<PAGE>
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 30, 2000
[_] 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 formal 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 ________ No---X---
Number of shares of Common Stock, $0.01 par value, outstanding at November 6,
2000: 342,197,176
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
Part I - Financial Information
<S> <C>
Item 1. Financial Statements
Unaudited condensed consolidated balance sheets as of January 1, 2000 and September 30, 2000 ...... 3
Unaudited condensed consolidated statements of operations for the threeand nine months ended
October 2, 1999 and September 30, 2000............................................................. 5
Unaudited condensed consolidated statements of cash flows for the nine months ended October 2,
1999 and September 30, 2000........................................................................ 6
Notes to unaudited condensed consolidated financial statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk.......................................... 19
Part II - Other Information
Item 1. Legal Proceedings.................................................................................. 20
Item 2. Changes in Securities and Use of Proceeds.......................................................... 20
Item 3. Defaults Upon Senior Securities.................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 21
Item 5. Other Information.................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K................................................................... 21
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
January 1,
2000 September 30,
(audited) 2000
------------ -------------
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $244,597 $1,167,280
Restricted cash............................................................ 2,103 2,229
Trade accounts receivable.................................................. -- 13,360
Inventory, net............................................................. 15,869 123,365
Other current assets....................................................... 1,641 7,461
---------- ----------
Total current assets.................................................... 264,210 1,313,695
Restricted cash................................................................. 15,000 15,000
Property and equipment, net..................................................... 22,355 69,869
Goodwill and other intangible assets, net....................................... 2,148 170,189
Other assets.................................................................... 3,566 10,687
---------- ----------
Total assets............................................................ $307,279 $1,579,440
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable, current portion.............................................. $ 15,287 $ 18,279
Capital lease obligations, current portion.................................. 1,587 1,704
Accounts payable............................................................ 6,823 42,898
Accrued expenses............................................................ 3,674 12,054
---------- ----------
Total current liabilities............................................... 27,371 74,935
Noncurrent liabilities:
Notes payable, net of current portion........................................ 35,807 23,000
Capital lease obligations, net of current portion............................ 2,964 1,720
Deferred lease liability..................................................... 1,512 3,131
---------- ----------
Total liabilities....................................................... 67,654 102,786
Commitments and contingencies
Stockholders' equity:
Series A convertible preferred stock; $0.01 par value;
1,550,000 shares authorized, issued and outstanding
as of January 1, 2000; none authorized, issued or
outstanding as of September 30, 2000 (liquidation preference
of $3,100 and $0, as of January 1, 2000 and September 30,
2000, respectively)..................................................... 16 --
Series B convertible preferred stock; $0.01 par value; 6,685,931
shares authorized, 6,328,955 issued and outstanding as of
January 1, 2000; none authorized, issued or outstanding as of
September 30, 2000 (liquidation preference of $13,607 and
$0, as of January 1, 2000 and September 30, 2000, respectively)......... 63 --
Series C convertible preferred stock; $0.01 par value; 3,270,819 shares
authorized, 3,120,118 issued and outstanding as of January 1, 2000;
none authorized, issued or outstanding as of September 30, 2000
(liquidation preference of $28,540 and $0, as of January 1, 2000
and September 30, 2000, respectively)................................... 31 --
Series D convertible preferred stock; $0.01 par value; 273,314 shares
authorized, 211,928 issued and outstanding as of January 1, 2000;
none authorized, issued or outstanding as of September 30, 2000
(liquidation preference of $1,939 and $0, as of January 1, 2000
and September 30, 2000, respectively)................................... 2 --
Series E convertible preferred stock; $0.01 par value; 641,121 shares
authorized as of January 1, 2000; none authorized, issued or
outstanding as of September 30, 2000 (liquidation preference of $0)..... -- --
Series F convertible preferred stock; $0.01 par value; 1,946,906 shares
authorized, 1,898,406 issued and outstanding as of January 1, 2000;
none authorized, issued or outstanding as of September 30, 2000
(liquidation preference of $46,036 and $0, as of January 1, 2000
and September 30, 2000, respectively)................................... 19 --
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Series G convertible preferred stock; $0.01 par value; 573,989 shares authorized,
292,825 issued and outstanding as of January 1, 2000; none authorized, issued
or outstanding as of September 30, 2000 (liquidation preference of $10,000 and
