<PAGE>
Filed persuant to Rule 424(b)(1)
Registration No. 333-36238
31,625,000 Shares
[LOGO OF CORVIS CORPORATION]
Common Stock
------------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "CORV."
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds
Public Commissions to Corvis
-------------- ------------- --------------
<S> <C> <C> <C>
Per Share.................................. $36.00 $2.52 $33.48
Total...................................... $1,138,500,000 $79,695,000 $1,058,805,000
</TABLE>
Delivery of the shares of common stock will be made on or about August 2,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Banc of America Securities LLC
Chase H&Q
J.P. Morgan & Co.
CIBC World Markets
The date of this prospectus is July 27, 2000.
<PAGE>
{These diagrams depict a Corvis enabled all-optical mesh network architecture
compared against a traditional ring architecture network, each overlaid on a
map of the United States. The ring architecture is congested with a large
number of electrical and electrical/optical transmission equipment located at
various points on each ring and at each network intersection. There are also
several redundant overlapping sections of rings that are the result of
inefficiencies inherent in ring architectures. The Corvis mesh network
solution has been provisioned with our all optical equipment. This mesh
network design provides end to end optical routes that are inherently more
efficient than the ring architecture.]
<PAGE>
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 3
Risk Factors........................ 8
Forward-Looking Statements.......... 19
Use of Proceeds..................... 20
Dividend Policy..................... 20
Capitalization...................... 21
Dilution............................ 23
Selected Consolidated Financial
Data............................... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................ 33
Management.......................... 47
</TABLE>
<TABLE>
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Page
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Certain Relationships and Related
Party Transactions................ 58
Recent Sales of Preferred Stock and
the Concurrent Private Placement.. 60
Principal Stockholders............. 61
Description of Capital Stock....... 63
Shares Eligible for Future Sale.... 67
Underwriting....................... 69
Notice to Canadian Residents....... 72
Legal Matters...................... 73
Experts............................ 73
Where You Can Find More
Information....................... 73
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until August 21, 2000, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
Corvis Corporation
We design, manufacture and market products that enable a fundamental shift
in the design and efficiency of long distance, fiber optic communication
networks, or backbone networks, by allowing for the transmission, switching and
management of communications traffic entirely as optical signals. Our products
enable the creation of these all-optical backbone networks that support
transmission over long distances and eliminate the need for expensive and
capacity-limiting electrical transmission and switching equipment. By deploying
our products, service providers can significantly reduce costs, increase
network capacity and more quickly and efficiently provide new services. We
believe that service providers will increasingly turn to optical technologies
because traditional electrical and electrical/optical technologies and the
existing network architecture do not adequately address service providers'
rapidly increasing capacity and reliability requirements in a cost effective
manner.
To date, we have not recognized meaningful revenue. We currently have only
three customers, Broadwing Communications, Inc., Williams Communications, Inc.
and Qwest Communications Corporation. 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 them 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 field
trials. We expect the Williams Communications field trial to be completed
during the second half of 2000. Qwest has agreed to purchase $150 million of
certain of our products, which are currently under development, over a two-year
period beginning on the date that the products meet agreed technical
requirements. Qwest's purchase obligations are subject to our products being
priced competitively and our ability to make products that meet the agreed
technical requirements by the end of 2001. We are in discussions with other
service providers to begin field trials and to purchase our products. However,
no additional customers have agreed to purchase our products at this time.
Our products offer service providers several key competitive advantages and
benefits, including:
. Reduced Capital Expenditures. By deploying our products in backbone
networks, service providers are able to dramatically reduce their
capital expenditures. Our all-optical network products eliminate the
need for costly electrical regeneration and switching equipment in
backbone networks, reducing the amount of equipment required for network
deployment and expansion. Our products support transmission of optical
signals up to 3,200 kilometers compared to 400 to 600 kilometers for
traditional equipment, which reduces the number of transmitters and
receivers and associated equipment by up to a factor of eight, resulting
in reduced capital expenditures.
. Speed to Deploy and Increase Capacity. Backbone networks constructed
using our products require significantly less equipment than used in
existing networks, reducing network complexity as well as the number of
tasks that must be performed to install our products. Once installed,
additional transmission capacity can be added simply by inserting
transmitters and receivers at the end points of a desired transmission
path. No additional equipment is required along the transmission path,
eliminating the need for lengthy, costly and manually-intensive
installations.
. Rapid Delivery of Services. Using our products, service providers can
rapidly and cost-effectively deliver services to their customers. The
delivery of services along a transmission path can be performed in hours
from a service provider's network operations center using our network
management software, eliminating the months and expense required for
service provider personnel to
3
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manually install and/or modify electrical transmission and switching
equipment along the transmission path.
. Reduced Operating Expenses. Our products reduce operating expenses by
dramatically reducing the amount of equipment in backbone networks and
reducing costs associated with maintaining equipment and spare parts
inventory and providing electrical power and facilities to operate and
house the equipment. Our products can reduce the number of transmitters
and receivers and associated equipment in a service provider's network
by up to a factor of eight and the cost associated with this equipment
in the network. This results in a more efficient, less complex network
with fewer parts to track, control, maintain and manage.
. Compatibility with Traditional Networks. Our products are compatible
with traditional network equipment, allowing service providers to
selectively migrate to an all-optical backbone network, while continuing
to use their existing networks.
Since beginning operations, we have incurred significant expenses while we
have developed our products. We had net losses of $0.5 million for the period
from June 2, 1997, the date of our inception, to December 31, 1997, $19.5
million for the year ended December 31, 1998 and $71.3 million for the year
ended January 1, 2000. We have large fixed expenses, and we expect to incur
increasing manufacturing, research and development, sales and marketing,
administrative and other expenses. As a result, we do not expect to generate
net income before at least 2002. Because our products have only been tested in
our laboratory and in two of our customers' laboratories and we have
successfully completed only one field trial, the likelihood of their success is
difficult to predict. Even if our products prove to be commercially viable, we
face intense competition from a number of competitors, including Alcatel,
Ciena, Cisco Systems, Lucent Technologies, NEC and Nortel Networks. After the
completion of this offering, our key employees, including Dr. David Huber, our
founder, President and Chief Executive Officer, will maintain significant
control over us, and our future success depends on the continued services of
our key employees.
Recent Acquisitions
We recently acquired two companies that will provide us with additional
technologies which we believe will enable us to further develop leading optical
network products. On July 1, 2000, we acquired Algety Telecom S.A., 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. The acquisition price
was 1,301,822 shares of our Series I convertible preferred stock, which will
convert into 15,621,858 shares of common stock upon the closing of this
offering. In addition, 189,586 shares of Series I convertible preferred stock
will be issued contingent upon satisfaction of certain minimum employment terms
for certain Algety employees. If the value of all of this stock is less than $2
billion after this offering or if we are acquired, we will be required to
increase the purchase price up to a total of (1) 8.0% of our outstanding stock,
with the number of additional shares depending on our market value following
this offering or our valuation in a transaction in which we are acquired by
another public company or (2) 8.0% of our outstanding stock if we issue 50% of
our shares in a single transaction or series of related transactions or if we
are acquired by a private company.
On May 19, 2000, we acquired Baylight Networks, Inc., 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 agreed to issue 2,400,012
shares of common stock over the term of three-year employment agreements with
the former Baylight shareholders.
For a detailed description of these acquisitions, please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Recent Acquisitions."
4
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Ciena Corporation Litigation
On July 19, 2000, Ciena Corporation filed a lawsuit in United States
District Court alleging that we are willfully infringing three of Ciena's
patents. We intend to defend ourselves vigorously against these claims and we
believe that we will prevail in this litigation. For a detailed description of
this litigation, please see "Business--Legal Proceedings."
Company Information
Our principal executive offices are located at 7015 Albert Einstein Drive,
Columbia, Maryland 21046-9400, and our telephone number is (443) 259-4000. Our
website address is www.corvis.com. Information contained in our website is not
incorporated by reference into this prospectus, and you should not consider
information contained in our website as part of this prospectus.
We have applied for trademark and service mark protection for our Corvis,
CorWave, CorManager, Wave Planner and Corvis logo marks. This prospectus also
contains additional trade names, trademarks and service marks of ours and of
other companies.
Recent Sales of Preferred Stock and the Concurrent Private Placement
On May 2, 2000 we sold 124,177 shares of Series H convertible preferred
stock to Williams Communications in a private placement which will
automatically convert into 1,490,124 shares of our common stock upon the
closing of this offering. On June 30, 2000, we sold 372,533 shares of Series H
convertible preferred stock to Broadwing in a private placement which will
automatically convert into 4,470,396 shares of our common stock upon the
closing of this offering.
Concurrent with this offering, we are offering shares of our common stock to
Broadwing and Williams Communications in a private placement. Broadwing and
Williams Communications each have the opportunity to purchase up to $5 million
of our common stock at the public offering price.
5
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The Offering
<TABLE>
<S> <C>
Common stock offered................. 31,625,000 shares
Common stock offered in the
concurrent private placement........ 277,778 shares
Common stock to be outstanding after
this offering and the concurrent
private placement................... 332,652,750 shares
Use of proceeds...................... For working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol........ CORV
</TABLE>
The number of shares to be outstanding after this offering and the
concurrent private placement is based on 296,120,090 shares outstanding as of
July 1, 2000, and excludes:
. 63,862,040 shares of common stock available for issuance under our 1997
Stock Option Plan, including 42,472,732 shares of common stock issuable
upon exercise of outstanding stock options as of July 1, 2000 at a
weighted average exercise price of $2.38 per share;
. 18,434,544 shares of common stock issuable upon exercise of warrants
outstanding as of July 1, 2000 at a weighted average exercise price of
$1.21 per share;
. 20,000,000 shares of common stock initially available for issuance under
our 2000 Long Term Incentive Plan; and
. 10,000,000 shares of common stock available for issuance under our
Employee Stock Purchase Plan.
----------------
Except as otherwise indicated, all information in this prospectus assumes:
. the acquisition of Algety;
. the issuance of 972,222 shares of our common stock, upon the exercise of
an outstanding warrant that is automatically exercised at the closing of
this offering for no additonal cash consideration;
. the issuance of 3,961,500 shares of our common stock upon the exercise
of outstanding warrants that, if not exercised by the holders, will
expire upon the closing of this offering at a weighted average exercise
price of $2.38 per share;
. the issuance in the concurrent private placement by us of 277,778 shares
of our common stock; and
. the automatic conversion of all outstanding shares of preferred stock
into 233,582,130 shares of common stock upon the closing of this
offering.
6
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Summary Consolidated Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period from Three Months
June 2, 1997 Year Ended Ended
(inception) to ----------------------- ------------------
December 31, December 31, January 1, April 3, April 1,
1997 1998 2000 1999 2000
-------------- ------------ ---------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
Operating loss.......... (537) (19,102) (69,123) (10,736) (28,271)
Net loss................ (494) (19,460) (71,269) (11,162) (26,831)
======= ======== ======== ======== ========
Basic and diluted net
loss per share......... $ (0.02) $ (0.86) $ (2.33) $ (0.41) $ (0.65)
======= ======== ======== ======== ========
Shares used in computing
basic and diluted net
loss per share......... 21,600 22,638 30,599 27,209 41,128
======= ======== ======== ======== ========
</TABLE>
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<CAPTION>
April 1, 2000
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $201,547 $264,604 $1,331,809
Working capital............................ 200,911 262,251 1,329,456
Total assets............................... 284,694 553,544 1,620,749
Notes payable and capital lease
obligations, net of current portion....... 34,488 35,752 35,752
Convertible preferred stock................ 161 -- --
Total stockholders' equity................. 213,714 476,568 1,543,773
</TABLE>
See note 9 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing net loss per
share data.
The Pro Forma consolidated balance sheet data as of April 1, 2000 gives
effect to:
. the acquisition of Algety;
. the sale of $40 million of convertible preferred stock to Broadwing and
Williams Communications;
. the issuance of 972,222 shares of our common stock,upon the exercise of
an outstanding warrant that is automatically exercised at the closing of
this offering for no additional cash consideration;
. the issuance of 3,961,500 shares of our common stock upon the exercise
of outstanding warrants that, if not exercised by the holders, will
expire upon the closing of this offering at a weighted average exercise
price of $2.38 per share; and
. the automatic conversion of all outstanding shares of preferred stock
into 233,582,130 shares of common stock upon the closing of this
offering.
The Pro Forma As Adjusted consolidated balance sheet data gives effect to
our receipt of the net proceeds from our sale of 31,625,000 shares of common
stock in this offering and 277,778 shares of common stock in the concurrent
private placement, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
7
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RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk.
Risks Related to Our Financial Results
We have not recognized meaningful revenue. We have incurred significant losses
since inception and expect to continue to incur losses in the future, all of
which may adversely affect the market price of our common stock.
We have not recognized meaningful revenue, and we have incurred significant
net losses since inception. We had net losses of $0.5 million for the period
from June 2, 1997, the date of our inception, to December 31, 1997, $19.5
million for the year ended December 31, 1998 and $71.3 million for the year
ended January 1, 2000. As of April 1, 2000, we had an accumulated deficit of
$118.1 million. We cannot be certain that we will generate meaningful revenue
or achieve or sustain profitability. We have large fixed expenses and expect to
continue to incur significant and increasing manufacturing, research and
development, sales and marketing, administrative and other expenses in
connection with the continued development and expansion of our business. As a
result, we will need to generate significant revenue to achieve and maintain
profitability. We do not expect to generate net income before at least 2002.
Our early stage of development makes it difficult to evaluate our business and
prospects.
We were incorporated in June 1997 and began operations in August 1997.
During the first quarter of 2000, we shipped, installed and activated two
laboratory test systems. We began shipping, installing and activating field
trial systems during the second quarter of 2000. We successfully completed our
field trial with Broadwing in July 2000, and we anticipate that our field trial
with Williams Communications will be completed in the second half of 2000.
Because we have not begun commercial sales of our products, our revenue and
profit potential is unproven and our limited operating history makes it
difficult for you to evaluate our business and prospects. Further, due to our
limited operating history, we have difficulty accurately forecasting our
revenue, and we have limited historical financial data upon which to base
operating expense budgets. You should consider our business and prospects in
light of the heightened risks and unexpected expenses and problems we may face
as a company in an early stage of development in a new and rapidly-evolving
industry.
We are entirely dependent on our optical network products. Failure of our
products to operate as expected could delay or prevent their deployment and
sale and could seriously impair our business and prospects.
Our future growth and success depends on the commercial success of our
optical network products. We have produced our products in limited quantities
and only to specifications required in order to conduct laboratory tests and
field trials. Our products have been deployed and tested in our laboratories
and, for our optical network gateway and our optical amplifier products, in two
of our customers' laboratories. In addition, our optical network gateway,
optical amplifier and optical add/drop multiplexer products have been deployed
and tested in field trials. We cannot assure you that our products will operate
as expected or if and when commercial sale of our products will occur. Our
optical switch is a significant part of our strategy to offer a complete all-
optical network product suite and is not yet commercially available. Failure of
our products to operate as expected could delay or prevent their deployment and
sale and could seriously impair our business and prospects. If our customers do
not successfully test and deploy our network products, our business will not
succeed.
The unpredictability of our quarterly results may adversely affect the trading
price of our common stock.
