intelligent optical network management system
allows service providers to rapidly provision and continuously monitor new
revenue generating optical services, while increasing the efficiency of
existing or new networks. The management suite consists of an integrated
network manager, a service layer management tool, element management systems
for each product and planning tools.
Partnerships
In addition to those products developed internally or added through
acquisition, CIENA has executed reseller agreements with both Laurel Networks
and Luminous Networks. Under the agreement with Laurel, which is exclusive as
to certain designated customers, CIENA markets, sells and supports Laurel
Networks ST200 Service Edge Router to service providers worldwide. Under the
agreement with Luminous, CIENA markets, sells and supports Luminous Networks
entire PacketWave family of products.
Services
CIENA provides a
comprehensive portfolio of service and support offerings for its products. Our
offerings include:
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Deployment services including network design, product
installation, network integration testing and acceptance testing;
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Maintenance services including parts exchange, engineering
dispatch, advanced technical support and hardware and software warranty
extensions; and
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Training and documentation services including product training, service partner
training and documentation services.
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PRODUCT DEVELOPMENT
We believe that to be successful, we must continue to enhance our existing
products, maintain our technological competitiveness and develop new products
that meet our customers evolving needs. As a result, CIENA has continued to
pursue strategic investment in our products and their feature sets despite the
downturn in the communications industry. Research and development expenses
(exclusive of stock compensation cost of $12.8, $15.7 and $17.8 million) were
$199.7 million, $239.6 million and $235.8 million for fiscal 2003, 2002 and
2001, respectively. For more information regarding our research and development
expenses, see Item 7. Managements Discussion and Analysis of Financial
Conditions and Results of Operations.
We plan to continue to make investments in research and development on
enhancements of our existing products that we believe will enable service
providers and enterprises to increase revenue or improve operating costs. We
also have engineering efforts underway focused on cost reductions for our
products. In addition, we plan to continue to invest in the development of new
products, especially products that operate at the edge of the network and
products that enable sophisticated services beyond transport and switching.
6
Our product development process is driven by market demand and a close
collaboration among our marketing, sales and product development organizations.
We also incorporate feedback from our customers in the product development
process. In some cases, we will work with and invest in partners to develop new
or modify existing products. In addition, we participate in industry and
standards organizations where appropriate and incorporate information from
these contacts throughout the product development process.
MARKETING AND DISTRIBUTION
We are focused on selling our innovative network solutions by building
long-term relationships with service providers, enterprises, governments and
other customers through our direct sales efforts and channel partnerships. We
maintain a direct sales presence in locations throughout the United States,
Latin America, Canada, Europe and Asia. Through these offices we sell and
support our network solutions to service provider, enterprise and government
customers. We also maintain a channel program with a dedicated team that works
with resellers, systems integrators and service providers to sell and market
our solutions to service providers, enterprises and governments.
In support of its worldwide sales efforts, CIENA conducts marketing
communications programs intended to position and promote its products within
the telecommunications industry. Marketing personnel also coordinate our
participation in trade shows and conduct media relations activities with trade
and general business publications.
MANUFACTURING
CIENA relies on contract manufacturers to assemble and test most of its
products. We work closely with these manufacturers to manage quality, cost and
delivery times. We continue to perform much of the assembly and testing of our
core transport products, but outsource all of the printed circuit board
assembly and some of the optical assembly and module functional testing. We
manufacture in-house all the in-fiber Bragg gratings used in our core transport
products. All products undergo a final system test performed by us in our
Maryland facility. We will continue to evaluate the extent to which third party
manufacturers can do even more of our manufacturing and testing on a reliable
and cost-effective basis.
COMPETITION
Competition in the telecommunications equipment industry is intense, and
became increasingly so as the market for communications networking equipment
declined. CIENAs competition is dominated by a small number of very large,
usually multi-national, vertically integrated companies. Each of which has substantially greater financial,
technical and marketing resources, and greater manufacturing capacity as well
as better established relationships with the incumbent carriers than CIENA.
Included among CIENAs competitors are: Alcatel, Cisco Systems, Inc. (Cisco),
Fujitsu Group (Fujitsu), Hitachi Ltd. (Hitachi), Huawei Technologies Co.
Ltd (Huawei), Lucent Technologies Inc. (Lucent), Marconi Corporation
(Marconi), NEC Corporation (NEC), Nortel Networks (Nortel), Siemens AG
(Siemens), Telefon AB LM Ericsson (Ericsson), and Tellabs, Inc.
(Tellabs). There are also several smaller, but established companies, such as
ADVA AG Optical Networking, and Sycamore Networks, Inc., that offer one or more
products that compete directly or indirectly with our offerings. In addition,
there are a variety of earlier-stage companies with products targeted at the
communications networking market in some stage of development or deployment,
most of them employing advanced technology that could offer advantages over
products offered by CIENA.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
As of November 30, 2003, CIENA had received 154 United States patents and
had pending 260 U.S. patent applications. We also have a number of foreign
patents and patent applications. Of the United States patents that have been
issued to CIENA, the earliest any will expire is 2015. In addition, CIENA has
licensed patents from third parties. CIENA also licenses from third parties
certain software components for its network management products. These licenses
are perpetual but will generally terminate after an uncured breach of the
agreement by CIENA. CIENA also relies on contractual rights, trade secrets and
copyrights to establish and protect its proprietary rights in its products.
CIENA enforces its intellectual property rights vigorously against
infringement or misappropriation. CIENAs practice is to require its employees
and consultants to execute non-disclosure and proprietary rights agreements
upon commencement of employment or consulting arrangements with CIENA. These
agreements acknowledge CIENAs exclusive ownership of all intellectual property
developed by the individual during the course of his or her work with CIENA,
and require that all proprietary information disclosed to the individual will
remain confidential. CIENAs employees generally also sign agreements not to compete, in jurisdictions
where these agreements are enforceable, with CIENA for a period of twelve
months following any termination of employment.
7
We are currently engaged in two patent lawsuits. See Item 3. Legal
Proceedings. In addition, parties who claim that we may be infringing one or
more of their patents approach us from time to time demanding that we take a
license from them. We are currently engaged in several discussions regarding
such assertions. As part of a settlement of a suit brought by Nortel, we have
agreed to attempt to negotiate a patent cross-license agreement with it.
EMPLOYEES
As of October 31, 2003, CIENA and its subsidiaries employed 1,816 persons,
of whom 787 were primarily engaged in research and development activities, 265
in manufacturing, 198 in installation services and customer support, 354 in
sales and marketing related activities, and 212 in administration. None of
CIENAs employees are currently represented by a labor union. CIENA considers
its relations with its employees to be good.
DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth certain information concerning each of the directors
and executive officers of CIENA:
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Name
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Age
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Position
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Patrick H. Nettles, Ph.D. (1)
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60
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Executive Chairman of the Board of Directors
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Gary B. Smith (1)
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President, Chief Executive Officer and Director
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Stephen B. Alexander
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Senior Vice President, Chief Technology Officer
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Steve W. Chaddick
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52
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Senior Vice President, Corporate Strategy and Marketing
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Joseph R. Chinnici
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49
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Senior Vice President, Finance and Chief Financial Officer
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James F. Collier III
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45
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Senior Vice
President, Corporate Development
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Nicholas S. Jeffery
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35
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Senior Vice President, World Wide Sales
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Jesús León
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59
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Senior Vice President, Chief Development Officer
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Edward A. Ogonek
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41
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Senior Vice
President, General Manager of Metro and
Enterprise Solutions
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Robert A. ONeil
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45
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Senior Vice President, General Manager of Data Networking
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Arthur Smith, Ph.D.
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37
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Senior Vice President, Global Operations
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Russell B. Stevenson, Jr.
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62
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Senior Vice President, General Counsel and Secretary
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Andrew C. Petrik
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40
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Vice President, Controller and Treasurer
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Stephen P. Bradley, Ph.D. (1)(3)(4)
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62
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Director
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Harvey B. Cash (1)(2)(4)
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65
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Director
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Don H. Davis, Jr. (1)(2)
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64
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Director
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John R. Dillon (1)(3)
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62
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Director
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Lawton W. Fitt (1)(3)
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50
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Director
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Judith M. OBrien (1)(2)(4)
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53
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Director
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Gerald H. Taylor (1)(2)
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62
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Director
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(1)
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The Companys Directors hold staggered terms of office, expiring as follows: Ms. OBrien and Messrs Cash and Smith
in 2005; Ms. Fitt and Messrs. Dillon and Nettles in 2004; Messrs. Bradley, Davis and Taylor in 2006
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(2)
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Member of the Compensation Committee
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(3)
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Member of the Audit Committee
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(4)
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Member of the Governance and Nominations Committee
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Patrick H. Nettles, Ph.D.
has served 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, and he was President, Chief
Executive Officer and Director from April 1994 to October 2000. Dr. Nettles
serves as a Trustee for the California Institute of Technology and also serves
on the Advisory Board to the President at Georgia Institute of Technology. Dr.
Nettles also serves on the board of directors of Axcelis Technologies, Inc.
Gary B. Smith
has served as Chief Executive Officer since May 2001;
President, Chief Operating Officer and Director since October 2000; and Senior
Vice President, Chief Operating Officer from August 1999 to October 2000. Mr.
Smith served as Senior Vice President, Worldwide Sales from September 1998 to
August 1999, and was previously Vice President of International Sales since joining the Company in
November 1997. He currently serves on the board of directors for the American
Electronics Association and as a commissioner for Global Information
Infrastructure Commission.
8
Stephen B. Alexander
has served as Senior Vice President and Chief
Technology Officer of CIENA since January 2000. He served as CIENAs Vice
President and Chief Technology Officer from September 1998 to
January 2000.
Steve W. Chaddick
was appointed CIENAs Chief Strategy Officer in May
2001, in addition to his existing responsibilities as Senior Vice President,
Systems and Technology, a role he has held since February 2000. Between July
1999 and February 2000, Mr. Chaddick served as President of CIENAs Core
Switching Division. From August 1998 to July 1999, he served as the Companys
Senior Vice President, Strategy and Corporate Development.
Joseph R. Chinnici
has served as CIENAs Senior Vice President, Finance
and Chief Financial Officer since August 1997. From May 1995 to August 1997,
Mr. Chinnici served as the Companys Vice President, Finance and Chief
Financial Officer. Mr. Chinnici joined CIENA in September 1994 as its
Controller. Mr. Chinnici serves on the board of directors for Guilford
Pharmaceuticals Inc.
James
F. Collier III
has served as Senior Vice President, Corporate
Development since June 2003. He served as CIENAs Vice
President, North American Sales between May 2002 and May 2003. Prior to joining
CIENA, Mr. Collier was employed by Nortel as Vice President of Major Accounts between
April 2001 and April 2002 and Vice President of Business Management, Wireless
Networks Division from January 1997 to April 2001.
Nicholas S. Jeffery
has served as Senior Vice President, Worldwide Sales
since November 2003. He served as CIENAs Vice
President, International Sales from September 2003 to
November 2003 and Managing Director and Vice President, Europe,
Middle East and Africa from June 2003 to September 23. Prior to
joining CIENA, Mr. Jeffery founded and was director of Microfone UK Ltd., a reseller of
voice services, from January 2003 to June 2003. Mr. Jeffery
remains a director of Microfone. From April 2002 to
January 2003, Mr. Jeffery was the Chief Executive Officer of the
Markets Group of Cable & Wireless Global. Prior to holding this
position, Mr. Jeffery served in a variety of other senior sales and
management positions with Cable & Wireless Global and other Cable &
Wireless Group Companies.
Jesús León
has served as Senior Vice President, Chief Development Officer
since August 2002. Mr. León served as Senior Vice President, Metro Transport
and Metro Switching from August 2001 to August 2002, Senior Vice President,
Metro Transport from May 2001 to August 2001, Senior Vice President, Products
and Technology between March 1999 and May 2001, and Vice President, Products and
Technology between September 1998 and March 1999.
Edward A. Ogonek
has served as Senior Vice President, General Manager of
Metro and Enterprise Solutions since November 2003. He served as Senior Vice
President, General Manager of Enterprise Solutions for CIENA between August
2003 and November 2003. From November 2000 until he joined CIENA, Mr. Ogonek
served as President and Chief Executive Officer of Akara Corporation, which was
acquired by CIENA in August 2003. Before joining Akara, Mr. Ogonek was
employed by Alcatel, serving as Senior Vice President and General Manager, Edge
Data Networks from May 2000 to November 2000. From May 1997 to May 2000, Mr.
Ogonek served in a variety of senior management positions with Newbridge
Networks and Alcatel.
Robert A. ONeil
has served as Senior Vice President, General Manager of
Data Networking since November 2003. He served as Vice President of Data
Networking for CIENA between June 2003 and November 2003. From November 2002
until he joined CIENA, Mr. ONeil served as Vice President of Sales of
WaveSmith Networks, which was acquired by CIENA in June 2003. From January
2001 to November 2002, Mr. ONeil was a Venture Partner of Bessemer Venture
Partners, a venture capital firm. From April 1998 to December 2002, Mr. ONeil
served as the Vice President of Sales, Network Access Division of Nortel.
Arthur Smith
has served as Senior Vice President, Global Operations since
September 2003. Previously, Dr. Smith served as Senior Vice President,
Worldwide Customer Services and Support from June 2002 to September 2003 and as
Senior Vice President, Core Transport Division from May 2001 through June 2002.
Prior to May 2001, he held engineering management positions in CIENAs
Transport Division since joining the company in May 1997.
Russell B. Stevenson, Jr.
has served as Senior Vice President, General
Counsel and Secretary since joining CIENA in August 2001. From March 2000 to
August 2001, he was Executive Vice President, General Counsel
and Secretary of ARBROS Communications, Inc., an integrated communications provider.
From 1996 to 2000, Mr. Stevenson was Executive Vice President and General
Counsel of CyberCash, Inc.
9
Andrew C. Petrik
has served as Vice President, Controller and Treasurer of
CIENA since August 1997.
Stephen P. Bradley, Ph.D.
has served as Director of the Company since
April 1998. Professor Bradley is the William Ziegler Professor of Business
Administration and the Chairman of the Program for Management Development 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.
Harvey B. Cash
has served as Director of the Company 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 i2 Technologies Inc., Silicon Laboratories, Inc., Microtune, Inc.,
Liberté Investors Inc., and Airspan Networks, Inc. In addition, he is a member
of the boards of several private corporations.
Don H. Davis, Jr.
has served as Director of the Company since March 2002.
Mr. Davis has been Chairman and CEO of Rockwell Automation, Inc. since 1998.
(Rockwell International Corporation changed its name to Rockwell Automation,
Inc. on June 29, 2001.) He previously served as Executive Vice President and
Chief Operating Officer with responsibility for Rockwell Internationals
automation and former semiconductor systems and automotive components
businesses. In addition to the Rockwell Automation board, Mr. Davis serves on
the boards of Illinois Tool Works, Inc. and Apogent Technologies Inc. He is
also a member of the Business Council, the Business Roundtable, and The
Conference Board. He is also a past chairman of the Board of Governors of the
National Electrical Manufacturers Association, Washington, DC.
John R. Dillon
has served as Director of the Company since October 1999.
Mr. Dillon has served in a variety of positions at The Coca-Cola Company,
Scientific-Atlanta, Inc. and Fuqua National. Mr. Dillon joined Cox Enterprises
in 1980 and, until his retirement in 1996, served as Senior Vice President,
Chief Financial Officer and director.
Lawton W. Fitt
has served as Director of the Company since November 2000.
Ms. Fitt was appointed Secretary (Chief Executive) of the Royal Academy of Arts
in London in October 2002. Responsible for the day to day operation of the
Royal Academy, she is the first woman and the first American to have been
appointed Secretary in the Academys history. Prior to her appointment, Ms.
Fitt was an investment banker with Goldman Sachs & Co. from 1979 to October
2002, where she was a partner from 1994 and a managing director from 1996 to
October 2002. Ms. Fitt is a trustee of the Darden School Foundation.
Judith M. OBrien
has served as Director of the Company since July 2000.
Since February 2001, Ms. OBrien has been a Managing Director at INCUBIC
L.L.C., a venture capital firm in Mountain View, California. From 1984 until
2001, she was a partner with Wilson Sonsini Goodrich & Rosati, where she
specialized in corporate finance, mergers and acquisitions and general
corporate matters.
Gerald H. Taylor
has served as Director of the Company since January 2000.
Mr. Taylor serves as a Managing Member of MortonsGroup, LLC and serves on the
board of directors of Lafarge North America Inc. From 1996 to 1998, Mr. Taylor
was Chief Executive Officer of MCI Communications Corporation.
TRADEMARKS
CIENA, MultiWave and MultiWave Sentry are registered trademarks of
CIENA. CoreDirector, CoreDirector CI, CoreStream, Fastmesh, Fastpath,
Flexible Concatenation, JEM, LightWorks, LightWorks OS, LightWorks
ONCenter, LightWorks Toolkit, MultiWave CoreDirector, MultiWave
CoreStream, MultiWave Metro, MultiWave Metro One, ONCenter, OSRP,
SmartSpan, SmartSupport, SmartTools, VLSR, ONLINE, OPTX, and
ONWAVE are trademarks of CIENA under federal and state law.
10
Item 2. Properties
As of October 31, 2003, all of CIENAs properties are leased. CIENAs
principal executive offices are located in Linthicum, Maryland. We lease nine
facilities related to ongoing operations, including the five buildings located
at various sites near Linthicum, Maryland, one as an engineering facility,
three as manufacturing facilities, and one as an administrative and sales
facility. The Company also has engineering and/or service facilities located in
Alpharetta, Georgia; San Jose, California; Durham, North Carolina, Acton,
Massachusetts, and Ottawa, Ontario. The Company also leases various small
offices in the United States and abroad to support its sales and services. We
believe the facilities we are now using are adequate and suitable for business
requirements.
CIENA leases a number of properties that we no longer occupy. As part of
its restructuring costs, CIENA provides for the estimated cost of the net lease
expense for these facilities. The cost is based on the future minimum lease
payments under contractual obligations offset by estimated future sublease
payments. As of October 31, 2003, CIENAs accrued restructuring liability
related to these properties was $63.7 million. If actual market conditions are
less favorable than those projected by management, additional restructuring
costs associated with these facilities may be required. For additional
information regarding the Companys lease obligations, See Item 8. Financial
Statements and Supplementary Data.
Item 3. Legal Proceedings
On October 3, 2000, Stanford University and Litton Systems filed a
complaint in the United States District Court for the Central District of
California alleging that optical fiber amplifiers incorporated into CIENAs
products infringe U.S. Patent No. 4,859,016 (the 016 Patent). The complaint
seeks injunctive relief, royalties and damages. We believe that we have valid
defenses to the lawsuit and intend to defend it vigorously. On October 10,
2003, the court stayed the case pending final resolution of matters before the
U.S. Patent and Trademark Office (the PTO), including a request for and
disposition of a reexamination of the 016 Patent. On October 16, 2003, the PTO
granted reexamination of the 016 Patent, thus resulting in a continuation of
the stay of the case.
On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned
subsidiary of CIENA, filed a complaint in the United States District Court for
the District of Delaware requesting damages and injunctive relief against
Corvis Corporation (Corvis). The suit charged Corvis with infringing four
patents relating to CIENAs optical networking communication systems and
technology. A jury trial to determine whether Corvis is infringing these
patents commenced on February 10, 2003. On February 24, 2003, the jury decided
that Corvis was infringing one of the patents and not infringing two others.
The jury was deadlocked with respect to infringement on the fourth patent. This
trial was immediately followed by a trial on Corvis affirmative defenses based
on the validity of two of the patents. On February 28, 2003, the jury in this
trial determined that the patents were valid. In April 2003, following a third
trial, another jury decided that Corvis had infringed the fourth patent on
which the previous jury had deadlocked. Based on these favorable verdicts
collectively holding that Corvis is infringing two valid CIENA patents, CIENA
has moved for an injunction to prohibit the sale by Corvis of the infringing
products. The court has not yet ruled on this motion.
As a result of the merger with ONI Systems Corp. (ONI), we became a defendant in a securities
class action lawsuit. Beginning in August 2001, a number of substantially
identical class action complaints alleging violations of the federal securities
laws were filed in the United States District Court for the Southern District
of New York. These complaints name ONI, Hugh C. Martin, ONIs former chairman,
president and chief executive officer; Chris A. Davis, ONIs former executive
vice president, chief financial officer and administrative officer; and certain
underwriters of ONIs initial public offering as defendants. The complaints
were consolidated into a single action, and a consolidated amended complaint
was filed on April 24, 2002. The amended complaint alleges, among other things,
that the underwriter defendants violated the securities laws by failing to
disclose alleged compensation arrangements (such as undisclosed commissions or
stock stabilization practices) in the initial public offerings registration
statement and by engaging in manipulative practices to artificially inflate the
price of our common stock after the initial public offering. The amended
complaint also alleges that ONI and the named former officers violated the
securities laws on the basis of an alleged failure to disclose the
underwriters alleged compensation arrangements and manipulative practices. No
specific amount of damages has been claimed. Similar complaints have been filed
against more than 300 other issuers that have had initial public offerings
since 1998, and all of these actions have been included in a single coordinated
proceeding. Mr. Martin and Ms. Davis have been dismissed from the action
without prejudice pursuant to a tolling agreement. In July 2002, ONI and other
issuers in the consolidated cases filed motions to dismiss the amended
complaint for failure to state a claim, which was denied as to ONI on February
19, 2003. CIENA has participated, together with the other issuer defendants in
these cases, in mediated settlement negotiations that have led to a preliminary
agreement among the plaintiffs, the issuer defendants and their insurers. The
settlement, which is subject to court approval, would result in the dismissal
of the plaintiffs cases against the issuers. CIENA has agreed in principle to
the terms of this settlement. Draft settlement documents were circulated for
preliminary review in October 2003.
11
As a result of the merger with ONI, we also became a defendant in two
substantially identical purported class actions on behalf of ONI security
holders originally brought against ONI and members of its board of directors.
The complaints allege that the director defendants breached their fiduciary
duties to ONI in approving the merger with CIENA and seek declaratory,
injunctive and other relief permitted by equity. The plaintiffs failed to
obtain an injunction against completion of the merger. The first of these cases
was filed on February 20, 2002, in the Superior Court of the State of
California, County of San Mateo, and is encaptioned K.W. Sams, On Behalf of
Himself and All Others Similarly Situated v. ONI Systems Corporation, et al.
The second case was brought on March 19, 2002, in the Superior Court of the
State of California, County of Santa Clara, and is encaptioned Steven Myeary,
On Behalf of Himself and All Others Similarly Situated v. ONI Systems
Corporation. On April 14, 2003, the plaintiffs in these cases filed a
consolidated amended complaint and named four additional defendants: CIENA
Corporation, James F. Jordan, Kleiner Perkins Caufield & Byers and Mohr Davidow
Ventures. CIENA and the other defendants subsequently filed a demurrer and
served a motion for sanctions on plaintiffs based on factual inaccuracies in
the consolidated amended complaint. In response, the plaintiffs filed a
corrected consolidated amended complaint, the demurrer to which is scheduled to
be heard by the court in December 2003. We believe that these lawsuits are
without merit and will continue to defend them vigorously.
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 2003.
12
PART II
Item 5. Market for Registrants Common Stock and Related Stockholder Matters
CIENAs Common Stock is traded on the NASDAQ National Market under the
symbol CIEN. The following table sets forth for the fiscal periods indicated
the high and low sales prices of the Common Stock, as reported on the NASDAQ
National Market.
|
|
|
|
|
|
|
|
|
|
|
|
Price Range of Common Stock
|
|
|
High
|
|
Low
|
|
|
|
|
|
Fiscal Year 2002
|
|
|
|
|
|
|
|
|
|
First Quarter ended January 31
|
|
$
|
21.71
|
|
|
$
|
12.60
|
|
|
Second Quarter ended April 30
|
|
$
|
12.95
|
|
|
$
|
7.03
|
|
|
Third Quarter ended July 31
|
|
$
|
7.53
|
|
|
$
|
3.60
|
|
|
Fourth Quarter ended October 31
|
|
$
|
4.90
|
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2003
|
|
|
|
|
|
|
|
|
|
First Quarter ended January 31
|
|
$
|
7.74
|
|
|
$
|
3.49
|
|
|
Second Quarter ended April 30
|
|
$
|
6.12
|
|
|
$
|
4.19
|
|
|
Third Quarter ended July 31
|
|
$
|
6.74
|
|
|
$
|
4.80
|
|
|
Fourth Quarter ended October 31
|
|
$
|
7.45
|
|
|
$
|
5.10
|
|
The market price of CIENAs Common Stock has fluctuated significantly and
may be subject to significant fluctuations in the future. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.
As of
December 9, 2003, there were approximately 2,473 holders of record
of CIENAs Common Stock and 473,795,871 shares of Common Stock outstanding.
CIENA has never paid cash dividends on its capital stock. If and when we
return to profitability, we intend to retain earnings for use in our business,
and we do not anticipate paying any cash dividends in the foreseeable future.
On August 29, 2003, we issued 2,343,015 shares of CIENA common stock to
stockholders of Akara Corporation as partial consideration for all outstanding
shares of Akara. Our issuance of these shares was exempt from registration
pursuant to Rule 506 promulgated under the Securities Act of 1933, and/or
Section 4(2) of the Securities Act.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements
and the notes thereto included in Item 8. Financial Statements and
Supplementary Data. CIENA has a 52 or 53 week fiscal year, which ends on the
Saturday nearest to the last day of October in each year. For purposes of
financial statement presentation, each fiscal year is described as having ended
on October 31. Fiscal 1999, 2000, 2002 and 2003 comprised 52 weeks and fiscal
2001 comprised 53 weeks.
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
As of October 31,
|
|
|
(in thousands)
|
|
|
|
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents,
short term and long-term
investments
|
|
$
|
262,396
|
|
|
$
|
238,318
|
|
|
$
|
1,795,141
|
|
|
$
|
2,078,464
|
|
|
$
|
1,626,218
|
|
Total assets
|
|
|
677,835
|
|
|
|
1,027,201
|
|
|
|
3,317,301
|
|
|
|
2,751,022
|
|
|
|
2,378,165
|
|
Long-term obligations,
excluding current
portion
|
|
|
4,881
|
|
|
|
4,882
|
|
|
|
869,865
|
|
|
|
999,935
|
|
|
|
861,149
|
|
Stockholders
equity
|
|
$
|
530,473
|
|
|
$
|
809,835
|
|
|
$
|
2,128,982
|
|
|
$
|
1,527,269
|
|
|
$
|
1,330,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data:
|
|
Year Ended October 31,
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
482,085
|
|
|
$
|
858,750
|
|
|
$
|
1,603,229
|
|
|
$
|
361,155
|
|
|
$
|
283,136
|
|
Excess and obsolete
inventory costs
(benefit)
|
|
|
6,534
|
|
|
|
15,022
|
|
|
|
68,411
|
|
|
|
286,475
|
|
|
|
(5,296
|
)
|
Cost of goods
sold
|
|
|
293,235
|
|
|
|
462,371
|
|
|
|
836,138
|
|
|
|
309,559
|
|
|
|
215,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
(loss)
|
|
|
182,316
|
|
|
|
381,357
|
|
|
|
698,680
|
|
|
|
(234,879
|
)
|
|
|
73,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
101,006
|
|
|
|
125,434
|
|
|
|
235,831
|
|
|
|
239,619
|
|
|
|
199,699
|
|
|
Selling and
marketing
|
|
|
61,603
|
|
|
|
90,922
|
|
|
|
146,949
|
|
|
|
130,276
|
|
|
|
103,193
|
|
|
General and
administrative
|
|
|
22,696
|
|
|
|
33,960
|
|
|
|
57,865
|
|
|
|
52,612
|
|
|
|
38,478
|
|
|
Settlement of accrued
contract
obligation
|
|
|
|
|
|
|
(8,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock compensation
costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
|
|
|
|
|
|
|
|
17,783
|
|
|
|
15,672
|
|
|
|
12,824
|
|
|
|
Selling and
marketing
|
|
|
|
|
|
|
|
|
|
|
8,378
|
|
|
|
3,560
|
|
|
|
2,728
|
|
|
|
General and
administrative
|
|
|
40
|
|
|
|
40
|
|
|
|
15,206
|
|
|
|
1,092
|
|
|
|
1,225
|
|
|
Amortization of
goodwill
|
|
|
3,197
|
|
|
|
3,197
|
|
|
|
177,786
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible
assets
|
|
|
438
|
|
|
|
438
|
|
|
|
4,413
|
|
|
|
8,972
|
|
|
|
17,870
|
|
|
In-process research and
development
|
|
|
|
|
|
|
|
|
|
|
45,900
|
|
|
|
|
|
|
|
2,800
|
|
|
Restructuring
costs
|
|
|
|
|
|
|
|
|
|
|
15,439
|
|
|
|
225,429
|
|
|
|
31,155
|
|
|
Goodwill and intangible
impairment
|
|
|
|
|
|
|
|
|
|
|
1,719,426
|
|
|
|
557,286
|
|
|
|
29,596
|
|
|
Merger related
costs
|
|
|
13,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for
doubtful
accounts
|
|
|
250
|
|
|
|
28,010
|
|
|
|
(6,579
|
)
|
|
|
14,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
202,251
|
|
|
|
273,463
|
|
|
|
2,438,397
|
|
|
|
1,249,331
|
|
|
|
439,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
(19,935
|
)
|
|
|
107,894
|
|
|
|
(1,739,717
|
)
|
|
|
(1,484,210
|
)
|
|
|
(366,523
|
)
|
Interest and other income,
net
|
|
|
14,448
|
|
|
|
13,020
|
|
|
|
63,579
|
|
|
|
61,145
|
|
|
|
42,959
|
|
Interest
expense
|
|
|
(504
|
)
|
|
|
(340
|
)
|
|
|
(30,591
|
)
|
|
|
(45,339
|
)
|
|
|
(36,331
|
)
|
Loss on equity investments,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,677
|
)
|
|
|
(4,760
|
)
|
Loss on extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,683
|
)
|
|
|
(20,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
(5,991
|
)
|
|
|
120,574
|
|
|
|
(1,706,729
|
)
|
|
|
(1,486,764
|
)
|
|
|
(385,261
|
)
|
Provision (benefit) for
income
taxes
|
|
|
(2,067
|
)
|
|
|
39,187
|
|
|
|
87,333
|
|
|
|
110,735
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
(loss)
|
|
$
|
(3,924
|
)
|
|
$
|
81,387
|
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per
common share
|
|
$
|
(0.01
|
)
|
|
$
|
0.29
|
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss)
per
common
and dilutive potential
common
share
|
|
$
|
(0.01
|
)
|
|
$
|
0.27
|
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic
common shares
outstanding
|
|
|
267,042
|
|
|
|
281,621
|
|
|
|
311,815
|
|
|
|
365,202
|
|
|
|
446,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic
common and dilutive
potential common shares
outstanding
|
|
|
267,042
|
|
|
|
299,662
|
|
|
|
311,815
|
|
|
|
365,202
|
|
|
|
446,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with
Selected Consolidated Financial Data and the Companys consolidated financial
statements and notes thereto included elsewhere in this report on
Form 10-K
.
