FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 0-12751
Corvis Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2041343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7015 Albert Einstein Drive, Columbia, Maryland 21046-9400
(Address of principal executive offices) (Zip Code)
(443) 259-4000
(Registrant's telephone number, including area code)
____________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
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___________
-----------
Number of shares of Common Stock, $0.01 par value, outstanding at October 27,
2001: 362,054,063.
TABLE OF CONTENTS
Page
----
Part I - Financial Information
Item 1. Financial Statements
Unaudited condensed consolidated balance sheets as of December 30, 2000 and
September 29, 2001................................................................. 3
Unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2000 and September 29, 2001............................. 4
Unaudited condensed consolidated statements of cash flows for the nine months
ended September 30, 2000 and September 29, 2001.................................... 5
Notes to unaudited condensed consolidated financial statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk........................... 19
Part II - Other Information
Item 1. Legal Proceedings................................................................... 20
Item 2. Changes in Securities and Use of Proceeds........................................... 21
Item 3. Defaults Upon Senior Securities..................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................. 21
Item 5. Other Information................................................................... 21
Item 6. Exhibits and Reports on Form 8-K.................................................... 21
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 30, September 29,
ASSETS 2000 2001
------ ----------- ------------
Current assets:
Cash and cash equivalents .................................................. $ 1,024,758 $ 714,976
Trade accounts receivable .................................................. 16,085 57,105
Inventory, net ............................................................. 219,414 184,347
Other current assets ....................................................... 26,802 28,836
----------- -----------
Total current assets .................................................. 1,287,059 985,264
Restricted cash ................................................................. 46,292 46,292
Property and equipment, net ..................................................... 106,681 171,610
Goodwill and other intangible assets, net ....................................... 929,204 160,188
Other long-term assets, net ..................................................... 12,600 21,973
----------- -----------
Total assets .......................................................... $ 2,381,836 $ 1,385,327
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable, current portion ............................................. $ 1,438 $ 1,705
Capital lease obligations, current portion ................................. 1,841 5,990
Accounts payable ........................................................... 90,995 24,338
Accrued expenses and other liabilities ..................................... 20,745 39,594
Provision for restructuring and other charges .............................. -- 28,904
----------- -----------
Total current liabilities ............................................. 115,019 100,531
Noncurrent liabilities:
Notes payable, net of current portion ...................................... 44,529 44,442
Capital lease obligations, net of current portion .......................... 1,380 2,439
Deferred lease liability and other ......................................... 4,315 3,579
----------- -----------
Total liabilities ..................................................... 165,243 150,991
Commitments and contingencies
Redeemable stock ................................................................ 30,000 30,000
Stockholders' equity:
Common stock--$0.01 par value; 1,600,000,000 shares authorized;
348,039,489 shares issued and outstanding as of December 30,
2000; 360,494,157 shares issued and outstanding as of
September 29, 2001 ....................................................... 3,478 3,603
Additional paid-in capital ................................................. 2,497,773 2,587,404
Accumulated other comprehensive income (loss):
Foreign currency translation adjustment .................................. 60,176 (8,550)
Accumulated deficit ........................................................ (374,834) (1,378,121)
----------- -----------
Total stockholders' equity ................................................. 2,186,593 1,204,336
----------- -----------
Total liabilities, redeemable stock and stockholders' equity........... $2,381,836 $ 1,385,327
=========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
----------------------------- -------------------------------
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
------------ -------------- ------------- --------------
Revenue .......................................... $ 22,911 $ 24,157 $ 22,911 $ 173,203
Cost of Revenue:
Product sales ............................... 14,507 15,554 14,507 108,999
Inventory write-downs and other
charges .................................. -- -- -- 99,166
----------- ----------- ----------- -----------
Gross profit (loss) .................... 8,404 8,603 8,404 (34,962)
----------- ----------- ----------- -----------
Operating expenses:
Research and development, exclusive
of equity-based expense ................... 24,944 34,827 58,601 117,751
Sales and marketing, exclusive of
equity-based expense....................... 9,481 12,672 18,485 43,185
General and administrative, exclusive
of equity-based expense ................... 9,926 7,652 18,071 27,163
Equity-based expense:
Research and development ............... 13,049 10,940 14,697 36,368
Sales and marketing .................... 12,528 8,265 48,057 15,560
General and administrative ............. 7,812 8,997 9,269 27,346
Amortization of intangible assets ........... 9,069 12,014 9,266 113,890
Purchased research and development .......... -- -- 40,300 --
Restructuring, impairment and
other charges ............................ -- 131 -- 606,866
----------- ----------- ----------- -----------
Total operating expenses ............... 86,809 95,498 216,746 988,129
----------- ----------- ----------- -----------
Operating loss ......................... (78,405) (86,895) (208,342) (1,023,091)
Interest income and other, net ................... 12,053 6,269 14,418 19,804
----------- ----------- ----------- -----------
Net loss .................................... $ (66,352) $ (80,626) $ (193,924) $(1,003,287)
Other comprehensive income (loss) -- Foreign
