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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 28, 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 October 26,
2002: 412,290,812
TABLE OF CONTENTS
Page
----
Part I - Financial Information
Item 1. Financial Statements
Unaudited condensed consolidated balance sheets as of December 29, 2001
and September 28, 2002 .............................................................. 2
Unaudited condensed consolidated statements of operations for the three
and nine months ended September 29, 2001 and September 28, 2002 ..................... 3
Unaudited condensed consolidated statements of cash flows for the nine
months ended September 29, 2001 and September 28, 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 .............................. 26
Item 4. Controls and Procedures ................................................................. 27
Part II - Other Information
Item 1. Legal Proceedings ....................................................................... 28
Item 2. Changes in Securities and Use of Proceeds ............................................... 29
Item 3. Defaults upon Senior Securities. ........................................................ 29
Item 4. Submission of Matters to a Vote of Security Holders. .................................... 29
Item 5. Other Information ....................................................................... 30
Item 6. Exhibits and Reports on Form 8-K ........................................................ 30
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, September 28,
2001 2002
------------- --------------
ASSETS
- ------
Current assets:
Cash and cash equivalents ......................................... $ 638,872 $ 510,729
Short-term investments ............................................ 21,907 38,014
Trade accounts receivable ......................................... 33,676 6,021
Inventory, net .................................................... 96,426 74,472
Other current assets .............................................. 17,486 12,544
------------ -------------
Total current assets ..................................... 808,367 641,780
Restricted cash, long-term ................................................. 2,417 2,396
Property and equipment, net ................................................ 134,393 104,852
Goodwill and other intangible assets, net .................................. 21,429 58,593
Other long-term assets, net ................................................ 12,219 2,811
------------ -------------
Total assets ............................................. $ 978,825 $ 810,432
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable, current portion .................................... $ 126 $ 105
Capital lease obligations, current portion ........................ 6,796 3,866
Accounts payable .................................................. 14,488 16,000
Accrued expenses and other liabilities ............................ 36,402 41,629
Provision for restructuring and other charges ..................... 24,050 19,696
------------ -------------
Total current liabilities ................................ 81,862 81,296
Noncurrent liabilities:
Notes payable, net of current portion ............................. 2,959 2,587
Capital lease obligations, net of current portion ................. 1,743 167
Deferred lease liability and other ................................ 3,408 2,871
------------ -------------
Total liabilities ........................................ 89,972 86,921
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; 412,288,312 shares issued and outstanding as of
September 28, 2002 ....................................... 3,621 4,117
Additional paid-in capital ........................................ 2,648,955 2,798,275
Shareholder notes receivable ...................................... -- (32)
Accumulated other comprehensive loss:
Foreign currency translation adjustment .................. (10,796) (8,377)
Accumulated deficit ...................................... (1,752,927) (2,070,472)
------------ -------------
Total stockholders' equity ............................... 888,853 723,511
------------ -------------
Total liabilities and stockholders' equity ............... $ 978,825 $ 810,432
============ =============
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 Nine Months Ended
----------------------------- ------------------------------
September 29, September 28, September 29, September 28,
2001 2002 2001 2002
------------- ------------- ------------- -------------
Revenue .............................................. $ 24,157 $ 1,353 $ 173,203 $ 13,092
Costs of Revenue:
Product sales ............................... 15,554 757 108,999 9,478
Inventory write-downs and other
charges .................................. -- 24,278 99,166 30,324
------------ ------------- ------------ ------------
Gross profit (loss) ......................... 8,603 (23,682) (34,962) (26,710)
Operating expenses:
Research and development, exclusive of
equity-based expense ..................... 34,827 32,980 117,751 95,123
Sales and marketing, exclusive of
equity-based expense ..................... 12,672 10,954 43,185 36,147
General and administrative, exclusive of
equity-based expense ..................... 7,652 7,231 27,163 24,407
Equity-based expense:
Research and development ................. 10,940 7,152 36,368 22,209
Sales and marketing ...................... 8,265 2,954 15,560 9,092
General and administrative ............... 8,997 7,601 27,346 23,383
Amortization of intangible assets ........... 12,014 5,658 113,890 12,833