$0, as of January 1, 2000 and September 30, 2000, respectively)............... 3 --
Series H convertible preferred stock; $0.01 par value; 3,186,710 shares authorized;
2,685,954 issued and outstanding as of January 1, 2000; none issued or
outstanding as of September 30, 2000 (liquidation preference of $216,300 and
$0, as of January 1, 2000 and September 30, 2000, respectively)............... 27 --
Series I convertible preferred stock; $0.01 par value; 2,496,564 shares authorized;
none issued or outstanding (liquidation preference of $0)..................... -- --
Common stock--$0.01 par value; 425,121,094 shares authorized; 61,114,020 shares
issued and outstanding as of January 1, 2000; 342,019,746 issued and
outstanding as of September 30, 2000.......................................... 609 3,418
Stockholder note receivable........................................................ (1,224) (1,224)
Additional paid-in capital......................................................... 331,302 1,772,766
Accumulated other comprehensive income:
Foreign currency translation adjustment....................................... -- (13,159)
Accumulated deficit................................................................ (91,223) (285,147)
-------- ----------
Total stockholders' equity.................................................... 239, 625 1,476,654
-------- ----------
Total liabilities and stockholders' equity.................................... $307,279 $1,579,440
======== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
October 2, September 30, October 2, September 30,
1999 2000 1999 2000
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenue.............................................. $ -- $ 22,911 $ -- $ 22,911
Costs of revenue..................................... -- 14,507 -- 14,507
-------- ----------- --------- -----------
Gross profit..................................... -- 8,404 -- 8,404
-------- ----------- --------- -----------
Operating expenses:
Research and development, exclusive of
equity-based expense.......................... 10,987 23,560 28,289 54,636
Sales and marketing, exclusive of equity-
based expense................................. 892 9,435 2,529 18,414
General and administrative, exclusive of
equity-based expense.......................... 2,683 9,370 7,690 16,766
Equity-based expense:
Research and development...................... -- 13,049 -- 14,697
Sales and marketing........................... 49 12,528 49 48,057
General and administrative.................... -- 7,812 -- 9,269
Depreciation and amortization..................... 843 11,055 1,637 14,607
Purchased research and development................ -- -- -- 40,300
-------- ----------- --------- -----------
Total operating expenses...................... 15,454 86,809 40,194 216,746
-------- ----------- --------- -----------
Operating loss................................ (15,454) (78,405) (40,194) (208,342)
Interest income (expense), net.................... (616) 12,053 (1,355) 14,418
-------- ----------- --------- -----------
Net loss...................................... $(16,070) $ (66,352) $ (41,549) $ (193,924)
======== =========== ========= ===========
Other comprehensive loss:
Foreign currency translation adjustment........... -- (13,159) -- (13,159)
-------- ----------- --------- -----------
Comprehensive loss................................... $(16,070) $ (79,511) $ (41,549) $ (207,083)
Basic and diluted net loss per common share.......... $ (0.56) $ (0.29) $ (1.59) $ (1.92)
Weighted average number of common shares
outstanding....................................... 28,878 226,094 26,183 101,094
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
October 2, September 30,
1999 2000
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................................... $(41,549) $ (193,925)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................. 1,637 14,607
Equity-based expense.......................................................... 49 72,023
Amortization of deferred financing fees....................................... 1,116 1,117
Purchased research and development expense.................................... -- 40,300
Changes in operating assets and liabilities:
Increase in accounts receivable............................................ -- (13,360)
Increase in inventory, net................................................. (8,114) (107,496)
Increase in other assets................................................... (2,449) (9,675)
Increase in accounts payable and accrued expenses.......................... 6,200 38,353
-------- ----------
Net cash used in operating activities.................................. (43,110) (158,056)
-------- ----------
Cash flows from investing activities:
Purchase of property and equipment............................................ (10,869) (46,540)
Cash acquired in business combination......................................... -- 23,840
Increase (decrease) in deposits and other non-current assets.................. 362 (2,000)
-------- ----------
Net cash used in investing activities..................................... (10,507) (24,700)
-------- ----------
Cash flows from financing activities:
Restricted cash............................................................... (17,103) (126)
Proceeds from issuance of notes payable and capital leases, net of
payments.................................................................. 43,389 (10,942)
Proceeds from the issuance of stock........................................... 59,484 1,118,381
-------- ----------
Net cash provided by financing activities................................. 85,770 1,107,313
-------- ----------
Effect of exchange rate changes on cash and cash equivalents.............. -- (1,874)
-------- ----------
Net increase in cash and cash equivalents................................ 32,153 922,683
Cash and cash equivalents--beginning............................................. 4,041 244,597