currency translation adjustment ............... (13,159) 11,949 (13,159) (68,726)
----------- ----------- ----------- -----------
Comprehensive loss .......................... $ (79,511) $ (68,677) $ (207,083) $(1,072,013)
=========== =========== =========== ===========
Basic and diluted net loss per common
share .............................. $ (0.29) $ (0.23) $ (1.92) $ (2.87)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding ................. 226,094 352,335 101,094 349,490
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
------------------------------
September 30, September 29,
2000 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (193,924) $(1,003,287)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 14,606 148,245
Equity-based expense 72,023 79,274
Amortization of deferred financing fees 1,117 --
Purchased research and development 40,300 --
Restructuring, impairment and other charges -- 663,480
Asset impairment and other non-cash expenses -- 8,682
Changes in operating assets and liabilities:
Increase in accounts receivable (13,360) (41,020)
Increase in inventory, net (107,496) (30,756)
Increase in other assets (9,675) (4,940)
Increase (decrease) in accounts payable and accrued expenses 38,353 (20,603)
---------- -----------
Net cash used in operating activities (158,056) (200,925)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (46,540) (93,634)
Cash acquired in business combination 23,840 --
Increase in deposits and other non-current assets (2,000) (15,150)
---------- -----------
Net cash used in investing activities (24,700) (108,784)
---------- -----------
Cash flows from financing activities:
Restricted cash (126) --
Payments on note payable and capital leases (10,942) (3,609)
Proceeds from the issuance of stock 1,118,381 5,420
---------- -----------
Net cash provided by financing activities 1,107,313 1,811
---------- -----------
Effect of exchange rate changes on cash and cash (1,874) (1,884)
equivalents ---------- -----------
Net increase (decrease) in cash and cash equivalents 922,683 (309,782)
Cash and cash equivalents--beginning 244,597 1,024,758
---------- -----------
Cash and cash equivalents--ending $1,167,280 $ 714,976
========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 639 $ 2,866
========== ===========
Supplemental disclosure of noncash activities:
Financed leasehold improvements $ 2,105 $ --
========== ===========
Obligations under capital lease $ -- $ 3,299
========== ===========
Purchase business combinations consideration paid with $ 218,706 $ --
preferred stock ========== ===========
Intangible assets acquired through the issuance of common stock $ 35,000 $ --
========== ===========
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(1) Summary of Significant Accounting Policies and Practices
(a) Basis of Presentation
The unaudited condensed consolidated financial statements included herein
for Corvis Corporation and subsidiaries (the "Company") have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the condensed
consolidated financial statements included in this report reflect all normal
recurring adjustments which the Company considers necessary for the fair
presentation of the results of operations for the interim periods. Certain
information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the information
presented. The operating results for interim periods are not necessarily
indicative of the operating results for the entire year.
These financial statements should be read in conjunction with the Company's
December 30, 2000 audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed on March 29, 2001.
(b) Revenue and Costs of Revenue
Revenue from product sales is recognized upon execution of a contract and
the completion of all delivery obligations provided that there are no
uncertainties regarding customer acceptance and collectibility is deemed
probable. If uncertainties exist, revenue is recognized when such uncertainties
are resolved.
Revenue from installation services is recognized as the services are
performed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying condensed consolidated balance sheets.
Costs of revenue include the costs of manufacturing the Company's products
and other costs associated with warranty and other contractual obligations,
inventory obsolescence costs and overhead related to the Company's
manufacturing, engineering, finishing and installation. Warranty reserves are
determined based upon actual warranty cost experience, estimates of component
failure rates and management's industry experience.
-6-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(c) Uses of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Inventory Write-downs, Restructuring and Other Charges
Recently, unfavorable economic conditions have resulted in reduced capital
expenditures by telecommunications service providers. In response to these
conditions, the Company implemented restructuring plans, approved by the
Company's Board of Directors, designed to decrease the Company's business
expenses and to align resources for long-term growth opportunities.
Additionally, the Company evaluated the carrying value of its long-lived assets
in light of the new economic environment. As a result of these initiatives, the
Company recorded the following restructuring and other charges during 2001:
Provision
Balance
Total Cash Non-cash September 29,
Charge Payments Charge 2001
-------- -------- -------- -------
Costs of revenue, special charges
Inventory write-down and open purchase
commitments .................................. $ 99,166 $ 8,734 $ 65,823 $24,609
-------- ------- -------- -------
Restructuring and other charges:
Workforce reduction........................... 9,512 4,274 5,061 177
Facility consolidations and idle equipment.... 9,059 640 4,301 4,118
Write-down of impaired goodwill............... 588,295 -- 588,295 --
-------- ------- -------- -------
Total restructuring and other charges..... 606,866 4,914 597,657 4,295
-------- ------- -------- -------
Impairment of investments (included in interest
income and other, net)....................... 8,682 -- 8,682 --
-------- ------- -------- -------
Total........................................... $714,714 $13,648 $672,162 $28,904
======== ======= ======== =======
(a) Cost of revenue; special charges
The restructuring plans approved by the Company's Board of Directors during
the second quarter 2001 include discontinuance of certain product lines and
reduction of planned production levels that resulted in second quarter charges
of approximately $99.2 million, which has been classified as a component of
costs of revenues. These charges include approximately $65.8 million associated
with the
-7-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
write-down of excess inventory and $33.4 million in incremental costs associated
with the cancellation of certain open purchase commitments.