Purchased research and development .......... -- -- -- 34,580
Restructuring, impairment and other
charges .................................. 131 31,313 606,866 35,664
------------ ------------- ------------ ------------
Total operating expenses ........... 95,498 105,843 988,129 293,438
------------ ------------- ------------ ------------
Operating loss ..................... (86,895) (129,525) (1,023,091) (320,148)
Interest income and other, net ....................... 6,269 2,127 19,804 2,603
------------ ------------- ------------ ------------
Net loss ........................... $ (80,626) $ (127,398) $ (1,003,287) $ (317,545)
============ ============= ============ ============
Other comprehensive income (loss)-- foreign
currency translation adjustment ................. 11,949 (128) (68,726) 2,419
------------ ------------- ------------ ------------
Comprehensive loss .......................... $ (68,677) $ (127,756) $ (1,072,013) $ (315,126)
============ ============= ============ ============
Basic and diluted net loss per common share .......... $ (0.23) $ (0.31) $ (2.87) $ (0.82)
============ ============= ============ ============
Weighted average number of common shares
outstanding ..................................... 352,335 410,323 349,490 385,643
See accompanying notes to unaudited
condensed consolidated financial statements.
3
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
---------------------------
September 29, September 28,
2001 2002
------------- -------------
Cash flows from operating activities:
Net loss .......................................................................... $(1,003,287) $ (317,545)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 148,245 38,807
Equity-based expense .......................................................... 79,274 54,684
Purchased research and development ............................................ -- 34,580
Restructuring, impairment and other charges ................................... 672,162 48,716
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ................................. (41,020) 27,655
Decrease (increase) in inventory, net ...................................... (30,756) 686
Decrease (increase) in other assets ........................................ (4,940) 10,191
Increase (decrease) in accounts payable and accrued
expenses ................................................................... (20,603) 4,918
----------- ----------
Net cash used in operating activities ......................................... (200,925) (97,308)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment ............................................ (93,634) (15,150)
Cash acquired in business combination ......................................... -- 6,013
Purchases and sales of short-term investments, net ............................ -- (16,107)
Decrease (increase) in deposits and other .................................
non-current assets ............................................................ (15,150) 21
----------- ----------
Net cash used in investing activities ......................................... (108,784) (25,223)
----------- ----------
Cash flows from financing activities:
Payments on note payable and capital leases ................................... (3,609) (4,899)
Proceeds from the issuance of stock ........................................... 5,420 941
----------- ----------
Net cash provided by (used in) financing activities ........................... 1,811 (3,958)
Effect of exchange rate changes on cash and cash
equivalents ................................................................... (1,884) (1,654)
----------- ----------
Net decrease in cash and cash equivalents .................................... (309,782) (128,143)
----------- ----------
Cash and cash equivalents--beginning .............................................. 1,024,758 638,872
----------- ----------
Cash and cash equivalents--ending ................................................. $ 714,976 $ 510,729
=========== ==========
Supplemental disclosure of cash flow information:
Interest paid ................................................................. $ 2,866 $ 754
=========== ==========
Supplemental disclosure of noncash activities:
Obligations under capital lease ............................................... $ 3,299 $ --
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
(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 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
(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
Inventories are comprised of the following:
December September
29, 28,
2001 2002
--------- ---------
Raw materials ............................................................... $ 197,549 $ 197,931
Work-in-process ............................................................. 17,037 5,913
Finished goods .............................................................. 52,268 40,063
Less: reserve for excess inventory and obsolescence ........................ (170,428) (169,435)
--------- ---------
Inventory, net ..................................................... $ 96,426 $ 74,472
========= =========
(3) Inventory Write-downs, Restructuring and Other Charges
During 2001 and 2002, unfavorable economic conditions resulted in reduced
capital expenditures by telecommunications service providers causing a
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 build-outs 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, 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 nine months ended September 28, 2002, the Company continued to
develop and implement restructuring plans designed to further align resources
for long-term growth opportunities.