Overview
CIENA is a leading global provider of innovative network solutions to
service providers and enterprises worldwide. Our customers include
long-distance carriers, local exchange carriers, cable operators, Internet
service providers, wireless and wholesale carriers, resellers, governments,
large businesses and non-profit institutions.
For several years, the market for our equipment was influenced by the
entry of a substantial number of new companies into the communications services
business. In the United States, this was largely due to changes in the
regulatory environment, in particular those brought about by the
Telecommunications Act of 1996. These new companies raised billions of dollars
in capital, much of which they invested in capital improvements, causing
acceleration in the growth of the market for telecommunications equipment.
The last three years have seen a reversal of this trend, including the
failure of a large number of the new entrants and a sharp contraction of the
availability of capital to the industry. Several of the more established
carriers also have experienced significant financial distress. These
developments have caused a substantial reduction in demand for
telecommunications equipment, including our products. This industry trend was
compounded by the slowing not only of the United States economy, but the
economies in virtually all of the countries in which we are marketing our
products. The combination of factors caused our customers to become more
conservative in their capital investment plans and more uncertain about their
future purchases. As a consequence, we are facing a market that is both reduced
in size and more difficult to predict and plan for.
These trends have had a number of significant effects on our business
during fiscal 2003 and 2002, including the reduction of revenue by $1,320.1
million since fiscal 2001, the incurrence of $286.5 million of costs related to
obsolete inventory and excess purchase commitments during fiscal 2002,
restructuring charges of $31.2 million and $225.4 million during fiscal 2003
and 2002, respectively, goodwill and intangible asset impairment charges of
$29.6 million and $557.3 million during fiscal 2003 and 2002, respectively,
provisions for bad debt expense of $14.8 million during fiscal 2002, $4.8
million and $15.7 million in losses on equity investments during fiscal 2003
and 2002, respectively, and a net income tax charge of approximately $110.7
million during fiscal 2002 to establish a valuation allowance against our
deferred tax assets. Our net losses of $386.5 million and $1,597.5 million, in
fiscal 2003 and 2002, respectively, were primarily attributable to the factors
listed above.
In response to the deterioration of our market, we have, since 2001,
entered new markets by expanding our network solution offerings and worked to
increase our market share by adding new features to our existing products. We
also have taken steps to expand our sales channels beyond direct sales to
service providers to include partnerships and other strategic relationships
targeting enterprise and government customers. We plan to continue to pursue
this strategy by adding new products and features to our portfolio, primarily
targeting delivery of data communications services because we expect a large
portion of carrier spending to occur in this area over the next few years.
As part of our efforts to implement our strategy, during fiscal 2003, we
completed the acquisitions of WaveSmith Networks, Inc. and Akara Corporation.
WaveSmith was a privately held corporation offering a multi-service switching
product designed to be deployed at the edge of carrier networks. Akara was a
privately held corporation providing SONET/SDH-based extended storage
solutions.
As of October 31, 2003, CIENA and its subsidiaries employed approximately
1,816 persons, which was a net reduction of 302 persons from the approximate
2,118 employed on October 31, 2002.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires CIENA to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, CIENA re-evaluates its estimates,
including those related to bad debts, inventories, investments, intangible assets, goodwill, income taxes, warranty
obligations, restructuring, contingencies and litigation. CIENA bases its
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Among other things, these
estimates form the basis for judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
CIENA believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
15
Revenue Recognition
CIENA recognizes product revenue in accordance with the terms of the
contract of sale and where collection is reasonably assured. For transactions
in which sales are not complete until the customer has accepted the product,
revenue is not recognized until the terms of acceptance are satisfied. Revenue
for installation services is recognized as the services are performed unless
the terms of the supply contract combine product acceptance with installation,
in which case, revenue from installation services is recognized when the terms
of acceptance are satisfied and installation is completed. Amounts received in
excess of revenue recognized are included as deferred revenue in the balance
sheet. For transactions involving the sale of software, revenue is recognized
in accordance with Statement of Position No. 97-2 (SOP 97-2), Software
Revenue Recognition, including deferral of revenue recognition in instances
where vendor specific objective evidence for undelivered elements is not
determinable. For distributor sales where risks of ownership have not
transferred, CIENA recognizes revenue when the product is shipped through to
the end user.
Allowances for Doubtful Accounts
CIENA maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of CIENAs customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. As of October 31, 2003, our accounts receivable balance, net of
allowances for doubtful accounts of $1.5 million, was $43.6 million, which
included three customers that accounted for 23.6%, 12.5%, and 10.1% of the net
trade accounts receivable.
Warranties
CIENA provides for the estimated cost of product warranties at the time
revenue is recognized. CIENA engages in extensive product quality programs and
processes including actively monitoring and evaluating the quality of its
component suppliers and third party contractors. CIENAs warranty obligation is
affected by product failure rates and material usage and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
material usage or service delivery costs differ from CIENAs estimates,
revisions to the estimated warranty liability would be required.
Reserve for Inventory Obsolescence
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 the fiscal year ended October 31, 2003, CIENA recorded a
benefit for inventory reserves of $5.3 million primarily related to the
realization of sales from previously reserved excess inventory. If actual
market conditions differ from those CIENA has projected, CIENA may be required
to take additional inventory write-downs or to record additional benefits.
Restructuring
As part of its restructuring costs, CIENA provides for the estimated cost
of the net lease expense for facilities that are no longer being utilized. The
provision is equal to the future minimum lease payments under contractual
obligations offset by estimated future sublease payments. As of the end of
fiscal 2003, CIENAs accrued restructuring liability related to net
consolidation of excess facilities is $63.7 million. If actual market
conditions are less favorable than those CIENA has projected, CIENA may be
required to recognize additional restructuring costs associated with these
facilities.
16
Minority Investments
CIENA holds minority interests in several companies having operations or
technology in areas within its strategic focus. As of October 31, 2003, $21.3 million of these investments are
included in other long-term assets. CIENA records an investment impairment
charge when it believes an investment has experienced a decline in value that
is other than temporary. During fiscal 2003, CIENA record a charge of $4.8
million associated with the impairment of one of these investments. Future
adverse changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investments current
carrying value, thereby possibly requiring an impairment charge in the future.
Impairment of Goodwill and Other Long-Lived Assets
Effective November 1, 2001, CIENA adopted Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets (SFAS
142) and ceased to amortize goodwill. As of October 31, 2003, CIENAs assets
include $336.0 million related to goodwill. SFAS 142 requires that we cease to
amortize goodwill and to test it for impairment on an annual basis, and between
annual tests if an event occurs or circumstances change that would, more likely
than not, reduce the fair value of CIENA below its carrying value. Since no
event occurred or circumstances changed during fiscal 2003 that would, more
likely than not, reduce the fair value of CIENA below its carrying value, no
impairment was recorded in fiscal 2003. If actual market conditions are less
favorable than those we have projected or if an event occurs or circumstances
change that would, more likely than not, reduce the fair value of CIENA below
its carrying value, we may be required to recognize additional goodwill
impairment charges.
As part of CIENAs review of financial results for fiscal 2003, CIENA
performed an assessment of the carrying value of the Companys long-lived
assets, including other intangible assets. The assessment was performed
pursuant to Statement Financial Accounting Standards No. 144 Accounting for
the Impairment or disposal of Long-Lived Assets (SFAS 144). As a result, CIENA
recorded a charge of $29.6 million during fiscal 2003, related to the
impairment of MetroDirector K2 technology acquired in the Cyras transaction.
This charge was based on the amount by which the carrying amount of the
developed technology exceeded its fair value. Fair value was determined based
on discounted future cash flows derived from the developed technology, which
had separately identifiable cash flows. The assumptions supporting the
estimated future cash flows, including the discount rate reflect managements
best estimates. If actual market conditions are less favorable than those we
have projected or if an event occurs or circumstances change that would, more
likely than not, reduce the fair value of our long-lived assets below their
carrying value, we may be required to recognize additional impairment charges.
Deferred Tax Valuation Allowance
As of October 31, 2003, CIENA has recorded a valuation allowance of $894.2
million against our gross deferred tax assets of $894.2 million. We calculated
the valuation allowance in accordance with the provisions of Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
109) which requires an assessment of both positive and negative evidence when
measuring the need for a valuation allowance. Positive evidence, such as
operating results during the most recent three-year period, is given more
weight when due to our current lack of visibility, there is a greater degree of
uncertainty that the level of future profitability needed to record the
deferred assets will be achieved. Our results over the most recent three-year
period were heavily affected by our recent deliberate and planned business
restructuring activities. Our cumulative loss in the most recent three-year
period represents sufficient negative evidence to require a valuation allowance
under the provisions of SFAS 109. We intend to maintain a valuation allowance
until sufficient positive evidence exists to support its reversal.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
Accounting for Stock-Based Compensation. SFAS 123 allows companies to account
for stock-based compensation either under the new provisions of SFAS 123 or
using the intrinsic value method provided by Accounting Principles Board
Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, but
requires pro forma disclosure in the footnotes to the financial statements as
if the measurement provisions of SFAS 123 had been adopted.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS 123,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. SFAS 148 is effective for financial statements
for fiscal years ending after December 15, 2002.
17
We have elected to continue to account for stock-based compensation in
accordance with the provisions of APB 25 as interpreted by FASB Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25, (FIN 44) and present the pro forma
disclosures required by SFAS 123 as amended by SFAS 148.
Results of Operations
Fiscal Years Ended 2003, 2002 and 2001
Revenue.
We recognized $283.1 million, $361.2 million, and $1,603.2
million in revenue for fiscal 2003, 2002, and 2001, respectively. The decrease
in revenue of $78.1 million, or 21.6% from fiscal 2002 to 2003 was primarily a
result of the continued decline in demand for our core networking products. The
decrease in revenue of $1,242.0 million, or 77.5% from fiscal 2001 to 2002 was
due to the reduction in demand for core networking products. CIENAs revenue
derived from products and services is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%
|
|
2002
|
|
%
|
|
2003
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,518,833
|
|
|
|
94.7
|
|
|
$
|
304,155
|
|
|
|
84.2
|
|
|
$
|
240,772
|
|
|
|
85.0
|
|
Services
|
|
|
84,396
|
|
|
|
5.3
|
|
|
|
57,000
|
|
|
|
15.8
|
|
|
|
42,364
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,229
|
|
|
|
100.0
|
|
|
$
|
361,155
|
|
|
|
100.0
|
|
|
$
|
283,136
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had sales to 110 customers in fiscal 2003, as compared to 77 customers
in fiscal 2002 and 53 customers in fiscal 2001. During the following fiscal
years, customers who each accounted for at least 10% of our revenue during the
respective periods are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%*
|
|
2002
|
|
%*
|
|
2003
|
|
%*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint
|
|
$
|
463,078
|
|
|
|
28.9
|
|
|
$
|
58,739
|
|
|
|
16.3
|
|
|
|
n/a
|
|
|
|
|
|
Qwest
|
|
|
347,083
|
|
|
|
21.6
|
|
|
|
n/a
|
|
|
|
|
|
|
|
31,148
|
|
|
|
11.0
|
|
AT&T
|
|
|
n/a
|
|
|
|
|
|
|
|
74,111
|
|
|
|
20.5
|
|
|
|
39,444
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
810,161
|
|
|
|
50.5
|
|
|
$
|
132,850
|
|
|
|
36.8
|
|
|
|
70,592
|
|
|
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Denotes % of total revenue
n/a Denotes revenue recognized less than 10% for the period
During the following fiscal years CIENAs geographic distribution of
revenue is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%
|
|
2002
|
|
%
|
|
2003
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,220,742
|
|
|
|
76.1
|
|
|
$
|
232,524
|
|
|
|
64.4
|
|
|
$
|
178,564
|
|
|
|
63.1
|
|
International
|
|
|
382,487
|
|
|
|
23.9
|
|
|
|
128,631
|
|
|
|
35.6
|
|
|
|
104,572
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,229
|
|
|
|
100.0
|
|
|
$
|
361,155
|
|
|
|
100.0
|
|
|
$
|
283,136
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (Loss).
Cost of goods sold consists of component costs,
direct compensation costs, warranty and other contractual obligations,
royalties, license fees, direct technical support costs, cost of excess and
obsolete inventory and overhead related to manufacturing, technical support and
engineering, furnishing and installation (EF&I) operations. Gross profit
(loss) was $73.0 million, ($234.9) million, and $698.7 million for fiscal 2003,
2002, and 2001, respectively. The $307.9 million increase in fiscal 2003
compared to fiscal 2002 was primarily the result of a $291.8 million decrease
in inventory obsolescence cost. The $933.6 million decrease in gross profit in
fiscal 2002 compared to fiscal 2001 was the result of decreased revenue and an
increase in excess and obsolete inventory charges. This increase in excess and
obsolete inventory charges was a result of the decline in capital spending by
our customers and a decline in forecasted revenue of existing products and
accordingly, we recorded a provision for inventory, including purchase
commitments, of approximately $286.5 million in fiscal 2002.
18
Gross profit (loss), as a percentage of total revenue, was 25.8%, (65.0%)
and 43.6% for fiscal 2003, 2002 and 2001, respectively. The increase from
fiscal 2002 to fiscal 2003 was largely attributable to decreases in inventory
obsolescence costs, increases in manufacturing efficiencies, higher margin
product mix and improvements in margin from installation and technical support
services. The decrease from fiscal 2001 compared to fiscal 2002 was largely
attributable to increases in inventory obsolescence costs, lower manufacturing
volumes resulting in reduced manufacturing efficiencies, and changes in product
mix resulting in sales of higher proportion of revenue from lower margin
installation and tech support services.
Gross profit on products, as a percentage of product revenue, was 34.0%,
25.0% and 52.5% for fiscal 2003, 2002 and 2001, respectively. The improvement
from fiscal 2002 to fiscal 2003 was largely attributable to increases in
manufacturing efficiencies and higher margin product mix. The reduction from
fiscal 2001 to fiscal 2002 was primarily attributable to lower manufacturing
volumes resulting in reduced manufacturing efficiencies.
Gross loss on services, as a percentage of services revenue, was 33.3%,
43.0% and 36.6% for fiscal 2003, 2002 and 2001, respectively. The improvement
from fiscal 2002 to fiscal 2003 was largely attributable to reductions in
services overhead costs. The reduction from fiscal 2001 to fiscal 2002 was
primarily the result of increased technical support costs.
Research and Development Expenses
.
Research and development expenses
(exclusive of stock compensation costs of $12.8, $15.7 and $17.8 million) were
$199.7 million, $239.6 million and $235.8 million for fiscal 2003, 2002 and
2001, respectively. During fiscal 2003, 2002 and 2001, research and development
expenses were 70.5%, 66.3% and 14.7% of revenue, respectively. The $39.9
million, or 16.7% decrease, from fiscal 2002 to fiscal 2003 was the result of
decreased employee related expenses, prototype costs, consulting expenses, and
depreciation expense. The $3.8 million, or 1.6% increase, from fiscal 2001 to
fiscal 2002 was primarily related to increases in depreciation expense that
were partially offset by reductions in prototype parts and employee related
costs. CIENA has expensed research and development costs as incurred.
Selling and Marketing Expenses
.
Selling and marketing expenses (exclusive
of stock compensation of $2.7, $3.6 and $8.4 million) were $103.2 million,
$130.3 million and $146.9 million for fiscal 2003, 2002 and 2001, respectively.
During fiscal 2003, 2002 and 2001, selling and marketing expenses were 36.5%,
36.1% and 9.2% of revenue, respectively. The $27.1 million, or 20.8% decrease,
from fiscal 2002 to fiscal 2003 was the result of reduced levels of sales
staff, advertising costs, outside consultants, facility costs and depreciation
expense. The $16.6 million, or 11.3% decrease, from fiscal 2002 to 2001 was
primarily the result of decreases in staffing levels, commissions earned, trade
show participation and promotional costs.
General and Administrative Expenses
.
General and administrative expenses
(exclusive of stock compensation of $1.2, $1.1 and $15.2 million) were $38.5
million, $52.6 million and $57.9 million for fiscal 2003, 2002 and 2001,
respectively. During fiscal 2003, 2002 and 2001 general and administrative
expenses were 13.6%, 14.6% and 3.6% of revenue, respectively. The $14.1
million, or 26.8% decrease, from fiscal 2002 to fiscal 2003 was primarily the
result of decreases in staffing levels, outside consultants and facility costs.
Fiscal 2003 general and administrative expenses also include costs of $2.5
million related to the settlement of litigation with Nortel. The $5.3 million,
or 9.2% decrease, from fiscal 2001 to 2002 was primarily due to decreases in
employee-related costs. Fiscal 2002 general and administrative expenses also
include costs of $1.8 million related to the settlement of litigation with
Pirelli.
Deferred Stock Compensation Costs
. The cumulative deferred stock
compensation costs related to research and development, selling and marketing
and general and administrative employees assumed as part of our merger and
acquisition activity were $16.8 million, $20.3 million and $41.4 million during
fiscal 2003, 2002 and 2001 respectively. As part of our acquisition of
WaveSmith, ONI, and Cyras we recorded $7.4 million, $8.8 million and $98.5
million of deferred stock compensation relating to the unvested stock options
and restricted stock assumed on the acquisition, respectively. Deferred stock
compensation is presented as a reduction of stockholders equity and is
amortized over the remaining vesting period of the applicable options. As of
October 31, 2003, the balance of deferred stock compensation was $9.7 million.
Amortization of Goodwill.
Amortization of goodwill was $0.0, $0.0, and
$177.8 million for fiscal 2003, 2002 and 2001, respectively. The Company
adopted SFAS 142 effective November 1, 2001 and upon adoption ceased to
amortize goodwill.
19
Amortization of Intangible Assets.
Amortization of intangible assets
(exclusive of $3.3 million, $0.0 and $0.0 included in costs of goods sold
related to certain technology licenses) was $17.9 million, $9.0 million and
$4.4 million for fiscal 2003, 2002 and 2001, respectively. In purchasing
companies, we have acquired intangible assets such as certain developed
technology, patents and covenants not to compete. As part of our acquisition of
Akara, WaveSmith, ONI, and Cyras we recorded $14.5 million, $59.7 million,
$15.1 million and $47.7 million worth of intangibles, respectively. The various
intangible assets will be amortized over periods ranging from 2 months to eight
years.
In-Process Research and Development
. In-process research and development
was $2.8 million, $0.0 and $45.9 million for fiscal 2003, 2002 and 2001,
respectively. In connection with our fiscal 2003 acquisitions of Akara and
WaveSmith, we recorded charges of $1.3 million and $1.5 million, respectively,
related to in-process research and development. This generally represents the
estimated value of purchased in-process technology that had not yet reached
technological feasibility and had no alternative future use at the time of the
acquisitions. In connection with our March 2001 acquisition of Cyras, we
recorded a $45.9 million charge for in-process research and development. This
represents the estimated value of purchased in-process technology related to
Cyras K2 product development that had not yet reached technological
feasibility and had no alternative future use at the time of the acquisition.
The amount of the purchase prices for Akara, WaveSmith and Cyras allocated to
in-process research and development was determined using the discounted cash
flow method. This method consisted of estimating future net cash flows
attributable to the in-process technology for a discrete projection period and
discounting the net cash flows back to their present value.
Restructuring Costs
. During fiscal 2003, we recorded a restructuring
charge of $32.0 million associated with workforce reductions and the
write-down of certain property and equipment. This was offset by a credit of
$0.8 million related to the adjustment of previously estimated restructuring
charges. The restructuring charge included $12.2 million associated with work
force reductions, $2.3 million primarily related to lease terminations and
non-cancelable lease costs and a $17.5 million write-down related to property
and equipment consisting primarily of leasehold improvements, production
equipment and research test equipment. See Note 3.
During fiscal 2002, we incurred $225.4 million in restructuring charges
associated with our ongoing efforts to align our operations with the current
telecommunications industry environment. The restructuring charges included
$32.9 million related to work force reductions of approximately 1,946
employees, $70.3 million primarily related to lease terminations and
non-cancelable lease costs and an $122.2 million write-down related to
property and equipment consisting primarily of leasehold improvements,
production equipment and research test equipment.
During fiscal 2001, we recorded $15.4 million in restructuring charges
related to the consolidation of excess facilities. The consolidation included
the closure of certain manufacturing warehouse facilities and the
consolidation of certain operational centers related to business activities
that have been restructured. The charges included $7.0 million primarily
related to lease terminations and non-cancelable lease costs and also included
an $8.4 million write-down related to property and equipment consisting
primarily of leasehold improvements and production equipment.
We expect to incur additional restructuring charges over the next several
quarters as a result of our ongoing program to restructure our business.
Goodwill and Other Intangible Impairment.
Goodwill and other intangible
impairment was $29.6 million, $557.3 million and $1.7 billion for fiscal 2003,
2002 and 2001, respectively. During fiscal 2003, we recorded a charge of $29.6
million related to the impairment of MetroDirector K2 technology acquired in
the Cyras transaction. This charge was determined in accordance with SFAS 144,
which requires CIENA to perform an assessment on the carrying value of its
developed technology intangible assets.
In fiscal 2002 and 2001 we recorded charges of $557.3 million and $1.7
billion, respectively. The fiscal 2002 charge was determined in accordance
with SFAS 142, which requires annual testing to determine and measure goodwill
impairment on a reporting unit basis. The fiscal 2001 charge was determined in
accordance with SFAS 121, which required CIENA to perform an assessment of the
carrying value of its long-lived assets including significant amounts of
goodwill and other intangible assets.
Provision for Doubtful Accounts.
CIENA performs ongoing credit evaluations
of its customers and generally does not require collateral or other forms of
security from its customers. CIENA maintains an allowance for potential losses
when a particular problem with the collectibility of a receivable is
identified. Provision for doubtful accounts expenses were $0.0, $14.8 million
and ($6.6) million for fiscal 2003, 2002 and 2001, respectively. In fiscal
2001, we received payment for $15.4 million of the gross outstanding accounts
receivable balance due from iaxis Limited primarily through our sales agreement
with Dynegy. Accordingly, we recognized a reduction of $6.6 million in the
provision for doubtful accounts during fiscal 2001. We recorded a provision for
doubtful accounts of approximately $14.8 million during fiscal 2002. This
provision related to the estimated losses of $18.1 million from three
customers, each of whom filed for bankruptcy protection during fiscal 2002,
offset by $3.3 million of the gross outstanding accounts receivable balance due
from iaxis Limited through our sales agreement with Dynegy. CIENA did not
record any additional provision for doubtful accounts during fiscal 2003.
20
Interest and Other Income, Net.
Interest and other income, net were $43.0
million, $61.1 million and $63.6 million for fiscal 2003, 2002 and 2001,
respectively. Interest and other income, net, consists of interest income
earned on our cash, cash equivalents and available-for-sale short and long-term
investments. The $18.1 million decrease from fiscal 2002 to fiscal 2003 was
attributable to the impact of lower average interest rates and lower average
cash and invested balances. The $2.5 million decrease from fiscal 2001 to
fiscal 2002 was attributable to the impact of lower average interest rates.
Interest Expense
. Interest expenses were $36.3 million, $45.3 million and
$30.6 million for fiscal 2003, 2002 and 2001, respectively. The $9.0 million,
or 19.9% decrease, from fiscal 2002 to fiscal 2003 was attributable to the
decrease in our debt obligations. The $14.7 million, or 48.0% increase, from
fiscal 2001 to fiscal 2002 was attributable to the acquisition of debt
obligations related to ONI.
Loss on Equity Investments, Net.
The $4.8 million loss on equity
investments in fiscal 2003 related to the decline in value of non-public equity
investments that were determined to be other than temporary. Loss on equity
investments, net was $15.7 million for fiscal 2002. We realized a loss of $1.9
million from the sale of a public equity investment and a loss of $16.6 million
from a decline in the fair value of a certain equity investments that were
determined to be other than temporary. On November 16, 2001, CIENA sold 80.1%
of its ownership in ATI International Investments, Inc., the parent company of
ATI Telecom International Ltd. (Alta), which resulted in a gain of $2.8
million. CIENA retains a 19.9% ownership in ATI International Investments, Inc.
Loss on Extinguishment of Debt.
Losses on extinguishment of debt were
$20.6 million, $2.7 million and $0.0 for fiscal 2003, 2002 and 2001,
respectively. On June 21, 2002, we assumed the outstanding ONI 5.00%
convertible subordinated notes, due October 15, 2005, in an aggregate principal
amount of $300 million. The notes were initially recorded at a value of $218.0
million based upon the present value of the outstanding notes at the time of
the acquisition. We are accreting the difference between $218.0 million and
$300.0 million over the remaining period to October 15, 2005, such that the
carrying value of the outstanding notes equals the principal value at the time
the notes become due. During fiscal 2003, we conducted a tender offer for the
ONI notes, which resulted in our purchasing $154.7 in principal amount of notes
for $140.3 million. Since the notes had an accreted value of $119.7 million,
the purchase resulted in a non-cash loss of $20.6 million. During fiscal 2002,
we purchased on the open market $97.1 million in principal amount of notes for
$75.2 million. Since the notes had an accreted value of $72.5 million, the
purchase resulted in a non-cash loss of $2.7 million.
Provision for Income Taxes.
Our income tax expenses were 0.3%, 7.4% and
5.1% of pre-tax loss for fiscal 2003, 2002 and 2001, respectively. The income
tax provision for fiscal 2003 was $1.3 million. This provision was primarily
attributable to foreign taxes related to our foreign operations. We did not
record a tax benefit for our domestic losses during fiscal 2003. We intend to
maintain a valuation allowance against our deferred tax assets until sufficient
positive evidences exists to support its reversal. The income tax provision for
2002 was $110.7 million. Our income tax provision for 2002 differed from the
expected statutory benefit of 35% primarily due to the establishment of a
valuation allowance against our deferred tax assets and the non-deductibility
of the goodwill impairment. The income tax provision for 2001 differed from the
expected 35% benefit primarily due to the non-deductibility of the goodwill
impairment, and in-process research and development.
Net Loss.
Our net losses were $386.5 million, $1,597.5 million and
$1,794.1 million for fiscal 2003, 2002 and 2001, respectively.
Liquidity and Capital Resources
At October 31, 2003, our principal source of liquidity was cash and cash
equivalents, short-term investments and long-term investments. We had $309.7
million in cash and cash equivalents, $796.8 million in short-term investments
and $519.7 million in long-term investments.
21
Our
operating activities consumed net cash of $241.2 million and $28.0
million in fiscal 2003 and 2002, respectively and provided net cash of $163.2
million in fiscal 2001. Cash used in operating activities during fiscal 2003
was primarily attributable to the net loss, the reduction in accrued
liabilities and an increase in accounts receivable. This was offset by the
non-cash charges for early extinguishment of debt, restructuring charges and
related asset write-downs, depreciation, amortization and impairment of
intangibles. Cash used in operating activities during fiscal 2002 was primarily
attributable to the net loss, offset by non-cash charges related to goodwill
impairment, amortization of other intangibles, deferred stock compensation and
debt issuance costs, non-cash portion of restructuring charges, depreciation
expense, provision for inventory excess and obsolescence, decrease in deferred
income tax asset and decrease in accounts receivable. Cash provided by
operating activities during fiscal 2001 was primarily attributable to decreases
in accounts receivable and inventories offset by non-cash charges related to
goodwill impairment, amortization of other intangibles, deferred stock
compensation and debt issuance costs, non-cash portion of restructuring
charges, depreciation expense, provision for inventory excess and obsolescence,
and increases in deferred revenue and other obligations.