Our revenue and operating results will vary significantly from quarter to
quarter due to a number of factors, many of which are outside of our control
and any of which may cause the price of our common stock to fluctuate. The
primary factors that may affect us include the following:
. loss of customers;
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. fluctuation in demand for optical network products;
. the length and variability of the sales cycle for our products;
. the timing and size of sales of our products;
. our ability to attain and maintain production volumes and quality levels
for our products;
. our ability to obtain sufficient supplies of sole or limited source
components;
. changes in our pricing policies or the pricing policies of our
competitors;
. increases in the prices of the components we purchase;
. new product introductions and enhancements by our competitors and us;
. our ability to develop, introduce and ship new products and product
enhancements that meet customer requirements in a timely manner;
. the timing and magnitude of prototype expenses;
. our ability to attract and retain key personnel;
. our sales of common stock or other securities in the future;
. costs related to acquisitions of technology or businesses; and
. general economic conditions as well as those specific to the
communications, Internet and related industries.
Our operating expenses are largely based on anticipated organizational
growth and revenue trends and a high percentage of our expenses are, and will
continue to be, fixed. As a result, a delay in generating or recognizing
revenue could cause significant variations in our operating results from
quarter to quarter and could result in substantial operating losses. It is
possible that in some future quarters our operating results may be below the
expectations of analysts and investors. In this event, the price of our common
stock will likely decrease.
The long and variable sales cycles for our products may cause revenue and
operating results to vary significantly from quarter to quarter, which may
adversely affect the trading price of our common stock.
Our products are designed to enable all-optical transmission and switching
of data traffic over long distances. We expect that customers who purchase our
products will do so as part of a large-scale deployment of these products
across their networks. As a result, a customer's decision to purchase our all-
optical network products will involve a significant commitment of its
resources. A lengthy testing and product qualification process, a portion of
which is funded by us, will precede any final decision to purchase our
products. Throughout this sales and qualification cycle, we will spend
considerable time and expense educating and providing information to
prospective customers about the uses and features of our products.
The timing of deployment of our products may vary widely and will depend on
the specific network deployment plan of the customer, the installation skills
of the customer, the complexity of the customer's network environment and the
degree of hardware and software configuration necessary. Customers with
substantial or complex networks have traditionally expanded their networks in
large increments on a periodic basis. Accordingly, we may receive purchase
orders for significant dollar amounts on an irregular and unpredictable basis.
Because of our limited operating history and the nature of our business, we
cannot predict the timing or size of these sales and deployment cycles. Long
sales cycles, as well as our expectation that customers will tend to place
large orders sporadically with short lead times, may cause our revenue and
results of operations to vary significantly and unexpectedly from quarter to
quarter.
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We currently have three customers and we expect that substantially all of our
revenue will be generated from a limited number of customers.
The target customers for our products are service providers that operate
backbone communications networks. There are only a limited number of potential
customers in our target market. We currently have three customers who have
signed agreements to purchase our products. Each of these agreements contains
significant obligations, the breach of which could result in termination of the
agreement. In addition, the Williams Communications agreement will terminate
if, among other circumstances, we do not complete successful field trials with
them. The Qwest agreement will terminate if, among other circumstances, our
products do not meet the agreed technical specifications. We expect that in the
future substantially all of our revenue will depend on sales of our optical
network products to a limited number of potential customers. The rate at which
customers purchase products from us will depend, in part, on the increasing
demand for bandwidth by service providers' customers. Any failure of service
providers to purchase products from us for any reason, including any downturn
in their business, would seriously harm our business, financial condition and
results of operations.
We depend on our key personnel to manage our business effectively in a rapidly
changing market. If we are unable to retain our key employees, our business,
financial condition and results of operations could be harmed.
Our future success depends upon the continued services of our executive
officers and other key engineering, manufacturing, operations, sales, marketing
and support personnel who have critical industry experience and relationships
that we rely on to implement our business plan. We do not have key person life
insurance policies covering any of our employees. The loss of the services of
any of our key employees, including Dr. David Huber, our founder, President and
Chief Executive Officer, could delay the development and production of our
products and negatively impact our ability to maintain customer relationships,
which would harm our business, financial condition and results of operations.
We do not have significant experience in international markets and may have
unexpected costs and difficulties in developing international revenue.
We plan to expand the marketing and sales of our products internationally.
This expansion will require significant management attention and financial
resources to successfully develop international sales and support channels.
Currently, we have a very limited sales and marketing staff outside of the
United States. International operations may be subject to certain risks and
challenges that could harm our results of operations, including:
. fluctuations in exchange rates;
. changes in regulatory requirements in the communications industry;
. expenses associated with developing and customizing our products for
foreign countries;
. tariffs, quotas and other import restrictions on communications
products;
. greater difficulty in accounts receivable collection and longer
collection periods;
. difficulties and costs of staffing and managing foreign operations;
. reduced protection for intellectual property rights;
. potentially adverse tax consequences;
. longer sales cycles for our products;
. compliance with international standards that differ from domestic
standards; and
. political and economic instability.
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Risks Related to the Growth of Our Industry
The market for all-optical backbone network products is new and uncertain and
our business will suffer if it does not develop as we expect.
Most service providers have made substantial investments in their current
network infrastructure, and they may elect to remain with current network
architectures or to adopt new architectures in limited stages or over extended
periods of time. A decision by a customer to purchase our all-optical products
will involve a significant capital investment. We will need to convince these
service providers of the benefits of our all-optical network products for
future network upgrades or expansions. We cannot be certain that a viable
market for our products will develop or be sustainable. If this market does not
develop, or develops more slowly than we expect, our business, financial
condition and results of operations would be seriously harmed.
The market we serve is highly competitive and, as an early stage company, we
may not be able to achieve or maintain profitability.
Competition in the backbone network communications equipment market is
intense. This market has historically been dominated by large companies, such
as Alcatel, Ciena, Cisco Systems, Lucent Technologies, NEC and Nortel Networks.
We may face competition from other large communications companies who may enter
our market. In addition, a number of private companies have announced plans for
new all-optical products to address the same network needs that our products
address. Due to several factors including the lengthy sales cycle, testing and
deployment process and manufacturing constraints associated with large-scale
deployments of our products, we may lose any advantage that we might have by
being an early provider of all-optical network products prior to achieving
market penetration. Many of our competitors have longer operating histories,
greater name recognition, larger customer bases and greater financial,
technical and sales and marketing resources than we do and may be able to
undertake more extensive marketing efforts, adopt more aggressive pricing
policies and provide more vendor financing than we can. Moreover, our
competitors may foresee the course of market developments more accurately than
we do and could develop new technologies that compete with our products or
render our products obsolete. Due to the rapidly evolving markets in which we
compete, additional competitors with significant market presence and financial
resources may enter our markets, further intensifying competition.
In order to compete effectively, we must deliver products that:
. provide extremely high reliability;
. increase network capability easily and efficiently with minimum
disruption;
. operate with existing equipment and network designs;
. reduce the complexity of the network in which they are installed by
decreasing the amount of equipment required;
. provide effective network management;
. reduce operating costs; and
. provide an overall cost-effective solution for service providers.
In addition, we believe that a knowledge of the infrastructure requirements
applicable to service providers, experience in working with service providers
to develop new services for their customers, and an ability to provide vendor
financing are important competitive factors in our market. We have limited
knowledge of service providers' infrastructure requirements and limited
experience in working with service providers to develop new services. We
currently provide only a limited vendor-sponsored financing program. Many of
our competitors, however, are able to offer more complete financing programs,
which may influence prospective customers to purchase from our competitors
rather than from us.
If we are unable to compete successfully against our current and future
competitors, we may have difficulty obtaining customers, and we could
experience price reductions, order cancellations, increased
11
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expenses and reduced gross margins, any one of which would harm our business,
financial condition and results of operations.
The communications industry is subject to government regulations which could
harm our business.
The Federal Communications Commission, or FCC, has jurisdiction over the
entire communications industry and, as a result, our products and our
customers' products, are subject to FCC rules and regulations. Current and
future FCC rules and regulations affecting communications services, our
products or our customers' businesses or products could negatively affect our
business. In addition, international regulatory standards could impair our
ability to develop products for international service providers in the future.
Delays caused by our compliance with regulatory requirements could result in
postponements or cancellations of product orders, which would harm our
business, results of operations and financial condition. Further, we cannot be
certain that we will be successful in obtaining or maintaining any regulatory
approvals that may, in the future, be required to operate our business.
Risks Related to Our Product Manufacturing
We have limited manufacturing experience and unproven manufacturing
capabilities. If we are unable to expand our manufacturing capacity in a timely
manner or if we do not accurately project demand, we will not achieve or
maintain profitability.
Our future operating results will depend on our ability to develop and
manufacture our products cost-effectively. To do so, we will have to develop
manufacturing processes that will allow us to produce sufficient quantities of
products at competitive prices. We have limited manufacturing experience and
have only used our current facility for producing prototypes, laboratory trial
equipment and limited quantities of products for field trial deployment.
Furthermore, our current facilities may not be sufficient for producing the
volume of products required on a timely basis by our customers. Due to the
complexities of the optical product manufacturing process, we may be unable to
supplement our internal manufacturing capability by outsourcing manufacturing
of our products to meet demand.
If we are unable to expand our manufacturing capacity in a timely manner or
if we do not accurately project demand, we will have insufficient capacity or
excess capacity, either of which will seriously harm our business. There are
numerous risks associated with expanding our manufacturing capabilities,
including the following:
. the inability to purchase and install the necessary manufacturing
equipment;
. the scarcity and cost of manufacturing personnel; and
. difficulties in achieving adequate yields from new manufacturing lines.
Our planned manufacturing expansion and related capital expenditures assume
a level of customer orders that we may not realize or, if we do realize, may
not be sustained over multiple quarters. If we do not receive anticipated
levels of customer orders, our gross margins will decline and we will not be
able to reduce our operating expenses quickly enough to prevent a decline in
our operating results.
We are dependent on sole source and limited source suppliers for several key
components. If we are unable to obtain these components on a timely basis, we
will be unable to meet our customers' product delivery requirements, which
would harm our business.
We currently purchase several key components from single or limited sources.
There is currently an industry-wide shortage of some optical components due to
rapidly increasing demand. For some of these components, there can be waiting
periods of six months or more between placement of an order and receipt of the
components. If any of our sole or limited source suppliers experiences capacity
constraints, work stoppages or any other reduction or disruption in output,
they may be unable to meet our delivery schedule. We currently
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<PAGE>
have no long-term supply contracts for many of our key components. Our
suppliers may enter into exclusive arrangements with our competitors, be
acquired by our competitors, stop selling their products or components to us at
commercially reasonable prices, refuse to sell their products or components to
us at any price or be unable to obtain or have difficulty obtaining components
for their products from their suppliers, and we may be unable to develop
alternative sources for the components. Even if alternate suppliers are
available to us, identifying them is often difficult and time consuming. If we
do not receive critical components from our suppliers in a timely manner, we
will be unable to manufacture our products in a timely manner and would,
therefore, be unable to meet customers' product delivery requirements. Any
failure to meet a customer's delivery requirements could harm our reputation
and decrease our sales, which would harm our business, financial condition and
results of operations.
Some of our competitors are also our suppliers and if our supply relationship
with them deteriorates, it could harm our business.
Some of our component suppliers are both our primary source for those
components and major competitors in the market for communications equipment.
For example, we buy some of our key components from Lucent and Alcatel, each of
which offers communications systems and equipment that compete with our
products. Our business, financial condition and results of operations could be
harmed if these supply relationships were to change in any manner adverse to
us.
Risks Related to Our Products
Because optical products are complex and are deployed in complex environments,
our products may have defects that we discover only after full deployment,
which could seriously harm our business.
Optical products are complex and are designed to be deployed in large
quantities across complex networks. Because of the nature of the products, they
can only be fully tested when completely deployed in large networks with high
amounts of traffic. Our customers may discover errors or defects in the
hardware or the software, or our products may not operate as expected, after
they have been fully deployed. If we are unable to fix defects or other
problems that may be identified in full deployment, we would experience:
. loss of, or delay in, revenue and loss of market share;
. loss of existing customers;
. failure to attract new customers or achieve market acceptance;
. diversion of development resources;
. increased service and warranty costs;
. legal actions by our customers; and
. increased insurance costs.
The occurrence of any of these problems would seriously harm our business,
financial condition and results of operations. Defects, integration issues or
other performance problems in our products could result in financial or other
damages to our customers or could negatively affect market acceptance for our
products. Our customers could also seek damages for losses from us, which, if
they were successful, would seriously harm our business, financial condition
and results of operations. A product liability claim brought against us, even
if unsuccessful, would likely be time consuming and costly and would put a
strain on our management and resources.
Our business will suffer if we do not respond rapidly to technological changes.
The market for backbone network communications equipment is characterized by
rapid technological change, frequent new product introductions and changes in
customer requirements. We may be unable to respond quickly or effectively to
these developments. We may experience design, manufacturing, marketing and
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<PAGE>
other difficulties that could delay or prevent our development, introduction or
marketing of new products and enhancements. The introduction of new products by
competitors, market acceptance of products based on new or alternative
technologies or the emergence of new industry standards could render our
existing or future products obsolete, which would harm our business, financial
condition and results of operations.
In developing our products, we have made, and will continue to make,
assumptions about the industry standards that may be adopted by our competitors
and potential customers. If the standards adopted are different from those
which we have chosen to support, market acceptance of our products may be
significantly reduced or delayed and our business will be seriously harmed. In
addition, the introduction of products incorporating new technologies and the
emergence of new industry standards could render our existing products
obsolete. In order to introduce products incorporating new technologies and new
industry standards, we must be able to gain access to the latest technologies
of our suppliers, other network vendors and our potential customers. Any
failure to gain access to the latest technologies would seriously harm our
business, financial condition and results of operations.
Our business will suffer if our current and future products do not meet
specific customer requirements.
Customers may require product features and capabilities that our current
products do not have. To achieve market acceptance for our products, we must
anticipate and adapt to customer requirements and offer products and services
that meet customer demands. Our failure to develop products or offer services
that satisfy customer requirements would seriously harm our business, financial
condition and results of operations.
We intend to continue to invest in product and technology development. The
development of new or enhanced products is a complex and uncertain process that
requires the accurate anticipation of technological and market trends. We may
experience design, manufacturing, marketing and other difficulties that could
delay or prevent the development, introduction or marketing of new products and
enhancements. The introduction of new or enhanced products also requires that
we manage the transition from older to newer products in order to minimize
disruption in customer ordering patterns and ensure that adequate supplies of
new products can be delivered to meet anticipated customer demand. Our
inability to effectively manage this transition would harm our business,
financial condition and results of operations.
Our business will be adversely affected if we are unable to protect our
intellectual property rights from third-party challenges.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our technology is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
We are involved in an intellectual property dispute and in the future we may
become involved in similar disputes, which could subject us to significant
liability, divert the time and attention of our management and prevent us from
selling our products.
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. 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
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<PAGE>
patent. 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 expect that defense of the lawsuit will be costly and
will 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.
We or our customers may be a party to additional litigation in the future to
protect our intellectual property or to respond to allegations that we infringe
others' intellectual property. Any parties asserting that our products infringe
upon their proprietary rights would force us to defend ourselves and possibly
our customers against the alleged infringement. If we are unsuccessful in any
intellectual property litigation, we could be subject to significant liability
for damages and loss of our proprietary rights. Intellectual property
litigation, regardless of its success, would likely be time consuming and
expensive to resolve and would divert management time and attention. In
addition, we could be forced to do one or more of the following:
. stop selling, incorporating or using our products that include the
challenged intellectual property;
. obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
. redesign those products that use the technology.