6
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Restructuring efforts included the completion of a multi-year manufacturing
outsourcing agreement with Celestica, a world leader in electronics
manufacturing services, in an effort to improve overall manufacturing
flexibility and reduce costs. Under the agreement, the Company will transition
all of its manufacturing capabilities to Celestica with the exception of final
assembly, system integration and testing capabilities. The full transition of
affected manufacturing capabilities is expected to be complete in the second
quarter of 2003.
In September 2002, the Company completed plans for the reorganization of
its French subsidiary, Corvis Algety. The reorganization will result in the
elimination of jobs as well as the consolidation of facilities and equipment.
These actions will result in staff reductions totaling approximately 165
employees or 80 percent of the local workforce over the next six months.
In light of these activities as well as the continued contraction within
the telecommunications sector, the Company continued to evaluate the carrying
value of its inventory and other assets. These events and analysis have resulted
in the following inventory write-downs, restructuring, impairment and other
special charges:
7
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Interest
Income and
Cost of Revenue Restructuring Other Charges Other
--------------- --------------------------------------------------- -----------
Special Charges,
Inventory Write-
downs, Contract Total
Losses and Restructuring Impairment
Purchase Workforce Facility Asset and Other of
Commitments Reduction Consolidation Impairments Charges Investments Total
---------------- ----------- ------------- ----------- ------------- ------------- ---------
(In thousands)
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)
Quarter ended September 28, 2002:
Restructuring and
other charges ................ 24,278 12,516 -- 18,832 31,348 -- 55,626
Non-cash charges ............. (23,841) -- -- (18,832) (18,832) -- (42,673)
Cash payments ................ (908) (1,576) (388) -- (1,964) -- (2,872)
Accretion of interest ........ -- -- (81) -- (81) -- (81)
Effect of
international exchange
rates ........................ 132 -- -- -- -- -- 132
Adjustments of prior
estimates .................... -- -- (34) -- (34) -- (34)
-------- -------- -------- -------- -------- -------- --------
Restructuring liability as
of September 28, 2002 ........ $ 2,421 $ 12,867 $ 4,408 -- $ 17,275 -- $ 19,696
======== ======== ======== ======== ======== ======== ========
(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):
8
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Three Months Ended
----------------------------
September 29, September 28,
2001 2002
------------ ------------
Net loss .......................................................................$ (80,626) $ (127,398)
Basic and diluted weighted average common shares ............................... 352,335 410,323
Basic and diluted net loss per common share ....................................$ (0.23) $ (0.31)
Nine Months Ended
----------------------------
September 29, September 28,
2001 2002
------------ ------------
Net loss .......................................................................$(1,003,287) $ (317,545)
Basic and diluted weighted average common shares ............................... 349,490 385,643
Basic and diluted net loss per common share ....................................$ (2.87) $ (0.82)
Options and warrants outstanding as of September 28, 2002 to purchase 52.3
million and 7.6 million shares of common stock, respectively, and 1.1 million
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three and nine months period
ended September 28, 2002 as their inclusion would be anti-dilutive.
Options and warrants outstanding as of September 29, 2001 to purchase 59.2
million and 7.6 million shares of common stock, respectively, and 6.4 million
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three and nine months ended
September 29, 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 41.8 million 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.
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.