Our investment activities provided net cash of $302.6 million and $239.1
million in fiscal 2003 and 2002 respectively, and used net cash of $1,490.6
million in fiscal 2001. Investment activities included the net redemption of
$364.8 million and $26.0 million of short and long-term investments during
fiscal 2003 and 2002, respectively and the net purchase of $1,293.2 million of
short and long-term investments during fiscal 2001. Investment activities also
included approximately $15.0 million, $10.0 million and $13.0 million of equity
investments in private companies, accounted for under the cost method, during
fiscal 2003, 2002 and 2001, respectively. Also included in investment
activities were additions to capital equipment and leasehold improvements in
fiscal 2003, 2002, and 2001 of $29.5 million, $66.3 million and $238.5 million,
respectively. The capital equipment expenditures were primarily for customer
demonstration systems, test systems, manufacturing equipment, computer
equipment and leasehold improvements. In fiscal 2003 we used cash of $26.7
million, net of expenditures, in connection with our acquisition of Akara and
WaveSmith. In fiscal 2002, we acquired cash of $286.9 million, net of
expenditures, in connection with our acquisition of ONI. In fiscal 2001, we
acquired cash of $54.1 million, net of expenditures, in connection with our
acquisition of Cyras.
Our financing activities used net cash of $128.9 million and $231.8 million
in fiscal 2003 and 2002, respectively and provided net cash of $1,582.2 million
in fiscal 2001. During fiscal 2003 the primary use was related to the purchase
of $154.7 million of the remaining $202.9 million outstanding ONI convertible
subordinated notes. We paid $139.2 million for the notes and fees of $1.1
million related to the purchase. Also, during fiscal 2003, we received $13.8
million from the exercise of stock options and $1.9 million from the repayment
of notes receivable from stockholders. The primary use of cash during fiscal
2002 related to the redemption of all outstanding Cyras Systems LLC 4.5%
convertible subordinated notes for $178.4 million and the purchase of ONI 5.0%
convertible subordinated notes with a cumulative accreted book value of $72.5
million. Also during fiscal 2002, we received $15.1 million from the exercise
of stock options and the sale of stock through our employee stock purchase plan
and $5.0 million from the repayment of notes receivable from stockholders.
During fiscal 2001, we completed a public offering of 11,000,000 shares of
common stock at a price of $83.50 per share less underwriters discounts and
commissions. Concurrent with the offering of common stock, we completed a
public offering of 3.75% convertible notes with an aggregate principal amount
of $690 million. Net proceeds from these offerings were approximately $1,547.8
million, after deducting underwriting discounts, commissions and offering
expenses. During fiscal 2001, we also received $31.9 million from the exercise
of stock options and the sale of stock through our employee stock purchase plan
and $4.6 million for the repayment of notes receivable from stockholders.
22
The following is a summary of our future minimum payments under
contractual obligations as of October 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than one year
|
|
One to three years
|
|
Four to five years
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes (1)(2)
|
|
|
859,542
|
|
|
|
28,289
|
|
|
|
102,441
|
|
|
|
728,812
|
|
|
|
|
|
Operating leases
|
|
|
251,005
|
|
|
|
37,810
|
|
|
|
72,128
|
|
|
|
56,071
|
|
|
|
84,996
|
|
Purchase obligations (3)
|
|
|
33,270
|
|
|
|
33,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,143,817
|
|
|
$
|
99,369
|
|
|
$
|
174,569
|
|
|
$
|
784,883
|
|
|
$
|
84,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The terms of our convertible notes with a principal value of $690.0
million include interest at 3.75% payable on a semi-annual basis on
February 1 and August 1 of each year; the notes are due February 1,
2008. The terms of the ONI convertible subordinated notes with a
principal value of $48.3 million include interest at 5.00% payable on a
semi-annual basis on April 15 and October 15 of each year; the
notes are due October 15, 2005.
|
|
(2)
|
|
On November 18, 2003, CIENA announced a full redemption of all of
the outstanding ONI 5.00% convertible subordinated notes due October
15, 2005. The principal amount of the notes outstanding is $48.3
million. On the redemption date of December 19, 2003, CIENA will pay
holders 102% of the outstanding principal amount of the notes plus
accrued interest.
|
|
(3)
|
|
Purchase commitments related to amounts we are obligated to pay to
our contract manufacturers and component suppliers for inventory.
|
Some of our commercial commitments, including some of the future minimum
payments set forth above, are secured by standby letters of credit. The
following is a summary of our commercial commitments secured by standby letters
of credit by commitment expiration date as of October 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than one year
|
|
One to three years
|
|
Four to five years
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
11,351
|
|
|
$
|
10,741
|
|
|
$
|
360
|
|
|
$
|
250
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIENA does not engage in any off-balance sheet financing arrangements. In
particular, we do not have any interest in so-called limited purpose entities,
which include special purpose entities (SPEs) and structured finance entities.
Based on past performance and current expectations, we believe that our
cash and cash equivalents, short-term investments, and cash generated from
operations will satisfy our working capital needs, capital expenditures,
investment requirements, full redemption of the ONI 5% convertible subordinated
notes, and other liquidity requirements associated with our existing operations
through at least the next 12 months.
23
Effects of Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard did not have a material impact on CIENAs financial
statements.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
applied to revenue arrangements entered into in fiscal periods beginning after
June 15, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51. FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after December 15,
2003. The Company believes that the adoption of this standard will have no
material impact on its financial statements.
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133. The
statement requires that contracts with comparable characteristics be accounted
for similarly and clarifies when a derivative contains a financing component
that warrants special reporting in the statement of cash flows. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003, except in
certain circumstances, and for hedging relationships designated
after June 30, 2003. The Company does not expect that the adoption of this
standard will have a material effect on its financial position or results of
operations.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures in
its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) because that financial instrument embodies an
obligation of the issuer. This Statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatory redeemable financial instruments of nonpublic entities. The FASB has
defined implementation of SFAS 150 indefinitely for certain non-controlling
interests, the provisions of which are currently not applicable to the Company.
The Company does not expect that the adoption of this standard will have a
material effect on its financial position or results of operations.
24
Quarterly Results of Operations
The tables below (in thousands, except per share data) set forth the
operating results and percentage of revenue represented by certain items in
CIENAs statements of operations for each of the eight quarters in the period
ended October 31, 2003. This information is unaudited, but in our opinion
reflects all adjustments (consisting only of normal recurring adjustments) that
we consider necessary for a fair presentation 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,
|
|
|
|
|
|
2002
|
|
2002
|
|
2002
|
|
2002
|
|
2003
|
|
2003
|
|
2003
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
139,935
|
|
|
$
|
73,465
|
|
|
$
|
41,029
|
|
|
$
|
49,726
|
|
|
$
|
61,221
|
|
|
$
|
63,399
|
|
|
$
|
59,294
|
|
|
$
|
56,858
|
|
|
Services
|
|
|
22,221
|
|
|
|
13,588
|
|
|
|
8,999
|
|
|
|
12,192
|
|
|
|
9,253
|
|
|
|
10,141
|
|
|
|
9,184
|
|
|
|
13,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
162,156
|
|
|
|
87,053
|
|
|
|
50,028
|
|
|
|
61,918
|
|
|
|
70,474
|
|
|
|
73,540
|
|
|
|
68,478
|
|
|
|
70,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
90,964
|
|
|
|
63,181
|
|
|
|
37,450
|
|
|
|
36,479
|
|
|
|
42,234
|
|
|
|
41,852
|
|
|
|
39,249
|
|
|
|
35,563
|
|
|
Services
|
|
|
28,309
|
|
|
|
24,344
|
|
|
|
13,510
|
|
|
|
15,322
|
|
|
|
14,632
|
|
|
|
14,919
|
|
|
|
12,749
|
|
|
|
14,189
|
|
|
Excess and obsolete inventory costs
|
|
|
20,414
|
|
|
|
223,277
|
|
|
|
41,192
|
|
|
|
1,592
|
|
|
|
(2,657
|
)
|
|
|
(1,446
|
)
|
|
|
(55
|
)
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Cost of goods sold
|
|
|
139,687
|
|
|
|
310,802
|
|
|
|
92,152
|
|
|
|
53,393
|
|
|
|
54,209
|
|
|
|
55,325
|
|
|
|
51,943
|
|
|
|
48,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
22,469
|
|
|
|
(223,749
|
)
|
|
|
(42,124
|
)
|
|
|
8,525
|
|
|
|
16,265
|
|
|
|
18,215
|
|
|
|
16,535
|
|
|
|
22,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
64,756
|
|
|
|
59,558
|
|
|
|
53,950
|
|
|
|
61,355
|
|
|
|
53,734
|
|
|
|
52,193
|
|
|
|
47,963
|
|
|
|
45,809
|
|
|
Selling and marketing
|
|
|
37,600
|
|
|
|
29,835
|
|
|
|
30,829
|
|
|
|
32,012
|
|
|
|
26,605
|
|
|
|
25,663
|
|
|
|
24,536
|
|
|
|
26,389
|
|
|
General and administrative (1)
|
|
|
13,655
|
|
|
|
13,276
|
|
|
|
10,798
|
|
|
|
14,883
|
|
|
|
14,706
|
|
|
|
8,066
|
|
|
|
7,969
|
|
|
|
7,737
|
|
|
Deferred stock compensation costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,951
|
|
|
|
3,465
|
|
|
|
3,860
|
|
|
|
4,396
|
|
|
|
3,798
|
|
|
|
3,406
|
|
|
|
2,932
|
|
|
|
2,688
|
|
|
|
|
Selling and marketing
|
|
|
956
|
|
|
|
851
|
|
|
|
842
|
|
|
|
911
|
|
|
|
759
|
|
|
|
676
|
|
|
|
687
|
|
|
|
606
|
|
|
|
|
General and administrative
|
|
|
227
|
|
|
|
176
|
|
|
|
256
|
|
|
|
433
|
|
|
|
374
|
|
|
|
346
|
|
|
|
312
|
|
|
|
193
|
|
|
Amortization of intangible assets
|
|
|
1,813
|
|
|
|
1,813
|
|
|
|
2,343
|
|
|
|
3,003
|
|
|
|
3,554
|
|
|
|
3,421
|
|
|
|
4,479
|
|
|
|
6,416
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
1,300
|
|
|
Restructuring costs
|
|
|
6,828
|
|
|
|
121,348
|
|
|
|
18,562
|
|
|
|
78,691
|
|
|
|
|
|
|
|
2,724
|
|
|
|
15,527
|
|
|
|
12,904
|
|
|
Goodwill and intangible impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
557,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,596
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
16,055
|
|
|
|
(1,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
129,786
|
|
|
|
246,377
|
|
|
|
120,198
|
|
|
|
752,970
|
|
|
|
103,530
|
|
|
|
96,495
|
|
|
|
105,905
|
|
|
|
133,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(107,317
|
)
|
|
|
(470,126
|
)
|
|
|
(162,322
|
)
|
|
|
(744,445
|
)
|
|
|
(87,265
|
)
|
|
|
(78,280
|
)
|
|
|
(89,370
|
)
|
|
|
(111,608
|
)
|
Interest and other income, net
|
|
|
16,172
|
|
|
|
15,045
|
|
|
|
13,558
|
|
|
|
16,370
|
|
|
|
13,301
|
|
|
|
11,131
|
|
|
|
8,865
|
|
|
|
9,662
|
|
Interest expense
|
|
|
(10,505
|
)
|
|
|
(8,637
|
)
|
|
|
(10,614
|
)
|
|
|
(15,583
|
)
|
|
|
(12,203
|
)
|
|
|
(8,061
|
)
|
|
|
(8,070
|
)
|
|
|
(7,997
|
)
|
Loss on equity investments, net
|
|
|
(5,306
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
(9,937
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,750
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,683
|
)
|
|
|
(20,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(106,956
|
)
|
|
|
(464,152
|
)
|
|
|
(159,378
|
)
|
|
|
(756,278
|
)
|
|
|
(106,783
|
)
|
|
|
(75,210
|
)
|
|
|
(88,575
|
)
|
|
|
(114,693
|
)
|
Provision (benefit) for income tax
|
|
|
(36,365
|
)
|
|
|
148,001
|
|
|
|
607
|
|
|
|
(1,508
|
)
|
|
|
359
|
|
|
|
251
|
|
|
|
299
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(70,591
|
)
|
|
$
|
(612,153
|
)
|
|
$
|
(159,985
|
)
|
|
$
|
(754,770
|
)
|
|
$
|
(107,142
|
)
|
|
$
|
(75,461
|
)
|
|
$
|
(88,874
|
)
|
|
$
|
(115,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share and dilutive
potential common share
|
|
$
|
(0.22
|
)
|
|
$
|
(1.86
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(1.75
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common and dilutive potential
common share
|
|
|
327,620
|
|
|
|
328,764
|
|
|
|
376,548
|
|
|
|
431,257
|
|
|
|
432,572
|
|
|
|
433,932
|
|
|
|
451,009
|
|
|
|
470,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During the quarter ended October 31, 2002 includes $1,792 of costs
related to Pirelli litigation. During the quarter ended January 31,
2003 includes $2,500 related to Nortel settlement costs.
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 31,
|
|
Apr. 30,
|
|
Jul. 31,
|
|
Oct. 31,
|
|
Jan. 31,
|
|
Apr. 30,
|
|
Jul. 31,
|
|
Oct. 31,
|
|
|
|
|
|
|
2002
|
|
2002
|
|
2002
|
|
2002
|
|
2003
|
|
2003
|
|
2003
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
86.3
|
%
|
|
|
84.4
|
%
|
|
|
82.0
|
%
|
|
|
80.3
|
%
|
|
|
86.9
|
%
|
|
|
86.2
|
%
|
|
|
86.6
|
%
|
|
|
80.5
|
%
|
|
Services
|
|
|
13.7
|
|
|
|
15.6
|
|
|
|
18.0
|
|
|
|
19.7
|
|
|
|
13.1
|
|
|
|
13.8
|
|
|
|
13.4
|
|
|
|
19.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
56.1
|
|
|
|
72.5
|
|
|
|
74.9
|
|
|
|
58.9
|
|
|
|
59.9
|
|
|
|
56.9
|
|
|
|
57.3
|
|
|
|
50.3
|
|
|
Services
|
|
|
17.5
|
|
|
|
28.0
|
|
|
|
27.0
|
|
|
|
24.8
|
|
|
|
20.8
|
|
|
|
20.3
|
|
|
|
18.6
|
|
|
|
20.1
|
|
|
Excess and obsolete inventory costs
|
|
|
12.6
|
|
|
|
256.5
|
|
|
|
82.3
|
|
|
|
2.6
|
|
|
|
(3.8
|
)
|
|
|
(2.0
|
)
|
|
|
(0.1
|
)
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
86.2
|
|
|
|
(357.0
|
)
|
|
|
184.2
|
|
|
|
86.3
|
|
|
|
76.9
|
|
|
|
75.2
|
|
|
|
75.8
|
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
13.8
|
|
|
|
(257.0
|
)
|
|
|
(84.2
|
)
|
|
|
13.7
|
|
|
|
23.1
|
|
|
|
24.8
|
|
|
|
24.2
|
|
|
|
31.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
39.9
|
|
|
|
68.4
|
|
|
|
107.8
|
|
|
|
99.1
|
|
|
|
76.3
|
|
|
|
71.0
|
|
|
|
70.0
|
|
|
|
64.8
|
|
|
Selling and marketing
|
|
|
23.2
|
|
|
|
34.3
|
|
|
|
61.6
|
|
|
|
51.7
|
|
|
|
37.7
|
|
|
|
34.9
|
|
|
|
35.8
|
|
|
|
37.4
|
|
|
General and administrative
|
|
|
8.4
|
|
|
|
15.3
|
|
|
|
21.6
|
|
|
|
24.0
|
|
|
|
20.9
|
|
|
|
11.0
|
|
|
|
11.6
|
|
|
|
11.0
|
|
|
|
Deferred stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
2.4
|
|
|
|
4.0
|
|
|
|
7.7
|
|
|
|
7.1
|
|
|
|
5.4
|
|
|
|
4.6
|
|
|
|
4.3
|
|
|
|
3.8
|
|
|
|
|
|
Selling and marketing
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
1.7
|
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
|
|
General and administrative
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
Amortization of intangible assets
|
|
|
1.1
|
|
|
|
2.1
|
|
|
|
4.7
|
|
|
|
4.8
|
|
|
|
5.0
|
|
|
|
4.6
|
|
|
|
6.6
|
|
|
|
9.1
|
|
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
1.8
|
|
|
|
Restructuring costs
|
|
|
4.2
|
|
|
|
139.4
|
|
|
|
37.1
|
|
|
|
127.1
|
|
|
|
|
|
|
|
3.7
|
|
|
|
22.7
|
|
|
|
18.3
|
|
|
|
Goodwill and intangible impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41.9
|
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
18.4
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
80.0
|
|
|
|
283.1
|
|
|
|
240.2
|
|
|
|
1,216.0
|
|
|
|
146.9
|
|
|
|
131.2
|
|
|
|
154.7
|
|
|
|
189.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(66.2
|
)
|
|
|
(540.1
|
)
|
|
|
(324.4
|
)
|
|
|
(1,202.3
|
)
|
|
|
(123.8
|
)
|
|
|
(106.4
|
)
|
|
|
(130.5
|
)
|
|
|
(158.0
|
)
|
Interest and other income, net
|
|
|
10.0
|
|
|
|
17.3
|
|
|
|
27.1
|
|
|
|
26.4
|
|
|
|
18.9
|
|
|
|
15.1
|
|
|
|
13.0
|
|
|
|
13.7
|
|
Interest expense
|
|
|
(6.5
|
)
|
|
|
(9.9
|
)
|
|
|
(21.2
|
)
|
|
|
(25.2
|
)
|
|
|
(17.3
|
)
|
|
|
(11.0
|
)
|
|
|
(11.9
|
)
|
|
|
(11.3
|
)
|
Loss on equity investment, net
|
|
|
(3.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(16.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.3
|
)
|
|
|
(29.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(66.0
|
)
|
|
|
(533.2
|
)
|
|
|
(318.5
|
)
|
|
|
(1,221.4
|
)
|
|
|
(151.5
|
)
|
|
|
(102.3
|
)
|
|
|
(129.4
|
)
|
|
|
(162.4
|
)
|
Provision (benefit) for income taxes
|
|
|
(22.4
|
)
|
|
|
170.0
|
|
|
|
1.2
|
|
|
|
(2.4
|
)
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(43.6
|
)%
|
|
|
(703.2
|
)%
|
|
|
(319.7
|
)%
|
|
|
(1,219.0
|
)%
|
|
|
(152.0
|
)%
|
|
|
(102.6
|
)%
|
|
|
(129.8
|
)%
|
|
|
(162.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk Factors
Investing in our securities involves a high degree of risk. In addition to
the other information contained in this annual report, including the reports we
incorporate by reference, you should consider the following factors before
investing in our securities.
Our business could continue to be adversely affected by unfavorable and uncertain conditions in the communications industry
The last three years have seen substantial changes in the communications
industry. Most of our customers and potential customers have confronted static
or declining revenue. Many have experienced significant financial distress, and
some have gone out of business. This has resulted in a significant change in
the structure of the equipment industry, with greater concentration of
purchasing power in a small number of large services providers, combined with a
substantial reduction in overall demand. Together these factors have adversely
affected our revenue and operating results. In addition, most of our customers
have become more conservative and uncertain about their future purchases which
has made managing our business difficult.
26
We expect the factors described above to continue to affect our business
for an indeterminate period, in several significant ways:
|
|
|
capital expenditures by many of our customers may be flat or reduced;
|
|
|
|
we will continue to have only limited ability to forecast the volume and product mix of our sales;
|
|
|
|
managing our expenditures will be difficult in light of the uncertainties surrounding our business;
|
|
|
|
increased competition resulting from reduced demand will put substantial downward pressures on the
pricing of our products, tending to reduce our profit margins;
|
|
|
|
increased competition will enable customers to insist on more favorable terms and conditions for
sales, including extended payment terms or other financing assistance, as a condition of procuring
their business; and
|
|
|
|
the bankruptcies or weakened financial condition of some of our customers may require us to write
off amounts due to us from prior sales.
|
The result of any one or a combination of these factors could lead to
further reduced revenue and increased operating losses.
We face intense competition that could hurt our sales and profitability
The market for networking solutions is extremely competitive. Competition
in this market is based on varying combinations of price, functionality,
manufacturing capability, installation, services, scalability and the ability
of the system solutions to meet customers immediate and future network
requirements. A small number of very large companies, including Alcatel, Cisco,
Fujitsu, Hitachi, Huawei, Lucent, Marconi, NEC, Nortel, Siemens, Ericsson, and
Tellabs have historically dominated the telecommunications equipment industry.
They all have greater financial, marketing, manufacturing and intellectual
property resources than CIENA. They also often have existing relationships with
our customers and potential customers. We also compete with a number of smaller
companies that provide significant competition.
Because we sell systems that compete directly with product offerings of
these companies, and in some cases displace or replace their equipment, we
represent a competitive threat. The decline in the market for communications
networking products has resulted in even greater competitive pressures. We
expect that the aggressive tactics we have confronted on the part of many of
these competitors will continue, and perhaps become more severe. These tactics
include:
|
|
|
intense price competition in sales of new equipment, resulting in lower profit margins;
|
|
|
|
discounting resulting from sales of used equipment or inventory that a competitor has
written down or written off;
|
|
|
|
early announcements of competing products and other marketing efforts;
|
|
|
|
one-stop shopping options;
|
|
|
|
customer financing assistance;
|
|
|
|
marketing and advertising assistance; and
|
|
|
|
intellectual property disputes.
|
Tactics such as those described above can be particularly effective in a
concentrated customer base like ours. Our customers are under increasing
competitive pressure to deliver their services at the lowest possible cost.
This pressure may result in the pricing of communications networking systems
becoming a more important factor in customer decisions. This may favor larger
competitors that can spread the effect of price discounts across a larger array
of products and services and across a larger customer base than ours. If we are
unable to offset any reductions in the average sales price for our products by
a reduction in the cost of our products, our gross profit margins will be
adversely affected. Our inability to compete successfully against our
competitors and maintain our gross profit margins would harm our business,
financial condition and results of operations.
27
New competitors continue to emerge to compete with our products. They
often base their products on the latest available technology. They may achieve commercial availability of their
products more quickly due to the narrower focus of their efforts. Our inability
to compete successfully against these companies would harm our business,
financial condition and results of operations.
The success of our strategy depends on our ability to increase our revenue substantially
We have deliberately chosen to continue to spend on research and
development, sales and marketing, and other operating expenses at levels that
will not permit us to return to profitability unless we can increase our
revenue substantially. In order to do so, we plan both to continue to maintain
and enhance our existing products and to expand and diversify our product
portfolio. In addition we believe we must continue to maintain a significant
sales presence in our principle markets and to spend on marketing our products
and services. We are implementing this strategy through a combination of
internal development, acquisitions of smaller companies, and strategic
alliances with other vendors. If we fail to execute this strategy effectively,
or it does not produce substantial revenue growth, we will be required to
modify the strategy, which would likely have an adverse effect on our financial
condition.
Our future success will depend on our ability to sell our products to our existing incumbent carrier customers and add additional incumbent carriers as new customers
Historically, a large percentage of our sales were made to emerging
carriers, many of which no longer exist or have experienced severe financial
difficulties and have reduced their equipment purchases. We expect that our
sales to emerging carriers will continue to be at a lower level than they were
at one time. Consequently, our future success will depend, to a large extent,
on our ability to increase our sales to large domestic and international
incumbent carriers.
We have limited experience in selling to incumbent carriers relative to
many of our larger competitors. Many of them have long-standing relationships
with incumbent carriers, which present additional challenges to the sales
process. The sales cycles for these larger customers is often substantially
longer than for sales to smaller customers; and they often require extensive
testing of products before deciding to purchase them. In addition, even after a
product has been selected for an incumbent carriers network and a contract has
been signed, we are typically unable to recognize revenue until final network
certification tests are completed satisfactorily, a process that is often
lengthy and difficult. Complying with these certification requirements may
involve unanticipated delays that could adversely affect our ability to sell to
larger carriers or the timing of recognition of revenue. If we do not succeed
in increasing our sales to our existing incumbent carrier customers and adding
additional incumbent carriers as customers, our business will suffer.
We may not be successful in selling our products through new channels or to government customers
We believe that, in order to succeed, we must enter new markets and build
a larger and more diverse customer base. Therefore, we are beginning to sell
some of our products to large enterprises and federal, state and local
governments. To succeed in these markets, we believe we must develop and manage
new sales channels through resellers, distributors and systems integrators for
sales of those of our products that are suitable for those markets. Since we
have only limited experience in developing and managing such channels, it is
uncertain to what extent we will be successful.
Sales to federal, state and local governments often require compliance
with complex procurement rules and regulations with which we have little
experience. We may be unable to compete for government opportunities if we
cannot comply with these rules and regulations.
Our failure either to develop and manage new sales channels or to sell to
government customers would adversely affect our ability to achieve our planned
levels of revenue, which would adversely affect our profitability.
28
Our strategy involves pursuing strategic acquisitions and investments that may not be successful
Our business strategy includes acquiring or making strategic investments
in other companies to expand our portfolio of products and services and to
acquire or accelerate the development of new or improved products. To
do so, we may use cash, issue equity that would dilute our current shareholders
ownership, incur debt or assume indebtedness. In addition, we may incur
significant amortization expenses related to intangible assets. In the fourth
quarter fiscal 2001 and fourth quarter fiscal 2002, we incurred a significant
write-off of goodwill associated with our previous acquisitions. Strategic
investments and acquisitions involve numerous risks, including:
|
|
|
potential large cash expenditures;
|
|
|
|
difficulties in integrating the operations, technologies and products of the acquired companies;
|
|
|
|
diversion of managements attention;
|
|
|
|
potential difficulties in completing projects of the acquired company;
|
|
|
|
the potential loss of key employees of the acquired company;
|
|
|
|
dependence on unfamiliar or relatively small supply partners; and
|
|
|
|
exposure to unanticipated liabilities.
|
In addition, acquisitions and strategic investments may involve risks of
entering markets in which we have little or no prior experience and competitors
have stronger market positions.
Product performance problems could limit our sales prospects
The development and production of new products with high technology
content often involves problems with software, components and manufacturing
methods. If significant reliability, quality or network monitoring problems
develop, including those due to defects in software or faulty components, a
number of negative effects on our business could result, including:
|
|
|
costs associated with fixing software or hardware defects;
|
|
|
|
high service and warranty expenses;
|
|
|
|
payment of liquidated damages for performance failures;
|
|
|
|
high inventory obsolescence expense;
|
|
|
|
high levels of product returns;
|
|
|
|
delays in collecting accounts receivable;
|
|
|
|
reduced orders from existing customers; and
|
|
|
|
declining interest from potential customers.
|
Although we maintain accruals for product warranties, actual costs could
exceed these amounts. From time to time, there will be interruptions or delays
in the activation of our products at a customers site. These interruptions or
delays may result from product performance problems or from issues with
installation and activation, some of which are outside our control. If we
experience significant interruptions or delays that we cannot promptly resolve,
confidence in our products could be undermined, which could cause us to lose
customers or otherwise harm our business.
29
Economic conditions require us to reduce the size of our business further
Since November 2001, we have taken several steps, including reductions in
force and dispositions of assets to reduce the size of our operations to better
match the reduced sales of our products and services. Weakness in the
telecommunications equipment market continues to affect our business.
Accordingly, during the next twelve months we believe that we will be required to reduce our costs further. This could
cause disruption in our business and require us to take accounting charges. If
we fail to execute effectively on a program of cost reductions, our
profitability could suffer.
Selling our products requires substantial investments of our resources that may not produce anticipated benefits
In order to sell our products to both potential and existing customers, we
must invest in financial, engineering, manufacturing and logistics support
resources, even though we are unsure of the volume, duration or timing of
customer purchases. Our customers are generally technically sophisticated and
demanding. Consequently, we may incur substantial expenses and devote resources
to potential relationships that never materialize or fulfill our expectations,
in which event our investment may largely be lost. For example, we often
provide equipment and services to our customers, free of charge, for the
purpose of performing laboratory testing. In the quarter ended October 31,
2003, inventory increased as a result of providing a large amount of test
equipment to a potential customer. If we are unsuccessful in winning this
contract, we may be required to take a charge for the write down or write off
of this inventory.
Our results can fluctuate unpredictably
Purchases by many of our potential and existing customers can be
unpredictable, sporadic and subject to unanticipated changes. Our results, in
turn, can fluctuate unpredictably. A decision to purchase our products requires
a significant investment and commitment of resources by our customers. As a
result, the sales cycles for many of our products are long, often as much as a
year or two between initial contact with a potential customer and the
recognition of revenue from sales to the customer. Further, purchases by our
existing customers tend to be large and sporadic, depending upon their need to
build a customer base, their plans for expanding their networks, the
availability of financing, and the effects of regulatory and business
conditions in the countries in which they operate. Current economic and market
conditions have made it even more difficult to make reliable estimates of
future revenue.
Fluctuations in our revenue can lead to even greater fluctuations in our
operating profits. Our budgeted expense levels depend in part on our
expectations of long-term future revenue. Any substantial adjustment to
expenses to account for lower levels of revenue is difficult and takes time.