-------- ----------
Cash and cash equivalents--ending................................................ $ 36,194 $1,167,280
======== ==========
Supplemental disclosure of cash flow information:
Interest paid................................................................. $ 654 $ 639
======== ==========
Supplemental disclosure of noncash activities:
Financed leasehold improvements............................................... $ 1,940 $ 2,105
======== ==========
Obligations under capital lease............................................... $ 3 ,000 $ --
======== ==========
Issuance of warrants under capital lease obligation........................... $ 94 $ --
======== ==========
Conversion of stockholder note payable........................................ $ 10,000 $ --
======== ==========
Stockholder note received for exercise of stock options ...................... $ 1,224 $ --
======== ==========
Purchase business combinations consideration paid with preferred stock........ $ 1,900 $ 218,706
======== ==========
Intangible assets acquired through the issuance of common stock............... $ -- $ 35,000
======== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
(1) Summary of Significant Accounting Policies and Practices
(a) Basis of Presentation
The unaudited condensed consolidated financial statements included herein
for Corvis Corporation and subsidiaries (the "Company") have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the 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 financial statements prepared in
accordance with generally accepted accounting principles 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
January 1, 2000 audited consolidated financial statements and notes thereto
included in the Company's Registration Statement on Form S-1 declared effective
July 27, 2000.
During the three month period ended September 30, 2000, the Company
commenced its planned principal operations, including production, shipment and
delivery of its commercial products. Accordingly, the Company is no longer
considered a development stage enterprise and previous disclosures related to a
development stage enterprise are no longer required.
(b) 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. Costs of revenues 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 operations. Warranty
reserves are determined based upon actual warranty cost experience, estimates of
component failure rates and management's industry experience.
-7-
<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
(c) Uses of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect 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:
January 1, September 30,
2000 2000
------------ ------------
Raw materials........................................ $13,467 72,994
Work-in-process...................................... 4,173 23,269
Finished goods....................................... -- 35,758
------- -------
17,640 132,021
Less reserve for excess inventory and obsolescence... (1,771) (8,656)
------- --------
$15,869 $123,365
======= ========
(3) Acquisitions
On May 19, 2000, the Company acquired Baylight Networks, Inc. ("Baylight"),
a company that designs network systems and subsystems. Baylight, based in Palo
Alto, California, was formed in February 2000 and was a development stage
company with no revenue. In consideration for all of the outstanding shares of
Baylight, the Company assumed $0.1 million of Baylight's liabilities and agreed
to issue 2,400,012 shares of common stock over the term of three-year employment
agreements with the former Baylight shareholders. The Company accounted for the
acquisition as a purchase. Accordingly, the operating results of Baylight are
included in the Company's financial results from the date of acquisition. The
allocation of the purchase price to the fair value of the assets acquired and
liabilities assumed has been based on an internal analysis of the fair value of
the assets and liabilities of Baylight. The excess of the aggregate purchase
price over the estimated fair value of net assets acquired of approximately $0.1
million is being amortized on a straight-line basis over five years. The Company
is recognizing compensation expense over the term of the employment agreements
equal to the fair value of the shares to be issued.
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<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
On July 1, 2000, the Company acquired Algety Telecom S.A. ("Algety"), a
French company that develops and markets high-capacity, high-speed optical
transmission equipment. Algety, based in Lannion, France, was formed in April
1999, and was a development stage company with no revenue. The acquisition price
is equal to 1,301,822 shares of Series I convertible preferred stock, valued at
$218.7 million at the date of purchase. The Company accounted for the
acquisition as a purchase. Accordingly, the operating results of Algety are
included in the Company's financial results from the date of acquisition. The
allocation of the purchase price to the fair value of the assets acquired and
liabilities assumed has been based upon an independent third party valuation of
the assets and liabilities of Algety. Based upon the results of the valuation,
the Company allocated $40.3 million of the purchase price to in-process research
and development. The excess of the aggregate purchase price over the fair value
of net assets acquired of $154.8 million, based on the purchase price
allocation, is amortized on a straight-line basis over five years.
On November 3, 2000, consistent with the terms of the acquisition
agreement, the Company completed a second closing in which an additional
11,385,358 shares of common stock valued at $728.4 million were delivered to the
former Algety shareholders. This additional consideration represents goodwill
that will be amortized on a straight-line basis over the remaining goodwill
life.
