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 June 29, 2002
[ ] 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 July 31, 2002:
411,482,833.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Unaudited condensed consolidated balance sheets as of December 29, 2001 and June 29, 2002 2
Unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2001 and
June 29, 2002 3
Unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2001 and June 29,
2002 4
Notes to unaudited condensed consolidated financial statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Part II - Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities. 30
Item 4. Submission of Matters to a Vote of Security Holders. 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
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 29, June 29,
----------------- ------------
2001 2002
ASSETS
Current assets:
Cash and cash equivalents $ 638,872 $ 541,085
Short-term investments 21,907 43,014
Trade accounts receivable 33,676 15,915
Inventory, net 96,426 91,135
Other current assets 17,486 14,251
------------ ------------
Total current assets 808,367 705,400
Restricted cash, long-term 2,417 2,409
Property and equipment, net 134,393 125,739
Goodwill and other intangible assets, net 21,429 67,203
Other long-term assets, net 12,219 6,187
------------ -------------
Total assets $ 978,825 $ 906,938
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, current portion $ 126 $ 102
Capital lease obligations, current portion 6,796 5,399
Accounts payable 14,488 16,578
Accrued expenses and other liabilities 36,402 35,870
Provision for restructuring and other charges 24,050 9,598
----------- -----------
Total current liabilities 81,862 67,547
Noncurrent liabilities:
Notes payable, net of current portion 2,959 2,650
Capital lease obligations, net of current portion 1,743 409
Deferred lease liability and other 3,408 3,050
----------- -----------
Total liabilities 89,972 73,656
Commitments and contingencies
Stockholders' equity:
Common stock--$0.01 par value; 1,900,000,000 shares authorized;
362,687,909 shares issued and outstanding as of December
29, 2001; 411,166,642 shares issued and outstanding as of
June 29, 2002 3,621 4,106
Additional paid-in capital 2,648,955 2,780,535
Shareholder notes receivable - (32)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (10,796) (8,250)
Accumulated deficit (1,752,927) (1,943,077)
------------ ------------
Total stockholders' equity 888,853 833,282
------------ ------------
Total liabilities and stockholders' equity $ 978,825 $ 906,938
============ ============
See accompanying notes to unaudited condensed consolidated
financial statements.
2
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
------------------------- --------------------------
June 30, June 29, June 30, June 29,
2001 2002 2001 2002
-------- --------- ------- ---------
Revenue $ 64,959 $ 3,022 $ 149,046 $ 11,739
Costs of Revenue:
Product Sales 40,542 2,233 93,445 8,722
Inventory write-downs and other
charges 99,166 1,738 99,166 6,046
------------ ------------ ------------ ------------
Gross profit (loss) (74,749) (949) (43,565) (3,029)
Operating expenses:
Research and development, exclusive of
equity-based 41,950 33,085 82,925 62,143
Sales and marketing, exclusive of
equity-based expense 15,101 13,988 30,512 25,193
General and administrative, exclusive of
equity-based expense 8,533 11,131 19,512 17,176
Equity-based expense:
Research and development 12,653 6,467 25,428 15,060
Sales and marketing 3,632 2,954 7,295 6,136
General and administrative 9,154 7,601 18,349 15,781
Amortization of intangible assets 49,631 4,258 101,876 7,175
Purchased research and development - 34,580 - 34,580
Restructuring, impairment and other
charges 606,735 1,792 606,735 4,351
------------ ------------ ------------ ------------
Total operating expenses 747,389 115,856 892,632 187,595
------------ ------------ ------------ ------------
Operating loss (822,138) (116,805) (936,197) (190,624)
Interest income (expense) and other, net 306 (2,305) 13,536 478
Net loss $ (821,832) $ (119,110) $ (922,661) $ (190,146)
============ ============ ============ ===========
Other comprehensive income (loss) -- Foreign
currency translation adjustment (24,402) 3,400 (80,675) 2,547
------------ ------------ ------------ ------------
Comprehensive loss $ (846,234) $ (115,710) $ (1,003,336) $ (187,599)
Basic and diluted net loss per common share $ (2.36) $ (0.31) $ (2.67) $ (0.51)
============ ============ ============ ===========
Weighted average number of common shares
outstanding 347,909 383,412 345,172 373,302
See accompanying notes to unaudited condensed
consolidated financial statements.
3
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
----------------------------
June 30, June 29,
2001 2002
-------- --------
Cash flows from operating activities:
Net loss $ (922,661) $(190,146)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 122,768 24,684
Equity-based expense 51,072 36,977
Purchased research and development - 34,580
Restructuring, impairment and other charges 671,959 10,460
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (51,354) 17,761
Decrease (increase) in inventory, net (23,474) 3,751
Decrease (increase) in other assets (3,740) 5,108
Increase (decrease) in accounts payable and accrued
expenses 4,437 (10,184)
---------- --------
Net cash used in operating activities (150,993) (67,009)
---------- --------
Cash flows from investing activities:
Purchase of property and equipment (86,103) (13,011)
Cash acquired in business combination - 6,013
Purchase of short-term investments - (21,107)
Increase in deposits and other non-current assets (15,150) -
---------- --------
Net cash used in investing activities (101,253) (28,105)
---------- --------
Cash flows from financing activities:
Restricted cash - 8
Payments on note payable and capital leases (1,674) (3,062)
---------- --------
Proceeds from the issuance of stock 3,776 896
---------- --------
Net cash provided by (used in) financing activities 2,102 (2,158)
---------- --------
Effect of exchange rate changes on cash and cash equivalents (3,008) (515)
---------- --------
Net decrease in cash and cash equivalents (253,152) (97,787)
---------- --------
Cash and cash equivalents--beginning 1,024,758 638,872
========== =========
Cash and cash equivalents--ending $ 771,606 $ 541,085
========== =========
Supplemental disclosure of cash flow information:
Interest paid $ 1,001 $ 649
========== =========
Supplemental disclosure of noncash activities:
Obligations under capital lease $ 5,699 $ -
Purchase business combinations consideration paid with
common stock - 91,818
See accompanying notes to unaudited condensed consolidated
financial statements.
4
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(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
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 29, 2001 audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K filed on March 21,
2002.
(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 unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. 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. Revenue from
annual maintenance agreements is recognized on a straight-line basis over the
service period.
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.