If we are forced to take any of these actions, our business would be
seriously harmed.
If necessary licenses of third-party technology are not available to us or are
very expensive, our business would be seriously harmed.
We currently license technology, and from time to time we may be required to
license additional technology, from third parties to sell or develop our
products and product enhancements. We cannot assure you that our existing and
future third-party licenses will be available to us on commercially reasonable
terms, if at all. Our inability to maintain or obtain any third-party license
required to sell or develop our products and product enhancements could require
us to obtain substitute technology of lower quality or performance standards or
at greater cost, any of which could seriously harm our business, financial
condition and results of operations.
Risks Related to the Expansion of Our Business
Our business will suffer if we do not expand our sales organization and our
customer service and support operations and hire additional qualified
personnel.
Our products and services require a sophisticated sales effort targeted at a
limited number of key individuals within our prospective customers'
organizations. Our success will depend, in part, on our ability to develop and
manage these relationships. This effort requires specialized sales personnel as
well as experienced sales engineers. We are building our direct sales force and
plan to hire additional qualified sales personnel and sales engineers.
Competition for these individuals is intense because there are a limited number
of people available with the necessary technical skills and understanding of
our market. Once we hire them or contract for these personnel, they may require
extensive training in our network products. We might not be able to hire the
kind and number of sales personnel and sales engineers required for us to be
successful. If we are unable to expand our customer service and support
operations, we may not be able to effectively market our products, which may
prevent us from achieving and maintaining profitability.
We believe our future success will also depend in large part upon our
ability to identify, attract and retain highly skilled managerial, engineering,
sales and marketing and finance personnel. Competition for these individuals is
also intense in our industry. We may not succeed in identifying, attracting and
retaining personnel. Further, competitors and other entities may attempt to
recruit our employees. If we are unable to hire any of these required personnel
and expand our corporate infrastructure, we may not be able to increase sales
of our products, which would seriously harm our business, financial condition
and results of operations.
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<PAGE>
To date, two of our customers have acquired an equity interest in our company,
and our third customer holds a warrant to purchase our common stock. If we
discontinue this practice of selling equity to our customers, we may not
attract new customers.
Two of our customers have purchased an equity interest in our company, and
our third customer holds a warrant to purchase our common stock. Although these
customers purchased the equity interests at fair value and the warrant has an
exercise price equal to the fair value on the date of grant, the opportunity to
invest in our company provided these customers with an additional incentive to
purchase our products. It is unlikely that we will offer this opportunity to
prospective customers, which may hurt our ability to sell our products.
Our business will suffer if we fail to properly manage our growth and
continually improve our internal controls and systems.
We have expanded our operations rapidly since our inception. We continue to
increase the scope of our operations and have increased the number of our
employees substantially. We plan to increase significantly our operating
expenses to broaden our in-house manufacturing and customer support
capabilities, develop new distribution channels, expand our sales and marketing
operations and fund greater levels of research and development. We also plan to
expand our general and administrative capabilities to address the increased
reporting and other administrative demands which will result from this offering
and the increasing size of our business. Our growth has placed, and our
anticipated growth will continue to place, a significant strain on our
management and resources. Our ability to successfully offer our products and
implement our business plan in a rapidly evolving market requires an effective
planning and management process. In order to manage our growth properly, we
must:
. retain existing personnel;
. hire, train, manage and retain additional qualified personnel, including
engineers and research and development personnel;
. manage and expand our manufacturing operations, controls and reporting
systems;
. effectively manage multiple relationships with our customers, suppliers
and other third parties; and
. implement additional operational controls, reporting and financial
systems and procedures.
Failure to do any of the above in an efficient and timely manner could
seriously harm our business, financial condition and results of operations.
If we become subject to unfair hiring claims we could incur substantial costs
in defending ourselves or our management's attention could be diverted away
from our operations.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring
practices. We have received claims of this kind in the past, and we cannot
assure you that we will not receive claims of this kind in the future as we
seek to hire qualified personnel or that those claims will not result in
material litigation. We could incur substantial costs in defending ourselves or
our employees against such claims, regardless of the merits of the claims. In
addition, defending ourselves from such claims could divert the attention of
our management away from our operations.
Any acquisitions we make could disrupt our business and seriously harm our
financial condition.
We may, from time to time, consider investments in complementary companies,
products or technologies. We have recently acquired two companies, and we may
acquire additional businesses, products or technologies in the future. In the
event of any future acquisitions, we could:
. issue stock that would dilute our current stockholders' percentage
ownership;
. incur debt;
. assume liabilities;
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<PAGE>
. incur amortization expenses related to goodwill and other intangible
assets; or
. incur large and immediate write-offs.
Our operation of any acquired business will also involve numerous risks,
including:
. problems combining the acquired operations, technologies or products;
. unanticipated costs;
. diversion of management's time and attention from our core business;
. adverse effects on existing business relationships with suppliers and
customers;
. risks associated with entering markets in which we have no or limited
prior experience; and
. potential loss of key employees, particularly those of acquired
companies.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future. Any failure to do so could seriously harm our business, financial
condition and results of operations.
We may need additional capital to fund our existing and future operations. If
we are unable to obtain additional capital, we may be required to reduce the
scope of our planned product development and marketing and sales efforts, which
would harm our business, financial condition and results of operations.
The development and marketing of new products and the expansion of our
direct sales operation and associated support personnel is expected to require
a significant commitment of resources. We may incur significant operating
losses or expend significant amounts of capital if:
. the market for our products develops more slowly than anticipated;
. we fail to establish market share or generate revenue;
. our capital expenditure forecasts change or prove inaccurate; and
. we need to respond to unforeseen challenges or take advantage of
unanticipated opportunities.
As a result, we may need to raise substantial additional capital. 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 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
capital, we may be required to reduce the scope of our planned product
development and marketing and sales efforts, which would harm our business,
financial condition and results of operations.
Risks Related to This Offering
Management will have broad discretion in how we use the proceeds of this
offering, and we may not use these proceeds effectively.
Our management will have considerable discretion in the application of the
net proceeds of this offering, and you will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. The net proceeds may be used for corporate purposes that do not
increase our profitability or our market value.
Insiders will continue to have substantial control over us after this offering
and could limit your ability to influence the outcome of key transactions,
including changes of control.
We anticipate that our executive officers, directors and entities affiliated
with them will, in the aggregate, beneficially own approximately 45.5% of our
outstanding common stock following the completion of this offering and the
concurrent private placement. These stockholders, if acting together, would be
able to influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers
or other business combination transactions.
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<PAGE>
We cannot assure you that a market will develop for our common stock or what
the market price of our common stock will be.
Before this offering there was no public trading market for our common
stock, and we cannot assure you that one will develop or be sustained after
this offering. We cannot predict the prices at which our common stock will
trade. The initial public offering price for our common stock was determined
through our negotiations with the underwriters and may not bear any
relationship to the market price at which it will trade after this offering or
to any other established criteria of our value.
The trading prices of many technology and Internet-related companies' stocks
reached historical highs within the last 52 weeks and reflect relative
valuations that are substantially above historical levels. During the same
period, these companies' stocks also have recorded lows well below historical
highs. We cannot assure you that our stock will trade at the same high levels
of other technology stocks or that we can sustain our common stock's trading
price regardless of our actual operating performance.
The trading price of our common stock is likely to be volatile. The stock
market in general, and the market for technology companies in particular, has
experienced extreme volatility. This volatility has often been unrelated to the
operating performance of particular companies. Volatility in the market price
of our common stock may prevent investors from being able to sell their common
stock at or above the initial public offering price.
We are at risk of securities class action litigation due to our expected stock
price volatility.
In the past, securities class action litigation has often been brought
against companies after periods of volatility in the market price of their
securities. Securities litigation could result in substantial costs and divert
management's attention and resources from our business. Due to the potential
volatility of our stock price, we may be the target of securities litigation in
the future.
We have various mechanisms in place to discourage takeover attempts that could
suppress our stock price and make it more difficult to acquire us.
Our certificate of incorporation and our bylaws to be effective on the
closing of this offering contain provisions that could make it more difficult
for a third party to acquire us, even if doing so would be beneficial to our
stockholders. These provisions include:
. authorizing the issuance of shares of blank check preferred stock;
. prohibiting cumulative voting in the election of directors;
. prohibiting stockholders from calling stockholders meetings;
. providing for a classified board of directors with staggered, three-year
terms; and
. prohibiting stockholder action by written consent.
In addition, Section 203 of the Delaware General Corporation Law prohibits us
from engaging in a business combination with any of our interested stockholders
for three years after such stockholder became an interested stockholder unless
certain specified conditions are met.
For information regarding these and other provisions, please see
"Description of Capital Stock."
If a significant number of shares become available for sale and are sold in a
short period of time, the market price of our stock could decline.
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the market price of our common stock
could fall. Based on shares outstanding as of July 1, 2000, upon completion of
this offering and the concurrent private placement, we will have outstanding
332,652,750 shares of common stock. Our stockholders will be subject to
agreements with the underwriters or us that restrict their ability to transfer
their stock for 180 days from the date of this prospectus, subject to certain
exceptions. For a detailed description of these exceptions, please see
"Underwriting." After these agreements expire, an additional 255,180,593 shares
will be eligible for sale in the public market. For a detailed discussion of
the shares eligible for future sale, please see "Shares Eligible for Future
Sale."
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<PAGE>
In addition, under the investor rights agreement some of our current
shareholders have "demand" and/or "piggyback" registration rights in connection
with future offerings of our common stock. "Demand" rights enable the holders
to demand that their shares be registered and may require us to file a
registration statement under the Securities Act at our expense. "Piggyback"
rights provide for notice to the relevant holders of our stock if we propose to
register any of our securities under the Securities Act, and grant such holders
the right to include their shares in the registration statement. All holders
with registrable securities have agreed not to exercise their demand
registration rights until 180 days following the date of this prospectus
without the consent of Credit Suisse First Boston Corporation.
As a new investor, you will incur substantial dilution as a result of this
offering and future equity issuances.
The initial public offering price will be substantially higher than the pro
forma net tangible book value per share of our outstanding common stock. As a
result, investors purchasing common stock in this offering will incur immediate
dilution of $31.96 a share. The exercise of outstanding options and warrants
and future equity issuances, including any additional shares issued in
connection with our acquisition of Algety, will result in further dilution.
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Result of Operations," and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance,
and involve known and unknown risks, uncertainties, and other factors that may
cause our actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. These
risks and other factors include those listed under "Risk Factors" and elsewhere
in this prospectus. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expects," "intends," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
the negative of these terms or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements.
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USE OF PROCEEDS
Our net proceeds from the sale of the 31,625,000 shares of common stock in
this offering and the 277,778 shares of common stock in the concurrent private
placement are estimated to be $1,067.2 million after deducting estimated
underwriting discounts and commissions and estimated offering expenses.
The principal purposes of this offering are to fund our operations, to
obtain additional working capital, to establish a public market for our common
stock, to increase our visibility in the industry and to facilitate future
access to public capital markets.
We intend to use the net proceeds of this offering and the concurrent
private placement for additional working capital and other general corporate
purposes, including the funding of operating losses, the expansion of sales and
marketing and product research and development activities. The amounts that we
actually expend for working capital and other general corporate purposes will
vary significantly depending on a number of factors, including future revenue
growth, if any, and the amount of cash that we generate from operations. As a
result, we will retain broad discretion over the allocation of the net proceeds
from this offering. A portion of the net proceeds may also be used for the
acquisition of businesses, products and technologies that are complementary to
ours. Complementary businesses may include optical system manufacturers and
companies with intellectual property portfolios relating to optical and
networking technology. Other than as described in this prospectus, we have no
current plans, agreements or commitments for acquisitions of any businesses,
products or technologies. Pending these uses, we will invest the net proceeds
of this offering and the concurrent private placement in short-term and
investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We do
not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently intend to retain all available funds and any
future earnings to fund the development and growth of our business.
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CAPITALIZATION
The following table sets forth our capitalization as of April 1, 2000:
. on an actual basis;
. on a pro forma basis after giving effect to:
-- the acquisition of Algety;
-- the sale of $40 million of convertible preferred stock to Broadwing
and Williams Communications;
-- the issuance of 972,222 shares of our common stock, upon the
exercise of an outstanding warrant that is automatically exercised
at the closing of this offering for no additional consideration;
-- the issuance of 3,961,500 shares of our common stock upon the
exercise of outstanding warrants that, if not exercised by the
holders, will expire upon the closing of this offering at a weighted
average exercise price of $2.38 per share; and
-- the automatic conversion of all outstanding shares of preferred
stock into 233,582,130 shares of common stock upon the closing of
this offering.
. on a pro forma as adjusted basis after giving effect to our receipt of
the net proceeds from our sale of 31,625,000 shares of common stock in
this offering and 277,778 shares of common stock in the concurrent
private placement, after deducting estimated underwriting discounts and
commissions and estimated offering expenses.
You should read this table in conjunction with our consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
April 1, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(in thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 201,547 $ 264,604 $1,331,809
========= ========= ==========
Notes payable and capital lease obligations,
net of current portion...................... $ 34,488 $ 35,752 $ 35,752
--------- --------- ----------
Stockholders' equity:
Convertible preferred stock, $0.01 par value
per share, authorized in Series A, B, C, D,
E, F, G, H, and I; 18,128,790 total shares
authorized, 16,091,047 total shares issued
and outstanding, actual; 18,128,790 shares
authorized, no shares issued or
outstanding, pro forma or pro forma as
adjusted................................... 161 -- --
Preferred stock, $0.01 par value per share,
no shares authorized, issued or
outstanding, actual or pro forma;
200,000,000 shares authorized, no shares
issued or outstanding pro forma as
adjusted................................... -- -- --
Common stock, par value $0.01 per share,
365,659,228 shares authorized, 61,378,676
shares issued and outstanding, actual;
425,121,094 shares authorized, 299,587,340
shares issued and outstanding, pro forma;
1,900,000,000 shares authorized,
331,490,118 shares issued and outstanding
pro forma as adjusted...................... 612 2,994 3,313
Stockholder note receivable................. (1,224) (1,224) (1,224)
Additional paid-in capital.................. 332,219 633,152 1,700,038
Deficit accumulated during development
stage...................................... (118,054) (158,354) (158,354)
--------- --------- ----------
Total stockholders' equity................. 213,714 476,568 1,543,773
--------- --------- ----------
Total capitalization..................... $ 248,202 $ 512,320 $1,579,525
========= ========= ==========
</TABLE>
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Share information above excludes:
. 63,862,040 shares of common stock available for issuance under our 1997
Stock Option Plan, including 42,472,732 shares of common stock issuable
upon exercise of outstanding stock options as of July 1, 2000 at a
weighted average exercise price of $2.38 per share;
. 18,434,544 shares of common stock issuable upon exercise of warrants
outstanding as of July 1, 2000 at a weighted average exercise price of
$1.21 per share;
. 20,000,000 shares of common stock initially available for issuance under
our 2000 Long Term Incentive Plan; and
. 10,000,000 shares of common stock available for issuance under our
Employee Stock Purchase Plan.