The following pro forma data summarizes the results of operations for the
periods indicated as if the Algety acquisition had been completed as of the
beginning of the periods presented. The pro forma data give 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 had occurred as of the beginning of the periods presented or that
may be obtained in the future.
Nine months ended
-------------------------
October 2, September 30,
1999 2000
----------- -------------
Revenues.............................................. $ -- $ 22,911
Net loss.............................................. 62,728 226,863
Basic and diluted
net loss per share.................................... $ 2.40 $ 2.24
(4) Equity-Based Expense
Equity-based expense related to research and development, sales and
marketing and general and administrative functions equaled $33.4 million for the
three months ended September 30, 2000 and $72.0
-9-
<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
million for the nine months ended September 30, 2000. These expenses are
primarily due to the waiving of certain forfeiture provisions terms contained in
warrants granted to certain customers and stock options granted at exercise
prices below fair market value.
(5) Basic and Diluted Net Loss Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 2, September 30, October 2, September 30,
1999 2000 1999 2000
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net loss.................................... $(16,070) $(66,352) $(41,549) $(193,924)
Basic and diluted weighted average
shares.................................... 28,878 226,094 26,183 101,094
Basic and diluted net loss per share........ $(0.56) $(0.29) $(1.59) $(1.92)
</TABLE>
Options and warrants outstanding as of September 30, 2000 to purchase
51,412,585 and 15,810,768 shares of common stock, respectively, and 19,651,666
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three and nine month periods
ended September 30, 2000 as their inclusion would be anti-dilutive.
Convertible Preferred Stock outstanding as of October 2, 1999, convertible
into 173,915,508 shares of common stock, options and warrants to purchase
13,641,036 and 13,785,612 shares of common stock, respectively, and 28,616,328
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three and nine month periods
ended October 2, 1999 as their inclusion would be anti-dilutive.
(6) Equity Transactions
(a) Private Placements
In July 2000, the Company sold 124,177 shares of Series H convertible
preferred stock to Williams Communications Group in a private placement
transaction for an aggregate purchase price of $10 million.
In June 2000, the Company sold 372,533 shares of Series H convertible
preferred stock to Broadwing Communications Inc. in a private placement
transaction for an aggregate purchase price of $30 million.
-10-
<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
(b) Initial Public Offering
On August 2, 2000, the Company sold 31,625,000 shares of common stock in an
initial public offering and 277,778 shares of common stock in a concurrent
private placement for proceeds of $1,066.5 million after deducting underwriter
discounts and commissions and offering expenses.
In September 1999, the Company entered into an exclusive license agreement
with a strategic investor for the use of certain intellectual property and a
non-exclusive license for certain other technology. As partial consideration for
the license, the Company granted the strategic investor a warrant to receive
common stock valued at $35.0 million. Consistent with the terms of the
agreement, the warrant was exercised upon the consummation of the IPO. In
conjunction with terms of the license agreement, the Company accepted ownership
of the license. The license is being amortized on a straight-line basis over
three years.
(7) Stock Split
On July 21, 2000, the Company declared a 4-for-1 split of its common stock.
All share and per share amounts of common stock in the accompanying unaudited
condensed consolidated financial statements have been retroactively adjusted to
reflect the stock split.
(8) Legal Matters
By letter dated July 10, 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, an unspecified amount of 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. The Company is currently in the discovery phase of the
litigation.
The Company has designed its products in an effort to respect the
intellectual property rights of others. The Company intends to defend itself
vigorously against these claims and believes that it will prevail in this
litigation. However, there can be no assurance that the Company 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. The Company may consider settlement due to the costs
-11-
<PAGE>
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except per share amounts)
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 the Company from producing some of its products
until the Company was able to implement a non-infringing alternative design to
any portion of its products to which such a determination applied. Even if the
Company considers settlement, there can be no assurance that it 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 the
Company, or could include terms in addition to payments, such as a redesign of
some of the Company's products, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
(9) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. The new standard establishes
accounting and reporting standards for derivative instruments embedded in other
contracts and for hedging activities. This statement, as amended, is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company does not expect SFAS 133 to have a material affect on its financial
position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation ("FIN") No. 44, Accounting for Certain Transactions Involving
Stock Compensation. FIN 44 further defines the accounting consequence of various
modifications to the terms of a previously fixed stock options or awards under
APB 25. FIN 44 became effective on July 15, 2000, but certain conclusions in FIN
44 cover specific events that occur after December 15, 1998 or January 12, 2000.