5
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(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
During 2001 and the first six months of 2002, unfavorable economic
conditions resulted in reduced capital expenditures by telecommunications
service providers causing a sharp decline in the demand for the Company's
products. In response to these conditions, in the second, third and fourth
quarters of 2001, the Company implemented restructuring plans designed to
decrease the Company's operating expenses and to align resources for long-term
growth opportunities. These plans included the closure of the Company's Canadian
operations. Additionally, the Company evaluated the recoverability of the
carrying value of its inventory and long-lived assets in light of the economic
environment, the delay of customer network buildouts and projected sales. As a
result, the Company recorded charges of approximately $1.0 billion in the year
ended December 29, 2001. These charges were comprised of $216.5 million in cost
of revenue charges associated with inventory write downs; $77.7 million
associated with consolidation of excess facilities and write-downs of idle
equipment and workforce reductions; $711.5 million associated with the
write-down of goodwill generated in the acquisition of Algety Telecom S.A.; and
$12.3 million associated with permanent impairment charges on strategic equity
investments carried at cost.
During the six months ended June 29, 2002, the Company continued to
develop and implement additional restructuring plans including work force
reduction programs that resulted in head count reductions of approximately 180
positions. In addition, the Company continued to evaluate the carrying value of
its inventory and long-lived assets. Based on these actions, the Company
recorded charges of approximately $15.2 million in the six months ended June 29,
2002, including $6.9 million recorded in the three months ended March 30, 2002
and $8.3 million recorded in the three months ended June 29, 2002, net of $8.1
million of adjustments to prior restructuring accruals. Adjustments
predominantly relate to better than expected resolutions of excess inventory
purchase commitments and resolution of contingencies associated with the cost of
exiting certain excess facilities.
6
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Selected information regarding these charges are as follows:
Interest
Income and
Cost of Revenue Restructuring and Other Charges Other
--------------- ------------------------------------------ ------------
Special
Charges,
Inventory
Write-downs
Contract Total
Losses and Restructuring Impairment
Purchase Workforce Facility and Other of
Commitments Reduction Consolidation Charges Investments Total
----------- --------- ------------- ------- ----------- -----
Restructuring liability as of
December 29, 2001 $ 15,313 $ 1,146 $ 7,591 $ 8,737 $ -- $24,050
Quarter ended March 30, 2002:
Restructuring and other charges 4,307 2,599 -- 2,599 -- 6,906
Non-cash charges (4,307) (775) -- (775) -- (5,082)
Cash Payments (5,002) (2,034) (151) (2,185) -- (7,187)
Quarter ended June 29, 2002:
Restructuring and other charges 6,895 4,232 500 4,732 4,771 16,398
Non-cash charges (6,895) (1,847) -- (1,847) (4,771) (13,513)
Cash payments (2,396) (1,394) (176) (1,570) -- (3,966)
Accretion of interest -- -- 127 127 -- 127
Adjustments of prior estimates (5,155) -- (2,980) (2,980) -- (8,135)
--------- --------- --------- -------- -------- -------
Restructuring liability as of
June 29, 2002 $ 2,760 $ 1,927 $ 4,911 $ 6,838 $ -- $ 9,598
========= ========= ========= ======== ======== =======
(3) Inventory
Inventories are comprised of the following:
December 29, June 29,
2001 2002
------------ -------
Raw materials $ 197,549 $ 200,922
Work-in-process 17,037 12,348
Finished goods 52,268 64,641
Less: reserve for excess inventory and obsolescence (170,428) (186,776)
Inventory, net $ 96,426 $ 91,135
(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):
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Three Months Ended
--------------------------
June 30, June 29,
2001 2002
---------- -----------
Net loss $ (821,832) $ (119,110)
Basic and diluted weighted average common shares 347,909 383,412
Basic and diluted net loss per common share $ (2.36) $ (0.31)
Six Months Ended
----------------------------
June 30, June 29,
2001 2002
---------- ---------
Net loss $ (922,661) $ (190,146)
Basic and diluted weighted average common shares 345,172 373,302
Basic and diluted net loss per common share $ (2.67) $ (0.51)
Options and warrants outstanding as of June 29, 2002 to purchase 54,299
and 7,594 shares of common stock, respectively, and 1,772 unvested shares
acquired through the exercise of options were not included in the computation of
diluted loss per share for the three and six months ended June 29, 2002 as their
inclusion would be anti-dilutive.
Options and warrants outstanding as of June 30, 2001 to purchase 47,975
and 7,635 shares of common stock, respectively, and 10,187 unvested shares
acquired through the exercise of options were not included in the computation of
diluted loss per share for the three and six months period ended June 30, 2001
as their inclusion would be anti-dilutive.
(5) Dorsal Acquisition
On May 16, 2002, the Company completed its acquisition of Dorsal
Networks, Inc., a privately held provider of next-generation transoceanic and
regional undersea optical network solutions for 41,809 shares of common stock
valued at approximately $91.8 million. The acquisition was accounted for under
the "purchase" method of accounting. Under the purchase method, the purchase
price of Dorsal was allocated to identifiable assets and liabilities acquired
from Dorsal, with the excess being treated as goodwill.
8
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition which is based on an
independent valuation.
Current assets $ 6,632
Property and equipment 5,506
Other assets 577
Patents 30,799
In-process research and development 34,580
Goodwill 19,089
Total assets acquired 97,183
Current liabilities (5,365)
Total liabilities assumed (5,365)
Net assets acquired $ 91,818
============
Acquired patents will be amortized over an estimated life of five
years. Goodwill will have an indefinite life, but will be subject to periodic
impairment tests. In process research and development was expensed during the
year ended June 29, 2002. Dr. David R. Huber, the Company's Chairman and Chief
Executive Officer, owned, directly or indirectly, approximately 31 percent of
the outstanding stock of Dorsal.
The following unaudited pro forma data summarizes the results of
operations for the period indicated as if the Dorsal 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. 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.
Three Months Ended
------------------------------
June 30, June 29,
2001 2002
--------- ----------
Revenues $ 64,959 $ 3,022
Net Loss (834,427) (132,256)
Basic and diluted net loss per share $ (2.40) $ (0.34)
Six Months Ended
------------------------------
June 30, June 29,
2001 2002
-------- ---------
Revenues $ 149,046 $ 11,739
Net Loss (948,956) (277,112)
Basic and diluted net loss per share $ (2.75) $ (0.58)
9
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
(6) 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 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 original trial date of April 1, 2002 was postponed by
the court and a new trial date has not been set. The litigation is currently in
the pre-trial phase, however, and a pre-trial conference originally scheduled
for July 30, 2002 has been rescheduled for September 9, 2002. Based on the
status of the litigation, the Company cannot reasonably predict the likelihood
of any potential outcome.