9
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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
nine months ended September 28, 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 each period 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
-------------------------------
September 29, September 28,
2001 2002
-------------- -------------
Revenues .................................... $ 24,157 $ 1,353
Net Loss .................................... (99,443) (127,398)
Basic and diluted net loss per share ........ $ (0.28) $ (0.31)
Nine Months Ended
-------------------------------
September 29, September 28,
2001 2002
-------------- -------------
Revenues .................................... $ 173,203 $ 13,092
Net Loss .................................... (1,059,294) (329,111)
Basic and diluted net loss per share ........ $ (3.03) $ (0.85)
10
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. Although a trial date has not been set, we believe that a
trial will commence in the first quarter of 2003. 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. Our
directors and officers have since been dismissed from the case, without
prejudice. 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 underwriter defendants' application for a writ of mandamus seeking
the judge's recusal from this
11
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
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 has recently been completed,
and the judge heard oral arguments on the motions on November 1, 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: Wiltel
Communications Group, Inc. (formally Williams Communications, LLC), Broadwing
Communications Services, Inc., Telefonica de Espana S.A.U. and France Telecom.
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.
(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 will 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
-----------------------------
September 29, September 28,
2001 2002
------------- --------------
Net loss, as reported .......................... $ (80,626) $ (127,398)
Goodwill amortization .......................... 8,982 --
Workforce in place amortization ................ 110 --
------------- --------------
Net loss, as adjusted .......................... $ 71,534 $ 127,398
============= ==============
Basic and diluted per share data:
Net loss per common share, as reported ....... $ (0.23) $ (0.31)
Goodwill and workforce in place amortization
per common share ........................... 0.03 --
------------- --------------
Net loss per common share, as adjusted ....... $ (0.20) $ (0.31)
============= ==============
Nine Months Ended
------------------------------
September 29, September 28,
2001 2002
-------------- -------------
Net loss, as reported .......................... $ (1,003,287) $ (317,545)
Goodwill amortization .......................... 104,790 --
Workforce in place amortization ................ 334 --
------------- ------------
Net loss, as adjusted .......................... $ (898,163) $ (317,545)
============= ============
13
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Amounts in thousands, except per share data)
Nine Months Ended
--------------------------------------
Basic and diluted per share data: September 29, 2001 September 28, 2002
Net loss per common share, as reported ... $ (2.87) $ (0.82)
Goodwill and workforce in place
amortization per common share ......... 0.30 --
----------------- ------------------
Net loss per common share, as adjusted ... $ (2.57) $ (0.82)
================= ==================
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 September 28, 2002, the
Company had approximately $87.9 million of intangible assets ($38.6 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
incurred amortization expense of $12.8 million during the nine months ended
September 28, 2002 and anticipates amortization expense to be the following for
the next five years:
Estimated Amortization Expense:
For the year ended 12/28/02: $18,492
For the year ended 12/27/03: $17,771
For the year ended 12/25/04: $10,966
For the year ended 12/24/05: $ 4,141
For the year ended 12/23/06: $ -
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 terrestrial and undersea 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 six customers, including Broadwing Communications
Services, Inc., Wiltel Communications Group, Inc. (formally Williams
Communications, LLC), Qwest Communications Corporation, Telefonica de Espana
S.A.U., France Telecom and the U.S. Federal Government.
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 September 28, 2002 totaled $191.6 million.
In 2001, Wiltel 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. Firm commitments totaling approximately $85.0 million must be
purchased prior to December 31, 2003. Wiltel 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 Wiltel through
September 28, 2002 total $77.5 million.
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. Firm commitments totaling $7.0
million must be purchased in 2002 and $5.0 million must be purchased in 2003
subject to certain acceptance criteria. In addition, we have agreed
15
with Qwest to enter into two field trials of Corvis ON transport and switching
equipment as well as our Corvis Optical Convergence Switch (OCS). The field
trials began in the third quarter 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.
In the third quarter of 2002, we created a wholly owned subsidiary, Corvis
Government Solutions, Inc. (CGSI), to provide optical networking solutions and
services to the Federal marketplace. During the third quarter, CGSI secured its
first contract and purchase order from the U.S. Federal Government.
We have also entered into lab trials and discussions regarding laboratory
and field trials with other carriers for our ON, OCS 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 nine months ended September 28, 2002, we continued to develop
and implement additional restructuring plans designed to further align resources
for long-term growth opportunities.