The application of FIN 44 did not have a material affect on the Company's
financial position or results of operations.
-12-
<PAGE>
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.
Overview
We design, manufacture and market products that enable a fundamental shift
in the design and efficiency of backbone networks by allowing for the
transmission, switching and management of communications traffic entirely in the
optical domain. Our products enable the creation of all-optical backbone
networks that support transmission over long distances and eliminate the need
for expensive and bandwidth-limiting electrical regeneration and switching
equipment.
We currently have only three customers, Broadwing, Williams Communications
and Qwest. We shipped, installed and activated a laboratory trial system for
each of Broadwing and Williams Communications during the first quarter of 2000.
We began shipping, installing and activating field trial systems to Broadwing
and Williams during the second quarter of 2000. We successfully completed our
field trial with Broadwing in July 2000, and Broadwing has agreed to purchase
$200 million of our products and services over a two-year period. Williams
Communications has agreed to purchase $200 million of our products and services
over a two-year period, subject to its successful completion of a field trial.
Qwest has agreed to purchase $150 million of certain of our products, some of
which are currently under development, over a two year period beginning on the
date that the products meet agreed upon technical requirements. Qwest's purchase
obligations are subject to our products being competitively priced and our
ability to make products that meet agreed-upon technical requirements by the end
of 2001.
We are in discussions with other service providers to begin field trials and
to purchase our products.
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. Costs of revenues 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 operations. Warranty
reserves are determined based upon actual warranty cost experience, estimates of
component failure rates and management's industry experience.
Research and Development. Research and development expenses consist
primarily of salaries and related personnel costs, test and prototype expenses
related to the design of our hardware and software products, laboratory units
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 this process,
significant quarterly fluctuations may result. We believe that research and
development is critical in achieving current and future strategic product
objectives. We expect that research and development expenses will continue to
increase in the future as we continue to enhance our existing products and
develop new products.
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries and related personnel costs, laboratory trial systems, trade shows,
travel expenses and other marketing programs. We intend to continue to expand
our sales operations in order to increase market awareness and acceptance of our
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<PAGE>
products, including establishing sales offices throughout the United States and
internationally. We also expect to initiate additional marketing programs to
support our current products. Our success depends on establishing and
maintaining key customer relationships. In order to achieve this objective, we
expect to expand our customer service and support organization. We anticipate
that our sales and marketing expenses will continue to increase in the future.
General and Administrative. General and administrative expenses consist
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. We anticipate that these costs will continue to increase in
the future.
Since our inception, we have incurred significant losses, and as of
September 30, 2000 we had an accumulated deficit of $285.1 million. We do not
expect to generate net income before at least 2002. We have a lengthy sales
cycle for our products and accordingly expect to incur significant research and
development, sales and marketing and general and administrative expenses before
we realize any related revenue. As a result, we will need to generate
significant revenue to achieve and maintain profitability.
During 1999, we changed our accounting reporting period from a calendar
year-end to a manufacturing 52- or 53-week fiscal year-end, ending on the
Saturday closest to December 31 in each year.
Results of Operations
Three months ended September 30, 2000 compared to three months ended October 2,
1999
Revenue. Revenue increased to $22.9 million for the three months ended
September 30, 2000 from zero for the three months ended October 2, 1999. The
increase in revenue is attributable to the acceptance of a field trial system
and the sale of network hardware and associated software to one customer for
commercial use.
Gross Profit. 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. Gross profit was $8.4 million for the
three months ended September 30, 2000. Gross margin as a percentage of revenues
was 36.7%.
Research and Development. Research and development expenses increased to
$23.6 million for the three months ended September 30, 2000 from $11.0 million
for the three months ended October 2, 1999. The increase in expenses was
primarily attributable to significant increases in headcount, as well as
material costs associated with prototype development and laboratory materials.
Sales and Marketing. Sales and marketing expenses increased to $9.4 million
for the three months ended September 30, 2000 from $0.9 million for the three
months ended October 2, 1999. The increase in expenses was primarily
attributable to significant increases in headcount and increases in promotional
and trade show activities.
General and Administrative. General and administrative expenses increased
to $9.4 million for the three months ended September 30, 2000 from $2.7 million
for the three months ended October 2, 1999.
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The increase in expenses was primarily attributable to salaries and related
benefits due to the hiring of additional personnel, as well as expenses incurred
during the development of manufacturing processes.