Between May 7, 2001 and June 15, 2001, nine class action lawsuits were
filed in the United States District Court for the Southern District of New York
relating to the Company's IPO 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 IPO, and
certain of the underwriters that participated in the Company's IPO. The
complaints allege that the registration statement and prospectus relating to the
Company's IPO 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 IPO 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 IPO. 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.
By order dated October 12, 2001, the court appointed an executive
committee of six plaintiffs' law firms to coordinate their claims and function
as lead counsel. Lead plaintiffs have been appointed in almost all of the IPO
allocation actions including the Corvis action. On October 17, 2001, a group of
underwriter defendants moved for the judge's recusal. The judge denied that
application. On December 13, 2001, the moving underwriter defendants filed a
petition for writ of mandamus seeking the disqualification of the judge in the
United States Court of Appeals for the Second Circuit. On April 1, 2002, the
Second Circuit denied the moving
10
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
underwriter defendants' application for a writ of mandamus seeking the judge's
recusal from this action. On April 19, 2002, plaintiffs filed amended complaints
in each of the IPO allocation actions, including the Corvis action. On May 23,
2002, a conference was held at which the court set a briefing schedule for the
filing of motions to dismiss the amended complaints. On July 1, 2002, the
underwriter defendants filed their motion to dismiss the amended complaints. On
July 15, 2002, the issuer defendants filed their motion to dismiss the amended
complaints. The briefing on the motions to dismiss is scheduled to be completed
by the end of September 2002. No discovery has occurred.
It is the position of Company 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 consolidated financial statements.
(7) Concentrations
The Company has relied on four customers for all of its revenue:
Williams Communications, LLC, Broadwing Communications Services, Inc.,
Telefonica de Espana S.A.U. and France Telecom. No revenue has been recorded
from our fifth customer, Qwest Communications Corporation. The Company expects
that a significant portion of its 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 the Company's financial condition or operating results.
At June 29, 2002, $7.7 million, or 48 percent, of the Company's trade
accounts receivable are due from Williams Communications, LLC, with the balance
due from Broadwing Communications Services, Inc. and France Telecom. Subsequent
to June 29, 2002, Williams Communications, LLC paid the Company approximately
$7.4 million of the accounts receivable as it became due. The remaining
outstanding amount owed to the Company from Williams Communications, LLC is $0.3
million. This amount is not yet due and is not subject to any setoff,
counter-claim, reduction or right of recoupment of any kind known to the
Company. At June 29, 2002, all amounts due from Williams Communications, LLC
were current and, based on the Company's historical collections from Williams
Communications, LLC and all publicly available financial information, the
Company has determined that no allowance for uncollectable amounts is necessary
at this time.
On April 22, 2002, Williams Communications Group, Inc., the parent
holding company of Williams Communications, LLC, entered into an agreement with
its principal creditor groups which contained the significant terms of a debt
restructuring requiring a negotiated Chapter 11 bankruptcy filing. In order to
effect the restructuring, the parent company filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of New York on April 22, 2002, which
was amended on July 30,
11
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
2002. Williams Communications, LLC, the entity which is obligated to the
Company, has not filed for bankruptcy and continues to operate outside of
bankruptcy.
In addition to the Chapter 11 reorganization plan, Williams
Communications Group, Inc. also filed a motion seeking approval of a settlement
agreement between various creditors of Williams Communications Group, Inc.,
which contains the terms of a negotiated restructuring of the finances of
Williams Communications Group, Inc. and affiliated companies, including Williams
Communications, LLC. The Chapter 11 reorganization plan provides that Williams
Communications, LLC will not file a bankruptcy case. As in all court
proceedings, the approval and success of Williams Communications Group, Inc.'s
Chapter 11 reorganization plan, and the ability of Williams Communications LLC
to remain outside of bankruptcy, cannot be guaranteed.
If Williams Communications, LLC files for bankruptcy in the future, the
Company cannot be certain when or if the Company will receive the outstanding
accounts receivable, and if so, how much will actually be received. In addition,
there may be other provisions under bankruptcy laws that would affect the
Company's ability to collect any amounts owed and may affect some payments that
the Company has already received. Bankruptcy laws may also allow Williams
Communications, LLC, under certain circumstances, to reject the Company's
purchase agreement. The Company continues to evaluate the need for allowances
for accounts receivable and can give no assurances that some or all of these
outstanding amounts will not be reserved for in the future.
(8) Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset
Retirement Obligations," in August 2001. SFAS 143 requires companies to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred, and capitalize the cost by increasing the carrying
amount of the related long-lived asset. The company is required to adopt SFAS
143 on January 1, 2003. The adoption of this standard did not have a material
effect on the company's results of operations.
The FASB issued SFAS 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" in April
2002. SFAS 145 clarifies guidance related to the reporting of gains and losses
from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. The provisions of this
statement relating to the extinguishment of debt are effective for financial
statements issued for fiscal years beginning after May 15, 2002. The provisions
of this statement relating to lease modifications are effective for transactions
occurring after May 15, 2002. The company does not believe this standard will
have a material impact on its results of operations.
12
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
The FASB issued SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities" in June 2002. SFAS 146 nullifies previous guidance on this
issue and requires a liability for a cost associated with an exit or disposal
activity to be recognized and measured at its fair value in the period in which
the liability is incurred. The company is required to adopt the provisions of
this statement for exit or disposal activities initiated after December 31,
2002. The Company is assessing the impact that the adoption of this standard
will have on the company's results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
the accounting for acquisitions of businesses and is effective for acquisitions
occurring on or after July 1, 2001. SFAS No. 142 addresses the method of
identifying and measuring goodwill and other intangible assets acquired in a
business combination, eliminates further amortization of goodwill, provides for
classification of workforce intangibles as goodwill and requires periodic
evaluations of impairment of goodwill balances. SFAS No. 141 and 142 are
effective January 1, 2002, except for acquisitions occurring on or after July 1,
2001, for which the provisions of SFAS No. 141 and 142 are applicable.
Accordingly, through December 29, 2001, the Company continued to amortize
goodwill.