(b) Workforce reduction
The Company's restructuring plans also included work force reduction
programs that resulted in the reduction of approximately 340 employees or 24% of
the Company's North American employee base. As a result, the Company recorded
restructuring charges of approximately $9.4 million in the second quarter of
2001 associated with termination plans within the United States and $0.1 million
recorded in the third quarter associated with termination plans in the Company's
Canadian operations, net of reductions in estimates for second quarter
restructuring charges. Restructuring charges recorded during the nine months
ended September 30, 2001 consisted of $4.4 million for severance and benefits
and $5.1 million for equity-based compensation.
(c) Facility Consolidation and Idle Equipment
To reduce costs and improve productivity, the restructuring plans approved
in the second quarter 2001 included the consolidation of excess facilities and
equipment. Losses on excess facility exit plans include $9.1 million in
incremental lease exit costs. Consolidation of facilities is expected to be
completed in early 2002.
(d) Impairment of Goodwill and Other Assets
When events and circumstances warrant a review, Corvis Corporation
evaluates the carrying value of long-lived assets to be held and used in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment and for Long-Lived Assets to be Disposed Of." In
the second quarter, unfavorable economic conditions resulted in a reduction in
capital expenditures by telecommunications service providers. In light of the
business environment and uncertain telecommunications spending, during the
second quarter Corvis evaluated its long-lived assets in accordance with SFAS
No. 121 and determined that the carrying value exceeded the estimated fair value
of goodwill recorded in association with the acquisition of Algety Telecom S.A.,
resulting in an impairment charge of approximately $588.3 million. In addition
the Company recorded an impairment charge of approximately $8.7 million
associated with the write-down of certain investments carried at cost.
-8-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(3) Inventory
Inventories are comprised of the following:
December 30, September 29,
2000 2001
------------ -------------
Raw materials ....................................... $131,983 $164,212
Work-in-process ..................................... 50,161 45,283
Finished goods ...................................... 51,119 44,351
-------- --------
233,263 253,846
Less reserve for excess inventory and obsolescence... (13,849) (69,499)
-------- --------
Inventory, net................................. $219,414 $184,347
======== ========
(4) Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share are computed as follows (in thousands,
except per share data):
Three Months Ended Nine Months Ended
----------------------------- -------------------------------
September 30, September 29, September 30, September 29,
2000 2001 2000 2001
------------- ------------ ------------- -------------
Net loss ...................................... $(66,352) $(80,626) $(193,924) $(1,003,287)
Basic and diluted weighted average common
shares ..................................... 226,094 352,335 101,094 349,490
Basic and diluted net loss per common share ... $ (0.29) $ (0.23) $ (1.92) $ (2.87)
Options and warrants outstanding as of September 30, 2000 to purchase
51,412,585 and 15,810,768 shares of common stock, respectively, and 19,651,666
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three months ended September
30, 2000 as their inclusion would be anti-dilutive.
Options and warrants outstanding as of September 29, 2001 to purchase
59,188,054 and 7,593,684 shares of common stock, respectively, and 6,446,253
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three month period ended
September 29, 2001 as their inclusion would be anti-dilutive.
(5) Legal Matters
In July 2000, Ciena Corporation ("Ciena") informed the Company of its
belief that there is significant correspondence between products that the
Company offers and several U.S. patents held by Ciena relating to optical
networking systems and related dense wavelength division multiplexing
communications systems technologies. On July 19, 2000, Ciena filed a lawsuit in
the United States
-9-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
District Court for the District of Delaware alleging that the Company is
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, monetary damages including treble damages, as well as costs of the
lawsuit, including attorneys' fees. On September 8, 2000, the Company filed an
answer to the complaint, as well as counter-claims alleging, among other things,
invalidity and/or unenforceability of the three patents in question. On March 5,
2001, a motion was granted, allowing Ciena to amend its complaint to include
allegations that the Company is willfully infringing two additional patents. The
litigation is currently in the discovery phase and a trial date has been set for
April 1, 2002. Based on the status of the litigation, the Company cannot
reasonably predict the likelihood of any potential outcome. Accordingly, no
provision for this matter has been made in the Company's condensed consolidated
financial statements.
Between May 7, 2001 and June 15, 2001, nine putative class action lawsuits
were filed in the United States District Court for the Southern District of New
York relating to the Company's initial public offering on behalf of all persons
who purchased Company stock between July 28, 2000 and the filing of the
complaints. Each of the complaints names as defendants: the Company, its
directors and officers who signed the registration statement in connection with
the Company's initial public offering, and certain of the underwriters that
participated in the Company's initial public offering. The complaints allege
that the registration statement and prospectus relating to the Company's initial
public offering contained material misrepresentations and/or omissions in that
those documents did not disclose (1) that certain of the underwriters had
solicited and received undisclosed fees and commissions and other economic
benefits from some investors in connection with the distribution of the
Company's common stock in the initial public offering and (2) that certain of
the underwriters had entered into arrangements with some investors that were
designed to distort and/or inflate the market price for the Company's common
stock in the aftermarket following the initial public offering. The complaints
ask the court to award to members of the class the right to rescind their
purchases of Corvis common stock (or to be awarded rescissory damages if the
class member has sold its Corvis stock) and prejudgment and post-judgment
interest, reasonable attorneys' and experts witness' fees and other costs. The
plaintiffs have moved to appoint lead plaintiff, to appoint lead counsel and to
consolidate the actions. By order dated October 12, 2001, the court appointed as
lead counsel an executive committee of six plaintiffs' law firms. The motions to
appoint lead plaintiff and to consolidate the actions are pending. No discovery
has yet occurred. The Company intends to vigorously defend itself and its
officers and directors. It is the position of Company's management that, at this
time, it is not possible to estimate the amount of a probable loss, if any, that
might result from this matter. Accordingly, no provision for this matter has
been made in the Company's condensed consolidated financial statements.