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DILUTION
If you invest in our common stock, your ownership interest will be diluted
to the extent of the difference between the public offering price per share of
our common stock and the pro forma net tangible book value per share of our
common stock immediately after this offering. The pro forma net tangible book
value of our common stock as of April 1, 2000 was $270.9 million, or
approximately $0.90 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less our total liabilities
divided by the pro forma number of shares of common stock outstanding after
giving effect to:
. the acquisition of Algety;
. the sale of $40 million of convertible preferred stock to Broadwing and
Williams Communications;
. the issuance of 972,222 shares of our common stock, upon the exercise of
an outstanding warrant that is automatically exercised at the closing of
this offering for no additional cash consideration;
. the issuance of 3,961,500 shares of common stock upon the exercise of
outstanding warrants that, if not exercised by the holders, will expire
upon the closing of this offering at a weighted average exercise price
of $2.38 per share; and
. the automatic conversion of all outstanding shares of preferred stock
into 233,582,130 shares of common stock upon the closing of this
offering.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to the sale of 31,625,000 shares of common stock in this offering and
277,778 shares of common stock in the concurrent private placement and after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of April 1, 2000
would have been $1,338.2 million or approximately $4.04 per share. This
represents an immediate increase in pro forma net tangible book value of $3.14
per share to existing stockholders and an immediate dilution of $31.96 per
share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $36.00
Pro forma net tangible book value per share as of April 1,
2000........................................................ $0.90
Increase per share attributable to new investors............. 3.14
-----
Pro forma as adjusted net tangible book value per share after
this offering................................................. 4.04
------
Dilution per share to new investors............................ $31.96
======
</TABLE>
23
<PAGE>
The following table presents, on a pro forma basis, as of April 1, 2000, the
differences between the number of shares of common stock purchased from us, the
total consideration paid or exchanged and the average price per share paid by
existing stockholders and by new investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
----------- ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 273,071,240 82.1% $ 331,767,448 18.6% $ 1.21
Former stockholders of
Algety................. 15,621,858 4.7% 218,706,012 12.3% 14.00
Additional convertible
preferred stock sold to
Broadwing and Williams
Communications......... 5,960,520 1.8% 40,000,000 2.2% 6.71
Common stock issued
pursuant to an
outstanding warrant
with no additional cash
consideration.......... 972,222 0.3% 35,000,000 2.0% 36.00
Exercise of outstanding
warrants that expire
upon closing of this
offering and options
and warrants exercised
after April 1, 2000.... 5,124,132 1.5% 10,032,303 0.6% 1.96
Concurrent private
placement of
common shares.......... 277,778 0.1% 10,000,000 0.6% 36.00
New investors in this
offering............... 31,625,000 9.5% 1,138,500,000 63.7% 36.00
----------- ----- -------------- -----
332,652,750 100.0% $1,784,005,763 100.0%
=========== ===== ============== =====
</TABLE>
The foregoing table and calculations assume no exercise of any options and
exclude:
. 63,862,040 shares of common stock available for issuance under our 1997
Stock Option Plan, including 42,472,732 shares of common stock issuable
upon exercise of outstanding stock options as of July 1, 2000 at a
weighted average exercise price of $2.38 per share;
. 18,434,544 shares of common stock issuable upon exercise of warrants
outstanding as of July 1, 2000 at a weighted average exercise price of
$1.21 per share;
. 20,000,000 shares of common stock initially available for issuance under
our 2000 Long Term Incentive Plan; and
. 10,000,000 shares of common stock available for issuance under our
Employee Stock Purchase Plan.
The exercise of outstanding options and warrants and future equity
issuances, including any additional shares issued in connection with our
acquisition of Algety, will result in further dilution.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
The following table presents our selected consolidated financial data. We
derived this data from our consolidated financial statements and the notes to
those statements. You should read this data along with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes to those statements included
elsewhere in this prospectus. All financial data as of December 31, 1998 and
January 1, 2000 and for the period from June 2, 1997 (inception) to December
31, 1997 and the years ended December 31, 1998 and January 1, 2000 have been
derived from our audited consolidated financial statements included elsewhere
in this prospectus. Financial data as of December 31, 1997 has been derived
from our audited consolidated financial statements not included in this
prospectus. All financial data as of April 1, 2000 and for the three months
ended April 3, 1999 and April 1, 2000 have been derived from our unaudited
consolidated financial statements included elsewhere in this prospectus, and in
the opinion of management, reflects all adjustments, which are of only a normal
or recurring nature, necessary to present fairly the data for the periods
presented. Operating results for the three months ended April 1, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 30, 2000. During 1999, we changed our accounting reporting cycle 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.
<TABLE>
<CAPTION>
Period from
June 2, 1997 Year Ended Three Months Ended
(inception) to ------------------------- ----------------------
December 31, December 31, January 1, April 3, April 1,
1997 1998 2000 1999 2000
-------------- ------------ ------------ ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development, including
equity-based expense.. 249 15,260 39,800 8,411 19,807
Sales and marketing,
including equity-based
expense............... -- 167 8,264 283 4,630
General and
administrative........ 268 3,147 18,319 1,700 2,359
Depreciation and
amortization.......... 20 528 2,740 342 1,475
------- -------- -------- -------- --------
Total operating
expenses.............. 537 19,102 69,123 10,736 28,271
------- -------- -------- -------- --------
Operating loss......... (537) (19,102) (69,123) (10,736) (28,271)
Interest income
(expense), net........ 43 (358) (2,146) (426) 1,440
------- -------- -------- -------- --------
Net loss............... $ (494) $(19,460) $(71,269) $(11,162) $(26,831)
======= ======== ======== ======== ========
Basic and diluted net
loss per common share.. $ (0.02) $ (0.86) $ (2.33) $ (0.41) $ (0.65)
======= ======== ======== ======== ========
Weighted average number
of common shares
outstanding............ 21,600 22,638 30,599 27,209 41,128
Pro forma basic and
diluted net loss per
common share
(unaudited)............ $ (0.39) $ (0.11)
======== ========
Pro forma weighted
average number of
common shares
outstanding
(unaudited)............ 184,319 252,787
<CAPTION>
December 31, December 31, January 1, April 1,
1997 1998 2000 2000
------------ ------------ ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 1,620 $ 4,041 $244,597 $201,547
Working capital......... 1,552 (1,474) 236,839 200,911
Total assets............ 2,652 8,488 307,279 284,694
Notes payable and
capital lease
obligations, net of
current portion........ -- 5,800 38,771 34,488
Total stockholders'
equity................. 2,506 (2,968) 239,625 213,714
</TABLE>
Included in research and development expenses is equity-based compensation
of $126 for the year ended January 1, 2000 and $745 for the three months ended
April 1, 2000. Included in sales and marketing expenses is equity-based
compensation of $4,845 for the year ended January 1, 2000.
See notes 1 and 9 of notes to consolidated financial statements for an
explanation of the determination of the number of shares used in computing net
loss and pro forma net loss per share data.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with our
consolidated financial statements and the notes to those statements included
elsewhere in this prospectus.
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 were incorporated on June 2, 1997 under the laws of the State of Delaware
under the name NOVA Telecommunications, Inc. On February 5, 1999, we changed
our name to Corvis Corporation.
Since our inception on June 2, 1997, we have been a development stage
company. Our operating activities consist primarily of research and
development, product design, manufacturing and testing. Additionally, we have
recruited and trained our administrative, financial, marketing and customer
support organizations, and we are establishing a direct sales force.
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 them 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 field trials. We expect the
Williams Communications field trial to be completed during the second half of
2000. Qwest has agreed to purchase $150 million of certain of our products,
which are currently under development, over a two year period beginning on the
date that the products meet agreed technical requirements. Qwest's purchase
obligations are subject to our products being competitively priced and our
ability to make products that meet agreed 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. To date, we have not recognized meaningful revenue. Our policy will
be to recognize revenue from product sales when a purchase commitment has been
received, delivery has been made, collection is probable and, if contractually
required, a customer's product acceptance has been received. Costs of revenues
will include the costs of manufacturing our products and other costs associated
with warranty and other contractual obligations. Under the two current customer
contracts where shipments have occurred, we did not recognize revenue from the
shipment of laboratory units or field trial units at the time of their
shipment.
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
significantly 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 and
other marketing programs and events and travel expenses. We
26
<PAGE>
intend to expand our sales operations significantly in order to increase market
awareness and acceptance of our 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 increase
significantly 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 expanding organization. This
infrastructure consists of executive, financial, legal, information systems and
other administrative responsibilities. We anticipate that these costs will
increase significantly in the future.
Since our inception, we have incurred significant losses, and as of April 1,
2000 we had an accumulated deficit of $118.1 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 April 1, 2000 compared to three months ended April 3, 1999
Revenue. We recognized no revenue in either period.
Research and Development. Research and development expenses increased to
$19.8 million for the three months ended April 1, 2000 from $8.4 million for
the three months ended April 3, 1999. The increase in expenses was primarily
attributable to $3.7 million of salaries and related benefits due to the hiring
of additional personnel, $2.6 million of prototype and laboratory materials,
$2.3 million of facilities expenses and $0.8 million in equity-based
compensation expense, primarily consisting of expenses related to the issuance
of options granted to non-employees.
Sales and Marketing. Sales and marketing expenses increased to $4.6 million
for the three months ended April 1, 2000 from $0.3 million for the three months
ended April 3, 1999. The increase in expenses was primarily attributable to
$2.7 million of laboratory trial systems, $0.8 million of salaries and related
benefits due to the hiring of additional personnel, and $0.2 million of travel
expenses.
General and Administrative. General and administrative expenses increased to
$2.4 million for the three months ended April 1, 2000 from $1.7 million for the
three months ended April 3, 1999. The increase in expenses was primarily
attributable to salaries and related benefits due to the hiring of additional
personnel.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $1.5 million for the three months ended April 1, 2000 from $0.3
million for the three months ended April 3, 1999. The increase was primarily
attributable to depreciation associated with administrative and manufacturing
facilities and research and development equipment. We expect depreciation and
amortization expenses to increase significantly in future years due primarily
to the amortization of intangibles resulting from our recent acquisitions, as
well as to increased depreciation expenses associated with the build-out of our
new facilities.
27
<PAGE>
Interest Income (Expense), Net. Interest income, net of interest expense,
increased to $1.4 million for the three months ended April 1, 2000 from $0.4
million of net interest expense for the three months ended April 3, 1999. The
increase was primarily attributable to higher invested cash balances from the
proceeds of private placements, offset in part by interest payments under new
credit facilities.
Year ended January 1, 2000 compared to year ended December 31, 1998
Revenue. We recognized no revenue in either period.
Research and Development. Research and development expenses increased to
$39.8 million for the year ended January 1, 2000 from $15.3 million for the
year ended December 31, 1998. The increase in expenses was primarily
attributable to $11.0 million of salaries and related benefits due to the
hiring of additional personnel, $5.0 million of prototype and laboratory
materials, $1.7 million of facilities costs, $1.4 million of information
systems support costs and $0.1 million of equity-based compensation expense.
Sales and Marketing. Sales and marketing expenses increased to $8.3 million
for the year ended January 1, 2000 from $0.2 million for the year ended
December 31, 1998. The increase in expenses was primarily attributable to $1.5
million of salaries and related benefits due to the hiring of additional
personnel, $1.0 million of promotional and trade show expenses and $4.8 million
of equity-based compensation expense related to the issuance of options granted
to non-employees and warrants issued to strategic investors.
General and Administrative. General and administrative expenses increased to
$18.3 million for the year ended January 1, 2000 from $3.1 million for the year
ended December 31, 1998. The increase in expenses was primarily attributable to
$9.6 million for financial, legal and advisory fees, $2.2 million of personnel
and related benefits due to the hiring of additional personnel and $2.2 million
of information system support costs.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $2.7 million for the year ended January 1, 2000 from $0.5 million
for the year ended December 31, 1998. The increase was primarily attributable
to depreciation associated with administrative and manufacturing facilities and
research and development equipment.
Interest Income (Expense), Net. Interest expense, net of interest income,
increased to $2.1 million for the year ended January 1, 2000 from $0.4 million
for the year ended December 31, 1998. Interest expense increased for the year
ended January 1, 2000 as a result of increased borrowings under new and
existing credit facilities, offset in part by an increase in interest income
primarily attributable to proceeds from private placements.
Year ended December 31, 1998 compared to the period from June 2, 1997
(inception) through December 31, 1997
Revenue. We recognized no revenue in either period.
Research and Development. Research and development expenses increased to
$15.3 million for the year ended December 31, 1998 from $0.2 million for the
period from inception through December 31, 1997. The increase in expenses was
primarily attributable to $8.4 million of prototype and lab materials and $4.0
million of salaries and related benefits due to the hiring of additional
personnel.
Sales and Marketing. Sales and marketing expenses increased to $0.2 million
for the year ended December 31, 1998 from zero dollars for the period from
inception through December 31, 1997. The increase in expense was attributable
to the initial establishment of our sales effort.
General and Administrative. General and administrative expenses increased to
$3.1 million for the year ended December 31, 1998 from $0.3 million for the
period from inception through December 31, 1997. The increase in expenses was
primarily attributable to $1.0 million of salaries and related benefits due to
the hiring of additional personnel, $0.7 million of information system support
and $0.6 million of facility costs.
28
<PAGE>
Liquidity and Capital Resources
Since inception through April 1, 2000, we have financed our operations,
capital expenditures and working capital primarily through private sales of our
capital stock and borrowings under credit and lease facilities. At April 1,
2000, cash and cash equivalents totaled $201.5 million.
Since inception through April 1, 2000, net cash used in operating activities
was $120.4 million. Net cash used in operating activities for the three months
ended April 1, 2000 was $32.0 million, primarily attributable to a net loss of
$26.8 million and $13.5 million of inventory purchases, offset by an increase
in accounts payable of $7.6 million. Net cash used in operating activities for
the year ended January 1, 2000 was $71.8 million, primarily attributable to a
net loss of $71.3 million and $15.9 million of inventory purchases, offset in
part by non-cash items of $9.9 million and an increase in accounts payable of
$4.7 million. Net cash used in operating activities for the year ended December
31, 1998 was $16.2 million, primarily attributable to a net loss of $19.5
million, offset in part by an increase in accounts payable of $1.8 million. Net
cash used in operating activities for the period June 2, 1997 (inception) to
December 31, 1997 was $0.4 million, primarily attributable to a net loss of
$0.5 million.
Since inception through April 1, 2000, net cash used in investing activities
was $24.2 million. Net cash used in investing activities for the three months
ended April 1, 2000 was $7.5 million, the year ended January 1, 2000 was $14.0
million, the year ended December 31, 1998 was $1.7 million and from June 2,
1997 (inception) to December 31, 1997 was $1.0 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. We are currently building out our second production facility and
have executed agreements with our existing landlord to build-out and improve
additional facilities. Significant capital expenditures will be required for
facility modification, equipment, systems and other capital additions.
Since inception through April 1, 2000, net cash provided by financing
activities was $346.1 million. Net cash used by financing activities for the
three months ended April 1, 2000 was $3.6 million, primarily attributable to
payments on debt. Net cash provided by financing activities for the year ended
January 1, 2000 was $326.3 million, primarily attributable to $290.5 million
from private placements, $49.1 million from issuance of notes payable and $8.3
million from issuance of stockholders' notes payable, offset in part by $6.3
million of payment on debt and an increase of $17.1 million in restricted cash
for certain debt facilities. Net cash provided by financing activities for the
year ended December 31, 1998 was $20.4 million, primarily attributable to $13.7
million from private placements and $5.0 million of proceeds from the issuance
of notes payable. Net cash provided from June 2, 1997 (inception) to December
31, 1997 was $3.0 million from a private placement.