Had the amortization provisions of SFAS No. 142 been applied as of
January 1, 2001, for all of the Company's acquisitions, the Company's income
(loss) and earnings (loss) per share would have been as follows:
Three Months Ended
-------------------------------
June 30, 2001 June 29, 2002
------------- -------------
Net loss, as reported $ 821,832 $ 119,110
Goodwill amortization (49,074) --
Workforce in place amortization (115) --
--------------- ------------
Net loss, as adjusted $ 772,643 $ 119,110
=============== ============
Basic and diluted per share data:
Net loss per common share, as reported $ (2.36) $ (0.31)
Goodwill and workforce in place amortization per common share 0.14 --
--------------- ------------
Net loss per common share, as adjusted $ (2.22) $ (0.31)
=============== ============
Six Months Ended
June 30, 2001 June 29, 2002
------------- -------------
Net loss, as reported $ 922,661 $ 190,146
Goodwill amortization (95,538) --
Workforce in place amortization (223) --
--------------- ------------
Net loss, as adjusted $ 826,900 $ 190,146
=============== ============
Basic and diluted per share data:
Net loss per common share, as reported $ (2.67) $ (0.51)
Goodwill and workforce in place amortization per common share 0.28 --
--------------- ------------
Net loss per common share, as adjusted $ (2.39) $ (0.51)
=============== ============
13
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
As of January 1, 2002, the Company reclassified approximately $0.7
million of intangible assets associated with an acquired employee workforce from
intangible assets to goodwill, which in accordance with SFAS No. 142, are no
longer separately identifiable from goodwill. As of June 29, 2002, the Company
had approximately $69.5 million of intangible assets ($45.8 million net of
accumulated amortization) related to patents and intellectual property, which
are being amortized straight-line over a period of three years. The Company has
amortization expense of $1.9 million during the six months ended June 29, 2002
and anticipates amortization expense to be the following for the next five
years:
Estimated Amortization Expense:
For the year ended 12/31/02: $18,492
For the year ended 12/31/03: $17,771
For the year ended 12/31/04: $10,966
For the year ended 12/31/05: $4,141
For the year ended 12/31/06: $ -
In August 2001, the Financial Accounting Standard 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). The adoption of SFAS No. 144 did not have
any effect on the Company's results of operations.
14
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 for the year ended December 29, 2001 filed on March 21, 2002 with the
Securities and Exchange Commission.
Overview
We design, manufacture and sell high performance all-optical and
electrical/optical communications systems that we believe accelerate carrier
revenue opportunities and lower the overall cost of network ownership for
carriers. Our optical products have enabled a fundamental shift in network
design and efficiency by allowing for the transmission, switching and management
of communications traffic entirely in the optical domain. By deploying our
products, carriers eliminate the need for expensive and bandwidth limiting
electrical regeneration and switching equipment, significantly reducing costs,
increasing network capacity and allowing them to provide new services more
quickly and efficiently. Our products also open new market opportunities for
carriers by enabling a flexible, in-service migration path from existing
point-to-point and ring electrical/optical networks to all-optical mesh
networks.
Customers
We currently have five customers, including Broadwing Communications
Services, Inc., Williams Communications, LLC, Qwest Communications Corporation,
Telefonica de Espana S.A.U. and France Telecom.
Broadwing has agreed to purchase at least $200 million of our products
and services as part of a multi-year purchase agreement. Since successfully
completing field trials in July 2000, Broadwing has deployed a wide range of our
optically optimized networking products, including the all-optical switch, to
create a national all-optical network that has been in service for over a year.
Sales to Broadwing continue as part of network expansions and maintenance.
Cumulative sales to Broadwing through June 29, 2002 total $190.6 million.
In 2001, Williams accepted a field trial system and agreed to purchase
up to $300 million of our products and services as part of a multi-year purchase
agreement, approximately $85 million of which must be purchased prior to
December 31, 2003. Williams has deployed our switching and transport equipment
to create a national all-optical network, which is currently in service carrying
commercial traffic. Cumulative sales to Williams through June 29, 2002 total
$75.1 million.
At June 29, 2002, $7.7 million, or 48 percent, of our trade accounts
receivable are due from Williams Communications, LLC, with the balance due from
Broadwing and France
15
Telecom. Subsequent to June 29, 2002, Williams Communications, LLC paid
us approximately $7.4 million of the accounts receivable as it became due. The
remaining outstanding amount owed to us from Williams Communications, LLC is
$0.3 million. This amount is not yet due and is not subject to any setoff,
counter-claim, reduction or right of recoupment of any kind known to the
Company. At June 29, 2002, all amounts due from Williams Communications, LLC
were current and, based on the Company's historical collections from Williams
Communications, LLC and all publicly available financial information, the
Company has determined that no allowance for uncollectable amounts is necessary
at this time.
On April 22, 2002, Williams Communications Group, Inc., the parent
holding company of Williams Communications, LLC, entered into an agreement with
its principal creditor groups which contained the significant terms of a debt
restructuring requiring a negotiated Chapter 11 bankruptcy filing. In order to
effect the restructuring, the parent company filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of New York on April 22, 2002, which
was amended on July 30, 2002. Williams Communications LLC, the entity which is
obligated to the Company, has not filed for bankruptcy and continues to operate
outside of bankruptcy.
In addition to the Chapter 11 reorganization plan, Williams
Communications Group, Inc. also filed a motion seeking approval of a settlement
agreement between various creditors of Williams Communications Group, Inc.,
which contains the terms of a negotiated restructuring of the finances of
Williams Communications Group, Inc. and affiliated companies, including Williams
Communications, LLC. The Chapter 11 reorganization plan provides that Williams
Communications, LLC will not file a bankruptcy case. As in all court
proceedings, the approval and success of Williams Communications Group, Inc.'s
Chapter 11 reorganization plan, and the ability of Williams Communications LLC
to remain outside of bankruptcy, cannot be guaranteed.
If Williams Communications, LLC files for bankruptcy in the future, we
cannot be certain when or how much we will receive with respect to the
outstanding accounts receivable. In addition, there may be other provisions
under bankruptcy laws that would affect our ability to collect any amounts owed
and may affect some payments that we have already received. Bankruptcy laws may
also allow Williams Communications, LLC, under certain circumstances, to reject
the purchase agreement. We continue to evaluate the need for allowances for
accounts receivable and can give no assurances we will not be required to
write-off some or all of these outstanding amounts.
On April 22, 2002, we reached an agreement with Qwest Communications
Corporation modifying the terms of our previous purchase agreement. Under the
terms of the new agreement, Qwest agreed to purchase up to $150 million of our
products and services over a multi-year period, $7.0 million of which must be
purchased in 2002 and $5.0 million of which must be purchased in 2003. In
addition, we have agreed with Qwest to enter into two field trials
16
of Corvis ON transport and switching equipment as well as our Corvis Optical
Convergence Switch (OCS). The field trials are expected to begin in the second
half of 2002.