Consequently, if our revenue does decline, our levels of inventory, operating
expenses and general overhead would be high relative to our revenue, resulting
in additional operating losses.
Other factors can also contribute to fluctuations in our revenue and
operating results, including:
|
|
|
variations and the mix between higher and lower margin products and services;
|
|
|
|
fluctuations in demand for our products;
|
|
|
|
changes in our pricing policies or the pricing policies of our competitors;
|
|
|
|
the timing and size of orders from customers;
|
|
|
|
changes in customers requirements, including changes or cancellations to orders from customers;
|
|
|
|
the introduction of new products by us or our competitors;
|
|
|
|
changes in the price or availability of components for our products;
|
|
|
|
readiness of customer sites for installation;
|
|
|
|
satisfaction of contractual customer acceptance criteria and related revenue recognition issues;
|
|
|
|
manufacturing and shipment delays and deferrals;
|
|
|
|
increased service, installation, warranty or repair costs;
|
30
|
|
|
the timing and amount of employer payroll tax to be paid on employee gains on stock options
exercised; and
|
|
|
|
changes in general economic conditions as well as those specific to the telecommunications industry.
|
We may not be successful in enhancing and upgrading our products
The market for communications networking solutions is characterized by
rapid technological change, frequent introductions of new products, and
recurring changes in customer requirements. To succeed in this market, we must
continue to develop new products and new features for existing products. Doing
so is difficult and costly, and there is no assurance that we will continue to
be successful. In addition, we must be able to identify and gain access to
promising new technologies. Failure to keep pace with technological advances
would impair the competitiveness of our products and sooner or later do serious
harm to our business.
Our products are based on complex technology that could result in
unanticipated delays in developing, improving, manufacturing or deploying them.
Modifying our products to enable customers to integrate them into a new type of
network architecture entails similar development risks.
Certain enhancements to our products are in the development phase and are
not yet ready for commercial manufacturing or deployment. The maturing process
from laboratory prototype to customer trials, and subsequently to general
availability, involves a number of steps, including:
|
|
|
completion of product development;
|
|
|
|
the qualification and multiple sourcing of critical components;
|
|
|
|
validation of manufacturing methods and processes;
|
|
|
|
extensive quality assurance and reliability testing, and staffing of testing infrastructure;
|
|
|
|
validation of software; and
|
|
|
|
establishment of systems integration and systems test validation requirements.
|
Each of these steps, in turn, presents serious risks of failure, rework or
delay, any one of which could decrease the speed and scope of product
introduction and marketplace acceptance of the product. Specialized application
specific integrated circuits (ASICs) and intensive software testing and
validation are key to the timely introduction of enhancements to several of our
products, and schedule delays are common in the final validation phase, as well
as in the manufacture of specialized ASICs. In addition, unexpected
intellectual property disputes, failure of critical design elements, and a host
of other execution risks may delay or even prevent the introduction of these
products. If we do not develop and successfully introduce these products in a
timely manner, our business, financial condition and results of operations
would be harmed.
We depend on a limited number of suppliers, and for some items we do not have a substitute supplier
We depend on a limited number of suppliers for components of our products,
as well as for equipment used to manufacture and test our products. Our
products include several high-performance components for which reliable,
high-volume suppliers are particularly limited. Furthermore, some key optical
and electronic components we use in our products are currently available only
from sole or limited sources, and in some cases, that source also is a
competitor. Any delay in component availability for any of our products could
result in delays in deployment of these products and in our ability to
recognize revenue. These delays could also harm our customer relationships and
our results of operations.
Furthermore, the market for optical components has recently been
consolidated resulting in reduced competition, which could lead to higher
prices. In addition, the loss of a source of supply of key components could
require us to re-engineer products that use those components, which would
increase our costs.
31
On occasion, we have experienced delays in receipt of components and have
received components that do not perform according to their specifications. Any
future difficulty in obtaining sufficient and timely delivery of components could result in delays or reductions in product shipments,
which, in turn, could harm our business.
Any delays in component availability for any of our products or test
equipment could result in delays in deployment of these products and in our
ability to recognize revenue from them. These delays could also harm our
customer relationships and our results of operations.
We rely on contract manufacturers for our products
We rely on a small number of contract manufacturers to perform the
majority of the manufacturing operations for our products. The qualification of
these manufacturers is an expensive and time-consuming process, and these
contract manufacturers build modules for other companies, including our
competitors. In addition, we do not have contracts in place with some of these
manufacturers. We may not be able to effectively manage our relationships with
our manufacturers and we cannot be certain that they will be able to fill our
orders in a timely manner. If we underestimate our future product requirements,
the contract manufacturers may not have enough product to meet our customer
requirements, and this could result in delays in the shipment of our products
and our ability to recognize revenue. If we overestimate product requirements,
we may have to write off excess inventory.
We rely on service delivery partners
We rely on a number of service delivery partners, both domestic and
international, to complement CIENAs global service and support resources. The
certification of these partners incurs costs and is time-consuming, and these
partners service products for other companies, including our competitors. We
may not be able to effectively manage our relationships with our partners and
we cannot be certain that they will be able to deliver our services in the
manner or time required. If our service partners are unsuccessful in
delivering services,
|
|
|
We may compromise the relevant services revenue; and
|
|
|
|
We may suffer delays in recognizing product revenues in cases were
revenue recognition is dependent upon product installation, testing
and acceptance.
|
Our ability to compete could be harmed if we are unable to protect and enforce our intellectual property rights or if we infringe on intellectual property rights of others
We share our proprietary information and intellectual property, including
our source code, with other parties as necessary to meet the needs of our
business. We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We enter into non-disclosure and proprietary rights agreements with our
employees and consultants, license agreements with our corporate partners, and
we control access to and distribution of our products, documentation and other
proprietary information. Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. This is likely to become an increasing issue as we
expand our operations and sales into countries that provide a lower level of
protection for intellectual property.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology. If competitors are able to use our technology, our ability to
compete effectively could be harmed. We have filed a patent infringement
lawsuit to enforce our intellectual property right, and may become involved
with additional disputes in the future. Such lawsuits can be costly and may
significantly divert the time and attention of our personnel.
We have been subject to several claims of patent infringement, which in
some cases have required us to pay the patent holders substantial sums or enter
into license agreements requiring ongoing royalty payments. The frequency of
assertions of patent infringement in the field of telecommunications networking
solutions is increasing as patent holders seek alternative sources of revenue.
There is a possibility that we may again find ourselves required to take patent
licenses or to redesign or stop selling products that allegedly infringe
patents belonging to others. If we are sued for infringement and are
unsuccessful in defending the suit, we could be subject to significant damages,
and our business and customer relationships could be adversely affected.
32
We face risks associated with our international operations
We market, sell and service our products globally. We have established
offices around the world, including in North America, Europe, Latin America and
the Asia Pacific region. We will continue to expand our international
operations and enter new international markets. This expansion will require
significant management attention and financial resources to develop
successfully direct and indirect international sales and support channels. In
some countries, our success will depend in part on our ability to form
relationships with local partners. We cannot be sure that we will be able to
identify appropriate partners or reach mutually satisfactory arrangements with
them for sales of our products. There is a risk that we may sometimes choose
the wrong partner. For these reasons, we may not be able to maintain or
increase international market demand for our products.
International operations are subject to inherent risks, and our future
results could be adversely affected by a variety of uncontrollable and changing
factors. These include:
|
|
|
greater difficulty in collecting accounts receivable and longer collection periods;
|
|
|
|
difficulties and costs of staffing and managing foreign operations;
|
|
|
|
the impact of recessions in economies outside the United States;
|
|
|
|
unexpected changes in regulatory requirements;
|
|
|
|
certification requirements;
|
|
|
|
reduced protection for intellectual property rights in some countries;
|
|
|
|
potentially adverse tax consequences;
|
|
|
|
political and economic instability;
|
|
|
|
trade protection measures and other regulatory requirements;
|
|
|
|
service provider and government spending patterns; and
|
|
|
|
natural disasters and epidemics.
|
Such factors could have a material adverse impact on our operating results
and financial condition.
We face risks in reselling the products of other companies
We have recently entered into agreements that permit us to distribute the
products of other companies and may enter into other agreements in the future.
To the extent we succeed in reselling the products of these companies, we may
be required by customers to assume warranty and service obligations. While
these suppliers have agreed to support us with respect to those obligations,
they are relatively small companies with limited financial resources. If they
should be unable, for any reason, to provide the required support, we may have
to expend our own resources on doing so. This risk is amplified by the fact
that the equipment has been designed and manufactured by others, and is thus
subject to warranty claims whose magnitude we are currently unable to evaluate
fully.
If we are unable to retain and attract qualified personnel, we may be unable to effectively manage our business.
If we are unable to retain and motivate our existing employees and attract
qualified personnel to fill key positions, we may be unable to effectively
develop our existing products, make timely product introductions and increase
sales. Since we generally do not have employment contracts with our employees,
we must rely upon providing competitive compensation packages and a dynamic
work environment to retain and motivate employees. In response to the decline
in our revenue and weakness in the telecommunications equipment market, we have
not increased salaries for or paid bonuses to most of our employees since the
end of fiscal 2001. Since our compensation packages include equity-based
incentives, pressure on our stock price could affect our ability to continue to
offer competitive compensation packages to our employees. In addition to these
compensation issues, we must continue to motivate employees to execute our
strategies and achieve our goals, which may be difficult due to morale
challenges posed by the workforce reductions and uncertainty in our industry and the economy in general.
33
If we lose members of our management team or other key personnel, it may
be difficult to replace them. Even in the current economic downturn,
competition for highly skilled technical and other personnel can be intense. As
a result, we may not be successful in identifying, recruiting and hiring
qualified engineers and other key personnel.
We are exposed to the credit risk of our customers
Industry and economic conditions have weakened the financial position of
some of our customers. To sell to some of these customers, we may be required
to take risks of uncollectible accounts. 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, if large, could have a material adverse effect on
our operating results and financial condition.
Our stock price is volatile
Our common stock price has experienced substantial volatility in the past,
and is likely to remain volatile in the future. Volatility can arise as a
result of divergence between our actual or anticipated financial results and
published expectations of analysts, and announcements that we, our competitors,
or our customers may make.
Divergence between our actual results and our anticipated results, analyst
estimates and public announcements by us, our competitors, or by customers will
occur from time to time in the future, with resulting stock price volatility,
irrespective of our overall year-to-year performance or long-term prospects. As
long as we continue to depend on a limited customer base, and particularly when
a substantial majority of their purchases consist of newly introduced products,
there is substantial chance that our quarterly results will vary widely.
Forward-looking statements
Some of the statements contained, or incorporated by reference, in this
annual report discuss future expectations, contain projections of results of
operations or financial condition or state other forward-looking information.
Those statements are subject to known and unknown risks, uncertainties and
other factors that could cause the actual results to differ materially from
those contemplated by the statements. The forward-looking information is
based on various factors and was derived using numerous assumptions. In some
cases, you can identify these so-called 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 those statements
only reflect our predictions. Actual events or results may differ
substantially. 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 above.
|
|
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
The following discussion about the Companys market risk disclosures
involves forward-looking statements. Actual results could differ materially
from those projected in the forward-looking statements. The Company is exposed
to market risk related to changes in interest rates and foreign currency
exchange rates. The Company does not use derivative financial instruments for
speculative or trading purposes.
Interest Rate Sensitivity.
The Company maintains a short-term and
long-term investment portfolio. These available-for-sale securities are subject
to interest rate risk and will fall in value if market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10
percent from levels at October 31, 2003, the fair value of the portfolio would
decline by approximately $112.2 million.
Foreign Currency Exchange Risk.
As a global concern, the Company faces
exposure to adverse movements in foreign currency exchange rates. These
exposures may change over time as business practices evolve and if our exposure
increases, adverse movement in foreign currency exchange rates could have a
material adverse impact on the Companys financial results. The Companys
primary exposures are related to non-dollar denominated operating expenses in
Canada, Latin America, Europe and Asia where the Company sells primarily in
U.S. dollars. The Company is prepared to hedge against fluctuations in foreign
currency if this exposure becomes material. As of October 31, 2003, the assets
and liabilities of the Company related to non-dollar denominated currencies
were not material. Therefore we do not expect an increase or decrease of 10% in the foreign
exchange rate would have a material impact on the Companys financial position.
34
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
The following is an index to the consolidated financial statements and supplementary data:
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
Report
of Independent Auditors
|
|
|
36
|
|
Consolidated Balance Sheets
|
|
|
37
|
|
Consolidated Statements of Operations
|
|
|
38
|
|
Consolidated Statements of Changes in Stockholders Equity
|
|
|
39
|
|
Consolidated Statements of Cash Flows
|
|
|
40
|
|
Notes to Consolidated Financial Statements
|
|
|
41
|
|
35
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and
Shareholders of CIENA Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders equity and cash flows present
fairly, in all material respects, the financial position of CIENA Corporation
and its subsidiaries at October 31, 2003 and October 31, 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended October 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Companys management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed with Note 1 to the financial statements, the Company ceased
amortizing certain goodwill and intangibles as a result of the adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective on first day of its 2002 fiscal year.
PricewaterhouseCoopers LLP
McLean, VA
December 9, 2003
36
CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
377,189
|
|
|
$
|
309,665
|
|
|
Short-term investments
|
|
|
1,130,414
|
|
|
|
796,809
|
|
|
Accounts receivable, net
|
|
|
28,680
|
|
|
|
43,600
|
|
|
Inventories, net
|
|
|
47,023
|
|
|
|
44,995
|
|
|
Prepaid expenses and other
|
|
|
54,351
|
|
|
|
34,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,637,657
|
|
|
|
1,229,403
|
|
Long-term investments
|
|
|
570,861
|
|
|
|
519,744
|
|
Equipment, furniture and fixtures, net
|
|
|
196,951
|
|
|
|
114,930
|
|
Goodwill
|
|
|
212,500
|
|
|
|
336,039
|
|
Other intangible assets, net
|
|
|
62,457
|
|
|
|
108,408
|
|
Other long-term assets
|
|
|
70,596
|
|
|
|
69,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,751,022
|
|
|
$
|
2,378,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
39,841
|
|
|
$
|
44,402
|
|
|
Accrued liabilities
|
|
|
132,588
|
|
|
|
98,926
|
|
|
Restructuring liabilities
|
|
|
27,423
|
|
|
|
14,378
|
|
|
Unfavorable lease commitments
|
|
|
7,630
|
|
|
|
9,380
|
|
|
Income taxes payable
|
|
|
|
|
|
|
4,640
|
|
|
Deferred revenue
|
|
|
15,388
|
|
|
|
14,473
|
|
|
Other current obligations
|
|
|
948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
223,818
|
|
|
|
186,199
|
|
|
Long-term deferred revenue
|
|
|
15,444
|
|
|
|
14,547
|
|
|
Long-term restructuring liabilities
|
|
|
65,742
|
|
|
|
52,164
|
|
|
Long-term unfavorable lease commitments
|
|
|
70,124
|
|
|
|
61,312
|
|
|
Other long-term obligations
|
|
|
5,009
|
|
|
|
2,698
|
|
|
Convertible notes payable
|
|
|
843,616
|
|
|
|
730,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,223,753
|
|
|
|
1,047,348
|
|
|
|
|
|
|
|
|
|
|
|
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; 980,000,000 shares authorized;
432,842,481 and 473,214,856 shares issued and outstanding
|
|
|
4,328
|
|
|
|
4,732
|
|
|
Additional paid-in capital
|
|
|
4,683,865
|
|
|
|
4,861,182
|
|
|
Deferred stock compensation
|
|
|
(24,983
|
)
|
|
|
(9,664
|
)
|
|
Notes receivable from stockholders
|
|
|
(3,866
|
)
|
|
|
(448
|
)
|
|
Accumulated other comprehensive income
|
|
|
8,840
|
|
|
|
2,447
|
|
|
Accumulated deficit
|
|
|
(3,140,915
|
)
|
|
|
(3,527,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,527,269
|
|
|
|
1,330,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
2,751,022
|
|
|
$
|
2,378,165
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
37
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,518,833
|
|
|
$
|
304,155
|
|
|
$
|
240,772
|
|
|
Services
|
|
|
84,396
|
|
|
|
57,000
|
|
|
|
42,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
1,603,229
|
|
|
|
361,155
|
|
|
|
283,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
720,874
|
|
|
|
228,074
|
|
|
|
158,898
|
|
|
Services
|
|
|
115,264
|
|
|
|
81,485
|
|
|
|
56,489
|
|
|
Excess and obsolete inventory costs (benefit)
|
|
|
68,411
|
|
|
|
286,475
|
|
|
|
(5,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
904,549
|
|
|
|
596,034
|
|
|
|
210,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
698,680
|
|
|
|
(234,879
|
)
|
|
|
73,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
235,831
|
|
|
|
239,619
|
|
|
|
199,699
|
|
|
|
Selling and marketing
|
|
|
146,949
|
|
|
|
130,276
|
|
|
|
103,193
|
|
|
|
General and administrative
|
|
|
57,865
|
|
|
|
52,612
|
|
|
|
38,478
|
|
|
|
Deferred stock compensation costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
17,783
|
|
|
|
15,672
|
|
|
|
12,824
|
|
|
|
|
Selling and marketing
|
|
|
8,378
|
|
|
|
3,560
|
|
|
|
2,728
|
|
|
|
|
General and administrative
|
|
|
15,206
|
|
|
|
1,092
|
|
|
|
1,225
|
|
|
|
Amortization of goodwill
|
|
|
177,786
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
4,413
|
|
|
|
8,972
|
|
|
|
17,870
|
|
|
|
In-process research and development
|
|
|
45,900
|
|
|
|
|
|
|
|
2,800
|
|
|
|
Restructuring costs
|
|
|
15,439
|
|
|
|
225,429
|
|
|
|
31,155
|
|
|
|
Goodwill and intangible impairment
|
|
|
1,719,426
|
|
|
|
557,286
|
|
|
|
29,596
|
|
|
|
Provision for doubtful accounts
|
|
|
(6,579
|
)
|
|
|
14,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,438,397
|
|
|
|
1,249,331
|
|
|
|
439,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,739,717
|
)
|
|
|
(1,484,210
|
)
|
|
|
(366,523
|
)
|
Interest and other income (expense), net
|
|
|
63,579
|
|
|
|
61,145
|
|
|
|
42,959
|
|
Interest expense
|
|
|
(30,591
|
)
|
|
|
(45,339
|
)
|
|
|
(36,331
|
)
|
Loss on equity investments, net
|
|
|
|
|
|
|
(15,677
|
)
|
|
|
(4,760
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(2,683
|
)
|
|
|
(20,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,706,729
|
)
|
|
|
(1,486,764
|
)
|
|
|
(385,261
|
)
|
Provision for income taxes
|
|
|
87,333
|
|
|
|
110,735
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
and dilutive potential common share
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common and dilutive
potential common shares outstanding
|
|
|
311,815
|
|
|
|
365,202
|
|
|
|
446,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial
statements.
38
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Deferred
|
|
Notes
|
|
Other
|
|
Retained
|
|
Stockholders'
|
|
|
|
|
Common Stock
|
|
Paid-in-
|
|
Stock
|
|
Receivable From
|
|
Comprehensive
|
|
Earnings
|
|
Equity
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Stockholders
|
|
Income
|
|
(Deficit)
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2000
|
|
|
286,530,631
|
|
|
$
|
2,865
|
|
|
$
|
541,030
|
|
|
$
|
16,227
|
|
|
$
|
(30
|
)
|
|
$
|
(903
|
)
|
|
$
|
250,646
|
|
|
$
|
809,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,794,062
|
)
|
|
|
(1,794,062
|
)
|
Changes in unrealized gains on
investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,804
|
|
|
|
|
|
|
|
5,804
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,788,317
|
)
|
Exercise of stock options
|
|
|
4,373,093
|
|
|
|
44
|
|
|
|
35,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,387
|
|
Unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,456
|
)
|
Deferred stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,367
|
|
Forfeiture of unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
(3,489
|
)
|
|
|
3,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net
of issuance costs
|
|
|
37,118,540
|
|
|
|
371
|
|
|
|
3,060,396
|
|
|
|
|
|
|
|
(7,785
|
)
|
|
|
|
|
|
|
|
|
|
|
3,052,982
|
|
Tax benefit from the exercise of
stock options
|
|
|
|
|
|
|
|
|
|
|
71,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,605
|
|
Repayment of receivables from
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,579
|
|
|
|
|
|
|
|
|
|
|
|
4,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2001
|
|
|
328,022,264
|
|
|
$
|
3,280
|
|
|
$
|
3,704,885
|
|
|
$
|
(37,373
|
)
|
|
$
|
(3,236
|
)
|
|
$
|
4,842
|
|
|
$
|
(1,543,416
|
)
|
|
$
|
2,128,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,597,499
|
)
|
|
|
(1,597,499
|
)
|
Changes in unrealized gains on
investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,731
|
|
|
|
|
|
|
|
3,731
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,593,501
|
)
|
Exercise of stock options
|
|
|
3,699,493
|
|
|
|
37
|
|
|
|
15,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,140
|
|
Unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,826
|
)
|
Deferred stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,216
|
|
Issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of issuance costs
|
|
|
101,120,724
|
|
|
|
1,011
|
|
|
|
963,877
|
|
|
|
|
|
|
|
(5,673
|
)
|
|
|
|
|
|
|
|
|
|
|
959,215
|
|
Repayment of receivables from
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,043
|
|
|
|
|
|
|
|
|
|
|
|
5,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2002
|
|
|
432,842,481
|
|
|
$
|
4,328
|
|
|
$
|
4,683,865
|
|
|
$
|
(24,983
|
)
|
|
$
|
(3,866
|
)
|
|
$
|
8,840
|
|
|
$
|
(3,140,915
|
)
|
|
$
|
1,527,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(386,517
|
)
|
|
|
(386,517
|
)
|
Changes in unrealized gains on
Investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,743
|
)
|
|
|
|
|
|
|
(6,743
|
)
|
|
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(392,910
|
)
|
Exercise of stock options
|
|
|
4,608,143
|
|
|
|
46
|
|
|
|
13,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,798
|
|
Unearned stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,385
|
)
|
Deferred stock compensation costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,093
|
|
Forfeiture of unearned stock
Compensation
|
|
|
|
|
|
|
|
|
|
|
(5,611
|
)
|
|
|
5,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock, net
of issuance costs
|
|
|
35,764,232
|
|
|
|
358
|
|
|
|
169,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,534
|
|
Repayment of receivables from
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2003
|
|
|
473,214,856
|
|
|
$
|
4,732
|
|
|
$
|
4,861,182
|
|
|
$
|
(9,664
|
)
|
|
$
|
(448
|
)
|
|
$
|
2,447
|
|
|
$
|
(3,527,432
|
)
|
|
$
|
1,330,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
39
CIENA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
20,606
|
|
|
|
Tax benefit related to exercise of stock options and warrants
|
|
|
71,605
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash impairment from equity transactions
|
|
|
|
|
|
|
13,823
|
|
|
|
4,760
|
|
|
|
Non-cash portion of restructuring charges and related asset write-downs
|
|
|
|
|
|
|
113,596
|
|
|
|
37,828
|
|
|
|
Effect of accumulated translation adjustment
|
|
|
(59
|
)
|
|
|
267
|
|
|
|
350
|
|
|
|
Accretion of convertible notes payable
|
|
|
6,183
|
|
|
|
12,693
|
|
|
|
6,432
|
|
|
|
In-process research and development
|
|
|
45,900
|
|
|
|
|
|
|
|
2,800
|
|
|
|
Depreciation
|
|
|
100,882
|
|
|
|
122,048
|
|
|
|
75,834
|
|
|
|
Amortization of goodwill, goodwill impairment, other intangibles,
deferred stock compensation and debt issuance costs
|
|
|
1,948,740
|
|
|
|
589,610
|
|
|
|
70,554
|
|
|
|
Provision for doubtful accounts
|
|
|
(6,579
|
)
|
|
|
14,813
|
|
|
|
|
|
|
|
Provision for inventory excess and obsolescence
|
|
|
68,411
|
|
|
|
250,457
|
|
|
|
(5,296
|
)
|
|
|
Provision for warranty and other contractual obligations
|
|
|
33,073
|
|
|
|
13,271
|
|
|
|
9,301
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(139,534
|
)
|
|
|
358,493
|
|
|
|
(14,187
|
)
|
|
|
|
Inventories
|
|
|
(177,482
|
)
|
|
|
(27,807
|
)
|
|
|
9,216
|
|
|
|
|
Deferred income tax asset
|
|
|
(6,631
|
)
|
|
|
186,861
|
|
|
|
|
|
|
|
|
Prepaid expenses and other
|
|
|
(35,640
|
)
|
|
|
(12,625
|
)
|
|
|
3,977
|
|
|
|
|
Accounts payable and accruals
|
|
|
8,648
|
|
|
|
6,275
|
|
|
|
(78,753
|
)
|
|
|
|
Income taxes payable
|
|
|
(834
|
)
|
|
|
(7,170
|
)
|
|
|
4,626
|
|
|
|
|
Deferred revenue and other obligations
|
|
|
40,522
|
|
|
|
(65,079
|
)
|
|
|
(2,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
163,173
|
|
|
|
(27,973
|
)
|
|
|
(241,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to equipment, furniture and fixtures
|
|
|
(238,544
|
)
|
|
|
(66,330
|
)
|
|
|
(29,544
|
)
|
|
Purchase of available for sale securities
|
|
|
(1,714,077
|
)
|
|
|
(1,521,479
|
)
|
|
|
(1,049,993
|
)
|
|
Maturities of available for sale securities
|
|
|
420,885
|
|
|
|
1,547,516
|
|
|
|
1,414,808
|
|
|
Marketable
securities (discount) premium amortization
|
|
|
|
|
|
|
2,469
|
|
|
|
11,948
|
|
|
Acquisition of business, inclusive of intellectual property and other
intangibles, net of cash acquired
|
|
|
54,101
|
|
|
|
286,899
|
|
|
|
(29,668
|
)
|
|
Minority equity investments
|
|
|
(13,005
|
)
|
|
|
(10,000
|
)
|
|
|
(15,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,490,640
|
)
|
|
|
239,075
|
|
|
|
302,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from (repayment of) other obligations
|
|
|
1,265
|
|
|
|
(1,015
|
)
|
|
|
(4,370
|
)
|
|
Proceeds from (repayment of) convertible notes payable
|
|
|
669,300
|
|
|
|
(250,971
|
)
|
|
|
(140,261
|
)
|
|
Proceeds from issuance of common stock and warrants
|
|
|
907,026
|
|
|
|
15,140
|
|
|
|
13,798
|
|
|
Repayment of notes receivable from stockholders
|
|
|
4,579
|
|
|
|
5,043
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,582,170
|
|
|
|
(231,803
|
)
|
|
|
(128,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
254,703
|
|
|
|
(20,701
|
)
|
|
|
(67,524
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
143,187
|
|
|
|
397,890
|
|
|
|
377,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
397,890
|
|
|
$
|
377,189
|
|
|
$
|
309,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
16,051
|
|
|
$
|
36,776
|
|
|
$
|
30,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
1,007
|
|
|
$
|
485
|
|
|
|
1,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for notes receivable from stockholders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
40
CIENA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
Description of Business
CIENA is a leading global provider of innovative network solutions to
service providers and enterprises worldwide. Our customers include long
distance carriers, local exchange carriers, cable operators, Internet service
providers, wireless and wholesale carriers, resellers, governments, large
businesses and non-profit institutions.
CIENA was incorporated in Delaware in November 1992, and completed its
initial public offering on February 7, 1997. CIENAs principal executive
offices are located at 1201 Winterson Road, Linthicum, Maryland 21090.
Principles of Consolidation
CIENA has 25 wholly owned U.S. and international subsidiaries, which have
been consolidated in the accompanying financial statements. On August 29, 2003,
CIENA acquired all of the outstanding capital stock of Akara Corporation
(Akara), a Delaware company based in Ottawa, Ontario. On June 16, 2003, CIENA
acquired by merger WaveSmith Networks, Inc. (WaveSmith), a Delaware company
based in Acton, Massachusetts. On June 21, 2002, CIENA acquired by merger ONI
Systems Corp. (ONI), a Delaware Company, listed on NASDAQ, which was
headquartered in San Jose, California. On March 29, 2001, CIENA acquired all of
the outstanding capital stock Cyras Systems, Inc. (Cyras), a Delaware company
based in Fremont, California. The Akara, WaveSmith, ONI and Cyras transactions
were all accomplished as tax-free reorganizations, all of which were recorded
using the purchase accounting method.
The accompanying consolidated financial statements include the accounts of
CIENA and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company has a 52 or 53 week fiscal year, which ends on the Saturday
nearest to the last day of October in each year (November 1, 2003, November 2,
2002, and November 3, 2001). For purposes of financial statement presentation,
each fiscal year is described as having ended on October 31. Fiscal 2001 was
comprised of 53 weeks. Fiscal 2002 and 2003 were comprised of 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses, together with amounts disclosed in the
related notes to the financial statements. Actual results could differ from the
recorded estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
expected original maturities of three months or less to be cash equivalents.
Investments
CIENAs short-term and long-term investments are classified as
available-for-sale and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in accumulated other comprehensive income.
Realized gains or losses and declines in value determined to be other than
temporary, if any, on available-for-sale securities will be reported in other
income or expense as incurred.