Equity-based Expense. Equity-based expense related to research and
development, sales and marketing and general and administrative functions for
the three months ended September 30, 2000 increased to $33.4 million from $0.05
million in the three months ended October 2, 1999. The increase in equity-based
compensation principally resulted from expenses associated with stock options
granted with an exercise price below fair value at the date of grant.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $11.1 million for the three months ended September 30, 2000 from
$0.8 million for the three months ended October 2, 1999. The increase was
primarily attributable to the amortization on intangibles resulting from our
recent acquisitions, as well as to increased depreciation expenses associated
with the build-out of our facilities.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $12.1 million for the three months ended September 30, 2000 from
$0.6 million of net interest expense for the three months ended October 2, 1999.
The increase was primarily attributable to higher invested cash balances from
the proceeds of the initial public offering and concurrent private placement,
offset in part by interest incurred under credit facilities.
Nine months ended September 30, 2000 compared to nine months ended October 2,
1999
Revenue. Revenue increased to $22.9 million for the nine months ended
September 30, 2000 from zero for the nine months ended October 2, 1999. The
increase in revenue is attributable to the acceptance of a field trial system
and the sale of network hardware and associated software to one customer for
commercial use.
Gross Profit. 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. Gross profits were $8.4 million for the
nine months ended September 30, 2000. Gross margin as a percentage of revenues
was 36.7%.
Research and Development. Research and development expenses increased to
$54.6 million for the nine months ended September 30, 2000 from $28.3 million
for the nine months ended October 2, 1999. The increase in expenses was
primarily attributable to significant increases in headcount and increased
expenses associated with prototype development and laboratory materials.
Sales and Marketing. Sales and marketing expenses increased to $18.4
million for the nine months ended September 30, 2000 from $2.5 million for the
nine months ended October 2, 1999. The increase in expenses was primarily
attributable to significant increases in headcount, increases in promotional and
trade show activities and expenses related to laboratory systems provided to
current and potential customers.
General and Administrative. General and administrative expenses increased
to $16.8 million for the nine months ended September 30, 2000 from $7.7 million
for the nine months ended October 2, 1999. The increase in expenses was
primarily attributable to increases in salaries and related benefits due to the
hiring of additional personnel and increased expenses incurred during the
development of manufacturing processes.
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Equity-based Expense. Equity-based expense related to research and
development, sales and marketing and general and administrative functions for
the nine months ended September 30, 2000 increased to $72.0 million from $0.05
million in the nine months ended October 2, 1999. The increase in equity-based
compensation principally resulted from expenses recognized upon the waiving of
certain forfeiture provisions contained in warrants granted to certain customers
and options granted with an exercise price below fair value at the date of
grant.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $14.6 million for the nine months ended September 30, 2000 from
$1.6 million for the nine months ended October 2, 1999. The increase was
primarily attributable to the amortization of intangibles resulting from our
recent acquisitions, as well as depreciation associated with administrative and
manufacturing facilities and research and development equipment.
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $14.4 million for the nine months ended September 30, 2000 from
$1.4 million of net interest expense for the nine months ended October 2, 1999.
The increase was primarily attributable to higher invested cash balances from
the proceeds of the initial public offering and the current private placement,
offset in part by interest incurred under credit facilities.
Liquidity and Capital Resources
Since inception through September 30, 2000, we have financed our
operations, capital expenditures and working capital primarily through private
and public sales of our capital stock and borrowings under credit and lease
facilities. At September 30, 2000, cash and cash equivalents totaled
approximately $1,167.3 million.
Net cash used in operating activities for the nine months ended September
30, 2000 was $158.1 million, primarily attributable to a net loss of $193.9
million and a $107.5 million increase in inventory, partially offset by an
increase in accounts payable and other accrued liabilities of $38.4 million, and
non-cash items of $128.0 million.
Net cash used in investing activities for the nine months ended September
30, 2000 was $24.7 million. The increase in net cash used in investing
activities was primarily attributable to purchases of manufacturing and test
equipment, information systems equipment and office equipment, partially offset
by cash acquired in the Algety purchase. We are currently expanding our
production and research facilities and have executed agreements with our
existing landlords to build-out and improve additional facilities. Significant
capital expenditures will be required for facility modification, equipment,
systems and other capital additions.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $1,107.3 million, primarily attributable to proceeds from
our initial public offering and concurrent private placement which totaled
$1,066.5 million after deducting underwriters discounts and commissions and
other offering expenses.