(6) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
-10-
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
changes in the fair value of these derivatives would be accounted for depending
on the use of the derivative and whether it qualifies for hedge accounting. SFAS
No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Certain Hedging Activities - Deferral of the Effective Date for SFAS No. 133,"
and by SFAS No. 138, "Accounting for Derivative Instruments and Certain Hedging
Activities, an Amendment of SFAS No. 133," was adopted on January 1, 2001. The
adoption of SFAS No. 133, SFAS No. 137 and SFAS No. 138 did not have a material
effect on the Company's consolidated financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations." This Statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Reacquisition
Contingencies of Purchased Enterprises." The provisions of this Statement apply
to all business combinations initiated after June 30, 2001. The application of
this accounting standard is not expected to have a material adverse effect on
the Company's results of operations or financial condition.
Also in July 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and other Intangible Assets." This statement addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes Accounting Practice Board ("APB") Opinion No.17, Intangible Assets.
It addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. This
statement is effective beginning January 2, 2002. The Company is currently
reviewing the provisions of this statement and its potential impact on the
Company's results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes FASB Statement No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and infrequently Occurring
/Events and Transactions," for the disposal of segments of a business (as
previously defined in that Opinion). This Statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The adoption of
SFAS No. 144 is not expected to have a material adverse effect on the Company's
result of operations.
-11-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis along with our
unaudited condensed consolidated financial statements and the notes to those
statements included elsewhere in this report and in conjunction with our Form
10-K filed on March 29, 2001 with the Securities and Exchange Commission.
Overview
We design, manufacture and sell high performance optical networking
products that accelerate service provider revenue opportunities and lower the
overall cost of network ownership for service providers. Our all-optical
products have enabled a fundamental shift in network design and efficiency by
allowing for the transmission, switching and management of communication traffic
entirely in the optical domain, thereby eliminating the capital and operational
expense of electrical regeneration and switching equipment and reducing the time
to provision revenue generating services in the backbone network. Our point to
point and repeaterless transmission products and optical switching products
allow us to offer high performance solutions that address a broad range of
networking requirements encountered by service providers.
We currently have five customers, including Broadwing Communications, Inc.,
Williams Communications, Inc., Qwest Communications Corporation, Telefonica, and
an unnamed major global carrier. During the first half of 2000, we shipped,
installed and activated laboratory trial systems and field trial systems for
both Broadwing and Williams Communications to allow for customer testing and
inspection. In July 2000, we successfully completed the Broadwing Communications
field trial and Broadwing agreed to purchase $200 million of our products and
services as part of a multi-year purchase agreement. Throughout the remainder of
2000, we began the deployment of both transmission and switching equipment to
Broadwing and built-up finished goods inventory necessary to support customer
orders throughout 2001.
In 2001, the field trial system provided to Williams Communications was
accepted and Williams Communications agreed to purchase up to $300 million of
our products and services in a multi-year purchase agreement. Shipment of
commercial equipment to Williams Communications began late in the first quarter
of 2001 and continues to date. In addition, shipments of equipment to Broadwing
continued throughout the year.
Qwest has agreed to purchase $150 million of our products, some of which
are currently under development, over a two-year period. In April 2001, we
received a commitment of $110 million to purchase both transmission and
switching equipment under the aforementioned agreement with shipments expected
to commence in fiscal 2001. Qwest's acceptance of delivered equipment is
contingent upon certain shipment pre-requisites.
In the second quarter 2001, the Company entered into a contract with an
unnamed major global service provider and reached agreement with Spanish
operator Telefonica for the delivery of our next generation optical products.
These contracts are in early stages; however, we hope to develop these
arrangements into long-term business relationships.
-12-
We have also entered into agreements and discussions regarding laboratory
and field trials with other service providers. Upon successful completion of
these trials, we hope to enter into agreements for commercial deployment with
new service providers.
Recently, unfavorable economic conditions have resulted in reduced capital
expenditures by telecommunications service providers. In response to these
conditions, we implemented restructuring plans, approved by our Board of
Directors, designed to decrease our business expenses and to align resources for
long-term growth opportunities. Additionally, we evaluated the carrying value of
our long-lived assets.
In the second quarter of 2001, our Board of Directors approved a plan for
the reduction of operations. As a result of the restructuring plan and our
evaluation of the long-lived asset carrying values, we recorded charges of
approximately $714.6 million. These charges were comprised of $99.2 million in
cost of revenue charges associated with inventory write-downs and losses on open
purchase commitment cancellations associated with component parts for
discontinued product lines; $9.4 million associated with workforce reduction;
$9.0 million associated with consolidation of excess facilities and write-down
of idle equipment; $588.3 million associated with the write-down of goodwill
associated with the acquisition of Algety Telecom S.A.; and $8.7 million
associated with impairment charges on investment carried at cost.