In 1997, we completed the private placement of 21,600,000 shares of common
stock and 1,500,000 shares of Series A convertible preferred stock for an
aggregate purchase price of $3.0 million.
In 1998, we completed the private placement of 50,000 shares of Series A
convertible preferred stock for an aggregate purchase price of $100,000 and
6,328,955 shares of Series B convertible preferred stock for an aggregate
purchase price of $13.6 million.
In 1999, we completed the private placement of 3,075,736 shares of Series C
convertible preferred stock for an aggregate purchase price of $28.1 million,
1,898,406 shares of Series F convertible preferred stock for an aggregate
purchase price of $46.0 million, 292,825 shares of Series G convertible
preferred stock for an aggregate purchase price of $10.0 million and 2,685,954
shares of Series H convertible preferred stock for an aggregate purchase price
of $216.3 million.
In 2000, we completed the private placement of 496,710 shares of Series H
convertible preferred stock for an aggregate purchase price of $40.0 million.
In 1999, we established a 36-month term facility of up to $40.0 million. As
of April 1, 2000, we owed $34.4 million under this facility. Under the facility
we are required to maintain minimum cash balances. As of April 1, 2000, we were
in compliance with those requirements. Outstanding amounts under the facility
bear interest at an effective weighted average rate of 13.2%.
29
<PAGE>
Since inception, we have entered other loan and lease financing arrangements
totaling $16.1 million and $5.0 million, respectively. Outstanding amounts
under these arrangements bear interest at a weighted average rate of
approximately 15.4% and carry terms which range from 36 to 48 months. As of
April 1, 2000, we owed $17.5 million under these various arrangements.
As of April 1, 2000, we had outstanding irrevocable letters of credit
aggregating $2.1 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.
We believe that the net proceeds from this offering and the concurrent
private placement, together with our current cash and cash equivalents and
lines of credit, 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 shareholders. If additional funds are raised through
the issuance of debt securities, the terms of such debt could impose additional
restrictions on our operations. Additional capital, if required, may not be
available on acceptable terms, or at all. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned product
development and sales and marketing efforts, which could harm our business,
financial condition and operating results. Increasingly, as a result of the
financial demands of major network deployments, service providers are looking
to their suppliers for financing assistance. From time to time we may provide
or commit to extend credit or credit support to our customers, as we consider
appropriate in the course of our business, considering our limited resources.
Ciena Litigation
On July 19, 2000, Ciena filed a lawsuit in United States District Court
alleging that we are willfully infringing three of Ciena's patent. Ciena is
seeking injunctive relief, an unspecified amount of damages including treble
damages, as well as costs of the lawsuit including attorneys' fees. 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 expect that defense of the lawsuit will be costly and will
divert the time and attention of some members of our management.
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. Algety had a net loss of $1.8 million for the period
from April 17, 1999 (inception) to December 31, 1999, and $2.6 million for the
three months ended March 31, 2000.
30
<PAGE>
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 will convert into 15,621,858 shares of common stock upon
the closing of this offering. In addition, 189,586 shares will be issued
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.
A second closing will occur under several circumstances, provided the value
of the stock that we deliver at the initial closing does not exceed $2 billion
at the time set for the second closing. At the second closing, we will deliver
to the Algety shareholders additional shares of our Series I convertible
preferred stock, or common stock if the Series I convertible preferred stock
has been converted by the second closing date. If the second closing occurs
either because (a) our common stock has been publicly traded for at least 90
days following this offering or (b) because a public company acquires us, then
the number of our shares delivered at the second closing will depend upon our
value, which will be our average market capitalization for the highest 10 days
of a 20 trading day period ending on the 90th day following this offering under
condition (a) or our enterprise value under condition (b). If our average
market capitalization or enterprise value is less than $13.5 billion, we will
be required to deliver a number of additional shares of our stock which, when
combined with the shares delivered at the initial closing, equals 7.4% of our
outstanding common stock on the second closing date. If our average market
capitalization or enterprise value equals or exceeds $13.5 billion, we will
deliver additional shares of common stock so that the stock we have delivered
at both closings will have an aggregate value of $1 billion (at the 10-day
average price during the measurement period under condition (a) or at the
transaction value under condition (b)), plus an additional $43.5 million for
each $500 million of average market capitalization or enterprise value in
excess of $13.5 billion, up to a maximum purchase price of $2 billion.
If we issue more than 50% of our shares in a single transaction or a series
of related transactions, or if a private company acquires control of us, we
will be required to deliver to the shareholders participating in the second
closing a number of shares of common stock which, when combined with the shares
delivered at the initial closing, equals 8.0% of our outstanding common stock
on the second closing date.
We may at any time elect to settle our obligation to deliver additional
shares by delivering to the Algety shareholders a number of shares of common
stock which, when combined with the shares delivered at the initial closing,
equals 8.0% of our outstanding common stock on the second closing date.
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 allocation of the purchase price to the fair value of the
assets acquired and liabilities assumed is preliminary and will be finalized
following completion of a full valuation of the assets and liabilities of
Algety. The excess of the aggregate purchase price over the fair value of net
assets acquired of approximately $164.2 million, based upon the preliminary
purchase price allocation, will be amortized on a straight-line basis over five
years. Based upon preliminary results of the valuation, we expect that
approximately $40.3 million of the purchase price will be allocated to in-
process technology.
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 will
be 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 will be based on an internal analysis of the fair value of
the assets and liabilities of Baylight. We do not anticipate that any of the
purchase price will be allocated to in-process technology. However, upon
completion of the analysis, a portion of the purchase price may be allocated to
other intangibles, including in-process technology. The excess of the aggregate
purchase price over the fair value of net assets acquired of
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approximately $0.1 million, based on the preliminary purchase price allocation,
will be amortized on a straight-line basis over five years. We will recognize
compensation expense over the terms of the employment agreements equal to the
fair value of the shares to be issued.
Corvis Canada, Inc.
In July 1999, we purchased all of the outstanding common stock of Corvis
Canada, Inc., a Canadian company formerly known as Kromafibre, Inc., for
211,928 shares of Series D convertible preferred stock valued at approximately
$1.9 million. Corvis Canada develops fiber optic technology that we use in some
of our products. We accounted for the acquisition as a purchase. Accordingly,
the operating results of Corvis Canada have been included in our results since
the date of our acquisition of Corvis Canada. We are amortizing the excess of
the aggregate purchase price over the fair value of net assets acquired of
approximately $1.7 million on a straight-line basis over five years. We will
release an additional 61,386 shares of Series D convertible preferred stock
originally valued at approximately $0.6 million to an officer and shareholder
of Corvis Canada. At the date of the acquisition, these shares were placed in
escrow to be released over the term of a three-year employment agreement. We
are recognizing compensation expense over the term of the employment agreement
for the fair value of the shares issued.
Year 2000 Compliance
The year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer controlled
systems using two digits rather than four to define the applicable year. For
example, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000, as a result of an
exception to the calculation of leap year that occurred in the year 2000. This
problem could result in miscalculation, data corruption, system failures or
disruptions of operations. As of April 1, 2000, we had not experienced any
significant disruptions in our business related to year 2000 issues, nor do we
expect to experience any year 2000 related disruption in the operation of our
systems.
We are not aware of any of the companies to which we have shipped our test
products experiencing any year 2000 related problems with our products or their
ability to deploy our products. In addition, we have not received notice from
any of our contract manufacturers or our other suppliers that they have
experienced any year 2000 problems with the parts supplied by them or that
would affect their ability to supply products and services to us. Although most
year 2000 problems should have become evident on or shortly after January 1,
2000, additional year 2000 related problems may occur. We will continue to
monitor our mission critical equipment and computer applications and those of
our suppliers and vendors throughout the year, in an effort to ensure that any
late year 2000 matters that may arise are promptly addressed.
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BUSINESS
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 include ultra-long distance optical signal
transmission, reception and amplification equipment, all-optical switching
equipment and software that enable the creation of all-optical backbone
networks that support transmission over long distances. By deploying our
products, service providers eliminate the need for expensive and bandwidth-
limiting electrical regeneration and switching equipment, significantly
reducing costs, increasing network capacity and allowing them to more quickly
and efficiently provide new services. We believe that service providers will
increasingly turn to optical technologies because traditional electrical and
electrical/optical technologies and the existing network architecture do not
adequately address service providers' rapidly increasing capacity and
reliability requirements in a cost effective manner.
Industry Background
Increase in Data Traffic on Service Provider Networks
Over the past decade, the volume of data traffic across communications
networks has grown rapidly and is expected to exceed the volume of voice
traffic. Data-intensive applications such as electronic commerce, Internet
access, e-mail, streaming audio and video, remote access and other new
applications place significant strains on the capacity of existing network
infrastructures. Data traffic across communications networks is expected to
increase from 350,000 terabytes per month in 1999 to more than 16 million
terabytes per month in 2003, according to RHK, Inc., a leading market research
and consulting firm. Ten terabytes is the equivalent of all of the information
contained in the Library of Congress.
To handle the increasing volume of data traffic, both established and
emerging service providers continue to build networks and add capacity to
existing networks using electrical/optical transmission and electrical
switching equipment. The electrical/optical transmission equipment provides
higher capacity and greater network reliability than older electrical
transmission equipment. In 1998 alone, service providers purchased $65 billion
of electrical/optical transmission equipment and electrical switching
equipment, according to RHK.
In order to remain competitive, service providers must continue to install
transmission and switching equipment that maximizes the value of their networks
while still maintaining or improving network reliability. Service providers are
currently having difficulty cost-effectively increasing and managing network
capacity using existing equipment and network architectures. This difficulty
has constrained service providers' attempts to manage their growth effectively.
The Existing Network Infrastructure
Backbone networks are the long distance networks that connect local
networks. The existing backbone network infrastructure is based on an
electrically interconnected network of optical fibers.
As an optical signal travels along an optical fiber, the signal strength and
quality degrade. Optical amplifiers are placed at 60 to 100 kilometer intervals
to strengthen the signal. Despite this amplification, the signal quality
continues to degrade as it travels along the optical fiber. In existing
backbone networks, the signal must be regenerated every 400 to 600 kilometers
in order for the signal to be successfully received at its destination. At each
regeneration point, the signal quality is restored through the use of
transmission equipment consisting of a receiver and a transmitter which are
both required for each optical signal. The receiver converts the optical signal
to an electrical signal and regenerates it. The transmitter then converts the
regenerated electrical signal back into an optical signal and transmits it
along the optical fiber.
At network intersections, traffic can enter, exit or continue along the
network. At each network intersection, all traffic must be converted from an
optical signal into an electrical signal and processed by
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electrical switching equipment. The traffic that does not exit the backbone
must then be converted back into an optical signal and transmitted further
along the optical fiber. At a network intersection, a receiver is required for
each optical signal entering the intersection and a transmitter is required for
each optical signal continuing along the backbone as well as for new signals
entering the backbone. Depending on the number and type of signals, one or more
electrical switches is required.
Today's existing backbone networks are comprised of electrical network
intersections linked together with optical fiber to form a series of
interconnected rings. Long distance routes spanning substantial geographic
lengths are established by linking several rings together. Each ring carries
traffic around the ring and between connected rings. The ring architecture
provides two independent fiber paths between any two points on a ring. A
working path carries traffic while a protection path provides a redundant route
in the event of failure along the working path. To establish full working and
protection path capacity, each ring must be provisioned with sufficient
transmission and switching equipment to handle all traffic on the working and
protection paths around and between rings.
[MAP]
[This diagram depicts a traditional ring architecture overlayed on a map of
the United States. The ring architecture is congested with a larger number of
electrical and electrical/optical transmission equipment located at various
points on each ring and at each network intersection. There are also several
redundant overlapping sections of rings that are the result of inefficiences
inherent in ring architectures.]
Limitations of the Existing Backbone Network Infrastructure
Existing backbone network infrastructures limit service providers' ability
to cost-effectively and efficiently meet increasing capacity and service
demands. The limitations result from substantial expenditures and complexities
associated with installing equipment, performing multiple optical-to-
electrical-to-optical conversions, transporting, switching and regenerating
traffic, adding network capacity, maintaining unused capacity for network
protection and managing the network to provision new services.
. Significant capital expenditures. At every network intersection and
regeneration point in the existing backbone network, all of the optical
signals, regardless of their ultimate destination, must undergo optical-
to-electrical-to-optical conversions. As a result, costly transmission
equipment must currently be placed every 400 to 600 kilometers to
perform optical-to-electrical-to-optical conversions to regenerate
degraded optical signals. Additionally, at each network intersection
various types of electrical switching equipment and transmission
equipment must be installed to switch all signals on
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every fiber as well as perform optical-to-electrical-to-optical
conversions. The amount of the equipment along with the associated
network management infrastructure increases the capital costs and
complexity of the network. The transmission equipment required merely to
pass signals to the same fiber at electrical switching sites can be in
excess of 50% of total transmission equipment at each network
intersection.
. Slow and costly to deploy and increase capacity. Equipment installation
in today's backbone network is time-consuming, manually intensive and
typically requires multiple "truck rolls". This process involves
dispatching teams of technicians to deploy equipment at every network
intersection and regeneration point across a network backbone.
Furthermore, the installation process results in a configuration
specifically tailored to provision services between two points.
Increasing network capacity in existing networks requires that the truck
roll installation process be repeated, which can take several months and
presents an obstacle to the service providers' ability to deploy new
services.
. Slow and costly to provision services. Service providers have attempted
to reduce the length of time and number of truck rolls required to
provision new services in the existing network by installing excess
transmission and switching equipment. The installation of excessive
equipment, or pre-provisioning, requires service providers to accurately
project when, where, how much and what type of capacity will be needed
in their networks. Today's backbone network architecture lacks the
flexibility to re-configure capacity after deployment and requires
significant manual intervention. If capacity demands vary from the
projections, unused transmission and switching equipment must be removed
and deployed elsewhere in the network by performing another truck roll
or else they will be stranded in the network. As a result, service
providers may be limited in their ability to respond to new and changing
demands for services.
. Significant operating expenses. The complexities of existing network
infrastructures require service providers to incur substantial operating
expenses. The extensive amount of equipment in existing backbone
networks must be maintained, spare equipment must be stocked and
electrical power and facilities must be sufficient to accommodate all of
the installed equipment. Management of existing backbone networks
requires an experienced team of operators to provision services. These
operating expenses will continue to increase as capacity is added to
existing network infrastructures.
As a result of the limitations and the high costs associated with the
technologies and equipment utilized in existing backbone networks, a
significant market opportunity exists for a more cost-effective backbone
solution.
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The Corvis Solution
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 traffic entirely in the optical
domain. Our products enable the creation of long distance, all-optical
transmission paths across multiple fibers by eliminating expensive and
bandwidth-limiting electrical regeneration and switching equipment in the
backbone network. Our products integrate three key technologies that enable the
deployment of all-optical backbone networks: ultra-long distance optical
transmission, all-optical switching and integrated network management. Our
products offer service providers several key competitive advantages and
benefits, including the following:
Reduced Capital Expenditures
By deploying our products in the backbone network, service providers are
able to dramatically reduce their capital expenditures. Our all-optical network
products eliminate the need for costly electrical regeneration and switching
equipment in the backbone network, reducing the amount of equipment required
for network deployment and expansion. Our products support transmission of
optical signals up to 3,200 kilometers compared to 400 to 600 kilometers for
traditional equipment, which reduces the number of transmitters and receivers
and associated equipment by up to a factor of eight, resulting in reduced
capital expenditures. This benefit is depicted in the diagram below.