CIENA also has certain other minority equity investments in non-publicly
traded companies. These investments are generally carried at cost as CIENA owns
less than 20% of the voting equity and does not have the ability to exercise
significant influence over these companies. As of October 31, 2002 and October
31, 2003, $16.1 million and
41
$21.3 million of these investments are included in other long-term assets,
respectively. These investments are inherently high risk as the market for
technologies or product manufactured by these companies are usually early stage
at the time of the investment by CIENA and such markets may never be
significant. CIENA could lose its entire investment in some or all of these
companies. CIENA monitors these investments for impairment and makes
appropriate reductions in carrying values when necessary. During fiscal 2003
and 2002, CIENA recorded a charge of $4.8 million and $16.6 million,
respectively, from a decline in the fair values of certain equity investments
that were determined to be other than temporary. No write-downs were recorded
during fiscal 2001.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out basis. The Company records a provision
for excess and obsolete inventory whenever such 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
2-5 years for equipment, furniture and fixtures and 2-10 years for leasehold
improvements.
Internal use software and web site development costs are capitalized in
accordance with Statement of Position (SOP) No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use, and Emerging
Issues Task Force (EITF) Issue No. 00-02, Accounting for Web Site
Development Costs. Qualifying costs incurred during the application
development stage, which consist primarily of outside services and purchased
software license costs, are capitalized and amortized over the estimated useful
life of the asset.
Goodwill and Purchased Intangible Assets
The Company has recorded goodwill and purchased intangible assets as a
result of several acquisitions. See Note 2. Purchased intangible assets are
carried at cost less accumulated amortization. Amortization is computed using
the straight-line method over the economic lives of the respective assets,
generally three to seven years. It is the Companys policy to assess
periodically the carrying amount of its purchased intangible assets to
determine if there has been an impairment to their carrying value. Impairments
of other intangibles assets are determined in accordance with Statement
Financial Accounting Standards No. 144 Accounting for the Impairment or
disposal of Long-Lived Assets (SFAS 144). This statement is effective for
fiscal 2003 and supersedes Statement of Financial Accounting Standard No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of (SFAS 121).
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 Business Combinations (SFAS 141) and
Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets (SFAS 142). SFAS 141 addresses financial accounting and
reporting for business combinations. This statement requires the purchase
method of accounting to be used for all business combinations, and prohibits
the pooling-of-interests method of accounting. It is effective for all business
combinations initiated after June 30, 2001 and supersedes APB Opinion No. 16,
Business Combinations as well as Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 38, Accounting for
Preacquisition Contingencies of Purchased Enterprises.
SFAS 142 addresses how intangible assets acquired individually or with a
group of other assets should be accounted for in financial statements upon
their acquisition. This statement requires goodwill amortization to cease and
for goodwill to be periodically reviewed for impairment for fiscal years
beginning after October 31, 2001. SFAS 142 supersedes APB Opinion No. 17,
Intangible Assets. The Company adopted the provisions of this standard for
its first quarter of fiscal 2002.
42
The following table presents the impact of SFAS 142 on net loss and net
loss per share had SFAS 142 been in effect for fiscal 2001, 2002 and 2003 (in
thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of goodwill
|
|
|
177,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net loss
|
|
$
|
(1,616,276
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares-basic
and diluted
|
|
|
311,815
|
|
|
|
365,202
|
|
|
|
446,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted basic and diluted EPS
|
|
$
|
(5.18
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported basic and diluted EPS
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations
Substantially all of CIENAs cash and cash equivalents, short-term and
long-term investments, are custodied at three major U.S. financial
institutions. The majority of CIENAs cash equivalents consist of money market
funds and overnight repurchase agreements. Deposits held with banks may exceed
the amount of insurance provided on such deposits. Generally these deposits may
be redeemed upon demand and, therefore, bear minimal risk.
Historically, CIENA has relied on a limited number of customers for a
substantial portion of the Companys revenue. During fiscal 2003 Qwest and AT&T
each accounted for at least 10% of CIENAs revenue and combined accounted for
24.9%. During fiscal 2002, Sprint and AT&T each accounted for at least 10% of
CIENAs revenue and combined accounted for 36.8%. During fiscal 2001, Sprint
and Qwest Communications each accounted for at least 10% of CIENAs revenue
and, combined, accounted for 50.5%. CIENA expects that a significant portion of
the Companys future revenue will continue to be generated by a limited number
of customers. The loss of any one of these customers or any substantial
reduction in orders by any one of these customers could materially adversely
affect CIENAs financial condition or operating results.
Additionally, CIENAs access to certain raw materials is dependent upon
single and sole source suppliers. The inability of any supplier to fulfill
supply requirements of CIENA could affect future results. CIENA relies on a
small number of contract manufacturers to perform the majority of the
manufacturing operations for its products. If CIENA cannot effectively manage
these manufacturers and forecast future demand, or of they fail to deliver
products or components on time, CIENAs business may suffer.
Revenue Recognition
CIENA recognizes product revenue in accordance with the terms of the sales
contract and where collection is reasonably assured. For transactions where
CIENA has yet to obtain customer acceptance, revenue is not recognized until
the terms of acceptance are satisfied. Revenue for installation services is
recognized as the services are performed unless the terms of the supply
contract combine product acceptance with installation, in which case, revenue
from installation services are recognized when the terms of acceptance are
satisfied and installation is completed. Amounts received in excess of revenue
recognized are included as deferred revenue in the accompanying balance sheet.
For transactions involving the sale of software, revenue is recognized in
accordance with Statement of Position No. 97-2 (SOP 97-2), Software Revenue
Recognition, including deferral of revenue recognition in instances where
vendor specific objective evidence for undelivered elements is not
determinable. For distributor sales where risks of ownership have not
transferred, CIENA recognizes revenue when the product is shipped through to
the end user.
Revenue-Related Accruals
The Company provides for the estimated costs to fulfill customer warranty
and other contractual obligations upon the recognition of the related revenue.
Such reserves are determined based upon actual warranty cost experience,
estimates of component failure rates, and managements industry experience. The
Companys sales contracts generally do not permit the right of return of
product by the customer after the product has been accepted.
Research and Development
The Company charges all research and development costs to expense as
incurred.
43
Advertising Costs
The Company expenses all advertising costs as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. SFAS 109 is an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences attributable to differences between the carrying amounts of assets
and liabilities for financial reporting purposes and their respective tax
bases, and for operating loss and tax credit carry forwards. In estimating
future tax consequences, SFAS 109 generally considers all expected future
events other than the enactment of changes in tax laws or rates. Valuation
allowances are provided if, based upon the weight of the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. Tax savings resulting from deductions associated with stock options
and certain stock warrants are credited directly to additional paid in capital
when realization of such benefit is fully assured. See Note 13.
Fair Value of Financial Instruments
The carrying amounts of the Companys financial instruments, which include
short-term and long-term investments, accounts receivable, accounts payable,
and other accrued expenses, approximate their fair values due to their short
maturities.
Foreign Currency Translation
The majority of the Companys foreign branches and subsidiaries use the
U.S. dollar as their functional currency, as the U.S. parent exclusively funds
the branches and subsidiaries operations with U.S. dollars. For those
subsidiaries using the local currency as their functional currency, assets and
liabilities are translated at exchange rates in effect at the balance sheet
date. Resulting translation adjustments are recorded directly to a separate
component of stockholders equity. Where the U.S. dollar is the functional
currency, translation adjustments are recorded in other income. The net gain
(loss) on foreign currency re-measurement and exchange rate changes for fiscal
2001, 2002 and 2003 was immaterial for separate financial statement
presentation.
Computation of Basic Net Income (Loss) per Common Share and Diluted Net Income
(Loss) per Common and
Dilutive Potential Common Share
The Company calculates earnings per share in accordance with the Statement
of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128).
SFAS 128 simplifies the earnings per share (EPS) computation and replaces the
presentation of primary EPS with a presentation of basic EPS. This statement
also requires dual presentation of basic and diluted EPS on the face of the
income statement for entities with a complex capital structure and requires a
reconciliation of the numerator and denominator used for the basic and diluted
EPS computations. See Note 11.
Software Development Costs
Statement of Financial Accounting Standards No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed (SFAS
86), requires the capitalization of certain software development costs
incurred subsequent to the date technological feasibility is established and
prior to the date the product is generally available for sale. The capitalized
cost is then amortized over the estimated product life. The Company defines
technological feasibility as being attained at the time a working model is
completed. To date, the period between achieving technological feasibility and
the general availability of such software has been short, and software
development costs qualifying for capitalization have been insignificant.
Accordingly, the Company has not capitalized any software development costs.
Accounting for Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123 (SFAS 123), Accounting for
Stock-Based Compensation. SFAS 123 allows companies to account for stock-based
compensation either under the new provisions of SFAS 123 or using the intrinsic
value method provided by Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, but requires pro forma disclosure in the footnotes to the financial statements
as if the measurement provisions of SFAS 123 had been adopted.
44
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure (SFAS 148). SFAS 148 amends SFAS 123,
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS 148 is effective for financial
statements for fiscal years ending after December 15, 2002.
The Company has elected to continue to account for its stock-based
compensation in accordance with the provisions of APB 25 as interpreted by FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25, (FIN 44) and present
the pro forma disclosures required by SFAS 123 as amended by SFAS 148. See Note
14.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about
Segments of an Enterprise and Related Information. SFAS 131 establishes annual
and interim reporting standards for operating segments of a company. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenue,
and its major customers. The Company is not organized by multiple operating
segments for the purpose of making operating decisions or assessing
performance. Accordingly, the Company operates in one operating segment and
reports only certain enterprise-wide disclosures. See Note 16.
Newly Issued Accounting Standards
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a
liability be recorded in the guarantors balance sheet upon issuance of a
guarantee. In addition, FIN 45 requires disclosures about the guarantees that
an entity has issued, including a reconciliation of changes in the entitys
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantors fiscal
year end. The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of this standard did not have a material impact on CIENAs financial
statements.
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF Issue No. 00-21 provides guidance on how to account for
arrangements that involve the delivery or performance of multiple products,
services and/or rights to use assets. The provisions of EITF Issue No. 00-21
will apply to revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not expect that the adoption of this
standard will have a material effect on its financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51. FIN 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after December 15,
2003. The Company does not expect that the adoption of this standard will have
a material effect on its financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standard
No. 149 (SFAS 149), Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities
45
under SFAS 133. The statement requires that contracts with comparable characteristics be accounted for similarly and clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, except in certain circumstances, and for hedging
relationships designated after June 30, 2003. The Company does not expect that
the adoption of this standard will have a material effect on its financial
position or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes
standards for how an issuer classifies and measures in its statement of
financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities. The FASB has defined
implementation of SFAS 150 indefinitely for certain non-controlling interests,
the provisions of which are currently not applicable to the Company. The
Company does not expect that the adoption of this standard will have a material
effect on its financial position or results of operations.
Reclassification
Certain prior year amounts have been reclassified to conform to current
year consolidated financial statement presentation.
(2) BUSINESS COMBINATIONS
In fiscal 2003, the Company acquired Akara and WaveSmith. In fiscal 2002,
and 2001, the Company acquired ONI and Cyras, respectively. As a result of
these acquisitions, the Company, has recorded charges for in-process research
and development and recorded intangible assets related to existing technology.
In-process research and development represents in-process technology that,
as of the date of the acquisition, has not reached technological feasibility
and has no alternative future use. Based on valuation assessments, the value of
these projects is determined by estimating the resulting net cash flows from
the sale of the products resulting from the completion of the projects, reduced
by the portion of the revenue attributable to developed technology and the
percentage of completion of the project. The resulting cash flows are then
discounted back to their present values at appropriate discount rates.
Existing technology represents purchased technology for which development
had been completed as of the date of acquisition. This amount is determined
using the income approach. This method consisted of estimating future net cash
flows attributable to existing technology for a discrete projection period and
discounting the net cash flows to their present value. The existing technology
will be amortized its useful life.
The purchase price for the Companys acquisitions have been based on the
average closing price of CIENAs common stock for two trading days prior to,
the date of, and the two trading days after the announcement of the
acquisition.
46
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of the acquisitions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akara
|
|
WaveSmith
|
|
ONI
|
|
Cyras
|
|
|
at
|
|
at
|
|
at
|
|
at
|
|
|
August 29, 2003
|
|
June 16, 2003
|
|
June 21, 2002
|
|
March 29, 2001
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, long and short-term investments
|
|
$
|
1,232
|
|
|
$
|
4,159
|
|
|
$
|
623,559
|
|
|
$
|
68,891
|
|
Inventory
|
|
|
909
|
|
|
|
983
|
|
|
|
14,705
|
|
|
|
4,618
|
|
Equipment, furniture and fixtures
|
|
|
282
|
|
|
|
793
|
|
|
|
40,759
|
|
|
|
4,597
|
|
Other tangible assets
|
|
|
1,542
|
|
|
|
472
|
|
|
|
25,847
|
|
|
|
47,591
|
|
Existing technology
|
|
|
9,300
|
|
|
|
54,300
|
|
|
|
13,000
|
|
|
|
47,700
|
|
Non-compete agreements
|
|
|
3,100
|
|
|
|
|
|
|
|
1,000
|
|
|
|
11,600
|
|
Contracts and purchase orders
|
|
|
2,100
|
|
|
|
5,400
|
|
|
|
1,100
|
|
|
|
|
|
Goodwill
|
|
|
34,275
|
|
|
|
89,264
|
|
|
|
590,895
|
|
|
|
2,059,899
|
|
Deferred stock compensation
|
|
|
|
|
|
|
7,385
|
|
|
|
8,826
|
|
|
|
98,456
|
|
Other assumed liabilities
|
|
|
(2,658
|
)
|
|
|
(2,405
|
)
|
|
|
(43,336
|
)
|
|
|
(35,914
|
)
|
CIENA initial investment
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
Unfavorable lease commitments
|
|
|
(541
|
)
|
|
|
|
|
|
|
(80,183
|
)
|
|
|
|
|
Promissory notes and loans
|
|
|
(6,099
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible subordinated notes payable
|
|
|
|
|
|
|
|
|
|
|
(218,013
|
)
|
|
|
(167,700
|
)
|
In-process research and development
|
|
|
1,300
|
|
|
|
1,500
|
|
|
|
|
|
|
|
45,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
44,742
|
|
|
$
|
156,851
|
|
|
$
|
978,159
|
|
|
$
|
2,185,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akara Corporation
On August 29, 2003, CIENA completed the acquisition by merger of Akara
Corporation, a privately held corporation headquartered in Ottawa, Ontario that
provides SONET/SDH based storage extension devices for storage area networks.
Pursuant to the terms of the acquisition agreement, Akara became a wholly owned
subsidiary of CIENA, and the outstanding shares of Akara common and preferred
stock were exchanged for $30.6 million in cash and approximately 2,343,015
shares of CIENA common stock. The aggregate purchase price was $44.7 million,
which included CIENA common stock valued at $13.8 million, and transaction
costs of $0.3 million.
The $2.1 million assigned to the contracts and purchase orders will be
amortized over five years. The $6.1 million assigned to the value of the
promissory notes and loans was based upon the present value of the notes at the
time of the acquisition. CIENA paid $3.1 million of these obligations in full
during the fourth quarter of fiscal 2003, and the remaining $3.0 million
payable to CIENA was eliminated during the consolidation.
The amount of goodwill allocated to the purchase price was $34.3 million
and is not deductible for tax purposes. The Company operates in one operating
segment and reports only certain enterprise-wide disclosures. Accordingly, the
goodwill from this transaction is not part of a reportable segment. The
operations of Akara are not material to the consolidated financial statements
of the Company and, accordingly, separate pro forma financial information has
not been presented.
WaveSmith Networks
On June 16, 2003, CIENA completed the acquisition by merger of WaveSmith,
a privately held corporation headquartered in Acton, Massachusetts that is a
leading innovator of multiservice switching equipment. Pursuant to the terms of
the acquisition agreement, WaveSmith merged into CIENA, and the outstanding
shares of WaveSmith common and preferred stock were exchanged for approximately
33,421,217 shares of CIENA common stock. The aggregate purchase price was
$156.8 million, which included CIENA common stock valued at $142.7 million,
CIENA options, warrants and restricted stock valued at $7.9 million,
transaction costs of $1.2 million and an initial CIENA investment of $5.0
million.
The $5.4 million assigned to the contracts and purchase orders will be
amortized over a range of two months to five years.
The amount of goodwill allocated to the purchase price was $89.3 million
and is not deductible for tax purposes. The Company operates in one operating
segment and reports only certain enterprise-wide disclosures. Accordingly, the
goodwill from this transaction is not part of a reportable segment. The
operations of WaveSmith are not material to the consolidated financial
statements of the Company and, accordingly, separate pro forma financial
information has not been presented.
47
ONI Systems
On June 21, 2002, CIENA completed the acquisition by merger of ONI Systems
Corp. (ONI), a NASDAQ-listed corporation headquartered in San Jose,
California. ONI is a provider of optical networking equipment specifically
designed to address bandwidth and service limitations of regional and
metropolitan networks. Under the terms of the agreement, each outstanding share
of capital stock of ONI was exchanged for 0.7104 shares of CIENA common stock,
and CIENA assumed all ONI outstanding options and warrants as well as the ONI
outstanding convertible debt. The stockholders of ONI received 101,120,724
shares of CIENA common stock of which 1,039,429 shares are restricted and
subject to repurchase.
Additionally, CIENA converted options and warrants to purchase
approximately 18,193,345 ONI shares into options and warrants to purchase
12,924,552 shares of CIENA common stock. The aggregate purchase price was
$978.2 million, including CIENA common stock valued at $875.7 million, CIENA
options, warrants and restricted stock valued at $89.2 million and transaction
costs of $13.3 million.
The $2.1 million assigned to the other intangible assets, non-compete
agreements and contracts, will be amortized over a range of two months to one
year.
During the quarter ended July 31, 2002, CIENA and ONI reduced their
combined workforce by approximately 283 employees. Approximately $3.8 million
of costs associated with the ONI workforce reduction qualify for treatment
under EITF 95-3 Recognition of Liabilities in Connection with a Purchase
Combination and were recorded as an element of the acquisition.
The $80.2 million assigned to the value of the unfavorable lease
commitments was based upon the present value of the assumed lease obligations
based upon current rental rates at the time of the acquisition. These
unfavorable lease commitments will be paid over the respective lease terms
through fiscal 2011. The $218.0 million assigned to the value of the ONI $300.0
million principal amount of 5.0% convertible subordinated notes due October 15,
2005 was based upon the present value of the notes at the time of the
acquisition. CIENA is accreting the difference between the present value of the
notes and the outstanding principal value over the remaining period to October
15, 2005, such that the carrying value of the notes equals the principal value
at the time the notes become due.
The amount of goodwill allocated to the purchase price was $590.9 million
and is not deductible for tax purposes. The Company operates in one operating
segment and reports only certain enterprise-wide disclosures. Accordingly, the
goodwill from this transaction is not part of a reportable segment.
The following unaudited pro forma data summarizes the results of
operations for the period indicated as if the ONI acquisition had been
completed as of the beginning of the periods presented. The unaudited pro forma
data gives effect to actual operating results prior to the June 21, 2002
acquisition, adjusted to include the pro forma effect of amortization of
intangibles, deferred stock compensation costs, and the tax effects to the pro
forma adjustments. These pro forma amounts 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 (in thousands, except per share data.)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,798,909
|
|
|
$
|
431,495
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,157,621
|
)
|
|
$
|
(1,702,866
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share
and dilutive potential common share
|
|
$
|
(5.14
|
)
|
|
$
|
(3.93
|
)
|
|
|
|
|
|
|
|
|
|
Cyras
On March 29, 2001, CIENA acquired all of the outstanding capital stock,
and assumed the options of Cyras Systems, Inc. (Cyras), a privately held
provider of next-generation optical networking systems based in Fremont,
California. The purchase price was approximately $2.2 billion and consisted of
the issuance of approximately 26.1 million shares of CIENA common stock, the
assumption of stock options of approximately 1.9 million shares and the
indirect assumption of $150 million principal amount of Cyras convertible
subordinated indebtedness.
48
The amortization period for the goodwill and intangibles, based on
managements estimate of the useful life of the acquired technology, was three
to seven years. As a result of the issuance of SFAS 142, amortization related
to goodwill will no longer be recorded in subsequent fiscal years.
The following unaudited pro forma data summarizes the results of
operations for the period indicated as if the Cyras acquisition had been
completed as of the beginning of the periods presented. The unaudited pro forma
data gives effect to actual operating results prior to the acquisition,
adjusted to include the pro forma effect of amortization of intangibles,
deferred stock compensation costs, the elimination of the charge for acquired
in-process research and development, the tax effects to the pro forma
adjustments and the recognition of the tax benefits arising from Cyras net
operating loss carry forwards. These pro forma amounts 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 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,
|
|
|
|
|
|
2000
|
|
2001
|
|
|
|
|
|
Revenue
|
|
$
|
858,750
|
|
|
$
|
1,603,229
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(274,330
|
)
|
|
$
|
(1,890,627
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net loss per common share
and dilutive potential common
share
|
|
$
|
(0.90
|
)
|
|
$
|
(6.06
|
)
|
|
|
|
|
|
|
|
|
|
(3) RESTRUCTURING COSTS AND IMPAIRMENT CHARGES
Restructuring
The following table displays the activity and balances of the
restructuring reserve account for the year ended October 31, 2003 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
in connection with
|
|
|
|
|
Workforce
|
|
Consolidation of
|
|
purchase
|
|
|
|
|
reduction
|
|
excess facilities
|
|
combination
|
|
Total
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2001
|
|
|
|
|
|
|
15,439
|
|
|
|
|
|
|
|
15,439
|
|
Additional reserve recorded
|
|
|
32,929
|
(b)
|
|
|
192,500
|
(b)
|
|
|
3,792
|
(c)
|
|
|
229,221
|
|
Non-cash charges
|
|
|
(893
|
)
|
|
|
(113,596
|
)
|
|
|
|
|
|
|
(114,489
|
)
|
Cash payments
|
|
|
(26,837
|
)
|
|
|
(6,498
|
)
|
|
|
(3,671
|
)
|
|
|
(37,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2002
|
|
|
5,199
|
|
|
|
87,845
|
|
|
|
121
|
|
|
|
93,165
|
|
Additional reserve recorded
|
|
|
12,240
|
(d)
|
|
|
19,748
|
(d)
|
|
|
430
|
(e)
|
|
|
32,418
|
|
Adjustment to previous estimates
|
|
|
(523
|
)(d)
|
|
|
(310
|
)(d)
|
|
|
|
|
|
|
(833
|
)
|
Non-cash charges
|
|
|
(1,913
|
)
|
|
|
(28,485
|
)
|
|
|
|
|
|
|
(30,398
|
)
|
Cash payments
|
|
|
(12,154
|
)
|
|
|
(15,105
|
)
|
|
|
(551
|
)
|
|
|
(27,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2003
|
|
$
|
2,849
|
|
|
$
|
63,693
|
|
|
$
|
|
|
|
$
|
66,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current restructuring
liabilities
|
|
$
|
2,849
|
|
|
$
|
11,529
|
|
|
$
|
|
|
|
$
|
14,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current restructuring
liabilities
|
|
$
|
|
|
|
$
|
52,164
|
|
|
$
|
|
|
|
$
|
52,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
During the fourth quarter of fiscal year 2001, CIENA recorded a
restructuring charge of $15.4 million relating to consolidation of
excess facilities. The consolidation of excess facilities included the
closure of certain manufacturing warehouse facilities and the
consolidation of certain operational centers related to business
activities that were restructured. The charge included $7.0 million
primarily related to lease terminations and non-cancelable lease costs
and also included an $8.4 million write-down related to property and
equipment consisting primarily of leasehold improvements and production
equipment.
|
|
(b)
|
|
During the first quarter of fiscal 2002, CIENA had a workforce
reduction of approximately 380 employees concentrated in manufacturing
operations staff. CIENA recorded a restructuring charge of $6.8 million
associated with this action.
|
|
|
|
During the second quarter of fiscal 2002, CIENA had a workforce reduction
of approximately 400 employees largely concentrated in manufacturing
operations and research and development activities associated with the
closure of CIENAs Marlborough, Massachusetts research and development
facility. On March 26, 2002, CIENA had a company-wide workforce reduction
of approximately 650 employees. CIENA recorded a restructuring charge of
$121.4 million associated with the workforce reductions, lease
terminations, non-cancelable lease costs and the write-down of certain
property, equipment and leasehold improvements associated with this action.
|
49
|
|
|
As a result of the CIENA and ONI Systems Corp. integration and
restructuring activities, CIENA recorded a charge of $11.0 million during
the third quarter of fiscal 2002 associated with workforce reductions of
approximately 66 employees, lease terminations, non-cancelable lease
costs and the write-down of certain property, equipment and leasehold
improvements. Also during the third quarter of fiscal 2002, CIENA
recorded an additional restructuring charge of approximately $7.6 million
to increase the estimated cost of the net lease expense for previously
restructured facilities.
|
|
|
|
During the fourth quarter of fiscal 2002, CIENA had a company-wide
workforce reduction of approximately 450 employees. CIENA recorded a
restructuring charge of $78.7 million associated with the workforce
reductions, lease terminations, non-cancelable lease costs and the
write-down of certain property, equipment and leasehold improvements
associated with this action.
|
|
(c)
|
|
During the third quarter of fiscal 2002, CIENA and ONI Systems
Corp. reduced their combined workforce by approximately 283 employees.
Approximately $3.8 million of costs associated with the ONI workforce
reduction qualify for treatment under EITF 95-3 Recognition of
Liabilities in Connection with a Purchase Combination and were
recorded as an element of the acquisition.
|
|
(d)
|
|
During the second quarter of fiscal 2003, CIENA reduced its
workforce by approximately 75 employees. CIENA recorded a restructuring
charge of $2.7 million associated with the workforce reduction.
|
|
|
|
During the third quarter of fiscal 2003, CIENA recorded a restructuring
charge of $15.5 million associated with a workforce reduction of
approximately 84 employees, lease terminations, non-cancelable lease
costs and the write-down of certain property, equipment and leasehold
improvements.
|
|
|
|
During the fourth quarter of fiscal 2003, CIENA recorded a restructuring
charge of $12.9 million associated with a workforce reduction of
approximately 231 employees, lease termination, non-cancelable lease
costs and the write-down of certain property, equipment and leasehold
improvements.
|
|
(e)
|
|
During the third quarter of fiscal 2003, CIENA and WaveSmith
reduced their combined workforce by 8 employees. Approximately $0.4
million of cost associated with the WaveSmith workforce reduction
qualify for treatment under EITF 95-3 Recognition of Liabilities in
Connection with a Purchase Combination and were recorded as an element
of the acquisition.
|
Goodwill Impairment Charges
The Company adopted SFAS 142 effective November 1, 2001 and upon adoption
ceased to amortize goodwill. On adoption of SFAS 142, the Company determined
that its operations represent a single reporting unit. The Company completed an
impairment review of the goodwill associated with its reporting unit during the
three months ended January 31, 2002. The Company compared the fair value of its
reporting unit at November 1, 2001 to the carrying value including goodwill for
the unit at November 1, 2001, and determined that the carrying value, including
goodwill, did not exceed the units fair value. As a result, no impairment
charge was required on adoption.
In accordance with SFAS 142, which requires annual testing to determine
and measure goodwill impairment on a reporting unit basis, and with the
assistance from independent valuation experts management performed an
assessment of the fair value of the Companys single reporting unit and its
intangible assets as of September 30, 2003 and 2002, respectively. The Company
compared its fair value to its carrying value including goodwill and determined
that its carrying value, including goodwill, did not exceed fair value as of
September 30, 2003 but did exceed fair value as of September 30, 2002. As a
result, during fiscal 2002 the Company assessed the fair value of its assets,
including identified intangible assets, and liabilities and derived an implied
fair value for its goodwill. Since the carrying amount of goodwill was greater
than its implied fair value, an impairment loss of $557.3 million was
recognized in fiscal 2002.
During fiscal 2003 the fair value of the Company was determined using the
average market price of the Companys common stock over a 10-day period before
and after September 27, 2003 and a control premium of 25%. During fiscal 2002
fair value of the Company was determined using the average market price of the
Companys common stock over a 10-day period before and after September 27, 2002
and a control premium of 25%. The Company determined the estimated fair value
of identified intangible assets and non-goodwill intangible assets and
liabilities using discounted cash flows. The cash flow periods used were eight
years, applying annual growth rates of 10% to 86%. The Company used discount
rates of 10% to 32% based of the specific risks and circumstances associated
with the identified intangible asset or other non-goodwill assets or liability
being evaluated. The assumptions supporting the estimated cash flows for
identified intangible assets and other non-goodwill assets and liabilities,
including the discount rate, reflects managements estimates. The discount rate
was based upon the Companys weighted average cost of capital as adjusted for
the risks associated with its operations.