In the third quarter of 2001, our Board of Directors approved a plan for
the consolidation of Canadian operations, which resulted in restructuring
charges of approximately $0.1 million associated with workforce reductions, net
of reductions in estimates for second quarter restructuring charges.
Revenue. Revenue from product sales is recognized upon execution of a
contract and the completion of all delivery obligations provided that there are
no uncertainties regarding customer acceptance and collectibility is deemed
probable. If uncertainties exist, revenue is recognized when such uncertainties
are resolved.
Revenue from installation services is recognized as the services are
performed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in our condensed consolidated balance sheets.
Costs of Revenue. Costs of revenue include the costs of manufacturing our
products and other costs associated with warranty and other contractual
obligations, inventory obsolescence costs and overhead related to our
manufacturing, engineering, finishing and installation. Warranty reserves are
determined based upon actual warranty cost experience, estimates of component
failure rates and management's industry experience. For the nine-month period
ended September 29, 2001, the cost of revenue included special charges of
approximately $99.2 million associated with our second quarter restructuring
plan.
Research and Development, Excluding Equity-Based Expense. Research and
development, excluding equity-based expense consists primarily of salaries and
related personnel costs, test and prototype expenses related to the design of
our hardware and software products, laboratory costs and
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facilities costs. All costs related to product development, both hardware and
software, are recorded as expenses in the period in which they are incurred. Due
to the timing and nature of the expenses associated with this process,
significant quarterly fluctuations may result. We believe that research and
development is critical in achieving current and future strategic product
objectives.
Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing,
excluding equity-based expense consists primarily of salaries and related
personnel costs, laboratory trial systems provided to customers, trade shows,
other marketing programs and travel expenses.
General and Administrative, Excluding Equity-Based Expense. General and
administrative, excluding equity-based expense consists primarily of salaries
and related personnel costs, information systems support, recruitment expenses
and facility demands associated with establishing the proper infrastructure to
support our organization. This infrastructure consists of executive, financial,
legal, information systems and other administrative responsibilities.
Equity-based Expense. Equity-based expense consists primarily of charges
associated with employee options granted at below fair market value prior to our
initial public offering.
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets primarily relates to the amortization of
goodwill associated with the acquisition of Algety Telecom S.A. As discussed
above, the Company recorded a charge of approximately $588.3 million, which was
recorded in restructuring and other special charges discussed below, to reduce
this goodwill to its current estimated fair value. As a result, amortization
expense should significantly decrease in future periods.
Results of Operations
Three months ended September 29, 2001 compared to three months ended September
30, 2000
Revenue. Revenue increased to $24.2 million for the three months ended
September 29, 2001 from $22.9 million for the three months ended September 30,
2000. The increase in revenue is attributable to the sale of our products for
commercial use to two customers.
Gross Profit. Gross profit was $8.6 million for the three months ended
September 29, 2001 and $8.4 million for the three months ended September 30,
2000. Gross margin as a percentage of revenues was 35.6% for the three months
ended September 29, 2001 and 36.7% for the three months ended September 30,
2000.
Research and Development, Excluding Equity-Based Expense. Research and
development expenses, excluding equity-based expense, increased to $34.8 million
for the three months ended September 29, 2001 from $24.9 million for the three
months ended September 30, 2000. The increase in expenses was primarily
attributable to significant increases in headcount, facilities, and depreciation
on capitalized laboratory and test equipment, offset in part by decreases in
material costs associated with prototype development and laboratory materials.
Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing
expenses, excluding equity-based expense, increased to $12.7 million for the
three months ended September 29, 2001 from
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$9.5 million for the three months ended September 30, 2000. The increase in
expenses was primarily attributable to significant increases in headcount and
increases in customer laboratory equipment.
General and Administrative, Excluding Equity-Based Expense. General and
administrative expenses, excluding equity-based expense, decreased to $7.7
million for the three months ended September 29, 2001 from $9.9 million for the
three months ended September 30, 2000. The decrease in expenses was primarily
attributable to decreases in the costs associated with establishing the proper
infrastructure to support our organization.
Equity-based Expense. Equity-based expense related to research and
development, sales and marketing and general and administrative functions
decreased to $28.2 million for the three months ended September 29, 2001 from
$33.4 million for the three months ended September 30, 2000. The decrease is
primarily attributable to compensation costs associated with non-employee stock
option grants.
Amortization of Goodwill and Intangible Assets. Amortization expenses
increased to $12.0 million for the three months ended September 29, 2001 from
$9.1 million for the three months ended September 30, 2000. The increase was
primarily attributable to the amortization of intangibles resulting from the
acquisition of Algety Telecom S.A in July 2000.
Restructuring and Other Charges. Restructuring and other charges increased
to 0.1 million for the three months ended September 29, 2001 from zero for the
three months ended September 30, 2000. These charges were comprised of $0.1
million associated with workforce reductions within our Canadian operations, net
of reductions in estimates for second quarter restructuring charges.
Interest Income and Other, Net. Interest income, net of interest and other
expenses, decreased to $6.3 million for the three months ended September 29,
2001 from $12.1 million for the three months ended September 30, 2000. The
decrease was primarily attributable to lower average invested cash balances and
yields on interest-bearing investments.