[MAP]
[This diagram depicts a Corvis enabled all-optical mesh network architecture
overlayed on a map of the United States. This mesh network has been
provisioned with our all-optical routing switch and our all-optical add/drop
multiplexer. This mesh network design provides end to end routes that are
inherently more efficient than traditional ring architectures.]
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Our optical switches enable optical signals to pass through a network
intersection without optical-to-electrical-to-optical conversions, eliminating
the need for one transmitter and one receiver for each signal passing through a
network intersection, potentially eliminating hundreds of transmitters and
receivers. It also eliminates the need for electrical switches at the network
intersection for these signals.
Our products enable all-optical mesh architectures, which allow for
transmission between any two points using any path in the network. The mesh
architecture eliminates the need for multiple rings and the deployment of
costly electrical transmission equipment required to support redundant capacity
in each of those rings, as depicted in the diagram below.
[GRAPHIC]
[This diagram is a comparison of a 3,200 kilometer point-to-point long
distance transmission route using Corvis equipment versues traditional
transmission equipment. The route provisioned with traditional equipment
contains eight pairs of transmitters and receivers, each pair at 400 kilometer
intervals over a 3,200 kilometer span while the Corvis provisioned route has
only one transmitter at the beginning of the route and one receiver at the end
of the route.]
Speed to Deploy and Increase Capacity
Service providers can deploy and increase capacity in a network more rapidly
using our equipment than with traditional equipment. Backbone networks
constructed using our products require significantly less equipment than used
in existing networks, reducing network complexity as well as the number of
tasks that must be performed to install our products.
Once installed, our optical network products simplify and accelerate network
expansion, enabling service providers to respond quickly to unpredictable
demand for services and to take advantage of revenue opportunities. Additional
transmission capacity can be added simply by inserting transmitters and
receivers at the end points of a desired transmission path of up to 3,200
kilometers. No additional equipment is required along a transmission path,
eliminating the need for truck rolls. The resulting cost and time savings give
service providers a distinct advantage in responding to capacity demands.
Rapid Delivery of Services
Using our products, service providers can rapidly and cost-effectively
deliver services to their customers. The delivery of services along a
transmission path can be performed in hours from a service provider's network
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operations center using our network management software, eliminating the months
and expense required for service provider personnel to manually install and/or
modify electrical transmission and switching equipment along a transmission
path.
Reduced Operating Expenses
Our products reduce operating expenses by dramatically reducing the amount
of equipment in backbone networks, significantly decreasing costs associated
with maintaining equipment and spare parts inventory and providing electrical
power and facilities to operate and house the equipment. Our products can
reduce the number of transmitters and receivers and associated equipment in a
service provider's network by up to a factor of eight and the cost associated
with this equipment in the network. This results in a more efficient, less
complex network with fewer parts to track, control, maintain and manage.
Compatibility with Traditional Networks
Our products include standard hardware and software interfaces, which
provide compatibility with traditional network equipment. This allows service
providers to selectively migrate to an all-optical backbone network, while
continuing to use their existing networks.
Corvis Strategy
Our goal is to be the leading provider of all-optical network products which
transmit, switch and manage traffic entirely in the optical domain. Key
elements of our strategy include the following:
Develop and Introduce Leading Optical Network Products
We intend to develop and provide products that enable service providers to
deploy faster, more flexible and more cost-effective backbone networks than
those using traditional equipment. Our products enable service providers to
significantly reduce equipment purchases and simplify network management. We
believe that service providers will increasingly turn to optical technologies
because traditional electrical and electrical/optical technologies and ring
architectures can no longer adequately address service providers' rapidly
increasing capacity, cost and reliability requirements.
Maintain and Extend Technology Leadership
We believe that we are currently the leader in developing all-optical
network technology. We intend to maintain and extend our technological
advantage by continuing to define next-generation optical networks. To further
this objective, we will continue investing in research and development efforts
focusing on innovative optical and networking technology. We will also continue
to aggressively recruit and retain talented engineers.
Penetrate and Expand Customer Base
We intend to sell our products to established and emerging service
providers, initially focusing our sales efforts on the North American market.
We will work closely with prospective customers, analyzing their existing
networks and developing customized plans for increasing their network capacity
and functionality. To further develop and expand our customer base, we intend
to significantly increase the size of our sales force and customer support
capabilities to address both domestic and international service providers. We
intend to increase our visibility as a leader in developing all-optical network
products and believe this increased visibility will generate additional sales.
We believe that providing ongoing support is critical to successful long term
relationships with, and follow-on sales to, our customers. In this regard, we
are committed to providing our customers with the highest levels of support and
service.
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Optimize Manufacturing Capabilities
We are expanding our internal manufacturing capabilities through the
addition of new manufacturing personnel, facilities and equipment.
Manufacturing our own products allows us to avoid risks related to fully-
outsourced manufacturing, including increased access by third parties to our
technology, shipment delays and decreased quality control. We develop our
manufacturing processes concurrently with the design and development of our
optical network products, facilitating the design of products that can be
manufactured more efficiently. We seek to outsource manufacturing whenever it
is cost-effective to do so and there is minimal risk of compromising our
proprietary technologies and processes. Where appropriate and cost-effective,
we selectively use contract manufacturers to increase manufacturing capacity
and speed to market, reduce costs and increase flexibility.
Pursue Strategic Relationships and Acquisitions
We intend to pursue strategic relationships and acquisitions with companies
that have innovative technologies. We believe that through acquisitions we will
be able to gain access to new technologies and additional skilled employees.
For example, we recently acquired Algety, a company that develops and markets
high capacity, high speed optical transmission equipment, and Baylight, a
designer of optical access systems and subsystems. Both of these acquisitions
will enable us to further develop leading optical network products.
Corvis Technology and Products
Our all-optical network products integrate three key technologies to
effectively deploy long haul, all-optical backbone networks: ultra-long
distance optical transmission, all-optical switching and integrated network
management. Our integration of these technologies allows service providers
using our equipment to build faster, more flexible and more cost-effective
backbone networks.
Our Optical Network Gateway and Optical Amplifier products are designed to
provide ultra-long distance, high capacity transmission. Our Optical Add/Drop
Multiplexer and Optical Switch products eliminate optical-to-electrical-to-
optical conversions at network intersections, enabling ultra-long distance,
all-optical transmission paths across multiple fiber links. Our CorManager
Network Management System controls our transmission and switching products to
create and provision long distance transmission paths through the network.
Currently, our Optical Network Gateways and Optical Amplifiers support
transmission of optical signals up to 3,200 kilometers without electrical
regeneration compared to traditional products that require regeneration every
400 to 600 kilometers. This can reduce the number of transmitters and receivers
needed in the network by up to a factor of eight. Our Optical Switch has been
designed to switch up to 2.4 terabits per second entirely in the optical
domain.
The following table describes our products:
<TABLE>
<CAPTION>
Corvis Product Function Design Specifications
----------------------- -------------------------- --------------------------
<S> <C> <C>
Optical Network Gateway Transmit and receive 160 OC-48(c) channels
optical channels to and 40 OC-192(c) channels
from the fiber
Optical Amplifier Amplification of optical 800 gigabits per second
channels along fiber per fiber pair
Optical Add/Drop Selective adding and 800 gigabits per second
Multiplexer dropping of optical per fiber pair
channels to and from the
fiber
Optical Switch Optical channel routing 2.4 terabits per second
between fibers
CorManager Network Comprehensive network Network planning
Management System management applications provisioning,
configuration and network
fault, configuration
performance and security
management
</TABLE>
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Optical Network Gateway--provides access to an all-optical network from
other networks. The Optical Network Gateway currently provides up to 800
gigabits per second capacity on one fiber pair that can be transmitted up to
3,200 kilometers without electrical regeneration over diverse fiber types.
Capacity can be added incrementally by inserting transmitters and receivers
into the Optical Network Gateway. Our Optical Network Gateway can be integrated
with our Optical Add/Drop Multiplexer or Optical Switch, which can provide
flexible traffic management, high network efficiency and rapid restoration of
services in the event of a fiber cut. Our OC-48(c) product is commercially
available. Our OC-192(c) product is expected to be commercially available in
the second half of 2001.
Optical Amplifier--employs various amplification technologies to support
high capacity transmission over diverse fiber types. Our distributed and
discrete amplification technologies allow us to tailor our amplifiers to
customers' fiber types and to provide longer optical transmission distances
than currently possible. Our Optical Amplifiers currently support up to 800
gigabits per second capacity on one fiber pair and transmission distances of up
to 3,200 kilometers without electrical regeneration. This product is
commercially available.
Optical Add/Drop Multiplexer--enables traffic to enter and exit the network
at a network intersection without requiring an optical-to-electrical-to-optical
conversion of traffic passing through the intersection. The Optical Add/Drop
Multiplexer is integrated with the Optical Network Gateway to allow traffic to
enter or exit the fiber at the network intersection. This product is
commercially available.
Optical Switch--provisions routes and has been designed to optically switch
up to 2.4 terabits per second of traffic between routes to provision services,
reconfigure the network or to restore services in the event of a fiber cut. The
Optical Switch optically interconnects multiple fibers to switch traffic
between one or more fibers entirely in the optical domain. In addition, the
Optical Switch is integrated with the Optical Network Gateway to allow traffic
to enter or exit any of the fibers at the network intersection. Our Optical
Switch is currently in trial and is expected to be commercially available in
the second half of 2000.
CorManager Network Management System--provides software-based network
management that is fully integrated with our transmission and switching
products. Our CorManager system is commercially available and consists of the
following applications:
-- Corvis Wavelength Planner--allows service providers to plan the
deployment of transmission and switching equipment in the network using
current traffic patterns. In addition, service providers can evaluate
and plan the redeployment of existing network capacity to meet evolving
capacity demands in the network.
-- Corvis Provisioning Tool--allows service providers to provision their
networks from a centralized location based on a service provider's
traffic patterns, including those automatically generated by the Corvis
Wavelength Planner.
-- Corvis Network Manager--provide a comprehensive view of the network as
well as fault, configuration, performance and security management in the
network.
-- Corvis Element Interface--provides detailed views down to the individual
line cards either using the Corvis Network Manager or by directly
accessing the individual network element.
Research and Development
Our future success depends on our ability to increase the performance of our
products, to develop and introduce new products and product enhancements and to
effectively respond to our customers' changing needs. Our research and
development team is primarily responsible for, and is currently working on,
meeting these objectives. We believe that we can enhance our technologies to
provide greater efficiency in current backbone networks, as well as extend
these technologies into other parts of a service provider's current network. We
have made, and will continue to make, a substantial investment in research and
development. Research and development expenses were $39.8 million for the year
ended January 1, 2000 and $19.8 million for the three month period ended April
1, 2000.
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To help meet the challenge of rapidly increasing network traffic demands, we
plan to develop optical transport and switching products which provide higher
capacity transport on each fiber over greater distances. We also plan to
develop additional features for our network management system that further
accelerate our customers' ability to deliver revenue generating services using
our transport and switching products. We have assembled a team of highly-
skilled hardware and software engineers with extensive experience in
telecommunications, dense wave division multiplexing and other optical
technologies and network management systems. As of July 1, 2000, we had 283
employees involved in research and development.
Customers
We currently have only three customers, Broadwing, Williams Communications
and Qwest.
Broadwing has agreed to purchase $200 million of our products and services
over a two-year period ending in July 2002, the first $100 million of which
must be purchased prior to July 2001. We have invoiced Broadwing $10.4 million
for the equipment, software and services deployed in Broadwing's field trial of
our equipment. We have agreed to provide by specified dates, versions of our
equipment with increased capacity and to provide training for a limited number
of Broadwing employees at no charge. We are obligated by the agreement to
repair or replace our products purchased by Broadwing that fail to perform to
specifications during the applicable warranty period at our cost. We have also
agreed to defend and indemnify Broadwing for any liability assessed against it
on account of any legal action relating to an alleged infringement of any
patent, copyright or trademark or a violation of misappropriation of any trade
secrets or other proprietary rights relating to the purchase, license or use of
our products in accordance with their specifications. If the use of any of our
products is enjoined or we believe that such use will be enjoined, at our
expense, we must secure for Broadwing the right to continue to use the product,
replace or modify the product to make it non-infringing or accept return of the
product and refund amounts paid by Broadwing. The procurement agreement can be
terminated by us or by Broadwing as a result of the other's bankruptcy,
material breach of the terms of the agreement, or attempted transfer or
assignment of the agreement to creditors or similar transfers, unless cured
within 30 days. Broadwing is a stockholder of Corvis and is purchasing common
stock in the concurrent private placement.
Williams Communications has agreed to purchase $200 million of our products
and services within two years following successful completion of their fields
trial of our products, the first $100 million of which must be purchased within
the first year. We began shipping, installing and activating a field trial
system for Williams in the second quarter of 2000. Our field trial with
Williams Communications, which will be deemed successfully completed if our
products pass various tests, is expected to be completed in the second half of
2000. Williams Communications is required to pay us the purchase price of the
field trial equipment following successful completion of the field trial. After
Williams has purchased $100 million of our products, we are required to
transfer title to our products and license for software used by Williams in its
laboratory trials for no additional consideration. We have also agreed to
provide by specified dates, versions of our equipment with increased capacity
and to provide training for a limited number of Williams Communications
employees at no additional charge, which number can be increased based on
Williams Communications' purchases. We will contribute 1% of the purchase price
of our products purchased by Williams Communications to a joint marketing
program for use by Williams in advertising that mentions us. We are required to
repair or replace our products that fail to perform to specifications during
the applicable warranty period at our cost. We have also agreed to defend and
indemnify Williams Communications for liability assessed against Williams
Communications on account of any legal action relating to an alleged
infringement of any U.S. patent, U.S. copyright or U.S. trademark or a
violation of misappropriation of any trade secrets or other U.S. proprietary
rights relating to the purchase, license or use of our products in accordance
with their specifications. If the use of any of our products is enjoined or we
believe that such use will be enjoined, at our expense, we must secure for
Williams Communications the right to continue to use the product, replace or
modify the product to make it non-infringing or accept return of the product
and refund amounts paid by Williams Communications. The agreement can be
terminated by us or by Williams Communications as a result of the other's
bankruptcy, material breach of the terms of the agreement, or attempted
transfer or assignment of the agreement to creditors
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or similar transfers, unless cured within 30 days. Williams Communications may
also terminate the agreement because of chronic late delivery of products
ordered by Williams Communications beginning six months after successful
completion of field trials or if the network deployed by Williams
Communications using our products fails to perform in accordance with any
material portion of our system specifications and we fail to cure such
nonconformity within the cure period. Williams Communications is a stockholder
of Corvis and is purchasing common stock in the concurrent private placement.