Restructuring efforts included the execution of a multi-year manufacturing
outsourcing agreement with Celestica, a world leader in electronics
manufacturing services in an effort to improve overall manufacturing flexibility
and reduce costs. Under the agreement, we will transition all of our
manufacturing capabilities to Celestica with the exception of final assembly,
system integration and test capabilities. The full transition of affected
manufacturing capabilities is expected to be complete in the second quarter of
2003.
16
In September 2002, we completed plans for the reorganization of our French
subsidiary, Corvis Algety. The reorganization will result in the elimination of
jobs as well as the consolidation of facilities and equipment. These actions
will result in total staff reductions of approximately 165 employees or 80
percent of the local workforce over the next six months.
In light of these activities as well as continued contraction within the
telecommunications sector, we continued to evaluate the carrying value of our
inventory and other assets. These events and analysis have resulted in the
following inventory write-downs, restructuring, impairment and other special
charges:
Interest
Income and
Cost of Revenue Restructuring and Other Charges Other
------------------ --------------------------------------------------------- --------------
Special
Charges,
Inventory
Write-downs, Total
Contract Losses Restructuring Impairment
and Purchase Workforce Facility Assets and Other of
Commitments Reduction Consolidation Impairments Charges Investments Total
------------------ ----------- --------------- ------------- ------------- -------------- --------
(In thousands)
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)
Quarter ended September
28, 2002:
Restructuring and
other charges ........... 24,278 12,516 -- 18,832 31,348 -- 55,626
Non-cash charges ......... (23,841) -- -- (18,832) (18,832) -- (42,673)
Cash payments ............ (908) (1,576) (388) -- (1,964) -- (2,872)
Accretion of interest .... -- -- (81) -- (81) -- (81)
Effect of international
exchange rates ........... 132 -- -- -- -- -- 132
Adjustments of prior
estimates ................ -- -- (34) -- (34) -- (34)
--------- -------- ------- --------- -------- -------- -------
Restructuring liability as
of September 28, 2002 .... $ 2,421 $ 12,867 $ 4,408 -- $ 17,275 -- $19,696
========= ======== ======= ========= ======== ======== =======
17
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. 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 stated 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 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
18
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 four 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 September 28, 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 outsourcing of a
majority of our manufacturing capabilities. 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, sales mix and
estimated selling prices. Facility consolidation costs are based on assumed exit
costs and timetables. Asset impairment charges are based on estimated salvage
values and recoverability estimates. Goodwill impairment charges are 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. Our annual impairment analysis will take
place in the fourth quarter. If we are required to record an impairment charge
in the future, it would have an adverse impact on our results of operations.
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. Although a trial date
has not been set, we believe that a trial will commence in the first quarter of
2003. Based on the status of the litigation, we cannot reasonably predict the
likelihood of any potential outcome.
19
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 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 has recently been completed, and the judge heard oral arguments on the
motions on November 1, 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 September 28, 2002 compared to three months ended September
29, 2001
Revenue. Revenue decreased to $1.35 million for the three months ended
September 28, 2002 from $24.2 million for the three months ended September 29,
2001. This decrease in revenue is primarily due to a reduction in capital
spending by telecommunications carriers resulting in a decline in demand for
telecommunications equipment, including our products. Revenue for the three
months ended September 28, 2002 was attributable to two customers.
20
Service revenues, including maintenance, training and support totaled
approximately $0.9 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) decreased to $(23.7) million for the three months ended
September 28, 2002 from $8.6 million for the three months ended September 29,
2001. Negative gross margins are attributable to inventory write-downs of $24.3
million recorded in the three months ended September 28, 2002. Excluding
inventory write-downs and other charges, gross profit and gross margin were $0.6
million and 44% for the three months ended September 28, 2002 and $8.6 million
and 36% for the three months ended September 29, 2001. The increase in gross
margin is primarily due to an increase in the relative proportion of service
revenue compared to product revenues as well as the recognition of certain
product revenues which had been deferred pending final acceptance. We expect
that gross margin, excluding inventory write-downs and other charges, will
decrease in the coming quarters as a result of an increase in the relative
proportion of product revenues.