Nine months ended September 29, 2001 compared to nine months ended September 30,
2000
Revenue. Revenue increased to $173.2 million for the nine months ended
September 29, 2001 from $22.9 million for the nine months ended September 30,
2000. The increase in revenue is attributable to the increased sale of our
products for commercial use. Revenue for the period is attributable to two
customers.
Gross Profit (Loss). In connection with discontinued product lines under
the Company's restructuring plan, the Company recorded cost of revenue charges
totaling $99.2 million, comprised of inventory write-downs of $65.8 million and
certain purchase commitments of $33.4 million. Gross profit (loss) was ($35.0
million) for the nine months ended September 29, 2001 and $8.4 million for the
nine months ended September 30, 2000.
Gross margin as a percentage of revenues was (20.2%) for the nine months
ended September 29, 2001 and 36.7% for the nine months ended September 30, 2000.
Excluding special charges of $99.2 million for the nine months ended September
29, 2001, gross profit was $64.2 million and gross margin was 37.1%.
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Research and Development, Excluding Equity-Based Expense. Research and
development expenses, excluding equity-based expense, increased to $117.8
million for the nine months ended September 29, 2001 from $58.6 million for the
nine months ended September 30, 2000. The increase in expenses was primarily
attributable to significant increases in headcount, facilities and depreciation
on capitalized laboratory and test equipment, offset in part by deceases in
material costs associated with prototype development and laboratory materials.
Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing
expenses, excluding equity-based expense, increased to $43.2 million for the
nine months ended September 29, 2001 from $18.5 million for the nine months
ended September 30, 2000. The increase in expenses was primarily attributable
to significant increases in headcount, commissions and customer laboratory
equipment.
General and Administrative, Excluding Equity-Based Expense. General and
administrative expenses, excluding equity-based expense, increased to $27.2
million for the nine months ended September 29, 2001 from $18.1 million for the
nine months ended September 30, 2000. The increase in expenses was primarily
attributable to significant increases in headcount, consulting, and facilities
cost, offset in part by decreased costs associated with establishing the proper
infrastructure to support our organization.
Equity-based Expense. Equity-based expense related to research and
development, sales and marketing and general and administrative functions
increased to $79.3 million for the nine months ended September 29, 2001 from
$72.0 million for the nine months ended September 30, 2000. The increase in
equity-based compensation primarily resulted from an increase in charges
associated with stock options granted prior to our initial public offering at an
exercise price below fair value on the date of grant.
Amortization of Goodwill and Intangible Assets. Amortization expenses
increased to $113.9 million for the nine months ended September 29, 2001 from
$9.3 million for the nine months ended September 30, 2000. The increase was
primarily attributable to the amortization of intangibles resulting from the
acquisition of Algety Telecom S.A. in July 2000.
Restructuring and Other Charges. Restructuring and other charges increased
to $606.9 million for the nine months ended September 29, 2001 from zero for the
nine months ended September 30, 2000. These charges were comprised of $9.5
million associated with workforce reduction, $9.1 million associated with
consolidation of excess facilities and write-down of idle equipment, and $588.3
million associated with the write-down of goodwill associated with the
acquisition of Algety Telecom S.A. in July 2000.
Interest Income and Other, Net. Interest income, net of interest and other
expense, increased to $19.8 million for the nine months ended September 29, 2001
from $14.4 million for the nine months ended September 30, 2000. The increase
was primarily attributable to higher invested cash balances from the proceeds of
the initial public offering and various private placements, offset in part by
lower yields on interest-bearing investments and a write-down of certain equity
investments of approximately $8.7 million associated with the permanent
impairment of certain investments carried at cost.
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Liquidity and Capital Resources
Since inception through September 29, 2001, we have financed a significant
portion of our operations, capital expenditures and working capital primarily
through public and private sales of our capital stock, borrowings under credit
and lease facilities and cash generated from operations. At September 29, 2001,
our cash and cash equivalents totaled $715.0 million.
Net cash used in operating activities was $200.9 million for the nine
months ended September 29, 2001. Cash used in operating activities for the nine
months ended September 29, 2001 was primarily attributable to net losses,
increases in accounts receivable and increases in net inventory, partially
offset by non-cash expense items including depreciation, amortization, equity-
based expense and restructuring, inventory write-down and other charges.
Net cash used in investing activities for the nine months ended September
29, 2001 was $108.8 million which was primarily attributable to purchases of
manufacturing and test equipment, information systems and office equipment. We
continue to evaluate our need for production and administrative equipment and
facilities to accommodate our current and future operations. Capital
expenditures for the remainder of 2001 are expected to total between $5 million
and $10 million.
Net cash provided by financing activities for the nine months ended
September 29, 2001 was $1.8 million, primarily attributable to proceeds from the
exercise of warrants and employee stock options.
As of September 29, 2001, long-term restricted cash totaled $46.3 million,
of which $43.5 million represents cash held as security under a note payable.
This restriction will be released upon repayment of the note which is due in
November 2002. In addition, as of September 29, 2001, we had outstanding
irrevocable letters of credit aggregating $2.8 million relating to lease
obligations for various manufacturing and office facilities and other business
arrangements. These letters of credit are collateralized by funds in our
operating account. Various portions of the letters of credit expire at the end
of each respective lease term or agreement term.