Qwest has agreed to purchase $150 million of certain of our OC-192 products,
which are currently under development, over a two year period beginning on the
date that the products meet agreed technical requirements. Qwest's purchase
obligations are subject to our products being priced competitively and our
ability to make products that meet the agreed technical requirements by the end
of 2001. If these conditions are met, Qwest is required to purchase at least
$50 million of our products in the first year after the date that the products
meet the agreed technical requirements. We are required to provide Qwest with a
laboratory system comprised of equipment specified by us. If Qwest satisfies
its $50 million purchase obligation, we will be required to transfer ownership
of the laboratory equipment to Qwest for no additional charge. We are required
to provide training for a limited number of Qwest employees at no additional
charge, subject to increase based on Qwest's purchases of our products. We are
obligated by the agreement to repair or replace our products purchased by Qwest
that fail to perform to specifications during the applicable warranty period at
our cost. We have also agreed to defend and indemnify Qwest for any liability
assessed against it on account of any legal action relating to an alleged
infringement of any U.S. or European Union patent, copyright or trademark or a
violation of misappropriation of any trade secrets or other proprietary rights
relating to the purchase, license or use of our products in accordance with
their specifications. If the use of any of our products is enjoined or we
believe that such use will be enjoined, at our expense, we must secure for
Qwest the right to continue to use the product, replace or modify the product
to make it non-infringing or accept return of the product and refund amounts
paid by Qwest. The agreement can be terminated by us or by Qwest as a result of
the other's bankruptcy or material breach of the terms of the agreement or
attempted transfer or assignment of the agreement to creditors or similar
transfers, unless cured within 30 days. Qwest holds a warrant to purchase
shares of our common stock.
We are in discussions with other service providers to test and/or purchase
our products.
Like many companies that compete in our industry, we maintain a technical
advisory board to assist us in developing our technology and marketing our
products and services. We believe that this advisory board provides necessary
customer and industry guidance and is critical to the success of our business.
Some of our customers have, and our potential customers and suppliers may in
the future have, representatives that are members of this advisory board. In
exchange for a participant's services on this advisory board, we have granted,
and may in the future grant, stock options to them, the terms of which are, and
will be, fully disclosed to the members' employer.
Sales, Marketing and Customer Support
Sales
Our sales strategy is to work closely with prospective customers to analyze
their existing networks and provide a customized plan for increasing their
network capacity and functionality. Our sales approach generally begins with a
senior sales executive contacting and establishing a relationship with a
service provider. We then assign an account manager to coordinate our efforts
and focus our resources on developing the relationship. This account manager
aligns our engineering teams and managers with their counterparts in the
service provider's organization to provide highly responsive technical and
operational support. We analyze the service provider's network layout and
traffic patterns and propose a network architecture and product configuration
tailored to these traffic patterns. We also invite the service provider to
observe product demonstrations and perform testing of our products at our on-
site laboratories. At the service provider's request, we provide it with
products for additional testing in its laboratories. Following these tests, the
service provider generally will undertake field trials of our products prior to
commercial
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deployment in its network. The service provider will accept the products
installed in its network upon successful completion of the field trials and
continue commercial deployment of additional products. A service provider
typically enters into a purchase agreement for optical network products that
provides for product deployment over several quarters. We anticipate that our
sales cycle, from initial contact with a service provider through the signing
of a purchase agreement, will take several quarters. If our products become
broadly deployed, service providers may not require laboratory or field tests
prior to purchasing our products, which could shorten our sales cycle.
As of July 1, 2000, we employed 21 people in our sales organization.
Marketing
We intend to market our products to established and emerging service
providers, initially focusing our efforts on the North American market. We
intend to increase our visibility as a leader in developing all-optical network
products and believe our increased visibility will generate additional sales.
As part of our marketing strategy, we:
. participate in industry trade shows, technical conferences and
technology seminars;
. communicate with market research firms;
. publish technical articles in industry magazines and related marketing
materials; and
. communicate and promote on the Internet.
Through these activities, we are building market awareness of our company
and our products. As of July 1, 2000, we employed 26 people in our marketing
organization. To further develop and expand our domestic and international
market presence, we intend to significantly increase the size of our marketing
staff.
Customer Service and Support
We believe that providing ongoing support is critical to successful long
term relationships with and follow-on sales to our customers. We are committed
to providing our customers with the highest levels of service and support. We
provide installation services directly, as well as through two third-party
providers with which we have contracted. Our customer service and systems
engineering teams provide extensive pre- and post-sale support, including
consultation, network design and in-depth training. We support our customers in
a variety of ways, including 24 hours a day, seven days a week support and
expedited repair and replacement of equipment.
As of July 1, 2000, we employed 28 people in our customer service and
support organization. To further develop and expand our customer base, we
intend to significantly increase the size of our sales force to focus on both
domestic and international service providers.
Competition
We compete in a rapidly evolving and highly competitive market. The market
for our products has historically been dominated by companies such as Alcatel,
Ciena, Cisco, Lucent, NEC and Nortel. We expect to continue to compete with
these and other established and new market entrants. We believe that the
principal competitive factors in our market include:
. product performance, including high-capacity transmission over long
distances without regeneration;
. speed and cost of deployment;
. speed and cost of service provisioning;
. ability to reconfigure or increase network capacity;
. compatibility with traditional products; and
. ongoing customer service and support.
Many of our competitors have longer operating histories, greater name
recognition, larger customer bases and greater financial, technical and sales
and marketing resources than we do and may be able to undertake more
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extensive marketing efforts, adopt more aggressive pricing policies and provide
more vendor financing than we can. To remain competitive, we must continue to
develop our products, manufacturing capabilities and customer support.
Manufacturing
We manufacture all of our products and conduct all final assembly and final
component, module and system tests at our manufacturing facilities in Columbia,
Maryland and Quebec, Canada. We have invested substantial resources in
developing efficient and automated production capabilities and manufacturing
processes. We expect to further enhance our manufacturing capabilities with
additional production process controls and by taking greater advantage of our
operational experience.
We focus our manufacturing efforts to produce uniformly high quality
products that perform according to their design specifications. Prior to
shipment, our products undergo a comprehensive testing process designed to
verify their performance capabilities. By manufacturing our own products, we
expect to avoid risks related to fully outsourced manufacturing which may
include shipment delays, lack of quality control and increased access to our
proprietary technology. Where appropriate and cost effective, we selectively
use contract manufacturers to increase our manufacturing capacity and speed to
market, reduce costs and increase flexibility. We have limited manufacturing
experience and unproven manufacturing capabilities. We are currently
manufacturing our products in limited quantities. In the optical equipment
industry there are limited sources for many key components. We purchase less
than 5% of our optical, electrical and mechanical components from single source
suppliers. In an effort to reduce the impact on our business of disruptions in
the delivery of products from these suppliers, we carry excess inventory of
components from these single source suppliers. As the number of manufacturers
of the remaining products increases, we intend to seek additional suppliers for
these components. The loss of any single source supplier would have a material
adverse affect on our business.
Intellectual Property
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We have applied for numerous patents, all of which are pending. We
require our employees and consultants to execute non-disclosure and proprietary
rights agreements at the beginning of employment or consulting arrangements
with us. These agreements acknowledge our exclusive ownership of all
intellectual property developed by the individual during the course of his or
her work with us and require that all proprietary information disclosed to the
individual remain confidential. We intend to enforce vigorously our
intellectual property rights if infringement or misappropriation occurs.
However, we do not expect that our proprietary rights in our technology will
prevent competitors from developing competitive technologies.
Given the technological complexity of our systems and products, we can give
no assurance that claims of infringement will not be asserted against us or
against our customers in connection with their use of our systems and products,
nor can there be any assurance as to the outcome of any such claims. By letter
dated July 10, 2000, 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 multi-plexing communications systems technologies. On July 19, 2000,
Ciena filed a lawsuit alleging that we are willfully infringing three of
Ciena's patents. We believe that we will prevail in this litigation. See "--
Legal Proceedings."
We license certain patents covering components, which require us to pay
royalties. Each of these patent licenses expires on the earlier of the date the
last licensed patent expires or is abandoned by the licensor. We also license
certain software components for our network management software. These software
licenses are perpetual but will generally terminate if we breach the agreement
and do not cure the breach in a timely manner.
Companies in our industry whose employees accept positions with competitors
frequently claim that their competitors have engaged in unfair hiring practices
or trade secret misappropriation. We have received claims of this kind in the
past and we cannot assure you that we will not receive claims of this kind in
the future as we seek to hire qualified personnel or that those claims will not
result in material litigation. In March 1999, we filed suit against Ciena
asking the court to invalidate noncompete agreements between Ciena and former
employees that we had hired. Ciena subsequently replied by suing us, the former
employees that were subject
44
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of the suit and Dr. David Huber, also a former employee of Ciena, seeking
injunctive relief and unspecified monetary damages for various alleged
activities, including breach of contract, unfair competition and theft of
intellectual property. Although we believed Ciena's counterclaims to be
unfounded, we ultimately settled the litigation without prejudice to either
party. If Ciena were to refile this suit, or any other party were to file a
similar suit, an adverse judgment could result in monetary damages or an
injunction that could materially affect our business. In addition, as with any
suit, regardless of the suit's merits we could incur substantial costs
defending ourselves and/or our employees. Also, defending ourselves from such
claims could divert the attention of our management away from our operations.
Employees
As of July 1, 2000, we employed 758 persons, of whom 329 were primarily
engaged in manufacturing, 283 in research and development activities, 28 in
customer service and support and 118 in sales, marketing and general
administration services. None of our employees are currently represented by a
labor union. We consider our relations with our employees to be good.
Facilities
The following table shows as of July 1, 2000 each of our facilities, its
function, location and size and whether it is owned or leased.
<TABLE>
<CAPTION>
Function Location Sq. Feet Lease Term
----------------------- ------------------ -------- --------------------------
<S> <C> <C> <C>
Manufacturing Columbia, Maryland 60,459 Leased until July 2005
Manufacturing Columbia, Maryland 35,783 Leased until October 2005
Customer service center Columbia, Maryland 16,205 Leased until November 2002
Executive offices and Columbia, Maryland 61,203 Leased until May 2009
research and
development facilities
Executive offices and Columbia, Maryland 82,032 Leased until July 2010
research and
development facilities
Executive offices and Columbia, Maryland 36,936 Leased until June 2005
manufacturing
Executive offices and Columbia, Maryland 38,560 Leased until October 2005
manufacturing
Manufacturing warehouse Columbia, Maryland 24,800 Leased until October 2001
Executive offices and Columbia, Maryland 7,500 Leased until March 2006
manufacturing
Executive offices and Quebec, Canada 12,123 Leased until May 2004
manufacturing
Executive offices and Lannion, France 11,320 Leased until April 2009
research and
development facilities
Warehouse and research Lannion, France 10,330 Leased at will
and development
facilities
Executive offices Paris, France 1,400 Leased until May 2008
</TABLE>
We believe that our facilities are adequate for the purposes for which they
are presently used and that replacement facilities are available at comparable
cost, should the need arise.
Legal Proceedings
By letter dated July 10, 2000, 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.
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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 expect that defense of the lawsuit will be costly and will 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.
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The following table describes our executive officers, directors and key
employees as of July 1, 2000:
<TABLE>
<CAPTION>
Name Age Position
------------------------ --- ------------------------------------------------------------
<S> <C> <C>
Executive Officers and
Directors
David R. Huber, Ph.D.
(1).................... 49 Chairman of the Board, President and Chief Executive Officer
Glenn M. Falcao......... 46 Executive Vice President
Terence F. Unter, Ph.D.. 47 Chief Operating Officer
Anne H. Stuart.......... 37 Senior Vice President, Chief Financial Officer and Treasurer
Kim D. Larsen........... 42 Senior Vice President, General Counsel and Secretary
Frank Bonsal (1)........ 62 Director
Vinod Khosla............ 44 Director
Frank M. Drendel (2).... 55 Director
Joseph R. Hardiman (2).. 63 Director
Ossama Hassanein (2).... 52 Director Nominee
Key Employees
Michael C. Antone....... 38 Senior Vice President, Intellectual Property Counsel
Moise A. Augis.......... 37 Senior Vice President, Business Development
Mike L. Bortz, Ph.D..... 34 Executive Engineer
Kris M. Boschert........ 37 Vice President, Customer Satisfaction
Ghazi M. Chaoui, Ph.D... 46 Vice President, Manufacturing
Tom J. Cullen, Ph.D..... 41 Executive Engineer
Timothy C. Dec.......... 42 Chief Accounting Officer and Corporate Controller
Steve G. Grubb, Ph.D.... 45 Executive Engineer
Francois Ouellete, Ph.D.
....................... 41 Vice President, Corvis Canada
Alistair J. Price....... 42 Executive Engineer
Robert L. Richmond...... 53 Senior Vice President, Hardware Engineering
Adel A. M. Saleh, Ph.D.
....................... 57 Vice President and Chief Network Architect
Jane M. Simmons, Ph.D... 36 Executive Engineer
David F. Smith ......... 45 Vice President, Hardware Engineering
Tom D. Stephens......... 43 Executive Engineer
Gil Tadmor.............. 40 Vice President, Software Engineering
Raymond Zanoni, Ph.D.... 45 Executive Engineer
</TABLE>
--------
(1)Member of the Compensation Committee.
(2)Member of or Nominee for the Audit Committee.
David R. Huber, Ph.D. is the founder of Corvis. He has served as a Director
and Chairman of our Board, President and Chief Executive Officer since June
1997. Dr. Huber has 18 years of experience in the development of optical
communications systems. From 1992 through April 1997, Dr. Huber served first as
Chief Technology Officer and later as Chief Scientist of Ciena Corporation, a
company he founded in 1992. Ciena Corporation was the first company to provide
volume commercial shipments of dense wave division multiplexing equipment. From
1989 through 1992, Dr. Huber managed the Lightwave Research and Development
Program for General Instrument Corp. Prior to 1989, Dr. Huber held positions in
optical communications development at Rockwell International Corp., Optelecom,
Inc. and ITT Industries, Inc., formerly International Telephone & Telegraph
Corp. Dr. Huber holds 41 U.S. patents in optics technology and has numerous
additional patents pending. He earned a Ph.D. in electrical engineering from
Brigham Young University and a B.S. in physics from Eastern Oregon State
University. Dr. Huber is the brother-in-law of Mr. Larsen.
Glenn M. Falcao has served as our Executive Vice President since July 1999.
From July 1997 to June 1999, Mr. Falcao was the President of Nortel Networks'
Internet Service Provider Business. Mr. Falcao's 20
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<PAGE>
years of management experience with Nortel included responsibility for the
Internet Access products including Remote Access, DSL, Voice/Data Integrated
Access and Internet Telephony. In addition, he held numerous general management
and key marketing positions at Nortel. Mr. Falcao has an Engineering degree
from McGill University in Montreal.
Terence F. Unter, Ph.D. has served as our Chief Operating Officer since
September 1998. From July 1997 through September 1998, Dr. Unter was Vice
President of Global Optoelectronics for AMP Incorporated. From August 1991
through June 1997, he was responsible for the creation and development of
Alcatel Optronics S.A., a subsidiary of Alcatel (formerly Alcatel Alsthom), a
leading supplier of optoelectronic components for dense wave division
multiplexing. He served as Managing Director of Alcatel Optronics from May 1994
and as Chairman and Chief Executive Officer from June 1996. Dr. Unter earned a
Ph.D. in silicon microelectronics and an Honors B.Sc. (Engineering) from the
University of Southampton in England.
Anne H. Stuart has served as our Chief Financial Officer and Treasurer since
January 1999 and a Senior Vice President since June 2000. From 1986 through
January 1999, Ms. Stuart held a variety of accounting, finance and treasury
positions with Marriott International, Inc., including Vice President, Finance
in the Senior Living Services division from March 1996 through January 1999.