As of September 30, 2000, we had outstanding irrevocable letters of credit
aggregating $2.2 million relating to lease obligations for various manufacturing
and office facilities and other business arrangements. These letters of credit
are collateralized by funds in our operating account. Various portions of the
letters of credit expire at the end of each respective lease term or agreement
term.
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We are currently in the process of putting in place a secured credit
facility with a syndicate of lenders. We expect this credit facility to be
available for borrowings by the end of 2000. We believe that the net proceeds
from our recent public offering and the concurrent private placement, together
with our current cash and cash equivalents and planned credit facility, will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
The optical network equipment industry is currently experiencing price
increases and shortages associated with certain component parts. A significant
price increase or a shortage of these parts could adversely affect our
liquidity, capital resources, and results of operations. We continue to evaluate
our need to acquire additional production and other facilities to accommodate
our expanding operations. We expect our expenditures associated with this
expansion to be significant over the next several years. 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 only three customers that
will provide substantially all of our revenues. The loss of any of these
customers, or any substantial reduction in anticipated orders, 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 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
convertible debt securities, the issuance of such securities could result in
dilution to our existing stockholders. If additional funds are raised through
the issuance of debt securities, the terms of such debt could impose additional
restrictions on our operations. Additional capital, if required, may not be
available on acceptable terms, or at all. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned product
development and sales and marketing efforts, which could harm our business,
financial condition and operating results. Increasingly, as a result of the
financial demands of major network deployments, service providers are looking to
their suppliers for financing assistance. From time to time we may provide or
commit to extend credit or credit support to our customers, as we consider
appropriate in the course of our business, considering our limited resources.
Ciena Litigation
On July 19, 2000, Ciena Corporation ("Ciena") filed a lawsuit in United
States District Court alleging that we are willfully infringing three of Ciena's
patents. Ciena is seeking injunctive relief, an unspecified amount of 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. We are currently in the discovery phase of the
litigation. We intend to defend ourselves vigorously against these claims and we
believe that we will prevail in this litigation. An adverse determination in, or
settlement of, the Ciena litigation could involve the payment of significant
amounts by us, or could include terms in addition to payments, such as a
redesign of some of our products, which could have a material adverse effect on
our business, financial condition and results of operations. If we are required
to redesign our products, we have to stop selling our current products until
they have been redesigned. We believe that defense of the lawsuit may be costly
and may divert the time and attention of some members of our management.
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Recent Acquisitions
Algety Telecom S.A.
On July 1, 2000, we acquired Algety, a French company that develops and
markets high capacity, high speed optical transmission equipment. Algety, based
in Lannion, France, was formed in April 1999, and is a development stage company
with no revenue.
At the initial closing on July 1, 2000, we delivered to the Algety
shareholders 1,301,822 shares of our Series I convertible preferred stock, less
348,402 shares delivered to our escrow agent to secure potential warranty
claims, which shares converted into 15,621,858 shares of common stock upon the
closing of our initial public offering. In addition, 189,586 shares will be
released from escrow contingent upon satisfaction of certain minimum employment
terms for certain Algety employees. We incurred approximately $1.0 million of
transaction costs relating to the transaction.
We have accounted for the acquisition using the purchase method whereby the
net tangible and identifiable intangible assets acquired and liabilities assumed
are recognized at their estimated fair market values at the date of acquisition.
The excess of the aggregate purchase price over the fair value of net assets
acquired of $154.8 million, based upon the purchase price allocation, is being
amortized on a straight-line basis over five years. In addition, $40.3 million
of the purchase price was allocated to in-process research and technology.
On November 3, 2000, consistent with the terms of the acquisition
agreement, the Company completed a second closing in which an additional
11,385,358 shares of common stock valued at $728.4 million were delivered to the
former Algety shareholders. This additional consideration represents goodwill
that will be amortized on a straight-line basis over the remaining goodwill
life.
Baylight Networks, Inc.
On May 19, 2000, we acquired Baylight, a company that designs optical
network access systems and subsystems. Baylight, based in Palo Alto, California,
was formed in February 2000 and is a development stage company with no revenue.