As a result of unfavorable economic conditions, our industry is
experiencing significant competitive pricing pressures and a general slow down
in telecommunication infrastructure spending. These conditions have resulted in
a significant decline in our revenue in the third quarter or 2001. In addition,
we expect gross margins for the remainder of the year to decrease from previous
levels. Lower gross margins are likely to result from several factors
including, but not limited to, selling our products to customers at lower
prices, providing financing to customers and reduced manufacturing efficiencies
due to changes in volume.
Our liquidity will also be dependent on our ability to manufacture and sell
our products. Changes in the timing and extent of the sale of our products will
affect our liquidity, capital resources and results of operations. We currently
have a limited number of customers that could provide substantially all of our
revenues for the near future. Some of these customers are nearing contractual
minimum purchase commitments. The loss of any of these customers, any
substantial reduction in current or anticipated orders or an inability to
attract new customers, could materially adversely affect our liquidity and
results of operations. We plan to diversify our customer base by seeking new
customers both domestically and internationally.
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Certain of our customer agreements include customer acceptance provisions
associated with equipment delivery. Unexpected delays in customer acceptance or
non-acceptance may give rise to delays in or elimination of cash collection and
related revenue recognition. Such events could adversely impact our liquidity
and results of operations.
In light of the current economic environment, we curtailed expansion within
current operations during 2001 and implemented plans to strategically lower
operating expenses for the remainder of the fiscal year. Actions included
workforce reductions, facilities consolidation and other measures to streamline
operating costs. The Company currently is developing additional cost reduction
plans, which may include further reductions in headcount, facilities
consolidation and elimination of certain spending initiatives. To date, those
plans include a workforce reduction program that will result in the reduction of
approximately 350 employees or 30% of our worldwide employee base and which
includes the closure of substantially all of our Canadian operations. If we are
unable to execute or manage these cost reduction measures effectively or in a
timely manner, or if margin pressures continue for longer than expected, our
liquidity and capital resources could be adversely effected.
We believe that our current cash and cash equivalents and cash generated
from operations will satisfy our expected working capital, capital expenditure,
and investment requirements through at least the next twelve months.
If cash on hand and cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. To the extent that we raise additional capital through the sale
of equity or debt securities, the issuance of such securities could result in
dilution to our existing shareholders. If additional funds are raised through
the issuance of debt securities, the terms of such debt could impose additional
restrictions on our operations. Additional capital, if required, may not be
available on acceptable terms, or at all. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned product
development and sales and marketing efforts, which could harm our business,
financial condition and operating results. Increasingly, as a result of the
financial demands of major network deployments, service providers are looking to
their suppliers for financing assistance. From time to time, we may provide or
commit to extend credit or credit support to our customers that we deem
appropriate in the course of our business.
Litigation
On July 19, 2000, Ciena Corporation ("Ciena") filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, monetary damages including treble damages, as well as costs of the
lawsuit, including attorneys' fees. On September 8, 2000, we filed an answer to
the complaint, as well as counter-claims alleging, among other things,
invalidity and/or unenforceability of the three patents in question. On March 5,
2001, a motion was granted, allowing Ciena to amend its complaint to include
allegations that we are willfully infringing two additional patents. We are
currently in the discovery phase of the litigation and a trial date has been set
for April 1, 2002. We intend to defend ourselves vigorously against these claims
and we believe that we will prevail in this litigation. An adverse determination
in, or settlement of, the Ciena litigation could involve the payment of
significant amounts by us, or could include terms in addition to payments, such
as an injunction preventing us from selling some of our products until we were
able to implement a non-infringing design to any portion of our products to
which such determination applied. Such an adverse determination could have a
material adverse effect on our business, financial condition and results of
operations. If we are required to redesign our products, we
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may have to stop selling our current products until they have been redesigned.
We believe that defense of the lawsuit may be costly and may divert the time and
attention of some members of our management.
Between May 7, 2001 and June 15, 2001, nine putative class action lawsuits
were filed in the United States District Court for the Southern District of New
York relating to our initial public offering on behalf of all persons who
purchased our stock between July 28, 2000 and the filing of the complaints. Each
of the complaints names as defendants: Corvis, our directors and officers who
signed the registration statement in connection with our initial public
offering, and certain of the underwriters that participated in our initial
public offering. The complaints allege that the registration statement and
prospectus relating to our initial public offering contained material
misrepresentations and/or omissions in that those documents did not disclose (1)
that certain of the underwriters had solicited and received undisclosed fees and
commissions and other economic benefits from some investors in connection with
the distribution of our common stock in the initial public offering and (2) that
certain of the underwriters had entered into arrangements with some investors
that were designed to distort and/or inflate the market price for our common
stock in the aftermarket following the initial public offering. The complaints
ask the court to award to members of the class the right to rescind their
purchases of Corvis common stock (or to be awarded rescissory damages if the
class member has sold its Corvis stock) and prejudgment and post-judgment
interest, reasonable attorneys' and experts witness' fees and other costs. The
plaintiffs have moved to appoint lead plaintiff, to appoint lead counsel and to
consolidate the actions. By order dated October 12, 2001, the court appointed as
lead counsel an executive committee of six plaintiffs' law firms. The motions to
appoint lead plaintiff and to consolidate the actions are pending. No discovery
has yet occurred. We intend to vigorously defend ourselves and our officers and
directors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates. We do not use derivative financial instruments
for speculative or trading purposes.