The changes in the carrying amount of goodwill for fiscal 2002 and 2003
are as follows (in thousands):
|
|
|
|
|
Balance as of November 1, 2002
|
|
$
|
178,891
|
|
Goodwill acquired during fiscal 2002
|
|
|
590,895
|
|
Impairment losses
|
|
|
(557,286
|
)
|
|
|
|
|
|
Balance as of October 31, 2002
|
|
|
212,500
|
|
Goodwill acquired during fiscal 2003
|
|
|
123,539
|
|
|
|
|
|
|
Balance as of October 31, 2003
|
|
$
|
336,039
|
|
|
|
|
|
|
50
As part of CIENAs review of financial results for fiscal 2001, CIENA
performed an assessment of the carrying value of the Companys long-lived
assets including significant amounts of goodwill and other intangible assets
recorded in connection with the acquisition of Cyras. The assessment was
performed pursuant to SFAS 121 because of the significant negative industry and
economic trends affecting both the Companys current operations and expected
future sales of MetroDirector K2 as well as the general decline of technology
valuations. The conclusion of that assessment was that the decline in market
conditions within the Companys industry was significant and other than
temporary. As a result, the Company recorded a charge of $1.7 billion to reduce
goodwill during the fourth quarter of 2001 based on the amount by which the
carrying amount of these assets exceeded their fair value. The write down is
related to the goodwill associated with the Cyras transaction. Fair value was
determined based on discounted future cash flows for the operating entity,
which had separately identifiable cash flows. The cash flow periods used were
six years, applying annual growth rates of 25% to 100%. The discount rate used
was 11.3%, and the terminal value was estimated based upon terminal growth
rates of 4%. The assumptions supporting the estimated future cash flows,
including the discount rate and estimated terminal values reflect managements
best estimates. The discount rate was based upon the Companys weighted average
cost of capital as adjusted for the risks associated with its operations.
Other Intangible Impairment Charges
As part of CIENAs review of financial results for fiscal 2003, CIENA
performed an assessment of the carrying value of the Companys long-lived
assets, including other intangible assets. The assessment was performed
pursuant to SFAS 144. As a result, the Company recorded a charge of $29.6
million during fiscal 2003, related to the impairment of MetroDirector K2
technology acquired in the Cyras transaction. This charge was based on the
amount by which the carrying amount of the developed technology exceeded its
fair value. Fair value was determined based on discounted future cash flows
derived from the developed technology, which had separately identifiable cash
flows. The cash flow periods used were five years, applying a first year growth
rate of 5% with subsequent declines of between 10% and 20% in the following
years. The discount rate used was 21.0%. The assumptions supporting the
estimated future cash flows, including the discount rate reflect managements
best estimates. The discount rate was based upon the Companys weighted average
cost of capital as adjusted for the risks associated with its operations.
(4) MARKETABLE DEBT AND EQUITY SECURITIES
Cash, short-term and long-term investments are comprised of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2003
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
617,837
|
|
|
$
|
787
|
|
|
$
|
163
|
|
|
$
|
618,461
|
|
Asset backed obligations
|
|
|
161,474
|
|
|
|
322
|
|
|
|
|
|
|
|
161,796
|
|
Municipal bonds
|
|
|
5,024
|
|
|
|
7
|
|
|
|
|
|
|
|
5,031
|
|
Commercial paper
|
|
|
10,487
|
|
|
|
2
|
|
|
|
28
|
|
|
|
10,461
|
|
US government obligations
|
|
|
518,609
|
|
|
|
2,095
|
|
|
|
229
|
|
|
|
520,475
|
|
Money market funds
|
|
|
309,994
|
|
|
|
|
|
|
|
|
|
|
|
309,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623,423
|
|
|
$
|
3,213
|
|
|
$
|
420
|
|
|
$
|
1,626,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
|
309,665
|
|
|
|
|
|
|
|
|
|
|
|
309,665
|
|
Included in short-term investments
|
|
|
793,807
|
|
|
|
3,012
|
|
|
|
10
|
|
|
|
796,809
|
|
Included in long-term investments
|
|
|
519,953
|
|
|
|
201
|
|
|
|
410
|
|
|
|
519,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,623,423
|
|
|
$
|
3,213
|
|
|
$
|
420
|
|
|
$
|
1,626,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2002
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Unrealized
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
669,699
|
|
|
$
|
2,639
|
|
|
$
|
521
|
|
|
$
|
671,817
|
|
Asset-backed obligations
|
|
|
109,755
|
|
|
|
625
|
|
|
|
|
|
|
|
110,380
|
|
Municipal bonds
|
|
|
20,745
|
|
|
|
92
|
|
|
|
|
|
|
|
20,837
|
|
Commercial paper
|
|
|
98,215
|
|
|
|
119
|
|
|
|
|
|
|
|
98,334
|
|
US obligations
|
|
|
793,327
|
|
|
|
6,580
|
|
|
|
|
|
|
|
799,907
|
|
Money market funds
|
|
|
377,189
|
|
|
|
|
|
|
|
|
|
|
|
377,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,068,930
|
|
|
$
|
10,055
|
|
|
$
|
521
|
|
|
$
|
2,078,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in cash and cash equivalents
|
|
$
|
377,189
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
377,189
|
|
Included in short-term investments
|
|
|
1,126,733
|
|
|
|
4,202
|
|
|
|
521
|
|
|
|
1,130,414
|
|
Included in long-term investments
|
|
|
565,008
|
|
|
|
5,853
|
|
|
|
|
|
|
|
570,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,068,930
|
|
|
$
|
10,055
|
|
|
$
|
521
|
|
|
$
|
2,078,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes maturities of debt investments (including
restricted investments) at October 31, 2003 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Amortized Cost
|
|
Value
|
|
|
|
|
|
Less than one year
|
|
$
|
793,807
|
|
|
$
|
796,809
|
|
Due in 1-2 years
|
|
|
467,262
|
|
|
|
466,962
|
|
Due in 2-5 years
|
|
|
52,691
|
|
|
|
52,782
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,313,760
|
|
|
$
|
1,316,553
|
|
|
|
|
|
|
|
|
|
|
(5) ACCOUNTS RECEIVABLE
As of October 31, 2003, the trade accounts receivable, net of allowance
for doubtful accounts, included three customers who each accounted for 23.6%,
12.5%, and 10.1% of the net trade accounts receivable, respectively. As of
October 31, 2002, the trade accounts receivable, net of allowance for doubtful
accounts, included three customers who each accounted for 19.3%, 15.0%, and
12.8% of the net trade accounts receivable, respectively.
CIENA performs ongoing credit evaluations of its customers and generally
has not required collateral or other forms of security from its customers.
CIENA maintains an allowance for potential losses on a specific identification
basis. CIENAs allowance for doubtful accounts as of October 31, 2003 and
October 31, 2002 was $1.5 million and $9.5 million, respectively. In fiscal
2001, CIENA received payment for approximately $15.4 million of the gross
outstanding accounts receivable balance due from iaxis Limited primarily
through the Companys sales agreement with Dynegy. Accordingly, CIENA
recognized a reduction in the provision for doubtful accounts of $6.6 million
during fiscal year 2001. CIENA recorded a provision for doubtful accounts of
approximately $14.8 million during fiscal 2002. This provision relates to the
estimated losses of $18.1 million from three customers, each of whom filed for
bankruptcy protection during fiscal 2002, offset by a payment of $3.3 million
of the gross outstanding accounts receivable balance due from iaxis Limited
through the Companys sales agreement with Dynegy. CIENA did not record any
additional provision for doubtful accounts during fiscal 2003.
The following table summarizes the activity in the Companys allowance
for doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning
|
|
|
|
|
|
|
|
|
|
Balance at end of
|
Year ended October 31
|
|
of period
|
|
Provisions
|
|
Deductions
|
|
period
|
|
|
|
|
|
|
|
|
|
2001
|
|
$
|
29,581
|
|
|
$
|
(6,579
|
)
|
|
$
|
21,511
|
|
|
$
|
1,491
|
|
2002
|
|
$
|
1,491
|
|
|
$
|
14,813
|
|
|
$
|
6,831
|
|
|
$
|
9,473
|
|
2003
|
|
$
|
9,473
|
|
|
$
|
|
|
|
$
|
7,975
|
|
|
$
|
1,498
|
|
52
(6) INVENTORIES
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
Raw materials
|
|
$
|
34,025
|
|
|
$
|
16,121
|
|
Work-in-process
|
|
|
12,658
|
|
|
|
5,904
|
|
Finished goods
|
|
|
48,485
|
|
|
|
46,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,168
|
|
|
|
68,088
|
|
Reserve for excess and
obsolescence
|
|
|
(48,145
|
)
|
|
|
(23,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
47,023
|
|
|
$
|
44,995
|
|
|
|
|
|
|
|
|
|
|
The Company 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. As a result of the decline in capital spending by the
Companys customers and a further decline in forecasted revenue of existing
products in fiscal 2002, the Company recorded a provision for excess inventory
and purchase commitments of $286.5 million, which included charges of $250.5
million for excess inventory and obsolescence and $36.0 million for excess
inventory purchase commitments. During fiscal 2003, the Company recorded a
benefit for excess inventory of $5.3 million, primarily related to the
realization of sales from previously reserved excess inventory.
The following table summarizes the activity in the Companys reserve for
excess and obsolete inventory (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Provisions
|
|
|
|
|
|
Balance at end of
|
Year ended October 31
|
|
beginning of period
|
|
(Benefits)
|
|
Deductions
|
|
period
|
|
|
|
|
|
|
|
|
|
2001
|
|
$
|
18,238
|
|
|
$
|
68,411
|
|
|
$
|
32,845
|
|
|
$
|
53,804
|
|
2002
|
|
$
|
53,804
|
|
|
$
|
250,457
|
|
|
$
|
256,116
|
|
|
$
|
48,145
|
|
2003
|
|
$
|
48,145
|
|
|
$
|
(5,296
|
)
|
|
$
|
19,756
|
|
|
$
|
23,093
|
|
(7) EQUIPMENT, FURNITURE AND FIXTURES
Equipment, furniture and fixtures are comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
Equipment, furniture and
fixtures
|
|
$
|
380,316
|
|
|
$
|
332,843
|
|
Leasehold improvements
|
|
|
78,761
|
|
|
|
70,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
459,077
|
|
|
|
402,988
|
|
Accumulated depreciation and
amortization
|
|
|
(266,501
|
)
|
|
|
(288,170
|
)
|
Construction-in-progress
|
|
|
4,375
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
196,951
|
|
|
$
|
114,930
|
|
|
|
|
|
|
|
|
|
|
(8) OTHER INTANGIBLE ASSETS
Other intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
Gross
|
|
Accumulated
|
|
Net
|
|
|
Intangible
|
|
Amortization
|
|
Intangible
|
|
Intangible
|
|
Amortization
|
|
Intangible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
|
$
|
60,700
|
|
|
$
|
(11,409
|
)
|
|
$
|
49,291
|
|
|
|
94,704
|
|
|
|
(22,975
|
)
|
|
|
71,729
|
|
Patents and licenses
|
|
|
14,155
|
|
|
|
(1,989
|
)
|
|
|
12,166
|
|
|
|
36,655
|
|
|
|
(8,984
|
)
|
|
|
27,671
|
|
Covenants not to compete,
outstanding
purchase orders and
contracts
|
|
|
2,100
|
|
|
|
(1,100
|
)
|
|
|
1,000
|
|
|
|
12,700
|
|
|
|
(3,692
|
)
|
|
|
9,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
76,955
|
|
|
|
|
|
|
$
|
62,457
|
|
|
|
144,059
|
|
|
|
|
|
|
|
108,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
In January 2003, CIENA reached a settlement agreement with Nortel. Under
the agreement, CIENA made a one-time payment of $25 million to Nortel, and
Nortel granted CIENA a license under the patents in suit and certain
related patents. CIENA accounted for the $25.0 million liability by recording an
expense of $2.5 million in first quarter 2003 related to the settlement of the
litigation, and recording the remaining $22.5 million as an intangible asset
that will be amortized over eight years based upon the expected life of the
patent rights acquired in the settlement.
As a result of the WaveSmith acquisition, we recorded $54.3 million in
developed technology and $5.4 million in other intangibles related to
contracts and outstanding purchase orders. As a result of the Akara
acquisition, we recorded $9.3 million in developed technology and $5.2 million
in other intangibles related to noncompete agreements and customer
relationships.
As a result of the impairment of intangible assets, we recorded a charge
against gross developed technology of $29.6 million.
The aggregate amortization expense of other intangible assets was $21.2
million, $9.0 million and $4.4 million for fiscal 2003, 2002 and 2001,
respectively. Expected future amortization of other intangible assets is as
follows (in thousands):
|
|
|
|
|
Year ended October 31,
|
|
|
|
|
2004
|
|
|
17,452
|
|
2005
|
|
|
17,453
|
|
2006
|
|
|
17,452
|
|
2007
|
|
|
17,453
|
|
2008
|
|
|
16,107
|
|
Thereafter
|
|
|
22,491
|
|
|
|
|
|
|
|
|
|
108,408
|
|
|
|
|
|
|
(9) OTHER BALANCE SHEET DETAILS
Other long-term assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
Maintenance spares inventory, net
|
|
$
|
27,170
|
|
|
$
|
26,206
|
|
Deferred debt issuance costs
|
|
|
15,897
|
|
|
|
12,869
|
|
Investments in privately held companies
|
|
|
16,052
|
|
|
|
21,292
|
|
Other
|
|
|
11,477
|
|
|
|
9,274
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,596
|
|
|
$
|
69,641
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
Warranty and other contractual obligations
|
|
$
|
45,498
|
|
|
$
|
37,380
|
|
Accrued compensation, payroll related tax and benefits
|
|
|
37,466
|
|
|
|
33,206
|
|
Accrued excess inventory purchase commitments
|
|
|
1,892
|
|
|
|
1,405
|
|
Accrued interest payable
|
|
|
6,981
|
|
|
|
6,583
|
|
Accrued Pirelli settlement
|
|
|
11,000
|
|
|
|
|
|
Other
|
|
|
29,751
|
|
|
|
20,352
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,588
|
|
|
$
|
98,926
|
|
|
|
|
|
|
|
|
|
|
54
The following table summarizes the activity in the Companys accrued
warranty and other contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
Balance at end of
|
Year ended October 31
|
|
beginning of period
|
|
Provisions
|
|
Settlements
|
|
period
|
|
|
|
|
|
|
|
|
|
2001
|
|
$
|
27,605
|
|
|
$
|
33,073
|
|
|
|
(20,832
|
)
|
|
$
|
39,846
|
|
2002
|
|
$
|
39,846
|
|
|
$
|
13,271
|
|
|
|
(7,619
|
)
|
|
$
|
45,498
|
|
2003
|
|
$
|
45,498
|
|
|
$
|
9,301
|
|
|
|
(17,419
|
)
|
|
$
|
37,380
|
|
Deferred revenue (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
Products
|
|
$
|
8,175
|
|
|
$
|
4,772
|
|
Services
|
|
|
22,657
|
|
|
|
24,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,832
|
|
|
|
29,020
|
|
Less current portion
|
|
|
(15,388
|
)
|
|
|
(14,473
|
)
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue
|
|
$
|
15,444
|
|
|
$
|
14,547
|
|
|
|
|
|
|
|
|
|
|
(10) CONVERTIBLE NOTES PAYABLE
On February 9, 2001, CIENA completed a public offering of 3.75%
convertible notes, in an aggregate principal amount of $690 million, due
February 1, 2008. Interest is payable on February 1 and August 1 of each year
beginning August 1, 2001. The notes may be converted into shares of CIENAs
common stock at any time before their maturity or their prior redemption or
repurchase by CIENA. The conversion rate is 9.5808 shares per each $1,000
principal amount of notes, subject to adjustment in certain circumstances. On
or after the third business day after February 1, 2004, CIENA has the option to
redeem all or a portion of the notes that have not been previously converted at
the following redemption prices (expressed as percentage of principle amount):
|
|
|
|
|
|
|
Redemption
|
Period
|
|
Price
|
|
|
|
Beginning on the third business day after February 1, 2004 and
ending on January 31, 2005
|
|
|
102.143
|
%
|
Beginning on February 1, 2005 and ending on January 31, 2006
|
|
|
101.607
|
%
|
Beginning on February 1, 2006 and ending on January 31, 2007
|
|
|
101.071
|
%
|
Beginning on February 1, 2007 and ending on January 31, 2008
|
|
|
100.536
|
%
|
On June 21, 2002, CIENA assumed the outstanding ONI 5.00% convertible
subordinated notes, in an aggregate principal amount of $300 million, due
October 15, 2005. Interest is payable on April 15 and October 15 of each year.
The ONI convertible subordinated notes were initially recorded at a value of
$218.0 million based upon the fair value of the outstanding notes at the time
of the acquisition.
During the fourth quarter fiscal 2002, CIENA purchased on the open market
$97.1 million of the $300 million outstanding ONI convertible subordinated
notes. The Company paid $75.2 million for notes with a cumulative accreted book
value of $72.5 million, which resulted in a loss on early extinguishment of
debt of $2.7 million.
During the first quarter fiscal 2003, CIENA purchased $154.7 million of
the remaining $202.9 million outstanding ONI convertible subordinated notes
pursuant to a tender offer. The Company paid $140.3 million related to the
tender offer for notes with a cumulative accreted book value of $119.7 million,
which resulted in a loss on early extinguishment of debt of $20.6 million.
The remaining outstanding ONI convertible subordinated notes have a
carrying value of $40.4 million and a face value of $48.3 million. CIENA is
accreting the difference between the values over the remaining period to
October 15, 2005, such that the carrying value of the outstanding notes equals
the principal value at the time the notes become due. Accretion of the
principal was $8.2 million for the period of June 21, 2002 to October 31, 2002.
Accretion of the principal was $6.4 million for fiscal 2003.
55
The remaining ONI convertible subordinated notes may be converted into
shares of CIENAs common stock at any time before their maturity. The
conversion rate is 7.7525 shares per each $1,000 principal amount of notes,
subject to adjustment in certain circumstances. On or after October 16, 2003,
CIENA has the option to redeem all or a portion of the notes that have not been
previously converted at the following redemption prices (expressed as
percentage of principal amount):
|
|
|
|
|
|
|
Redemption
|
Period
|
|
Price
|
|
|
|
October 16, 2003
|
|
|
102
|
%
|
October 15, 2004
|
|
|
101
|
%
|
On November 18, 2003, CIENA announced a full redemption of all of the
outstanding ONI 5.00% convertible subordinated notes due October 15, 2005. See
note 17.
(11) EARNINGS (LOSS) PER SHARE CALCULATION
Basic EPS is computed using the weighted average number of common shares
outstanding. Diluted EPS is computed using the weighted average number of
common shares outstanding, stock options and warrants using the treasury stock
method. Approximately 34.6 million, 41.5 million and 16.4 million options and
restricted stock were outstanding during fiscal 2003, 2002, and 2001
respectively, but were not included in the computation of diluted EPS as the
effect would be anti-dilutive.
(12) STOCKHOLDERS EQUITY
Authorized Shares
On March 12, 2001, the shareholders of the Company approved an increase to
the number of authorized shares of common stock from 460 million to 980 million
shares.
Stockholder Rights Plan
In December 1997, the Companys Board of Directors adopted a Stockholder
Rights Plan. This plan is designed to deter any potential coercive or unfair
takeover tactics in the event of an unsolicited takeover attempt. It is not
intended to prevent a takeover of the Company on terms that are favorable and
fair to all shareholders and will not interfere with a merger approved by the
Board of Directors. Each right entitles shareholders to buy a unit equal to
one one-thousandth of a share of Preferred Stock of the Company. The rights
will be exercisable only if a person or a group acquires or announces a tender
or exchange offer to acquire 15% or more of the Companys common stock or if
the Company enters into certain other business combination transactions not
approved by the Board of Directors.
In the event the rights become exercisable, the rights plan allows for
CIENA shareholders to acquire stock of the surviving corporation, whether or
not CIENA is the surviving corporation, having a value twice that of the
exercise price of the rights. The rights were distributed to shareholders of
record in January 1998. The rights will expire in December 2007 and are
redeemable for $0.001 per right at the approval of the Companys Board of
Directors.
Public Offerings
On February 9, 2001, CIENA completed a public offering of 11,000,000
shares of common stock at a price of $83.50 per share less underwriters
discounts and commissions. Net proceeds from the public offering were
approximately $878.5 million, after deducting underwriting discounts,
commissions and offering expenses. Pending use of the net proceeds, the Company
has invested them in interest bearing, investment grade securities.
Accumulated Comprehensive Income
The components of accumulated comprehensive income (loss) are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
Changes in net unrealized gains on investments
|
|
|
5,804
|
|
|
|
3,731
|
|
|
|
(6,743
|
)
|
Change in accumulated translation adjustments
|
|
|
(59
|
)
|
|
|
267
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
$
|
(1,788,317
|
)
|
|
$
|
(1,593,501
|
)
|
|
$
|
(392,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
(13) INCOME TAXES
Loss before income taxes and the provision for income taxes consists of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(1,706,729
|
)
|
|
$
|
(1,486,764
|
)
|
|
$
|
(385,261
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
77,705
|
|
|
|
(16,168
|
)
|
|
|
|
|
|
State
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
133
|
|
|
|
989
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
77,338
|
|
|
|
(15,179
|
)
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
9,595
|
|
|
|
116,802
|
|
|
|
|
|
|
State
|
|
|
400
|
|
|
|
9,112
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
9,995
|
|
|
|
125,914
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
87,333
|
|
|
$
|
110,735
|
|
|
$
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax provision reconciles to the amount computed by multiplying income
before income taxes by the U.S. federal statutory rate of 35% as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
Provision at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Non-deductible purchased research and development
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
(0.3
|
)
|
Research and development credit
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
1.3
|
|
Foreign sales corporation benefit
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Non-deductible goodwill and other
|
|
|
(39.7
|
)
|
|
|
(13.6
|
)
|
|
|
(1.6
|
)
|
Valuation allowance
|
|
|
|
|
|
|
(29.2
|
)
|
|
|
(34.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.1
|
)%
|
|
|
(7.4
|
)%
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The significant components of deferred tax assets and liabilities were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Reserves and accrued liabilities
|
|
$
|
118,817
|
|
|
$
|
84,530
|
|
|
Depreciation and amortization
|
|
|
15,715
|
|
|
|
1,371
|
|
|
NOL and credit carryforward
|
|
|
616,178
|
|
|
|
803,407
|
|
|
Convertible notes
|
|
|
(18,068
|
)
|
|
|
(2,875
|
)
|
|
Other
|
|
|
6,976
|
|
|
|
7,765
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
739,618
|
|
|
|
894,198
|
|
|
Valuation allowance
|
|
|
(739,618
|
)
|
|
|
(894,198
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
$
|
|
|
|
$
|
|
|
|
Depreciation and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred long-term tax liabilities
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
57
During fiscal 2002, the Company established a valuation allowance against
its deferred tax assets. The Company intends to maintain a valuation allowance
until sufficient positive evidence exists to support its reversal.
As of October 31, 2003, the Company had a $2.0 billion net operating loss
carry forward and a $68.4 million income tax credit carry forward which begin
to expire in fiscal year 2020 and 2012 respectively. The Companys ability to
use net operating losses and credit carry forwards may be subject to
limitations pursuant to the ownership change rules of the Internal Revenue Code
Section 382.
The income tax provision does not reflect the tax savings resulting from
deductions associated with the Companys stock. The tax benefit on deductions
of approximately $92.6 million associated with the Companys stock will be
credited to additional paid-in capital when realized.
Approximately $184.1 million of the valuation allowance as of October 31,
2003 was attributable to deferred tax assets associated with the acquisitions
of ONI, WaveSmith and Akara, that when realized, will first reduce goodwill,
then other non-current intangibles of the acquired companies, and then income
tax expense.
The IRS is currently examining the Companys federal income tax returns
for fiscal 1999 through fiscal 2002. Management does not expect the outcome of
these examinations to have a material effect on the Companys consolidated
financial position, results of operations or cash flow.
(14) EMPLOYEE BENEFIT PLANS
Active Equity Incentive Plans
The Company maintains four active equity incentive plans under which it
grants stock options, restricted stock, or other forms of equity-based
compensation: the 1999 Non-Officer Incentive Stock Plan (the 1999 Plan); the
Third Amended and Restated 1994 Stock Option Plan (the 1994 Plan); the 1996
Outside Directors Stock Option Plan (the 1996 Plan); and the CIENA
Corporation 2000 Equity Incentive Plan (the 2000 Plan).
The 1999 Plan authorizes the issuance of non-qualified options to
employees of the Company who are not executive officers or directors. The
exercise price for each option is established by the Board of Directors at not
less than 85% of fair market value of the Common Stock at the time of grant.
Options issued under the plan vest over four years. As of October 31, 2003,
there were 57,175,278 shares in the plan.
The 1994 Plan authorizes the issuance of either qualified or non-qualified
options to directors, employees or consultants. In general, the Company uses
the 1994 Plan to grant options to executive officers. The exercise price for
options under the plan is established by the Board of Directors at not less
than the fair market value of the Common Stock at the time of grant. The Board
determines the terms of vesting of options issued under the plan. The Companys
current practice is for options to vest over a four-year period. As of October
31, 2003, there were 55,354,872 shares in the plan. Under the terms of the
plan, this number will increase by 0.75% of the number of issued and
outstanding shares of the common stock on the last day of fiscal 2004.
The 1996 Plan provides for the issuance of non-qualified options to
non-employee directors of the Company. The plan provides automatic grants of
(i) an initial option at the time of a directors election to the Board and
(ii) annual options on the day following the Companys annual meeting of
shareholders. The exercise price is equal to the fair market value of the stock
at the time of grant. Initial options vest over three years, and annual options
vest after one year. As of October 31, 2003, there were 1,500,000 shares in the
plan.
The 2000 Plan was assumed by the Company as a result of its merger with
ONI. It authorizes the issuance of stock options, restricted stock, and stock
bonuses to employees, officers, directors, consultants, independent contractors
and advisors. The terms of awards under the plan are established by the Board
of Directors or its Compensation Committee. The exercise price of options may
not be less than 85% of the fair market value of the stock at the date of grant
(100% of the fair market value for qualified options). The Board of Directors
(or the Compensation Committee) has broad discretion to establish the terms and
conditions for grants of restricted stock and stock bonuses. As of October 31,
2003, there were 45,211,839 shares in the plan. Under the terms of the plan,
this number will increase by 5.0% of the number of issued and outstanding
shares of the Company each January 1st, unless the Compensation Committee reduces the amount
of the increase in any year. By action of the Compensation Committee,
the amount of the increase on January 1, 2004 will be only 2.0% of
the issued and outstanding shares of the Company. In addition, any shares subject to options or other
awards under the ONI 1997 Stock Plan, ONI 1998 Equity Incentive Plan, or ONI
1999 Equity Incentive Plan that are forfeited upon cancellation of the option or
award are available for grant and issuance under the 2000 Plan.
58
Other Equity Incentive Plans
As a result of its acquisitions of Lightera, Omnia, Cyras, ONI, WaveSmith
and Akara, the Company has assumed obligations under various equity incentive
plans previously maintained by those companies, including the obligation to
honor grants made under these plans prior to the acquisitions. The Company will
issue CIENA Common Stock upon the exercise of options outstanding under these
plans, and restricted stock issued under these plans has been converted into
restricted shares of CIENA Common Stock. The Company does not intend to issue
any further grants under these plans.
These inactive plans include:
|
|
|
The WaveSmith 2000 Stock Option and Incentive Plan
|
|
|
|
The ONI 1997 Stock Option Plan
|
|
|
|
The ONI 1998 Equity Incentive Plan
|
|
|
|
The ONI 1999 Equity Incentive Plan
|
|
|
|
The Cyras 1998 Stock Plan
|
|
|
|
The Omnia 1997 Stock Plan
|
|
|
|
The Lightera 1998 Stock Plan
|
Stock Option Activity
The following table is a summary of the Companys stock option activity
(shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Shares
|
|
Exercise Price
|
|
|
|
|
|
Balance at October 31, 2000
|
|
|
30,721
|
|
|
$
|
44.72
|
|
Granted and assumed
|
|
|
23,715
|
|
|
|
41.35
|
|
Exercised
|
|
|
(3,987
|
)
|
|
|
6.07
|
|
Canceled
|
|
|
(3,517
|
)
|
|
|
54.62
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2001
|
|
|
46,932
|
|
|
|
45.56
|
|
Granted and assumed
|
|
|
26,620
|
|
|
|
12.07
|
|
Exercised
|
|
|
(2,118
|
)
|
|
|
2.30
|
|
Canceled
|
|
|
(28,959
|
)
|
|
|
56.63
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2002
|
|
|
42,475
|
|
|
|
19.20
|
|
Granted and assumed
|
|
|
22,382
|
|
|
|
4.83
|
|
Exercised
|
|
|
(2,004
|
)
|
|
|
1.75
|
|
Canceled
|
|
|
(13,995
|
)
|
|
|
30.17
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2003
|
|
|
48,858
|
|
|
$
|
10.10
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2003, approximately 1.3 million shares of Common Stock
subject to repurchase by the Company had been issued upon the exercise of
options and restricted stock purchase agreements, and 22.6 million of the total
outstanding options were vested and not subject to repurchase by the Company
upon exercise. As of October 31, 2003, approximately 83.3 million shares are
available for issuance under these plans.
In May 2002, CIENA commenced a registered exchange offer pursuant to which
it offered eligible employees the opportunity to exchange outstanding certain
stock options for new options with an exercise price to be established in
November 2002. The stock options included in the offer had an exercise price
greater than $12.00 per share and were outstanding under the 1994 Plan, the
1999 Plan or the Cyras Systems, Inc. 1998 Plan (the Cyras Plan). New options
exchanged for options issued under the 1994 Plan and the 1999 Plan were to be
issued under the 1999 Plan, and the new options exchanged for options tendered
under the Cyras Plan were to be issued under the Cyras Plan. Except for options
issued after October 16, 2001, the new options were to be exercisable for one
half the number of shares covered by the old options tendered for exchange.