During the first quarter of 2002, we completed the first sales of our
XF repeaterless link product to Telefonica de Espana, which was deployed between
the island of Mallorca and Telefonica's backbone network in Spain. In April
2002, we sold a XF repeaterless link to France Telecom to upgrade its link
between the European mainland and the island of Corsica. The relationships with
Telefonica and France Telecom are in early stages and the agreements do not
include significant purchase commitment levels, however, we hope to develop
these arrangements into long-term business relationships.
We have also entered into lab trials and agreements and discussions
regarding laboratory and field trials with other carriers for our ON, OCS, XF
products and transoceanic subsea products. Upon successful completion of these
field trials, we hope to enter into agreements for commercial deployment with
new customers.
Starting in 2001 and continuing in 2002, conditions within the general
economy and the telecommunications sector have resulted in reduced capital
expenditures by carriers and a reduced demand for telecommunications networking
systems. As a response to these conditions, we implemented restructuring plans
designed to decrease our business expenses and to align resources for long-term
growth opportunities. Additionally, we evaluated the carrying value of our
inventory and long-term assets. As a result of these steps, we recorded charges
totaling approximately $1.0 billion in the second, third and fourth quarters of
2001. These charges were comprised of $216.5 million in cost of revenue charges
associated with inventory write-downs and losses on open purchase commitment
cancellations; $24.5 million associated with workforce reductions; $53.2 million
associated with consolidation of excess facilities and write-downs of idle
equipment; $711.5 million associated with the write-down of goodwill; and $12.3
million associated with permanent impairment charges on strategic equity
investments.
During the first six months of 2002, we implemented additional
restructuring plans and continued to evaluate the carrying value of our
inventory and long-term assets resulting in charges of $6.9 million and $8.3
million in the first and second quarter, respectively, net of adjustments to
prior restructuring estimates.
17
These charges related to plans that we adopted to reduce head count by
approximately 180 positions, and to consolidate office, research and
manufacturing facilities. In addition, adjustments were made to previously
recorded restructuring accruals. Selected financial data related to these
charges are as follows:
Interest
Income and
Cost of Revenue Restructuring and Other Charges Other
--------------- ------------------------------- -----------
Special Charges,
Inventory
Write-downs,
Contract Losses Total Impairment
and Purchase Workforce Facility Restructuring and of
Commitments Reduction Consolidation Other Charges Investments Total
----------- --------- ------------- ------------- ----------- -----
Restructuring liability as of
December 29, 2001 15,313 1,146 7,591 8,737 -- 24,050
Quarter ended March 30, 2002:
Restructuring and other
charges 4,307 2,599 -- 2,599 -- 6,906
Non-cash charges (4,307) (775) -- (775) -- (5,082)
Cash payments (5,002) (2,034) (151) (2,185) -- (7,187)
Quarter ended June 29, 2002:
Restructuring and other
charges 6,895 4,232 500 4,732 4,771 16,398
Non-cash charges (6,895) (1,847) -- (1,847) (4,771) (13,513)
Cash payments (2,396) (1,394) (176) (1,570) -- (3,966)
Accretion of interest -- -- 127 127 -- 127
Adjustments of prior
estimates (5,155) -- (2,980) (2,980) -- (8,135)
------ ----- ------ ------ ----- ------
Restructuring liability as of
June 29, 2002 2,760 1,927 4,911 6,838 -- 9,598
====== ===== ====== ====== ===== ======
In June 2002, we announced that we were developing plans for the
reorganization of its French subsidiary, Corvis Algety. Corvis Algety is a
division of approximately 200 employees focusing primarily on research and
development. We believe that the reorganization could involve the elimination of
approximately 170 jobs at the division. French labor laws mandate specific
procedures for reorganizations involving staff reductions. The procedures
involve presentation of a plan and discussions with appointed worker
representatives known as the "workers' committee" and with certain government
entities. The workers' committee and authorities learn the reasons for the
restructuring, and have an opportunity to provide their input on restructuring
plans. To date, we have presented a plan to the workers' committee and are also
working with government authorities to ensure compliance with all French labor
laws. Upon completion of a definitive restructuring plan, we will record
associated charges including charges for severance and benefits to be paid to
exiting employees. In addition, the plan may result in the decommissioning of
certain fixed assets and facilities. If the plans do include such actions, we
18
would also record charges for associated asset write-downs. At this time, we
cannot estimate the amount of the charge that will be taken. We believe that the
plan will be completed and associated charges will be recorded during the second
half of 2002.
We continue to monitor our financial position and will make strategic
decisions as necessary to position us for long-term success, which may result in
additional restructuring charges. This may include such strategic initiatives as
the increased use of contract manufacturers. These initiatives could lead to
further reductions in our facility and fixed asset needs, resulting in
associated asset impairment and write-down charges.
Critical Accounting Policies and Estimates
We have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements. The preparation of our financial
statements in conformity with accounting principles generally accepted in the
United States of America requires us to make estimates and judgments that affect
our reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to asset impairment, revenue
recognition, product warranty liabilities, allowance for doubtful accounts, and
contingencies and litigation. We state these accounting policies in the notes to
our 2001 annual consolidated financial statements and at relevant sections in
this discussion and analysis. These estimates are based on the information that
is currently available to us and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results could vary from those
estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the
more significant judgments and estimates used in the preparation of our
consolidated financial statements.
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. Customer contracts generally include extensive lab and field trial
testing and some include other acceptance criteria.
Our products can be installed by our customers, third party service
providers or by us. Revenue from installation services is recognized as the
services are performed unless the terms of the supply contract combine product
acceptance with installation, in which case revenues for installation services
are recognized when the terms of acceptance are satisfied and installation is
completed. To the extent customer contracts include both product sales and
installation services, revenues are recognized based on their respective fair
values. Revenues from installation service fixed price contracts are recognized
on the percentage-of-completion method, measured by the
19
percentage of costs incurred to date compared to estimated total costs for each
installation contract. Amounts received in excess of revenue recognized are
included as deferred revenue in our condensed consolidated balance sheet.
Revenue from annual maintenance agreements is recognized on a straight-line
basis over the service period.
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 operations. Warranty
reserves are determined based upon actual warranty cost experience, estimates of
component failure rates and management's industry experience. Inventory
obsolescence costs are estimated using certain assumptions, including projected
sales and sales mix. Actual results may differ from those estimates. We
continually monitor component failures, technical changes, and levels of on-hand
inventory and adjust our estimates accordingly. If, however, actual results vary
significantly from our estimates, we will adjust the assumptions utilized in our
methodologies and reduce or provide for additional accruals as appropriate.