Interest Rate Sensitivity
We maintain a portfolio of cash equivalents in a variety of securities
including: commercial paper, certificates of deposit, money market funds and
government and non-government debt securities. Substantially all amounts are in
money market funds, the value of which is generally not subject to interest rate
changes. The other available-for-sale securities are subject to interest rate
risk and may fall in value if market interest rates increase, however, because
of the short-term nature of these investments, we do not believe the risk is
significant. Our long-term debt obligations bear fixed interest rates. As such,
we have minimal cash flow exposure due to general interest rate changes
associated with our long-term debt obligations.
Exchange Rate Sensitivity
We have two wholly owned subsidiaries which use a foreign currency as their
functional currency and are translated into U.S. dollars. The functional
currency of Algety is the French Franc and Corvis Canada's functional currency
is the Canadian dollar. As such, we are exposed to risk related to the adverse
movements in foreign currency exchange rates. These exposures may change over
time and could have a material adverse impact on our financial results. For the
nine months ended September 29, 2001, we recognized a foreign currency
translation loss of $68.7 million as part of other comprehensive loss.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
By letter dated July 10, 2000, Ciena Corporation ("Ciena") informed us of
its belief that there is significant correspondence between products that we
offer and several U.S. patents held by Ciena relating to optical networking
systems and related dense wavelength division multiplexing communications
systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, monetary damages including treble damages, as well as costs of the
lawsuit, including attorneys' fees. On September 8, 2000, we filed an answer to
the complaint, as well as counter-claims alleging, among other things,
invalidity and/or unenforceability of the three patents in question. On March 5,
2001, a motion was granted, allowing Ciena to amend its complaint to include
allegations that we are willfully infringing two additional patents. The
litigation is currently in the discovery phase and a trial date has been set for
April 1, 2002.
We have designed our products in an effort to respect the intellectual
property rights of others. We intend to defend ourselves vigorously against
these claims and we believe that we will prevail in this litigation. However,
there can be no assurance that we will be successful in the defense of the
litigation, and an adverse determination in the litigation could result from a
finding of infringement of only one claim of a single patent. We may consider
settlement due to the costs and uncertainties associated with litigation in
general, and patent infringement litigation in particular. Even if we consider
settlement, there can be no assurance that we will be able to reach a settlement
with Ciena. An adverse determination in, or settlement of, the Ciena litigation
could involve the payment of significant amounts by us, or could include terms
in addition to payments, such as an injunction that could preclude us from
producing some of our products until we were able to implement a non-infringing
design to any portion of our products to which such a determination applied.
Such an adverse determination could have a material adverse effect on our
business, financial condition and results of operations.
We believe that defense of the lawsuit may be costly and may divert the
time and attention of some members of our management. Further, Ciena and other
competitors may use the existence of the Ciena lawsuit to raise questions in
customers' and potential customers' minds as to our ability to manufacture and
deliver our products. There can be no assurance that questions raised by Ciena
and others will not disrupt our existing and prospective customer relationships.
Between May 7, 2001 and June 15, 2001, nine putative class action lawsuits
were filed in the United States District Court for the Southern District of New
York relating to our initial public offering on behalf of all persons who
purchased our stock between July 28, 2000 and the filing of the complaints. Each
of the complaints names as defendants: Corvis, our directors and officers who
signed the registration statement in connection with our initial public
offering, and certain of the underwriters that participated in our initial
public offering. The complaints allege that the registration statement and
prospectus relating to our initial public offering contained material
misrepresentations and/or omissions in that those documents did not disclose (1)
that certain of the underwriters had solicited and received undisclosed fees and
commissions and other economic benefits from some investors in connection with
the distribution of our common stock in the initial public offering and (2) that
certain of the underwriters had entered into arrangements with some investors
that were designed to distort and/or inflate the market price for our common
stock in the aftermarket following the initial public offering. The complaints
ask
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the court to award to members of the class the right to rescind their
purchases of Corvis common stock (or to be awarded rescissory damages if the
class member has sold its Corvis stock) and prejudgment and post-judgment
interest, reasonable attorneys' and experts witness' fees and other costs. The
plaintiffs have moved to appoint lead plaintiff, to appoint lead counsel and to
consolidate the actions. By order dated October 12, 2001, the court appointed as
lead counsel an executive committee of six plaintiffs' law firms. The motions to
appoint lead plaintiff and to consolidate the actions are pending. No discovery
has yet occurred. We intend to vigorously defend ourselves and our officers and
directors.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) During September 2001, a warrant holder exercised 3,416 Series E warrants,
convertible into 40,992 shares of common stock, through a cashless exercise
election at an aggregate exercise price of $0.03 million, resulting in the
net issuance of 25,749 shares of common stock. The transaction is exempt
from the registration requirements pursuant to Section 4(2) of the
Securities Act.
(d) Not applicable.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are required to be filed herewith.
(b) We did not file any Current Reports on Form 8-K during the three months
ended September 29, 2001.
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SIGNATURES
Pursuant to the requirements 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.
Corvis Corporation
Date: November 13, 2001 /s/ Anne H. Stuart
-------------------------------------
Anne H. Stuart
Senior Vice President, Chief Financial
Officer and Treasurer
Date: November 13, 2001 /s/ Timothy C. Dec
--------------------------------------
Timothy C. Dec
Vice President, Chief Accounting
Officer and Corporate Controller