With respect to options issued after October 16, 2001, the new options were to
be exercised for the same number of shares as the old options tendered for
exchange. Eligible employees tendered for exchange in the offer options to
purchase a total of 15.1 million shares. On November 19, 2002, CIENA completed
the exchange offer and issued new options for approximately 6.4 million shares
at an exercise price of $4.53 per share.
59
The following table summarizes information with respect to stock options
outstanding at October 31, 2003 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested Options Not Subject to
|
|
|
|
|
|
|
Options Outstanding
|
|
Repurchase Upon Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Remaining
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
Range of
|
|
Outstanding
|
|
Contractual
|
|
Average
|
|
Number
|
|
Average
|
|
|
Exercise
|
|
at Oct. 31,
|
|
Life
|
|
Exercise
|
|
at Oct. 31,
|
|
Exercise
|
|
|
Price
|
|
2003
|
|
(Years)
|
|
Price
|
|
2003
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01-$ 3.92
|
|
|
|
5,101
|
|
|
|
4.30
|
|
|
$
|
1.01
|
|
|
|
4,817
|
|
|
$
|
0.97
|
|
|
|
$
|
3.93-$ 4.50
|
|
|
|
3,924
|
|
|
|
8.75
|
|
|
|
4.30
|
|
|
|
1,173
|
|
|
|
4.30
|
|
|
|
$
|
4.51-$ 4.53
|
|
|
|
12,754
|
|
|
|
9.05
|
|
|
|
4.53
|
|
|
|
1,734
|
|
|
|
4.53
|
|
|
|
$
|
4.54-$ 6.97
|
|
|
|
9,038
|
|
|
|
8.89
|
|
|
|
6.08
|
|
|
|
2,573
|
|
|
|
6.65
|
|
|
|
$
|
6.98-$ 11.88
|
|
|
|
5,065
|
|
|
|
7.41
|
|
|
|
9.58
|
|
|
|
3,164
|
|
|
|
9.38
|
|
|
|
$
|
11.89-$ 16.13
|
|
|
|
3,469
|
|
|
|
6.04
|
|
|
|
14.94
|
|
|
|
3,372
|
|
|
|
14.97
|
|
|
|
$
|
16.14-$ 19.88
|
|
|
|
7,267
|
|
|
|
7.86
|
|
|
|
16.55
|
|
|
|
3,970
|
|
|
|
16.59
|
|
|
|
$
|
19.88-$149.50
|
|
|
|
2,240
|
|
|
|
6.88
|
|
|
|
61.54
|
|
|
|
1,782
|
|
|
|
60.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.01-$149.50
|
|
|
|
48,858
|
|
|
|
7.84
|
|
|
$
|
10.10
|
|
|
|
22,585
|
|
|
$
|
12.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
In March 1998, the shareholders approved the Corporations 1998 Employee
Stock Purchase Plan (1998 ESPP) under which 5.0 million shares of common
stock had been reserved for issuance. Eligible employees may purchase a limited
number of shares of the Companys stock at 85% of the market value at certain
plan-defined dates. Approximately 1,339,000, 1,927,000 and 424,000 shares of
common stock have been issued for $4.7 million, $10.0 million, and $7.8 million
during fiscal 2003, 2002 and 2001, respectively. In March 2003 the 1998 ESPP
terminated by its own terms due to the issuance all remaining shares of the
Companys common stock available for issuance under this plan.
In March 2003, the shareholders approved the Corporations 2003 Employee
Stock Purchase plan (2003 ESPP) under which 20.0 million shares of common
stock had been reserved for issuance. Eligible employees may purchase a limited
number of shares of the Companys stock at 85% of the market value at certain
plan-defined dates. Approximately 1,487,000 shares of common stock have been
issued for $6.2 million during fiscal 2003. As of October 31, 2003
approximately 18.5 million shares are available for issuance under this plan.
Pro Forma Stock-Based Compensation
Had compensation cost for the Companys stock option plans and employee
stock purchase plan been determined based on the fair value at the grant date
for awards in fiscal years 2003, 2002 and 2001 consistent with the provisions
of SFAS 123 as amended by SFAS 148, the Companys net loss and net loss per
share for fiscal 2003 and 2001 would have increased and the Companys net loss
and net loss per share for fiscal 2002 would have decreased to the pro forma
amounts indicated below (in thousands, except per share):
The below pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
60
The weighted average fair value of each option granted under the various
stock option plans for 2001, 2002 and 2003 is $27.92, $4.88 and $3.32
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes Option Pricing Model with the following weighted
average assumptions for fiscal years 2001, 2002 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Option Plans
|
|
Employee Stock Purchase Plan
|
|
|
October 31,
|
|
October 31,
|
|
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
131
|
%
|
|
|
92
|
%
|
|
|
71
|
%
|
|
|
131
|
%
|
|
|
92
|
%
|
|
|
71
|
%
|
Risk-free interest rate
|
|
|
3.6
|
%
|
|
|
2.6
|
%
|
|
|
3.2
|
%
|
|
|
3.6
|
%
|
|
|
1.3
|
%
|
|
|
1.3
|
%
|
Expected life (years)
|
|
|
2.6
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
|
|
|
2001
|
|
2002
|
|
2003
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders as reported
|
|
$
|
(1,794,062
|
)
|
|
$
|
(1,597,499
|
)
|
|
$
|
(386,517
|
)
|
Compensation (expense) benefit, net of tax
|
|
|
(324,660
|
)
|
|
|
40,068
|
|
|
|
(22,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders pro forma
|
|
$
|
(2,118,722
|
)
|
|
$
|
(1,557,431
|
)
|
|
$
|
(409,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share as reported
|
|
$
|
(5.75
|
)
|
|
$
|
(4.37
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share pro forma
|
|
$
|
(6.79
|
)
|
|
$
|
(4.26
|
)
|
|
$
|
(0.92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions including the expected stock price volatility.
The Company uses projected volatility rates, which are based upon historical
volatility rates, trended into future years. Because the Companys employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in managements opinion, existing models,
including the Black-Scholes option-pricing model, do not necessarily provide a
reliable single measure of the fair value of the Companys options.
Employee 401(k) Plan
The Company has a 401(k) defined contribution profit sharing plan. The
plan covers all full-time employees who are not covered by a collective
bargaining agreement where retirement benefits are subject to good faith
bargaining. Participants may contribute up to 60% of pre-tax compensation,
subject to certain limitations. The Company may make discretionary annual
profit sharing contributions of up to the lesser of $30,000 or 25% of each
participants compensation. The Company has made no profit sharing
contributions to date. The plan also includes an employer matching contribution
equal to 50% of the first 3% of participating employee contributions each pay
period. During fiscal 2003, 2002, and 2001 the Company made matching
contributions of approximately $2.0 million, $4.1 million and $3.7 million
respectively
(15) COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company has certain minimum obligations under non-cancelable operating
leases expiring on various dates through 2019 for equipment and facilities.
Future annual minimum rental commitments under non-cancelable operating leases
at October 31, 2003 are as follows (in thousands):
|
|
|
|
|
Year ended October 31,
|
|
|
|
|
2004
|
|
$
|
37,810
|
|
2005
|
|
|
36,902
|
|
2006
|
|
|
35,226
|
|
2007
|
|
|
28,982
|
|
2008
|
|
|
27,089
|
|
Thereafter
|
|
|
84,996
|
|
|
|
|
|
|
|
|
$
|
251,005
|
|
|
|
|
|
|
Rental expense for fiscal 2003, 2002, and 2001 was approximately $16.6
million, $24.7 million and $19.5 million, respectively. In addition the Company
paid approximately $22.7, $7.2 and $0.0 million during fiscal 2003, 2002 and
2001, respectively, related to rent costs for restructured facilities and
unfavorable lease commitments, which was offset against the Companys
restructuring liabilities and unfavorable lease obligations, respectively.
61
Purchase Commitments with Contract Manufacturers and Suppliers
The Company relies on a small number of contract manufacturers to perform
the majority of the manufacturing operations for its products. In order to
reduce lead times and ensure adequate component supply, the Company
enters into agreements with these suppliers that allow them to procure inventory
for the Companys forecasted future demands. As of October 31, 2003, the
Company has purchase commitments of $33.3 million.
Litigation
On October 3, 2000, Stanford University and Litton Systems filed a
complaint in the United States District Court for the Central District of
California alleging that optical fiber amplifiers incorporated into CIENAs
products infringe U.S. Patent No. 4,859,016 (the 016 Patent). The complaint
seeks injunctive relief, royalties and damages. We believe that we have valid
defenses to the lawsuit and intend to defend it vigorously. On October 10,
2003, the court stayed the case pending final resolution of matters before the
U.S. Patent and Trademark Office (the PTO), including a request for and
disposition of a reexamination of the 016 Patent. On October 16, 2003, the PTO
granted reexamination of the 016 Patent, thus resulting in a continuation of
the stay of the case.
On July 19, 2000, CIENA and CIENA Properties, Inc., a wholly owned
subsidiary of CIENA, filed a complaint in the United States District Court for
the District of Delaware requesting damages and injunctive relief against
Corvis Corporation (Corvis). The suit charged Corvis with infringing four
patents relating to CIENAs optical networking communication systems and
technology. A jury trial to determine whether Corvis is infringing these
patents commenced on February 10, 2003. On February 24, 2003, the jury decided
that Corvis was infringing one of the patents and not infringing two others.
The jury was deadlocked with respect to infringement on the fourth patent. This
trial was immediately followed by a trial on Corvis affirmative defenses based
on the validity of two of the patents. On February 28, 2003, the jury in this
trial determined that the patents were valid. In April 2003, following a third
trial, another jury decided that Corvis had infringed the fourth patent on
which the previous jury had deadlocked. Based on these favorable verdicts
collectively holding that Corvis is infringing two valid CIENA patents, CIENA
has moved for an injunction to prohibit the sale by Corvis of the infringing
products. The court has not yet ruled on this motion.
As a result of the merger with ONI, we became a defendant in a securities
class action lawsuit. Beginning in August 2001, a number of substantially
identical class action complaints alleging violations of the federal securities
laws were filed in the United States District Court for the Southern District
of New York. These complaints name ONI, Hugh C. Martin, ONIs former chairman,
president and chief executive officer; Chris A. Davis, ONIs former executive
vice president, chief financial officer and administrative officer; and certain
underwriters of ONIs initial public offering as defendants. The complaints
were consolidated into a single action, and a consolidated amended complaint
was filed on April 24, 2002. The amended complaint alleges, among other things,
that the underwriter defendants violated the securities laws by failing to
disclose alleged compensation arrangements (such as undisclosed commissions or
stock stabilization practices) in the initial public offerings registration
statement and by engaging in manipulative practices to artificially inflate the
price of our common stock after the initial public offering. The amended
complaint also alleges that ONI and the named former officers violated the
securities laws on the basis of an alleged failure to disclose the
underwriters alleged compensation arrangements and manipulative practices. No
specific amount of damages has been claimed. Similar complaints have been filed
against more than 300 other issuers that have had initial public offerings
since 1998, and all of these actions have been included in a single coordinated
proceeding. Mr. Martin and Ms. Davis have been dismissed from the action
without prejudice pursuant to a tolling agreement. In July 2002, ONI and other
issuers in the consolidated cases filed motions to dismiss the amended
complaint for failure to state a claim, which was denied as to ONI on February
19, 2003. CIENA has participated, together with the other issuer defendants in
these cases, in mediated settlement negotiations that have led to a preliminary
agreement among the plaintiffs, the issuer defendants and their insurers. The
settlement, which is subject to court approval, would result in the dismissal
of the plaintiffs cases against the issuers. CIENA has agreed in principle to
the terms of this settlement. Draft settlement documents were circulated for
preliminary review in October 2003.
As a result of the merger with ONI, we also became a defendant in two
substantially identical purported class actions on behalf of ONI security
holders originally brought against ONI and members of its board of directors.
The complaints allege that the director defendants breached their fiduciary
duties to ONI in approving the merger with CIENA and seek declaratory,
injunctive and other relief permitted by equity. The plaintiffs failed to
obtain an injunction against completion of the merger. The first of these cases
was filed on February 20, 2002, in the Superior Court of the State of
California, County of San Mateo, and is encaptioned K.W. Sams, On Behalf of
Himself and All Others Similarly Situated v. ONI Systems Corporation, et al.
The second case was brought on March 19, 2002, in the Superior Court of the
State of California, County of Santa Clara, and is encaptioned Steven Myeary,
On Behalf of Himself and All Others Similarly Situated v. ONI Systems
Corporation. On April 14, 2003, the plaintiffs in these cases filed a
consolidated amended complaint and named four additional defendants: CIENA
Corporation, James F. Jordan, Kleiner Perkins Caufield & Byers and Mohr Davidow
Ventures. CIENA and the other defendants subsequently filed a
62
demurrer and served a motion for sanctions on plaintiffs based on factual inaccuracies in the consolidated amended complaint. In response, the plaintiffs
filed a corrected consolidated amended complaint, the demurrer to which is
scheduled to be heard by the court in December 2003. We believe that these
lawsuits are without merit and will continue to defend them vigorously.
(16) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments
of an Enterprise and Related Information. SFAS 131 establishes annual and
interim reporting standards for operating segments of a company. It also
requires entity-wide disclosures about the products and services an entity
provides, the material countries in which it holds assets and reports revenue,
and its major customers. The Company is not organized by multiple operating
segments for the purpose of making operating decisions or assessing
performance. Accordingly, the Company operates in one operating segment and
reports only certain enterprise-wide disclosures.
CIENAs geographic distributions of revenue are the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%
|
|
2002
|
|
%
|
|
2003
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,220,742
|
|
|
|
76.1
|
|
|
$
|
232,524
|
|
|
|
64.4
|
|
|
$
|
178,564
|
|
|
|
63.1
|
|
International
|
|
|
382,487
|
|
|
|
23.9
|
|
|
|
128,631
|
|
|
|
35.6
|
|
|
|
104,572
|
|
|
|
36.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,229
|
|
|
|
100.0
|
|
|
$
|
361,155
|
|
|
|
100.0
|
|
|
$
|
283,136
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIENAs revenue derived from products and services are the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%
|
|
2002
|
|
%
|
|
2003
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
1,518,833
|
|
|
|
94.7
|
|
|
$
|
304,155
|
|
|
|
84.2
|
|
|
$
|
240,772
|
|
|
|
85.0
|
|
Services
|
|
|
84,396
|
|
|
|
5.3
|
|
|
|
57,000
|
|
|
|
15.8
|
|
|
|
42,364
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,229
|
|
|
|
100.0
|
|
|
$
|
361,155
|
|
|
|
100.0
|
|
|
$
|
283,136
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historically, CIENA has relied upon on a limited number of customers for a
majority of the Companys revenue. During the following fiscal years customers
who each accounted for at least 10% of CIENAs revenue during the respective
periods are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years
|
|
|
|
|
|
2001
|
|
%*
|
|
2002
|
|
%*
|
|
2003
|
|
%*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sprint
|
|
$
|
463,078
|
|
|
|
28.9
|
|
|
$
|
58,739
|
|
|
|
16.3
|
|
|
$
|
n/a
|
|
|
|
|
|
Qwest
|
|
|
347,083
|
|
|
|
21.6
|
|
|
|
n/a
|
|
|
|
|
|
|
|
31,148
|
|
|
|
11.0
|
|
AT&T
|
|
|
n/a
|
|
|
|
|
|
|
|
74,111
|
|
|
|
20.5
|
|
|
|
39,444
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
810,161
|
|
|
|
50.5
|
|
|
$
|
132,850
|
|
|
|
36.8
|
|
|
$
|
70,592
|
|
|
|
24.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- denotes % of total revenue
n/a denotes revenue recognized less than 10% for the period.
(17) SUBSEQUENT EVENTS
On November 18, 2003, CIENA announced a full redemption of all of the
outstanding ONI 5.00% convertible subordinated notes due October 15, 2005. The
principal amount of the notes outstanding is $48.3 million. On the redemption
date of December 19, 2003, CIENA will pay holders 102% of the outstanding
principal amount of the notes plus accrued interest.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
63
Item 9A. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer of CIENA have
evaluated the effectiveness of the disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act), as required by paragraph (b) of Rules
13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end
of the period covered by this report the disclosure controls and procedures
were effective.
There was no change in CIENAs internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rules
13a-15 and 15d-15 under the Exchange Act during CIENAs last fiscal quarter
that materially affected, or is reasonably likely to materially affect, CIENAs
internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to the directors and executive officers of the
Company is set forth in Part I of this report under the caption Item 1.
BusinessDirectors, and Executive Officers.
Additional information on compliance with Section 16(a) of the Exchange
Act is incorporated herein by reference to the Companys definitive 2004 Proxy
Statement.
As part of our system of corporate governance, our board of directors has
adopted a code of ethics that is specifically applicable to our chief executive
officer and senior financial officers. This code of ethics is available on our
website at http://www.ciena.com/investors/corpgovernance.htm.
Item 11. Executive Compensation
The information is incorporated herein by reference to the Companys
definitive 2004 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information is incorporated herein by reference to the Companys
definitive 2004 Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information is incorporated herein by reference to the Companys
definitive 2004 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information is incorporated herein by reference to the Companys
definitive 2004 Proxy Statement.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)
|
|
1.
|
|
The information required by this item is included in Item 8 of Part
II of this Form 10-K.
|
|
|
2.
|
|
The information required by this item is included in Item 8 of Part II
of this Form 10-K.
|
|
|
3.
|
|
Exhibits: See Index to Exhibits on page 66. The Exhibits
listed in the accompanying Index to Exhibits are filed or
incorporated by reference as part of this report.
|
|
|
|
Form 8-K (Item 5 and Item 7 reported) filed on August 21, 2003.
|
|
|
|
Form 8-K (Item 5 and Item 7 reported) filed on September 3, 2003.
|
|
|
|
Form 8-K (Item 5 and Item 7 reported) filed on November 18, 2003.
|
|
|
|
Form 8-K (Item 12 reported) filed on December 11, 2003.
|
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Linthicum, County of Anne Arundel, State of Maryland, on the 11th day of
December 2003.
|
|
|
|
|
|
|
CIENA CORPORATION
|
|
|
|
|
|
|
|
By:
|
|
/s/ Gary B. Smith
|
|
|
|
|
|
|
|
|
|
Gary B. Smith
President, Chief Executive Officer
and Director
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
/s/ Patrick H. Nettles, Ph.D.
Patrick H. Nettles, Ph.D.
|
|
Executive Chairman of the
Board of Directors
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Gary B. Smith
Gary B. Smith
(Principal Executive Officer)
|
|
President, Chief Executive Officer
and Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Joseph R. Chinnici
Joseph R. Chinnici
(Principal Financial Officer)
|
|
Sr. Vice President, Finance and
Chief Financial Officer
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Andrew C. Petrik
Andrew C. Petrik
(Principal Accounting Officer)
|
|
Vice President, Controller
and Treasurer
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Stephen P. Bradley
Stephen P. Bradley, Ph.D.
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Harvey B. Cash
Harvey B. Cash
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Don H. Davis, Jr.
Don H. Davis, Jr.
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ John R. Dillon
John R. Dillon
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Lawton W. Fitt
Lawton W. Fitt
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
/s/ Judith M. OBrien
Judith M. OBrien
|
|
Director
|
|
December 11, 2003
|
|
|
|
|
|
s/ Gerald H. Taylor
Gerald H. Taylor
|
|
Director
|
|
December 11, 2003
|
65
INDEX TO EXHIBITS
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
3.1 (1)
|
|
Certificate of Amendment to Third Restated Certificate of Incorporation
|
|
|
|
3.2 (1)
|
|
Third Restated Certificate of Incorporation
|
|
|
|
3.3 (1)
|
|
Amended and Restated Bylaws
|
|
|
|
3.5 (10)
|
|
Certificate of Amendment to Third Restated Certificate of Incorporation dated March 23, 1998
|
|
|
|
3.6 (10)
|
|
Certificate of Amendment to Third Restated Certificate of Incorporation dated March 16, 2000
|
|
|
|
3.7 (13)
|
|
Certificate of Amendment to Third Restated Certificate of Incorporation dated March 13, 2001
|
|
|
|
4.1 (1)
|
|
Specimen Stock Certificate
|
|
|
|
4.2 (3)
|
|
Rights Agreement dated December 29, 1997
|
|
|
|
4.3 (17)
|
|
Amendment to Rights Agreement dated June 2, 1998
|
|
|
|
4.4 (11)
|
|
Amendment No. 2 to Rights Agreement dated September 13, 1998
|
|
|
|
4.5 (4)
|
|
Amendment No. 3 to Rights Agreement dated October 19, 1998
|
|
|
|
4.6 (12)
|
|
Indenture dated February 9, 2001 between CIENA
Corporation and First Union National Bank for 3.75% convertible
subordinated notes due February 1, 2008
|
|
|
|
4.11 (18)
|
|
Indenture dated October 27, 2000 between ONI Systems Corp. and State Street Bank and Trust Company for 5% convertible
notes due October 15, 2005
|
|
|
|
4.12 (21)
|
|
First Supplemental Indenture dated June 21, 2002 to the Indenture dated October 27,
2000 between ONI Systems Corp. and State Street Bank and Trust Company for 5%
convertible subordinated notes due October 15, 2005
|
|
|
|
10.1 (1)
|
|
Form of Indemnification Agreement for Directors and Officers
|
|
|
|
10.2 (14)
|
|
Third Amended and Restated 1994 Stock Option Plan
|
|
|
|
10.3 (1)
|
|
Form of Employee Stock Option Agreements
|
|
|
|
10.4 (1)
|
|
1996 Outside Directors Stock Option Plan
|
|
|
|
10.5 (1)
|
|
Forms of 1996 Outside Directors Stock Option Agreement
|
|
|
|
10.13 (1)
|
|
Employment Agreement dated April 9, 1994 between the Company and Patrick Nettles
|
|
|
|
10.18 (5)
|
|
Form of Transfer of Control/Severance Agreement
|
|
|
|
10.19 (6)
|
|
Lightera 1998 Stock Option Plan and Form of Stock Option Agreement
|
|
|
|
10.20 (7)
|
|
Omnia Communications, Inc. 1997 Stock Plan and Form of Agreements
|
|
|
|
66
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
|
10.21 (9)
|
|
Employment Agreement dated August 18, 1999 between the Company and Gary B. Smith
|
|
|
|
10.22 (9)
|
|
1999 Non-Officer Stock Option Plan and Form of Stock Option Agreement
|
|
|
|
10.24 (13)
|
|
Cyras Systems, Inc. 1998 Stock Plan as amended and Form of Stock Option Agreement
|
|
|
|
10.25 (15)
|
|
Amendment No. 1 to 1999 Non-Officer Stock Option Plan
|
|
|
|
10.26 (16)
|
|
Form of Amendment 1 to Transfer of Control/Severance Agreement for named executive officers (other than Gary B. Smith)
|
|
|
|
10.27 (16)
|
|
Transfer of Control/Severance Agreement between CIENA Corporation and Gary B. Smith
|
|
|
|
10.28 (19)
|
|
ONI 1997 Stock Plan
|
|
|
|
10.29 (19)
|
|
ONI 1998 Equity Incentive Plan
|
|
|
|
10.30 (19)
|
|
ONI 1999 Equity Incentive Plan
|
|
|
|
10.34 (22)
|
|
CIENA Corporation 2003 Employee Stock Purchase Plan
|
|
|
|
10.35 (23)
|
|
CIENA Corporation Nonqualified Management Deferred Compensation Plan
|
|
|
|
10.36 (24)
|
|
WaveSmith Networks, Inc. 2000 Stock Option and Incentive Plan
|
|
|
|
10.37 (25)
|
|
CIENA Corporation 2000 Equity Incentive Plan (Amended
and Restated ONI Systems Corp. 2000 Equity Incentive Plan) (Filed herewith)
|
|
|
|
21
|
|
Subsidiaries of registrant (filed herewith)
|
|
|
|
23.1
|
|
Consent of Independent Accountants (filed herewith)
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934 as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
|
(1)
|
|
Incorporated by reference from the Companys Registration Statement on Form
S-1 (333-17729).
|
(3)
|
|
Incorporated by reference from the Companys Form 8-K filed December 29, 1997.
|
(4)
|
|
Incorporated by reference from the Companys Form 8-K filed October 19, 1998.
|
(5)
|
|
Incorporated by reference from the Companys Form 10-K filed December 10, 1998.
|
(6)
|
|
Incorporated by reference from the Companys Form 10-Q filed May 21, 1999.
|
(7)
|
|
Incorporated by reference from the Companys Form 10-Q filed August 19, 1999.
|
(9)
|
|
Incorporated by reference from the Companys Form 10-K filed December 10, 1999.
|
(10)
|
|
Incorporated by reference from the Companys Form 10-Q filed May 18, 2000.
|
(11)
|
|
Incorporated by reference from the Companys Form 8-K filed September 14, 1998.
|
(12)
|
|
Incorporated by reference from the Companys Form 10-Q filed February 15, 2001.
|
(13)
|
|
Incorporated by reference from the Companys Form 10-Q filed May 17, 2001.
|
(14)
|
|
Incorporated by reference from the Companys Form S-8 filed October 30, 2001.
|
(15)
|
|
Incorporated by reference from the Companys Form 10-K filed December 13, 2001.
|
(16)
|
|
Incorporated by reference from the Companys Form 10-Q filed February 21, 2002.
|
(17)
|
|
Incorporated by reference from the Companys Form 8-K filed June 3, 1998.
|
(18)
|
|
Incorporated by reference from ONI Systems Corp.s Form 10-Q filed November 14, 2000.
|
(19)
|
|
Incorporated by reference from ONI Systems Corp.s Form S-1filed March 10, 2000 (333-32104).
|
(21)
|
|
Incorporated by reference from the Companys Form 10-K filed December 12, 2002
|
(22)
|
|
Incorporated by reference from the Companys Form S-8 filed February 19, 2003.
|
(23)
|
|
Incorporated by reference from the Companys Form 10-Q filed February 20, 2003.
|
(24)
|
|
Incorporated by reference from the Companys Form 10-Q filed August 21, 2003.
|
(25)
|
|
Effective August 19, 2003, the Companys compensation committee of the board of directors amended the ONI 2000 Equity Incentive Plan to change
the name of this plan to the CIENA Corporation 2000 Equity Incentive Plan.
|
67
EXHIBIT 10.37
CIENA CORPORATION
2000 EQUITY INCENTIVE PLAN
As Adopted April 7, 2000 and Amended May 16, 2001 and August 19, 2003
1.
PURPOSE
. The purpose of this Plan is to provide incentives to attract,
retain and motivate eligible persons whose present and potential contributions
are important to the success of the Company, its Parent and Subsidiaries, by
offering them an opportunity to participate in the Companys future performance
through awards of Options, Restricted Stock and Stock Bonuses. Capitalized
terms not defined in the text are defined in Section 23.
2.
SHARES SUBJECT TO THE PLAN
.
2.1
Number of Shares Available.
Subject to Sections 2.2 and 18, the total
number of Shares reserved and available for grant and issuance pursuant to this
Plan is 34,459,2491 Shares plus Shares that are subject to: (a) issuance upon
exercise of an Option but cease to be subject to such Option for any reason
other than exercise of such Option; (b) an Award granted hereunder but are
forfeited or are repurchased by the Company at the original issue price; and
(c) an Award that otherwise terminates without Shares being issued. In
addition, any authorized shares not issued or subject to outstanding grants
under the ONIs 1999 Equity Incentive Plan, 1998 Equity Incentive Plan and 1997
Stock Option Plan (the
Prior Plans
) on the Effective Date (as defined below)
and any shares issued under the Prior Plans that are forfeited or repurchased
by the Company or that are issuable upon exercise of options granted pursuant
to the Prior Plans that expire or become unexercisable for any reason without
having been exercised in full, will no longer be available for grant and
issuance under the Prior Plans, but will be available for grant and issuance
under this Plan. In addition, on each January 1, the aggregate number of
Shares reserved and available for grant and issuance pursuant to this Plan will
be increased automatically by a number of Shares equal to 5% of the total
outstanding shares of the Company as of the immediately preceding December 31;
provided
, that the Board may in its sole discretion reduce the amount of the
increase in any particular year; and,
provided further
, that no more than
50,000,000 shares shall be issued as ISOs (as defined in Section 5 below). At
all times the Company shall reserve and keep available a sufficient number of
Shares as shall be required to satisfy the requirements of all outstanding
Options granted under this Plan and all other outstanding but unvested Awards
granted under this Plan.
2.2
Adjustment of Shares.
In the event that the number of outstanding
shares is changed by a stock dividend, recapitalization, stock split, reverse
stock split, subdivision, combination, reclassification or similar change in
the capital structure of the Company without consideration, then (a) the number
of Shares reserved for issuance under this Plan, (b) the number of Shares that
may be granted pursuant to Sections 3 and 9 below, (c) the Exercise Prices of
and number of Shares subject to outstanding Options, and (d) the number of
Shares subject to other outstanding Awards will be proportionately adjusted,
subject to any required action by the Board or the stockholders of the Company
and compliance with applicable securities laws;
provided
,
however
, that
fractions of a Share will not be issued but will either be replaced by a cash
payment equal to the Fair Market Value of such fraction of a Share or will be
rounded up to the nearest whole Share, as determined by the Committee.