Allowance for Bad Debt. To date, we have relied on five customers for
all of our revenues. We expect that a significant portion of our future revenue
will continue to be generated by a limited number of customers. We monitor the
financial conditions of these customers closely and have concluded that no
allowance for bad debt was appropriate as of June 29, 2002.
Restructuring and Other Charges. Reflecting continued unfavorable
economic conditions and continued lack of expected customer wins and product
sales, our Board of Directors approved plans for the reduction of operations
including the consolidation of facilities, reduction of employees and the
discontinuation of certain product lines. In addition, we evaluated the
recoverability of the carrying value of our inventory and long-lived assets. As
a result, we recorded charges associated with estimated excess inventory and
open purchase commitments based on projected sales volumes, facility
consolidation costs based on assumed exit costs and time tables, disposal of
property and equipment based on estimated salvage values and goodwill impairment
charges based on estimated discounted future cash flows. If actual results
differ significantly from our estimates and assumptions, we will adjust our
reserves and allowances accordingly.
Goodwill and Other Intangible Assets. We have recorded goodwill and
intangibles resulting from our acquisitions. Through December 29, 2001, goodwill
and intangibles have been amortized on a straight-line basis over their
respective lives of between 3 and 5 years. Upon the adoption of SFAS No. 142 on
December 30, 2001, we ceased amortizing goodwill and will perform an annual
impairment analysis to assess the recoverability of the goodwill, in accordance
with the provisions of SFAS No. 142. If we are required to record an impairment
charge in the future, it would have an adverse impact on our results of
operations.
20
Litigation. In July 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
original trial date of April 1, 2002 was postponed by the court and a new trial
date has not been set. The litigation is currently in the pre-trial phase,
however, a pre-trial conference originally scheduled for July 30, 2002 has been
rescheduled for September 9, 2002.
Between May 7, 2001 and June 15, 2001, nine 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.
By order October 12, 2001, the court appointed an executive committee
of six plaintiffs' law firms to coordinate their claims and function as lead
counsel. Lead plaintiffs have been appointed in almost all of the IPO allocation
actions, including the Corvis action. On October 17, 2001, a group of
underwriter defendants moved for the judge's recusal. The judge denied that
application. On December 13, 2001, the moving underwriter defendants filed a
petition for writ of mandamus seeking the disqualification of the judge in the
United States Court of Appeals for the Second Circuit. On April 1, 2002, the
Second Circuit denied the moving underwriter defendants' application for a writ
of mandamus seeking the judge's recusal from this action. On April 19, 2002,
plaintiffs filed amended complaints in each of the IPO allocation actions,
including the Corvis action. On May 23, 2002, a conference was held at which the
court set a
21
briefing schedule for the filing of motions to dismiss the amended complaints.
On July 1, 2002, the underwriter defendants filed their motion to dismiss the
amended complaints. On July 15, 2002, the issuer defendants filed their motion
to dismiss the amended complaints. The briefing on the motions to dismiss is
scheduled to be completed by the end of September 2002. No discovery has
occurred.
Based on the status of the litigation, we cannot reasonably predict the
likelihood of any potential outcome. We continue to monitor the status of the
litigation, however we can give no assurances that an unfavorable outcome will
not result in future charges.
Results of Operations
Three months ended June 29, 2002 compared to three months ended June 30, 2001
Revenue. Revenue decreased to $3.0 million for the three months ended
June 29, 2002 from $65.0 million for the three months ended June 30, 2001.
Overall, our quarterly revenues have declined from a high of $84.1 million in
the first quarter of 2001 to $3.0 million for the second quarter of 2002. This
decrease in revenue is due to a reduction in capital spending by
telecommunications carriers resulting in a sharp decline in demand for
telecommunications equipment, including our products. Revenue for the three
months ended June 29, 2002 was attributable to three customers. Service
revenues, including maintenance, training and support totaled $1.9 million. We
expect revenue for the next quarter to be at or below current levels.
Gross Profit (loss). Costs of revenue consists of component costs,
direct compensation costs, warranty and other contractual obligations, inventory
obsolescence costs and overhead related to our manufacturing and engineering,
finishing and installation operations. In addition, cost of revenue includes
charges associated with our restructuring plans and excess inventories.
Gross profit (loss) increased to $(0.9) million for the three months
ended June 29, 2002 from $(74.8) million for the three months ended June 30,
2001. Negative gross margins are attributable to inventory write-downs of $1.7
million recorded in the three months ended June 29, 2002 and $99.2 million
recorded in the three months ended June 30, 2001. Excluding inventory
write-downs and other charges, gross profit and gross margin were $0.8 million
and 26% for the three months ended June 29, 2002 and $24.4 million and 38% for
the three months ended June 30, 2001. Due to current competitive and economic
pressures, we expect that gross margin, excluding inventory write-downs and
other charges, may continue to decrease in the coming quarters.
Research and Development, Excluding Equity-Based Expense. Research and
development expense, 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 facilities
costs. All costs related to product development, both
22
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 research
and development, significant quarterly fluctuations may result. We believe that
research and development is critical to achieving current and future strategic
product objectives.
Research and development expenses, excluding equity-based expense
decreased to $33.1 million for the three months ended June 29, 2002 from $42.0
million for the three months ended June 30, 2001. The decrease in expenses was
primarily attributable to the effects of cost saving initiatives including staff
reductions, facility consolidation and the curtailment of certain discretionary
spending.
Sales and Marketing, Excluding Equity-Based Expense. Sales and
marketing expense, 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.
Sales and marketing expense, excluding equity-based expense, decreased
to $14.0 million for the three months ended June 29, 2002 from $15.1 million for
the three months ended June 30, 2001. The decrease in expenses was primarily
attributable to the effects of cost saving initiatives including staff
reductions, facility consolidation and the curtailment of certain discretionary
spending.
General and Administrative, Excluding Equity-Based Expense. General and
administrative expense, 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.
General and administrative expenses, excluding equity-based expense,
increased to $11.1 million for the three months ended June 29, 2002 from $8.5
million for the three months ended June 30, 2001. The increase in expenses was
primarily attributable to increases in professional service fees.
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.
Equity-based expense related to research and development, sales and
marketing and general and administrative functions for the three months ended
June 29, 2002 decreased to $17.0 million from $25.4 million for the three months
ended June 30, 2001. The decrease in equity-based expense resulted from a
decrease in employee headcount.