In consideration for all of the outstanding shares of Baylight, we assumed $0.1
million of Baylight liabilities and placed in escrow 2,400,012 shares of common
stock for release over the term of three-year employment agreements with the
former Baylight shareholders. We have accounted for the acquisition as a
purchase. Accordingly, the operating results of Baylight are included in our
financial results from the date of acquisition. The allocation of the purchase
price to the fair value of the assets acquired and liabilities assumed is based
on an internal analysis of the fair value of the assets and liabilities of
Baylight. The excess of the aggregate purchase price over the fair value of net
assets acquired of approximately $0.1 million is being amortized on a straight-
line basis over five years. We are recognizing compensation expense over the
terms of the employment agreements equal to the fair value of the shares to be
issued.
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 the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
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Interest Rate Sensitivity
We maintain a portfolio of cash equivalents in a variety of securities
including: commercial paper, certificates of deposit, money market funds and
government and non-government debt securities. These available for sale
securities are subject to interest rate risk and may fall in value if market
interest rates increase. We have the ability to hold our fixed income
investments until maturity, and therefore do not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden
change in market interest rates. The Company's long-term debt obligations bear
fixed interest rates. As such, we have minimal cash flow exposure due to general
interest rate changes associated with our long-term debt obligations.
Exchange Rate Sensitivity
The Company has two wholly owned subsidiaries which use a foreign currency
as their functional currency and are translated into U.S. dollars. The Company's
Algety and Corvis Canada subsidiaries' functional currency is the French Franc
and Canadian dollar, respectively. As such, the Company is exposed to risk
related to the adverse movements in foreign currency exchange rates. These
exposures may change over time and could have a material adverse impact on th
Company's financial results. For the three and nine month periods ended
September 30, 2000, the Company recognized a foreign currency translation
adjustment of $13.2 million as part of Other Comprehensive Income.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
By letter dated July 10, 2000, Ciena Corporation ("Ciena") informed us of
its belief that there is significant correspondence between products that we
offer and several U.S. patents held by Ciena relating to optical networking
systems and related dense wavelength division multiplexing communications
systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, an unspecified amount of 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. We
are currently in the discovery phase of the litigation.
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.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) During the quarter ended September 30, 2000, we granted stock options to
purchase 13,377,954 shares of common stock at an exercise price of $7.61
per share to employees, consultants and directors pursuant to our 1997
Stock Option Plan, as amended.
During the quarter ended September 30, 2000, we issued and sold an
aggregate of 3,219,776 shares of common stock to employees, consultants and
directors for aggregate consideration of $0.51 per share pursuant to
exercises of options pursuant to its 1997 Stock Option Plan, as amended.
Such sales were
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made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Rule 701 of the Securities Act of 1933, for
those employees who are our officers or directors or Section 4(2) of the
Securities Act for those employees, consultants and directors who are
accredited investors.
On August 2, 2000, we sold 277,778 shares of common stock in a private
placement for an aggregate of $10 million in a transaction exempt from the
registration requirements pursuant to Section 4(2) of the Securities Act.
In July 2000, the Company sold 124,177 shares of Series H convertible
preferred stock to Williams Communications for an aggregate purchase price
of $10 million in a transaction exempt from the registration requirements
pursuant to Section 4(2) of the Securities Act.
In June 2000, the Company sold 372,533 shares of Series H convertible
preferred stock to Broadwing Communications for an aggregate purchase price
of $30 million in a transaction exempt from the registration requirements
pursuant to Section 4(2) of the Securities Act.
(d) Not applicable.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On July 10, 2000, the holders of our Series C preferred stock elected
Joseph R. Hardiman to our board of directors. The affirmative vote of 72% of the
outstanding shares of our Series C preferred stock was received.
On July 24, 2000, our stockholders approved by written consent a resolution
authorizing us from time to time in the future to sell, lease or exchange our
assets in one or more transactions to or with wholly owned subsidiaries upon
such terms and conditions as the board of directors may determine. The
affirmative vote of 76% of the outstanding shares of our capital stock eligible
to vote on this matter was received.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) A list of exhibits filed herewith is contained on the Index to Exhibits
immediately preceding such exhibits, which is incorporated herein by
reference.
(b) We did not file any reports on Form 8-K during the quarter ended September
30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Corvis Corporation
Date:_____________________ _______________________________________
Anne H. Stuart
Senior Vice President, Chief Financial
Officer and Treasurer
Date:_____________________ _______________________________________
Timothy C. Dec
Chief Accounting Officer and
Corporate Controller
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INDEX TO EXHIBITS
Exhibit
Number Description
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27.1 Financial Data Schedule
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