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 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 $33.0 million for the three months ended September 28, 2002 from $34.8
million for the three months ended September 29, 2001. The decrease in expenses
was primarily due to lower prototype and lab materials expense, offset in part
by higher labor costs associated with the Dorsal acquisition.
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
$11.0 million for the three months ended September 28, 2002 from $12.7 million
for the three months ended September 29, 2001. The decrease in expenses was
primarily attributable to the effects of cost saving initiatives including staff
reductions 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
21
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 $7.2 million for the three months ended September 28, 2002 from
$7.7 million for the three months ended September 29, 2001. The decrease in
expenses was primarily attributable to staff reductions and 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
September 28, 2002 decreased to $17.7 million from $28.2 million for the three
months ended September 29, 2001. The decrease in equity-based expense resulted
from a decrease in employee headcount.
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 $5.7 million for
the three months ended September 28, 2002 from $12.0 million for the three
months ended September 29, 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, Net. Interest income, net of interest expense, decreased
to $2.1 million for the three months ended September 28, 2002 from $6.3 million
of net interest income for the three months ended September 29, 2001. The
decrease was primarily attributed to lower average invested cash balances and
lower average returns on investments.
Nine months ended September 28, 2002 compared to nine months ended September 29,
2001
Revenue. Revenue decreased to $13.1 million for the nine months ended
September 28, 2002 from $173.2 million for the nine months ended September 29,
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 nine
months ended September 28, 2002 was attributable to four customers. Service
revenues, including maintenance, training and support totaled $4.3 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.
22
Gross loss decreased to $(26.7) million for the nine months ended September
28, 2002 from $(35.0) million for the nine months ended September 29, 2001.
Negative gross margins are primarily attributable to inventory write-downs of
$30.3 million in the nine months ended September 28, 2002 and $99.2 million
recorded in the nine months ended September 29, 2001. Excluding inventory
write-downs and other charges, gross profit and gross margin were $3.7 million
or 28% in the nine months ended September 28, 2002 and $64.2 million or 37% in
the nine months ended September 29, 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 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 $95.1 million for the nine months ended September 28, 2002 from
$117.8 million for the nine months ended September 29, 2001. The decrease in
expenses was primarily attributable to the reduction in prototype and lab
material expenses.
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
$36.1 million for the nine months ended September 28, 2002 from $43.2 million
for the nine months ended September 29, 2001. The decrease in expenses was
primarily attributable to the effects of staff reductions and decreases in
professional service fees and transportation expenses.
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 $24.4 million for the nine months ended September 28, 2002 from
$27.2 million for the nine months ended September 29, 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.
23
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 nine months ended
September 28, 2002 decreased to $54.7 million from $79.3 million for the nine
months ended September 29, 2001. The decrease in equity-based expense resulted
from decreases in employee headcount.
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 $12.8 million for
the nine months ended September 28, 2002 from $113.9 million for the nine months
ended September 29, 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, Net. Interest income, net of interest expense, decreased
to $2.6 million for the nine months ended September 28, 2002 from $19.8 million
of net interest income for the nine months ended September 29, 2001. The
decrease was primarily attributable to lower average invested cash balances,
lower average returns on investments and the write down of certain strategic
investments.
Liquidity and Capital Resources
Since inception through September 28, 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 September 28, 2002, our cash and cash
equivalents and short-term investments totaled $548.8 million.
Net cash used in operating activities was $97.3 million for the nine months
ended September 28, 2002 and $200.9 million for the nine months ended September
29, 2001. Cash used in operating activities for the nine months ended September
28, 2002 was primarily attributable to a net loss of $317.5 million, offset in
part by non-cash charges including depreciation and amortization of $38.8
million, equity-based expense of $54.7 million and purchased research and
development expense of $34.6 million associated with our acquisition of Dorsal
Networks in May 2002 and certain non-cash restructuring charges of $48.7
million. Cash flows from operating activities were further offset by changes in
operating assets and liabilities of $43.7 million, principally a change in
accounts receivable of $27.7 million.