23
Amortization of Intangible Assets. Amortization of intangible assets
relates to the amortization of certain intangible assets with finite lives. As a
result of the issuance of SFAS No. 142, we no longer record amortization of
goodwill, rather goodwill will be tested at least annually for impairment. There
may be more volatility in reported income (loss) than previous standards because
impairment losses are likely to occur irregularly and in varying amounts.
Amortization of intangible assets expenses decreased to $4.3 million
for the three months ended June 29, 2002 from $49.6 million for the three months
ended June 30, 2001. The decrease was primarily attributable to the
discontinuation of amortization of goodwill resulting from the acquisition of
Algety Telecom S.A. that was being amortized over five years.
Interest Income (Expense), Net. Interest income, net of interest
expense, decreased to ($2.3) million for the three months ended June 29, 2002
from $0.3 million of net interest income for the three months ended June 30,
2001. The decrease was primarily attributed to the write-down of certain equity
investments in the three months ended June 30, 2001 totaling $8.7 million.
Six months ended June 29, 2002 compared to six months ended June 30, 2001
Revenue. Revenue decreased to $11.7 million for the six months ended
June 29, 2002 from $149.0 million for the six months ended June 30, 2001. This
decrease in revenue is due to a reduction in capital spending by
telecommunications carriers resulting in a sharp decline in demand for
telecommunications equipment, including for our products. Revenue for the six
months ended June 29, 2002 was attributable to two customers. Service revenues,
including maintenance, training and support totaled $3.4 million.
Gross Profit (loss). Costs of revenue consists of component costs,
direct compensation costs, warranty and other contractual obligations, inventory
obsolescence costs and overhead related to our manufacturing and engineering,
finishing and installation operations. In addition, cost of revenue includes
charges associated with our restructuring plans and excess inventories.
Gross profit (loss) increased to $(3.0) million for the six months
ended June 29, 2002 from $(43.6) million for the six months ended June 30, 2001.
Negative gross margins are primarily attributable to inventory write-downs of
$6.0 million in the six months ended June 29, 2002 and $99.2 million recorded in
the six months ended June 30, 2001. Excluding inventory write-downs and other
charges, gross profit and gross margin were $3.0 million or 26% in the six
months ended June 29, 2002 and $55.6 million or 37% in the six months ended June
30, 2001. Due to current competitive and economic pressures, we expect that
gross margin, excluding inventory write-downs and other charges, may continue to
decrease in the coming quarters.
Research and Development, Excluding Equity-Based Expense. Research and
development expense, excluding equity-based expense, consists primarily of
salaries and related
24
personnel costs, test and prototype expenses related to the design of our
hardware and software products, laboratory costs and 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 research and development, significant quarterly
fluctuations may result. We believe that research and development is critical to
achieving current and future strategic product objectives.
Research and development expenses, excluding equity-based expense,
decreased to $62.1 million for the six months ended June 29, 2002 from $82.9
million for the six months ended June 30, 2001. The decrease in expenses was
primarily attributable to the effects of cost saving initiatives including staff
reductions, facility consolidation and the curtailment of certain discretionary
spending.
Sales and Marketing, Excluding Equity-Based Expense. Sales and
marketing expense, 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.
Sales and marketing expense, excluding equity-based expense, decreased
to $25.2 million for the six months ended June 29, 2002 from $30.5 million for
the six months ended June 30, 2001. The decrease in expenses was primarily
attributable to the effects of cost saving initiatives including staff
reductions, facility consolidations and the curtailment of certain discretionary
spending, offset, in part, by increases in professional service fees.
General and Administrative, Excluding Equity-Based Expense. General and
administrative expense, 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.
General and administrative expenses, excluding equity-based expense,
decreased to $17.1 million for the six months ended June 29, 2002 from $19.5
million for the six months ended June 30, 2001. The decrease in expenses was
primarily attributable to the effects of cost saving initiatives including staff
reductions, facility consolidations and the curtailment of certain discretionary
spending, offset, in part, by increases in professional service fees.
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.
Equity-based expense related to research and development, sales and
marketing and general and administrative functions for the six months ended June
29, 2002 decreased to $37.0 million from $51.1 million for the six months ended
June 30, 2001. The decrease in equity-based expense resulted from decreases in
employee headcount.
25
Amortization of Intangible Assets. Amortization of intangible assets
relates to the amortization of certain intangible assets with finite lives. As a
result of the issuance of SFAS No. 142, we no longer record amortization of
goodwill on a straight-line basis, rather goodwill will be tested at least
annually for impairment. There may be more volatility in reported income (loss)
than previous standards because impairment losses are likely to occur
irregularly and in varying amounts.
Amortization of intangible assets expenses decreased to $7.2 million
for the six months ended June 29, 2002 from $101.9 million for the six months
ended June 30, 2001. The decrease was primarily attributable to the
discontinuation of amortization of goodwill resulting from the acquisition of
Algety Telecom S.A. that was being amortized over five years.
Interest Income (Expense), Net. Interest income, net of interest
expense, decreased to $0.5 million for the six months ended June 29, 2002 from
$13.5 million of net interest income for the six months ended June 30, 2001. The
decrease was primarily attributable to lower average invested cash balances and
lower average returns on investments and the write-off of certain strategic
investments of approximately $4.8 million.
Liquidity and Capital Resources
Since inception through June 29, 2002, we have financed 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 product sales. At June 29, 2002, our cash and cash
equivalents and short-term investments totaled $584.1 million.
Net cash used in operating activities was $67.0 million for the six
months ended June 29, 2002 and $151.0 million for the six months ended June 30,
2001. Cash used in operating activities for the six months ended June 29, 2002
was primarily attributable to a net loss of $190.1 million, offset in part by
non-cash charges including depreciation and amortization of $24.7 million,
equity-based expense of $37.0 million and purchased research, expense of $34.6
million associated with our acquisition of Dorsal Networks in May 2002 and
certain non-cash restructuring charges of $10.5 million. Cash flows from
operating activities were offset by decreases in accounts receivable of $17.8
million.
Net cash used in investing activities was $28.1 million for the six
months ended June 29, 2002 and $101.3 million for the six months ended June 30,
2001. The decrease in net cash used in investing activities for the six months
ended June 29, 2002 was primarily attributable to reductions in capital
expenditures offset in part by purchases of short-term investments.
Net cash used in financing activities for the six months ended June 29,
2002 was $2.2 million, primarily attributable to the repayment of principal on
notes and capital leases. Net cash provided by financing activities for the six
months ended June 30, 2001 was $2.1 million, primarily attributable to proceeds
from the issuance of stock offset by payment on notes and capital leases.