3.
ELIGIBILITY
. ISOs (as defined in Section 5 below) may be granted only
to employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisors of the Company or any Parent or Subsidiary of the Company;
provided
such consultants, contractors and advisors render bona fide services
not in connection with the offer and sale of securities in a capital-raising
transaction. No person will be eligible to receive more than 1,000,000 Shares
in any calendar year under this Plan pursuant to the grant of Awards hereunder,
other than new employees of the Company or of a Parent or Subsidiary of the
Company (including new employees who are also officers and directors of the
Company or any Parent or Subsidiary of the Company), who are eligible to
receive up to a maximum of 2,000,000 Shares in the calendar year in which they
commence their employment. A person may be granted more than one Award under
this Plan.
4.
ADMINISTRATION
.
4.1
Committee Authority.
This Plan will be administered by the Committee
or by the Board acting as the Committee. Subject to the general purposes,
terms and conditions of this Plan, and to the direction of the
Board, the Committee will have full power to implement and carry out this Plan.
The Committee will have the authority to:
|
(a)
|
|
construe and interpret this Plan, any Award
Agreement and any other agreement or document executed
pursuant to this Plan;
|
|
(a)
|
|
prescribe, amend and rescind rules and
regulations relating to this Plan or any Award;
|
|
(c)
|
|
select persons to receive Awards;
|
|
(d)
|
|
determine the form and terms of Awards;
|
|
(e)
|
|
determine the number of Shares or other
consideration subject to Awards;
|
|
(f)
|
|
determine whether Awards will be granted singly,
in combination with, in tandem with, in replacement of, or as
alternatives to, other Awards under this Plan or any other
incentive or compensation plan of the Company or any Parent or
Subsidiary of the Company;
|
|
(g)
|
|
grant waivers of Plan or Award conditions;
|
|
(h)
|
|
determine the vesting, exercisability and payment
of Awards;
|
|
(i)
|
|
correct any defect, supply any omission or
reconcile any inconsistency in this Plan, any Award or any
Award Agreement;
|
|
(j)
|
|
determine whether an Award has been earned; and
|
|
(k)
|
|
make all other determinations necessary or
advisable for the administration of this Plan.
|
4.2
Committee Discretion.
Any determination made by the Committee with
respect to any Award will be made in its sole discretion at the time of grant
of the Award or, unless in contravention of any express term of this Plan or
Award, at any later time, and such determination will be final and binding on
the Company and on all persons having an interest in any Award under this Plan.
The Committee may delegate to one or more officers of the Company the
authority to grant an Award under this Plan to Participants who are not
Insiders of the Company.
5.
OPTIONS
. The Committee may grant Options to eligible persons and will
determine whether such Options will be Incentive Stock Options within the
meaning of the Code (
ISO
) or Nonqualified Stock Options (
NQSOs
), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1
Form of Option Grant.
Each Option granted under this Plan will be
evidenced by an Award Agreement which will expressly identify the Option as an
ISO or an NQSO (
Stock Option Agreement
) and will be in such form and contain
such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2
Date of Grant.
The date of grant of an Option will be the date on
which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3
Exercise Period.
Options may be exercisable within the times or upon
the events determined by the Committee as set forth in the Stock Option
Agreement governing such Option;
provided
,
however
, that no Option will be
exercisable after the expiration of ten (10) years from the date the Option is
granted; and
2
provided further
that no ISO granted to a person who directly or
by attribution owns more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or of any Parent or Subsidiary of
the Company (
Ten Percent Stockholder
) will be exercisable after the
expiration of five (5) years from the date the ISO is granted. The Committee
also may provide for Options to become exercisable at one time or from time to
time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee
determines.
5.4
Exercise Price.
The Exercise Price of an Option will be determined by
the Committee when the Option is granted and may be not less than 85% of the
Fair Market Value of the Shares on the date of grant; provided that: (i) the
Exercise Price of an ISO will be not less than 100% of the Fair Market Value of
the Shares on the date of grant; and (ii) the Exercise Price of any ISO granted
to a Ten Percent Stockholder will not be less than 110% of the Fair Market
Value of the Shares on the date of grant. Payment for the Shares purchased may
be made in accordance with Section 8 of this Plan.
5.5
Method of Exercise.
Options may be exercised only by delivery to the
Company of a written stock option exercise agreement (the
Exercise
Agreement
) in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participants investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price for the number of Shares being
purchased.
5.6
Termination.
Notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option will always be subject to the
following:
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(a)
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If the Participant is Terminated for any reason
except death or Disability, then the Participant may exercise
such Participants Options only to the extent that such
Options would have been exercisable upon the Termination Date
no later than three (3) months after the Termination Date (or
such shorter or longer time period not exceeding five (5)
years as may be determined by the Committee, with any exercise
beyond three (3) months after the Termination Date deemed to
be an NQSO), but in any event, no later than the expiration
date of the Options.
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(b)
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If the Participant is Terminated because of
Participants death or Disability (or the Participant dies
within three (3) months after a Termination other than for
Cause or because of Participants Disability), then
Participants Options may be exercised only to the extent that
such Options would have been exercisable by Participant on the
Termination Date and must be exercised by Participant (or
Participants legal representative or authorized assignee) no
later than twelve (12) months after the Termination Date (or
such shorter or longer time period not exceeding five (5)
years as may be determined by the Committee, with any such
exercise beyond (a) three (3) months after the Termination
Date when the Termination is for any reason other than the
Participants death or Disability, or (b) twelve (12) months
after the Termination Date when the Termination is for
Participants death or Disability, deemed to be an NQSO), but
in any event no later than the expiration date of the Options.
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(c)
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Notwithstanding the provisions in paragraph
5.6(a) above, if a Participant is terminated for Cause,
neither the Participant, the Participants estate nor such
other person who may then hold the Option shall be entitled to
exercise any Option with respect to any Shares whatsoever,
after termination of service, whether or not after termination
of service the Participant may receive payment from the
Company or Subsidiary for vacation pay, for services rendered
prior to termination, for services rendered for the day on
which termination occurs, for salary in lieu of notice, or for
any other benefits. In making such determination, the Board
shall give the Participant an opportunity to present to the
Board evidence on his behalf. For the purpose of this
paragraph, termination of service shall be deemed to occur on
the date when the Company dispatches notice or advice to the
Participant that his service is terminated.
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5.7
Limitations on Exercise
. The Committee may specify a reasonable
minimum number of
3
Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8
Limitations on ISO.
The aggregate Fair Market Value (determined as of
the date of grant) of Shares with respect to which ISO are exercisable for the first time by a
Participant during any calendar year (under this Plan or under any other
incentive stock option plan of the Company, Parent or Subsidiary of the
Company) will not exceed $100,000. If the Fair Market Value of Shares on the
date of grant with respect to which ISO are exercisable for the first time by a
Participant during any calendar year exceeds $100,000, then the Options for the
first $100,000 worth of Shares to become exercisable in such calendar year will
be ISO and the Options for the amount in excess of $100,000 that become
exercisable in that calendar year will be NQSOs. In the event that the Code or
the regulations promulgated thereunder are amended after the Effective Date of
this Plan to provide for a different limit on the Fair Market Value of Shares
permitted to be subject to ISO, such different limit will be automatically
incorporated herein and will apply to any Options granted after the effective
date of such amendment.
5.9
Modification, Extension or Renewal.
The Committee may modify, extend
or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participants rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding
Options without the consent of Participants affected by a written notice to
them;
provided
,
however
, that the Exercise Price may not be reduced below the
minimum Exercise Price that would be permitted under Section 5.4 of this Plan
for Options granted on the date the action is taken to reduce the Exercise
Price.
5.10
No Disqualification.
Notwithstanding any other provision in this
Plan, no term of this Plan relating to ISO will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6.
RESTRICTED STOCK
. A Restricted Stock Award is an offer by the Company
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the price to be paid (the
Purchase Price
), the
restrictions to which the Shares will be subject, and all other terms and
conditions of the Restricted Stock Award, subject to the following:
6.1
Form of Restricted Stock Award.
All purchases under a Restricted
Stock Award made pursuant to this Plan will be evidenced by an Award Agreement
(
Restricted Stock Purchase Agreement
) that will be in such form (which need
not be the same for each Participant) as the Committee will from time to time
approve, and will comply with and be subject to the terms and conditions of
this Plan. The offer of Restricted Stock will be accepted by the Participants
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date the
Restricted Stock Purchase Agreement is delivered to the person. If such person
does not execute and deliver the Restricted Stock Purchase Agreement along with
full payment for the Shares to the Company within thirty (30) days, then the
offer will terminate, unless otherwise determined by the Committee.
6.2
Purchase Price.
The Purchase Price of Shares sold pursuant to a
Restricted Stock Award will be determined by the Committee on the date the
Restricted Stock Award is granted, except in the case of a sale to a Ten
Percent Stockholder, in which case the Purchase Price will be 100% of the Fair
Market Value. Payment of the Purchase Price may be made in accordance with
Section 8 of this Plan.
6.3
Terms of Restricted Stock Awards.
Restricted Stock Awards shall be
subject to such restrictions as the Committee may impose. These restrictions
may be based upon completion of a specified number of years of service with the
Company or upon completion of the performance goals as set out in advance in
the Participants individual Restricted Stock Purchase Agreement. Restricted
Stock Awards may vary from Participant to Participant and between groups of
Participants. Prior to the grant of a Restricted Stock Award, the Committee
shall: (a) determine the nature, length and starting date of any Performance
Period for the Restricted Stock Award; (b) select from among the Performance
Factors to be used to measure performance goals, if any; and (c) determine the
number of Shares that may be awarded to the Participant. Prior to the payment
of any Restricted Stock Award, the Committee shall determine the extent to
which such Restricted Stock Award has been earned. Performance Periods may
overlap
4
and Participants may participate simultaneously with respect to
Restricted Stock Awards that are subject to different Performance Periods and
having different performance goals and other criteria.
6.4
Termination During Performance Period.
If a Participant is Terminated
during a Performance Period for any reason, then such Participant will be entitled to
payment (whether in Shares, cash or otherwise) with respect to the Restricted
Stock Award only to the extent earned as of the date of Termination in
accordance with the Restricted Stock Purchase Agreement, unless the Committee
will determine otherwise.
7.
STOCK BONUSES
.
7.1
Awards of Stock Bonuses.
A Stock Bonus is an award of Shares (which
may consist of Restricted Stock) for services rendered to the Company or any
Parent or Subsidiary of the Company. A Stock Bonus may be awarded for past
services already rendered to the Company, or any Parent or Subsidiary of the
Company pursuant to an Award Agreement (the
Stock Bonus Agreement
) that will
be in such form (which need not be the same for each Participant) as the
Committee will from time to time approve, and will comply with and be subject
to the terms and conditions of this Plan. A Stock Bonus may be awarded upon
satisfaction of such performance goals as are set out in advance in the
Participants individual Award Agreement (the
Performance Stock Bonus
Agreement
) that will be in such form (which need not be the same for each
Participant) as the Committee will from time to time approve, and will comply
with and be subject to the terms and conditions of this Plan. Stock Bonuses
may vary from Participant to Participant and between groups of Participants,
and may be based upon the achievement of the Company, Parent or Subsidiary
and/or individual performance factors or upon such other criteria as the
Committee may determine.
7.2
Terms of Stock Bonuses.
The Committee will determine the number of
Shares to be awarded to the Participant. If the Stock Bonus is being earned
upon the satisfaction of performance goals pursuant to a Performance Stock
Bonus Agreement, then the Committee will: (a) determine the nature, length and
starting date of any Performance Period for each Stock Bonus; (b) select from
among the Performance Factors to be used to measure the performance, if any;
and (c) determine the number of Shares that may be awarded to the Participant.
Prior to the payment of any Stock Bonus, the Committee shall determine the
extent to which such Stock Bonuses have been earned. Performance Periods may
overlap and Participants may participate simultaneously with respect to Stock
Bonuses that are subject to different Performance Periods and different
performance goals and other criteria. The number of Shares may be fixed or may
vary in accordance with such performance goals and criteria as may be
determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3
Form of Payment.
The earned portion of a Stock Bonus may be paid
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash
or whole Shares or a combination thereof, either in a lump sum payment or in
installments, all as the Committee will determine.
8.
PAYMENT FOR SHARE PURCHASES
.
8.1
Payment.
Payment for Shares purchased pursuant to this Plan may be
made in cash (by check) or, where expressly approved for the Participant by the
Committee and where permitted by law:
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(a)
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by cancellation of indebtedness of the Company to
the Participant;
|
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(b)
|
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by surrender of shares that either: (1) have
been owned by Participant for more than six (6) months and
have been paid for within the meaning of SEC Rule 144 (and, if
such shares were purchased from the Company by use of a
promissory note, such note has been fully paid with respect to
such shares); or (2) were obtained by Participant in the
public market;
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(c)
|
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by tender of a full recourse promissory note
having such terms as may be approved by the Committee and
bearing interest at a rate sufficient to avoid imputation of
income under Sections 483 and 1274 of the Code;
provided
,
however
, that Participants who are not
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5
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employees or directors
of the Company will not be entitled to purchase Shares with a
promissory note unless the note is adequately secured by
collateral other than the Shares;
|
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(d)
|
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by waiver of compensation due or accrued to the
Participant for services rendered;
|
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(e)
|
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with respect only to purchases upon exercise of
an Option, and provided that a public market for the Companys
stock exists:
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(1)
|
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through a same day sale commitment
from the Participant and a broker-dealer that is a
member of the National Association of Securities Dealers
(an
NASD Dealer
) whereby the Participant irrevocably
elects to exercise the Option and to sell a portion of
the Shares so purchased to pay for the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise Price
directly to the Company; or
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(2)
|
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through a margin commitment from the Participant and a NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge
the Shares so purchased to the NASD Dealer in a margin account as security for
a loan from the NASD Dealer in the amount of the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of such Shares to forward the
Exercise Price directly to the Company; or
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(f)
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by any combination of the foregoing.
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8.2
Loan Guarantees
. The Committee may help the Participant pay for
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. [
RESERVED
]
10.
WITHHOLDING TAXES
.
10.1
Withholding Generally
. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding
tax requirements.
10.2
Stock Withholding
. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay the
Company the amount required to be withheld, the Committee may in its sole
discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be
issued that number of Shares having a Fair Market Value equal to the minimum
amount required to be withheld, determined on the date that the amount of tax
to be withheld is to be determined. All elections by a Participant to have
Shares withheld for this purpose will be made in accordance with the
requirements established by the Committee and be in writing in a form
acceptable to the Committee.
11.
TRANSFERABILITY
.
11.1 Except as otherwise provided in this Section 11, Awards granted under
this Plan, and any interest therein, will not be transferable or assignable by
Participant, and may not be made subject to execution, attachment or similar
process, otherwise than by will or by the laws of descent and distribution or
as determined by the Committee and set forth in the Award Agreement with
respect to Awards that are not ISOs.
11.2
All Awards other than NQSOs.
All Awards other than NQSOs shall be
exercisable: (i) during the Participants lifetime, only by (A) the
Participant, or (B) the Participants guardian or legal representative; and
(ii) after Participants death, by the legal representative of the
Participants heirs or legatees.
11.3
NQSOs
. Unless otherwise restricted by the Committee, an NQSO shall
be exercisable: (i) during the Participants lifetime only by (A) the
Participant, (B) the Participants guardian or legal representative, (C) a
Family Member of the Participant who has acquired the NQSO by permitted
transfer; and (ii) after Participants
6
death, by the legal representative of
the Participants heirs or legatees. Permitted transfer means, as authorized
by this Plan and the Committee in an NQSO, any transfer effected by the
Participant during the Participants lifetime of an interest in such NQSO but
only such transfers which are by gift or domestic relations order. A permitted
transfer does not include any transfer for value and neither of the following
are transfers for value: (a) a transfer of under a domestic relations order in
settlement of marital property rights or (b) a transfer to an entity in which
more than fifty percent of
the voting interests are owned by Family Members or the Participant in exchange
for an interest in that entity.
12.
PRIVILEGES OF STOCK OWNERSHIP; RESTRICTIONS ON SHARES
.
12.1
Voting and Dividends.
No Participant will have any of the rights of
a stockholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a stockholder and have all the rights of a stockholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares;
provided
, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as
the Restricted Stock;
provided
,
further
, that the Participant will have no
right to retain such stock dividends or stock distributions with respect to
Shares that are repurchased at the Participants Purchase Price or Exercise
Price pursuant to Section 12.
12.2
Financial Statements.
The Company will provide financial statements
to each Participant prior to such Participants purchase of Shares under this
Plan, and to each Participant annually during the period such Participant has
Awards outstanding;
provided
,
however
, the Company will not be required to
provide such financial statements to Participants whose services in connection
with the Company assure them access to equivalent information.
12.3
Restrictions on Shares.
At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase a portion of or all Unvested Shares held by a Participant
following such Participants Termination at any time within ninety (90) days
after the later of Participants Termination Date and the date Participant
purchases Shares under this Plan, for cash and/or cancellation of purchase
money indebtedness, at the Participants Exercise Price or Purchase Price, as
the case may be.
13.
CERTIFICATES
. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable federal, state or
foreign securities law, or any rules, regulations and other requirements of the
SEC or any stock exchange or automated quotation system upon which the Shares
may be listed or quoted.
14.
ESCROW; PLEDGE OF SHARES
. To enforce any restrictions on a
Participants Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause
a legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will
be required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participants obligation to
the Company under the promissory note;
provided
,
however
, that the Committee
may require or accept other or additional forms of collateral to secure the
payment of such obligation and, in any event, the Company will have full
recourse against the Participant under the promissory note notwithstanding any
pledge of the Participants Shares or other collateral. In connection with any
pledge of the Shares, Participant will be required to execute and deliver a
written pledge agreement in such form as the Committee will from time to time
approve. The Shares purchased with the promissory note may be released from
the pledge on a pro rata basis as the promissory note is paid.
15.
EXCHANGE AND BUYOUT OF AWARDS
. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash, Shares
(including Restricted Stock) or other consideration, based on such terms and
conditions as the Committee and the Participant may agree.
7
16.
SECURITIES LAW AND OTHER REGULATORY COMPLIANCE
. An Award will not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of
exercise or other issuance. Notwithstanding any other provision in this Plan,
the Company will have no obligation to issue or deliver certificates for Shares
under this Plan prior to: (a) obtaining any approvals from governmental
agencies that the Company determines are necessary or advisable; and/or (b)
completion of any registration or other qualification of such Shares under any
state or federal law or ruling of any governmental body that the Company
determines to be necessary or advisable. The Company will be under no
obligation to register the Shares with the SEC or to effect compliance with the
registration, qualification or listing requirements of any state securities
laws, stock exchange or automated quotation system, and the Company will have
no liability for any inability or failure to do so.
17.
NO OBLIGATION TO EMPLOY
. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the
right of the Company or any Parent or Subsidiary of the Company to terminate
Participants employment or other relationship at any time, with or without
cause.
18.
CORPORATE TRANSACTIONS
.
18.1
Assumption or Replacement of Awards by Successor
. In the event of
(a) a dissolution or liquidation of the Company, (b) a merger or consolidation
in which the Company is not the surviving corporation (other than a merger or
consolidation with a wholly-owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings and the Awards granted under this Plan are assumed, converted or
replaced by the successor corporation, which assumption will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company immediately prior to such
merger (other than any stockholder that merges, or which owns or controls
another corporation that merges, with the Company in such merger) cease to own
their shares or other equity interest in the Company, (d) the sale of
substantially all of the assets of the Company, or (e) the acquisition, sale,
or transfer of more than 50% of the outstanding shares of the Company by tender
offer or similar transaction (each, a
Corporate Transaction
), any or all
outstanding Awards may be assumed, converted or replaced by the successor
corporation (if any), which assumption, conversion or replacement will be
binding on all Participants. In the alternative, the successor corporation may
substitute equivalent Awards or provide substantially similar consideration to
Participants as was provided to stockholders (after taking into account the
existing provisions of the Awards). The successor corporation may also issue,
in place of outstanding Shares of the Company held by the Participants,
substantially similar shares or other property subject to repurchase
restrictions no less favorable to the Participant. In the event such successor
corporation (if any) refuses to assume or substitute Awards, as provided above,
pursuant to a transaction described in this Subsection 18.1, such Awards will
expire on such transaction at such time and on such conditions as the Committee
will determine. Notwithstanding anything in this Plan to the contrary, the
Committee may, in its sole discretion, provide that the vesting of any or all
Awards granted pursuant to this Plan will accelerate upon a transaction
described in this Section 18. If the Committee exercises such discretion with
respect to Options, such Options will become exercisable in full prior to the
consummation of such event at such time and on such conditions as the Committee
determines, and if such Options are not exercised prior to the consummation of
the corporate transaction, they shall terminate at such time as determined by
the Committee.
18.2
Other Treatment of Awards
. Subject to any greater rights granted to
Participants under the foregoing provisions of this Section 18, in the event of
the occurrence of any Corporate Transaction described in Section 18.1, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation, or sale of assets.
18.3
Assumption of Awards by the Company.
The Company, from time to time,
also may substitute or assume outstanding awards granted by another company,
whether in connection with an acquisition of such other company or otherwise,
by either; (a) granting an Award under this Plan in substitution of such other
companys award; or (b) assuming such award as if it had been granted under
this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible
if the holder of the substituted or assumed award would have been eligible to
be granted an Award under this Plan if the
8
other company had applied the rules
of this Plan to such grant. In the event the Company assumes an award granted
by another company, the terms and conditions of such award will remain
unchanged (
except
that the exercise price and the number and nature of Shares
issuable upon exercise of any such option will be adjusted appropriately
pursuant to Section 424(a) of the Code). In the event the Company elects to
grant a new Option rather than assuming an existing
option, such new Option may be granted with a similarly adjusted Exercise
Price.
19.
ADOPTION AND STOCKHOLDER APPROVAL
. This Plan will become effective on
the date on which the registration statement filed by the Company with the SEC
under the Securities Act registering the initial public offering of the
Companys Common Stock is declared effective by the SEC (the
Effective Date
).
This Plan shall be approved by the stockholders of the Company (excluding
Shares issued pursuant to this Plan), consistent with applicable laws, within
twelve (12) months before or after the date this Plan is adopted by the Board.
Upon the Effective Date, the Committee may grant Awards pursuant to this Plan;
provided
,
however
, that: (a) no Option may be exercised prior to initial
stockholder approval of this Plan; (b) no Option granted pursuant to an
increase in the number of Shares subject to this Plan approved by the Board
will be exercised prior to the time such increase has been approved by the
stockholders of the Company; (c) in the event that initial stockholder approval
is not obtained within the time period provided herein, all Awards granted
hereunder shall be cancelled, any Shares issued pursuant to any Awards shall be
cancelled and any purchase of Shares issued hereunder shall be rescinded; and
(d) in the event that stockholder approval of such increase is not obtained
within the time period provided herein, all Awards granted pursuant to such
increase will be cancelled, any Shares issued pursuant to any Award granted
pursuant to such increase will be cancelled, and any purchase of Shares
pursuant to such increase will be rescinded.
20.
TERM OF PLAN/GOVERNING LAW
. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the date this Plan is
adopted by the Board or, if earlier, the date of stockholder approval. This
Plan and all agreements thereunder shall be governed by and construed in
accordance with the laws of the State of California.
21.
AMENDMENT OR TERMINATION OF PLAN
. The Board may at any time terminate
or amend this Plan in any respect, including without limitation amendment of
any form of Award Agreement or instrument to be executed pursuant to this Plan;
provided
,
however
, that the Board will not, without the approval of the
stockholders of the Company, amend this Plan in any manner that requires such
stockholder approval.
22.
NONEXCLUSIVITY OF THE PLAN
. Neither the adoption of this Plan by the
Board, the submission of this Plan to the stockholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and bonuses otherwise than under this Plan, and such
arrangements may be either generally applicable or applicable only in specific
cases.
23.
DEFINITIONS
.
As used in this Plan, the following terms will have the
following meanings:
Award
means any award under this Plan, including any Option, Restricted
Stock or Stock Bonus.
Award Agreement
means, with respect to each Award, the signed written
agreement between the Company and the Participant setting forth the terms and
conditions of the Award.
Board
means the Board of Directors of the Company.
Cause
means the commission of an act of theft, embezzlement, fraud,
dishonesty or a breach of fiduciary duty to the Company or a Parent or
Subsidiary of the Company.
Code
means the Internal Revenue Code of 1986, as amended.
Committee
means the Compensation Committee of the Board.
Company
means CIENA Corporation or any successor corporation.
Disability
means a disability, whether temporary or permanent, partial
or total, as determined by the Committee.
9
Exchange Act
means the Securities Exchange Act of 1934, as amended.
Exercise Price
means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
Fair Market Value
means, as of any date, the value of a share of the
Companys Common Stock determined as follows:
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(a)
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if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq National
Market on the date of determination as reported in
The Wall
Street Journal
;
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(b)
|
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if such Common Stock is publicly traded and is
then listed on a national securities exchange, its closing
price on the date of determination on the principal national
securities exchange on which the Common Stock is listed or
admitted to trading as reported in
The Wall Street Journal
;
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(c)
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if such Common Stock is publicly traded but is
not quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange, the
average of the closing bid and asked prices on the date of
determination as reported in
The Wall Street Journal
;
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(d)
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in the case of an Award made on the Effective
Date, the price per share at which shares of the Companys
Common Stock are initially offered for sale to the public by
the Companys underwriters in the initial public offering of
the Companys Common Stock pursuant to a registration
statement filed with the SEC under the Securities Act; or
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(e)
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if none of the foregoing is applicable, by the
Committee in good faith.
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Family Member
includes any of the following:
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(a)
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child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, or sister-in-law of the Participant, including
any such person with such relationship to the Participant by
adoption;
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(b)
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any person (other than a tenant or employee)
sharing the Participants household;
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(c)
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a trust in which the persons in (a) and (b) have
more than fifty percent of the beneficial interest;
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(d)
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a foundation in which the persons in (a) and (b)
or the Participant control the management of assets; or
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(e)
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any other entity in which the persons in (a) and
(b) or the Participant own more than fifty percent of the
voting interest.
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Insider
means an officer or director of the Company or any other person
whose transactions in the Companys Common Stock are subject to Section 16 of
the Exchange Act.
Option
means an award of an option to purchase Shares pursuant to
Section 5.
Outside Director
means a member of the Board who is not an employee of
the Company or any Parent or Subsidiary.
Parent
e means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company if each of such corporations
other than the Company owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
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Participant
means a person who receives an Award under this Plan.
Performance Factors
means the factors selected by the Committee from
among the following measures to determine whether the performance goals
established by the Committee and applicable to Awards have been satisfied:
|
(a)
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Net revenue and/or net revenue growth;
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(b)
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Earnings before income taxes and amortization and/or earnings before
|
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income taxes and amortization growth;
|
|
(c)
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Operating income and/or operating income growth;
|
|
(d)
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Net income and/or net income growth;
|
|
(e)
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Earnings per share and/or earnings per share growth;
|
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(f)
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Total stockholder return and/or total stockholder return growth;
|
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(h)
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Operating cash flow return on income;
|
|
(i)
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Adjusted operating cash flow return on income;
|
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(j)
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Economic value added; and
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(k)
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Individual confidential business objectives.
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Performance Period
means the period of service determined by the
Committee, not to exceed five years, during which years of service or
performance is to be measured for Restricted Stock Awards or Stock Bonuses.
Plan
means this CIENA Corporation 2000 Equity Incentive Plan, as amended
from time to time.
Restricted Stock Award
means an award of Shares pursuant to Section 6.
SEC
means the Securities and Exchange Commission.
Securities Act
means the Securities Act of 1933, as amended.
Shares
means shares of the Companys Common Stock reserved for issuance
under this Plan, as adjusted pursuant to Sections 2 and 18, and any successor
security.
Stock Bonus
means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
Subsidiary
means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain owns stock possessing 50%
or more of the total combined voting power of all classes of stock in one of
the other corporations in such chain.
Termination
or
Terminated
means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director, consultant, independent
contractor, or advisor to the Company or a Parent or Subsidiary of the Company.
An employee will not be deemed to have ceased to provide services in the case
of (i) sick leave, (ii) military leave, or (iii) any other leave of absence
approved by the Committee, provided, that such leave is for a period of not
more than 90 days, unless reemployment upon the expiration of such leave is
guaranteed by contract or statute or unless provided otherwise pursuant to
formal policy adopted from time to time by the Company and issued and
promulgated to employees in writing. In the case of
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any employee on an approved leave of absence, the Committee may make such provisions respecting
suspension of vesting of the Award while on leave from the employ of the
Company or a Subsidiary as it may deem appropriate,
except that in no event may an Option be exercised after the expiration of the
term set forth in the Option agreement. The Committee will have sole
discretion to determine whether a Participant has ceased to provide services
and the effective date on which the Participant ceased to provide services (the
Termination Date
).
Unvested Shares
means Unvested Shares as defined in the Award
Agreement.
Vested Shares
means Vested Shares as defined in the Award Agreement.
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