Net cash used in investing activities was $25.2 million for the nine months
ended September 28, 2002 and $108.8 million for the nine months ended September
29, 2001. The decrease in net cash used in investing activities for the nine
months ended September 28, 2002
24
was primarily attributable to reductions in capital expenditures offset in part
with cash acquired through our purchase of Dorsal Networks.
Net cash used in financing activities for the nine months ended September
28, 2002 was $4.0 million, primarily attributable to the repayment of principal
on notes and capital leases. 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 off-set in
part by proceeds from the issuance of common stock.
As of September 28, 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.
On October 24, 2002, we announced that our Board of Directors has
authorized a share repurchase program under which we can acquire up to $25
million of our common stock in the open market. The purchases will be executed
at times and prices considered appropriate by us during the next two years. The
share repurchase program may be implemented at such future date as we may
determine and may be suspended at any time and from time-to-time without prior
notice. The repurchase program will be funded using our existing cash balances
and the repurchases shares may be used for corporate purposes in compliance with
applicable law.
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. 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.
If we experience delays or disruptions in manufacturing output or we are
unable to successfully manufacture our products and to develop alternative
manufacturing sources in a timely manner, our sales, financial position and
results of operations would be adversely affected.
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.
25
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 41.8 million 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. 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.
26
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 nine months ended
September 28, 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 September 28, 2002, our
European subsidiaries maintained cash and cash equivalents and trade accounts
receivable of approximately (Euro) 6.2 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.
Item 4. Controls and Procedures
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14 of the
Securities Exchange Act of 1923 ("Exchange Act") promulgated thereunder, our
chief executive officer and chief financial officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days prior to the date of the filing of this report (the "Evaluation Date") with
the Securities and Exchange Commission. Based on such evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures were effective as of the Evaluation Date to ensure that
information required to be disclosed in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms. In addition, a Disclosure Committee
has been established consisting of key legal, financial and business unit
leaders to review the Company's public filings and to insure accurate and timely
disclosure of required information.
Except for the establishment of a Disclosure Committee, there have been no
significant changes in the internal controls or in other factors that could
significantly affect our internal controls subsequent to the date of their most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
27
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. Although a
trial date has not been set, we believe that a trial will commence in the first
quarter of 2003.
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.
Our directors and officers have since been dismissed from the case, without
prejudice. The complaints allege that the registration statement and prospectus
relating to our initial public offering contained material
28
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 has recently been completed, and the judge heard oral
arguments on the motions on November 1, 2002. No discovery has occurred. We
intend to vigorously defend ourselves.
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) None.
(b) None.
29
(c) None.
(d) None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Certification under Section 906 of the Sarbanes-Oxley Act of 2002.
(b) On August 13, 2002, we filed a Current Report on Form 8-K dated August
13, 2002 containing the certification required by Section 906 of the
Sarbanes-Oxley Act of 2002.
30
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 12, 2002 /s/ Lynn D. Anderson
----------------------------------------
Lynn D. Anderson
Senior Vice President, Chief Financial
Officer and Treasurer
Date: November 12, 2002 /s/ Timothy C. Dec
----------------------------------------
Timothy C. Dec
Vice President and Chief Accounting
Officer
31
CERTIFICATE
I, David R. Huber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corvis Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
32
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 12, 2002
---------------------
/s/ David R. Huber
---------------------------------------
Name: David R. Huber
Title: Chairman and
Chief Executive Officer
33
CERTIFICATE
I, Lynn D. Anderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Corvis Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
34
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: /s/ November 12, 2002
-----------------------
/s/ Lynn D. Anderson
---------------------------------------
Name: Lynn D. Anderson
Title: Senior Vice President,
Chief Financial Officer and
Treasurer
35
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
99.1 Certificate of the Chief Executive Officer and the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
36