26
As of June 29, 2002, long-term restricted cash totaled $2.4 million
associated with outstanding irrevocable letters of credit 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.
Due to current economic conditions, we have and may be required to sell
our product to future customers at lower margins or be required to provide
customers with financing which could result in reduced gross margins, extended
payment terms or delayed revenue recognition, all of which could have a negative
impact on our liquidity, capital resources and results of operations.
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 and these customers are operating in a
troubled economic environment. 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.
We believe that our current cash and cash equivalents, short-term
investments and cash generated from product sales 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, carriers are looking to their
suppliers for financing assistance. From time to time, we have and may continue
to provide or commit to extend credit or credit support to our customers as we
consider appropriate in the course of our business.
Dorsal Networks
On May 16, 2002, we completed our acquisition of Dorsal Networks, Inc.,
a privately held provider of next-generation transoceanic and regional undersea
optical network solutions for 41,809,000 shares of common stock valued at
approximately $91.8 million. The acquisition
27
was accounted for under the "purchase" method of accounting. Under the purchase
method, the purchase price of Dorsal was allocated to identifiable assets and
liabilities acquired from Dorsal, with the excess being treated as goodwill. The
acquisition resulted in an in-process research and development charge of
approximately $34.6 million as well as the recognition of certain intangible
assets of $30.2 million, which will be amortized over an estimated life of five
years. In addition, the acquisition will result in goodwill of approximately
$19.1 million, which will have an indefinite life, but will be subject to
periodic impairment tests. Dr. David R. Huber, our Chairman and Chief Executive
Officer, owned, directly or indirectly, approximately 31 percent of the
outstanding stock of Dorsal.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. We maintain instruments subject to
interest rate and foreign currency exchange rate risk. We categorize all of our
market risk sensitive instruments as non-trading or other instruments.
Interest Rate Sensitivity
We maintain a portfolio of cash equivalents and short-term investments
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 as well as high grade,
short-term commercial paper and certificates of deposit, the value of which is
generally not subject to interest rate changes. We believe that a 10% increase
or decline in interest rates would not be material to our investment income or
cash flows. 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.
Foreign Rate Sensitivity
We primarily operate in the United States; however, we have expanded
operations to include research and development and sales offices in various
European countries. As a result, we may have sales in foreign currencies
exposing us to foreign currency rate fluctuations. For the six months ended June
29, 2002, we recorded limited sales in a foreign currency. We are exposed to the
impact of foreign currency changes, associated with the Euro, for financial
instruments held by our European subsidiaries. These instruments are limited to
cash and cash equivalents and trade receivables. It is the policy of management
to fund foreign operations on a monthly basis, thus minimizing average cash and
overnight investments in the Euro. At June 29, 2002, our European subsidiaries
maintained cash and cash equivalents and trade accounts receivable of
approximately (Euro) 6.3 million. We believe that a 10% increase or decline in
the Euro exchange ratio would not be material to cash and cash equivalent
balances, interest income, or cash flows from consolidated operations.
28
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
original trial date of April 1, 2002 was postponed by the court and a new trial
date has not been set. The litigation is currently in the pre-trial phase,
however, a pre-trial conference originally scheduled for July 30, 2002 has been
rescheduled for September 9, 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, and due to the fact
that an adverse determination in the litigation could preclude us from producing
some of our products until we were able to implement a non-infringing
alternative design to any portion of our products to which such a determination
applied. 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 a
redesign of some of our products, which 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 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
29
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.
By order dated October 12, 2001, the court appointed an executive
committee of six plaintiffs' law firms to coordinate their claims and function
as lead counsel. Lead plaintiffs have been appointed in almost all of the IPO
allocation actions, including the Corvis action. On October 17, 2001, a group of
underwriter defendants moved for Judge Scheindlin's recusal. Judge Scheindlin
denied that application. On December 13, 2001, the moving underwriter defendants
filed a petition for writ of mandamus seeking the disqualification of Judge
Scheindlin in the United States Court of Appeals for the Second Circuit. On
April 1, 2002, the Second Circuit denied the moving underwriter defendants'
application for a writ of mandamus seeking Judge Scheindlin's recusal from this
action. On April 19, 2002, plaintiffs filed amended complaints in each of the
actions, including the Corvis action. On May 23, 2002, a conference was held at
which the court set a briefing schedule for the filing of motions to dismiss the
amended complaints. On July 1, 2002, the underwriter defendants filed their
motion to dismiss the amended complaints. On July 15, 2002, the issuer
defendants filed their motion to dismiss the amended complaints. The briefing on
the motions to dismiss is scheduled to be completed by the end of September
2002. No discovery has 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) None.
(d) Not applicable.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) We held our annual meeting of stockholders on May 10, 2002.
30
(b) Joseph R. Hardiman was elected as a Class II Director, with a term expiring
at the annual meeting stock holders to be held in 2005. Our Directors whose
terms of office continued after the meeting are: David S. Oros, David R.
Huber and Frank M. Drendel. The Board accepted Mr. Drendel's resignation as
a Director on July 18, 2002.
(c) Following is a tabulation of the number of votes cast for, the number of
votes cast against, the number of votes withheld and the number of broker
non-votes for each item upon which stockholders voted at our annual
meeting:
Broker
Item For Against Withheld Non-votes
---- --- ------- -------- ---------
Approval of the issuance of shares of our 152,410,443 34,220,784 726,388 132,490,548
common stock pursuant to the merger of Dorsal
Networks, Inc. and a wholly-owned subsidiary
of Corvis
Election of Joseph R. Hardiman as a Class II 306,584,457 - 13,263,706 -
Director
Approval of the appointment of KPMG LLP as 312,429,324 4,625,466 2,793,373 -
our auditors for fiscal 2002
(d) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are required to be filed herewith.
(b) On April 22, 2002, we filed a Current Report on Form 8-K dated April
22, 2002 announcing that we had entered into an amendment, dated April
22, 2002, with Qwest Communications Corporation ("Qwest") amending the
Procurement Agreement, dated June 5, 2000, between Corvis and Qwest.
31
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: August 13, 2002 /s/ LYNN D. ANDERSON
----------------------------------
Lynn D. Anderson
Senior Vice President, Chief
Financial Officer and Treasurer
Date: August 13, 2002 /s/ TIMOTHY C. DEC
----------------------------------
Timothy C. Dec
Vice President, Chief Accounting
Officer and Corporate Controller
32