From 1995 through 1996, Ms. Stuart also served as Senior Director, Corporate
Finance and Corporate Treasurer for the Forum Group, Inc., an operating and
real estate holding company that was acquired by Marriott International in
1996. Ms. Stuart earned an M.B.A. from the University of North Carolina at
Chapel Hill and a B.S. in mathematics and applied statistics from Brigham Young
University.
Kim D. Larsen has served as our General Counsel and Secretary since
September 1998 and a Senior Vice President since June 2000. From October 1994
through September 1998, Mr. Larsen was a partner with the law firm of Mayer,
Brown & Platt and served as partner-in-charge of its Cologne, Germany office.
Mr. Larsen earned his law degree from Columbia University and a B.S. in
economics and political science from Brigham Young University. Mr. Larsen was a
founding director of Ciena Corporation. Mr. Larsen is the brother-in-law of Dr.
Huber.
Frank Bonsal has served as a Director since March 1998. Mr. Bonsal is a
partner of New Enterprise Associates, a venture capital firm, which he co-
founded in 1978. His current board memberships include Aether Systems, ViewGate
Networks, Inc., Med Specialists, Inc., Seneca Network, Versient and Healthy
Pet, Inc. In addition, he is a special limited partner of Amadeus Capital
Partners, Boulder Venture, Novak Biddle, Trellis Ventures and Windward
Ventures. Previously, he was a director of Aspect Medical Systems, Inc.,
Biopure Corporation, CARS, Inc., Entevo Corporation, Explore, Inc., GeneScreen,
Inc., Synaptic Pharmaceuticals, Torrent Network Technology and Vertex
Pharmaceuticals. Prior to founding New Enterprise Associates, Mr. Bonsal was a
general partner of Alex. Brown & Sons. He received a B.A. in Economics from
Princeton University.
Vinod Khosla has served as a Director since May 1998. Mr. Khosla has been a
general partner of Kleiner Perkins Caufield & Byers, a venture capital firm,
since 1987. Mr. Khosla was a co-founder of Daisy Systems Corporation, an
electrical design automation company, and the founding Chief Executive Officer
of Sun Microsystems, Inc., a computer and data networking company. Mr. Khosla
also serves on the boards of directors of Concentric Network Corporation, Corio
Inc., Juniper Networks, Inc., Redback Networks, Inc. and Qwest Communications
International Inc., as well as several other private companies. Mr. Khosla
received his B.S.E.E. from the Indian Institute of Technology in New Delhi, an
M.S.E. from Carnegie-Mellon University and an M.B.A. from the Stanford Graduate
School of Business.
Frank M. Drendel has served as a Director of the Company since July 2000.
Mr. Drendel has served as Chairman and Chief Executive Officer of CommScope,
Inc. of North Carolina since its spin off from General Instrument Corporation
in 1997. Mr Drendel previously served as President and Chairman of CommScope,
Inc. of North Carolina from 1986 to 1997 and Chief Executive Officer of that
company since 1976. He was a director of General Instrument Corporation until
its merger with Motorola on January 5, 2000. He is currently a director of
Nextel Communications, Inc., C-SPAN and the National Cable Television
Association.
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<PAGE>
Joseph R. Hardiman has served as a Director of the Company since July 2000.
Mr. Hardiman served as the President and Chief Executive Officer of the
National Association of Securities Dealers, Inc. and its wholly owned
subsidiary, The Nasdaq Stock Market Inc., from September 1987 through January
1997. From 1975 through September 1987, Mr. Hardiman held various positions at
Alex. Brown & Sons, including Managing Director and Chief Operating Officer.
Mr. Hardiman earned BA and LLB degrees from the University of Maryland. Mr.
Hardiman serves on the Boards of Intellectual Development Systems, Inc., the
Flag Investors Funds, the ISI Funds, the Nevis Fund, the Wit Capital Group,
Inc., the University of Maryland Foundation, the University of Maryland School
of Law and The Nasdaq Stock Market Educational Foundation. Previously, he
served on the Boards of the Depository Trust Company, the Securities Industry
Foundation for Economic Education, the Securities Regulation Institution and
the Center for the Study of the Presidency and as a member of the American
Business Conference.
Ossama R. Hassanein will become a Director of the Company as of or prior to
the closing of this offering. Mr. Hassanein has been managing general partner
of Newbury Ventures since September 1997, and founder and CEO of Advanced
Computer Communications, a wide area network remote access company, since April
1990. From April 1984 to April 1990, he was an executive vice president of
Berkeley International Capital, and from September 1976 to April 1984 he was
Director of System Engineering and Strategic Marketing with NorTel.
Mr. Hassanein co-founded and chaired the board of Technocom Ventures in Paris,
a seed financing venture capital company managed jointly by France Telecom. He
is a director of several international communication technology companies
including Algety, NetCentrex and HighWave Optical Technologies in France and he
is chairman of both High Deal and nCipher in Cambridge, England. Mr. Hassanein
received his B.A.Sc. in electrical engineering from the University of
Alexandria, and completed his M.A.Sc. and Ph.D. programs in electrical
engineering and M.B.A. in management sciences at the University of British
Columbia.
All of the directors (except Messrs. Hassanein and Drendel) have been
elected pursuant to voting agreements which will terminate upon the closing of
this offering.
Upon the closing of this offering, the board of directors will be divided
into three classes, with one class of directors elected at each annual meeting.
The members of Class I, whose terms expire at the next annual meeting will be
Messrs. Bonsal and Khosla. The members of Class II, whose terms expire at the
second annual meeting following this offering, will be Messrs. Hardiman and
Hassanein. The members of Class III, whose terms will expire at the third
annual meeting following this offering, will be Messrs. Drendel and Huber.
Michael C. Antone has served as Senior Vice President, Intellectual Property
Counsel since June 2000 and as our Intellectual Property Counsel from February
1998 to June 2000. Mr. Antone was previously an intellectual property attorney
in the law firm of Kirkpatrick and Lockhart, LLP, where his patent practice
included optics and various other technologies. Mr. Antone was previously a
senior engineer at Westinghouse Electric Corporation, where he received awards
for his work in multi-discipline, mathematical performance and predictive
modeling. Mr. Antone holds a law degree from Duquesne University and Masters
and Bachelors degrees in Chemical Engineering from the University of
Pittsburgh, as well as his Professional Engineer's License.
Moise A. Augis has served as Senior Vice President, Business Development
since June 2000 and served as Vice President, Sales and Marketing from May 1998
to June 2000. From February 1996 to May 1998, Mr. Augis was Marketing and Sales
Director North America for Alcatel Telecom's Optronics Division in Reston,
Virginia. From November 1991 to January 1996, he held a number of marketing and
sales positions in the long-distance equipment division of Alcatel. He has also
worked for Philips Telecom and Thompson France where he was in charge of the
deployment of large data communication networks. Mr. Augis holds a Masters
degree in Electrical Engineering from Illinois Institute of Technology in
Chicago, Illinois and a Masters degree in Telecommunications from the Institut
National des Sciences Appliquees de Lyon in France.
Michael L. Bortz, Ph.D. has served as an Executive Engineer since June 2000
and as a member of our hardware engineering staff since January 1998, where he
has been responsible for development of the Corvis Optical Router. From
November 1996 through December 1997, he was a research scientist at SDL, Inc.
where he was responsible for the development of optical amplifiers. From July
1994 through October 1996, he was
49
<PAGE>
employed by New Focus as a research scientist. Dr. Bortz has four U.S. patents
in optical technology and several patents pending. Dr. Bortz received his Ph.D.
in Applied Physics from Stanford University in 1994 and a B.S. in Applied
Physics from Cornell University in 1987.
Kris M. Boschert has served as our Vice President, Customer Satisfaction
since June 2000. Prior to that, from January 1988 to May 2000 she held various
positions at Sprint Corporation including Assistant Vice President, Integration
Management and most recently as Vice President of Network Engineering. At
Sprint, she was responsible for the engineering, installation and budget
management of long distance networks, as well as the management of long
distance programs, software design and network design. Ms. Boschert earned a
B.S. in Mechanical Engineering from the University of Missouri in 1985.
Ghazi M. Chaoui, Ph.D. has served as our Vice President, Manufacturing since
May 2000. From January 1999 to April 2000, Dr. Chaoui was the R&D Director of
Lucent Technologies' Passive Optical Network Lab in Makuhari, Japan. From
February 1997 to December 1998, Dr. Chaoui led the Lucent Technologies/Furukawa
Electric Joint Venture FiNet as the President and Chief Executive Officer. From
September 1994 to February 1997, he was the manager of manufacturing of high
performance lasers for Lucent Technologies' Opto Electronics division. Dr.
Chaoui's 15 years of management experience with Lucent Technologies (formerly
AT&T Bell Laboratories) included responsibilities for the design and
manufacturing of high performance opto-electronics active and passive
components. Dr. Chaoui earned a Ph.D. in Robotics from the University of Rhode
Island and a "Docteur Ingenieur" degree in Electrical Engineering from the
Laboratoire d'Automatique et d'Analyse des Systemes of Toulouse, France, which
belongs to the French Centre National de Recherche Scientifique. He also earned
an M.B.A. from the Institut de Preparation aux Affaires-University Paul
Sabatier (Toulouse, France).
Thomas J. Cullen has served as an Executive Engineer since June 2000 and as
a Principal Engineer from December 1997 to June 2000. From April 1988 to
December 1997, Dr. Cullen was at Nortel Networks, where he had extensive
experience in the development of fiber based optical components. Dr. Cullen
holds Ph.D. and B.Sc. degrees in Electronics and Electrical Engineering from
the University of Glasgow in Scotland.
Timothy C. Dec has served as our Chief Accounting Officer and Corporate
Controller since June 2000 and he has been our Corporate Controller since June
1999. From December 1997 to June 1999, Mr. Dec was the Director of Accounting
and Administration for Thermo Trilogy Corporation, a division of Thermo
Electron, Inc., a Fortune 400 multinational company. From August 1995 to
December 1997, he was the Corporate Controller of North American Vaccine, a
publicly traded company. Prior to that, until August 1995, he was the Corporate
Controller of Clark Construction Co. Mr. Dec is a C.P.A. and received an M.B.A.
from American University in 1990 and a B.S. in Accounting from Mount St. Mary's
College in 1980.
Stephen G. Grubb, Ph.D. has served as an Executive Engineer since June 2000,
and from December 1997 until June 2000 he served as a Principal Engineer. From
July 1996 to December 1997, Dr. Grubb was with SDL, Inc. developing fiber laser
amplifier products. Prior to that, from July 1991 to July 1996 he was with Bell
Laboratories (Lucent), where he headed a group that developed high power fiber
lasers and Raman amplifiers. Dr. Grubb holds 17 patents in optical technology
and has numerous patent applications pending. Dr. Grubb has served or continues
to serve on the committees for the Optical Amplifiers and the Optical Fiber
Communications conference and also has served as an IEEE/LEOS distinguished
lecturer. He received his Ph.D. from Cornell University and his B.S. degree
from the State University of New York at Purchase.
Francois Ouellette, Ph.D. has served as our Vice President, Corvis Canada
since we acquired it in July 1999 and was the founder of its predecessor
company, Kromafibre, Inc., which he founded in March 1997. From November 1996
to March 1997 he was a fiber optic consultant for Roctest, a manufacturer of
fiber optic and other types of components. Prior to this from January 1994 to
November 1996 he was a Principal Research Fellow of the Optical Fiber
Technology Center in Sydney, Australia. Dr. Ouellete was also a Professor of
Electrical Engineering at Laval University in Quebec from July 1989 to January
1994. He earned his Ph.D. in Physics from Laval University in 1987 and holds a
B.S. in Physics from the University of Montreal which he received in 1979.
50
<PAGE>
Alistair J. Price has served as an Executive Engineer since June 2000 and as
a Principal Engineer from August 1997 to June 2000. From 1994 to August 1997,
Mr. Price worked for Rockwell International, where he was involved in the
system design and integration of an experimental dense wave multiplexer system.
From 1985 to 1994, Mr. Price worked for Alcatel Network Systems where he worked
on optical transmitter and receiver development. Mr. Price holds a Master's
degree and an Honors Bachelor's degree in Electrical Sciences from the
University of Cambridge, England.
Robert L. Richmond has served as our Senior Vice President, Hardware
Engineering since July 2000. Prior to this, since January 1991, he was an
Assistant Vice President, Engineering at Hughes Network Systems where he had
program, project, product and line management responsibilities for the design,
development, manufacturing and support of a wide variety of communications
products, including both hardware and software elements. From September 1981 to
December 1991, Mr. Richmond held various positions at Hadron Inc. including
Corporate Vice President, and since March 1983, President and Chief Executive
Officer of Hadron CPD, Inc., a subsidiary company that develops satellite
modems, communications simulators other military communications products used
by the U.S. Government and selected foreign governments. He has also held
positions at M/A-COM Communications, which later became Hughes Network Systems,
where he was involved in product development, program and product line
management and marketing support. He earned an AAET from Montgomery College in
1970 and a BSEE from the University of Maryland in 1973.
Adel A. M. Saleh, Ph.D. has been our Chief Network Architect since February
1999 and a Vice President since June 2000. Since 1970 and prior to joining us,
he held various engineering positions and most recently was the head of the
Broadband Access Research Department at AT&T Labs (formerly AT&T Bell Labs),
where he conducted and directed research in optical and wireless communications
systems and networks. At AT&T, he was responsible for fundamental advancements
made in optical communications and transparent multiwavelength optical
networking. Dr. Saleh has also led several cross-industry Defense, Advanced
Research Projects Agency consortia on optical networks, including the All-
Optical Networks Consortium and the Multiwavelength Optical Network Consortium,
which pioneered the vision of transparent optical networks in backbone and
access networks. Dr. Saleh holds a Ph.D. in Electrical Engineering from the
Massachusetts Institute of Technology and is a Fellow of the Institute of
Electrical and Electronics Engineers.
Jane M. Simmons, Ph.D. has served as an Executive Engineer since June 2000
and as a Senior Network Architect since March 1999. Dr. Simmons was previously
a Principal Technical Staff Member at AT&T/Bell Laboratories where she was
involved in the development of regional access networks to provision broadband
access. She earned her Ph.D. in Electrical Engineering from M.I.T. in 1993 and
a B.S. in Electrical Engineering from Princeton in 1985.
David F. Smith has served as our Vice President, Hardware Engineering since
July 1997. Before this Mr. Smith worked at Honeywell's Microswitch Division
where he was the Chief Architect of their high-speed gigabit fiber-optic LAN
strategy, from November 1989 to June 1997. He has also held various positions
at STL in Harlow, England and at Rockwell International specializing in high-
speed optical transmission technology. He earned a B.S. in Physics from the
University of Glasgow in 1982.
Thomas D. Stephens has served as an Executive Engineer since June 2000 and
as a Principal Engineer from November 1997 to June 2000. From September 1989 to
November 1997, Mr. Stephens worked for Telstra Research Laboratories in
Australia where he was the Manager of the Transport Networks Group and was
responsible for all research and development activities associated with
Telstra's long distance fiber optic network. Mr. Stephens previously worked for
Rockwell International where he was a Visiting Research Fellow in their
Advanced Technology Group. Prior to that he also worked at Telcom Research
Laboratories where he was a Senior Engineer in their Optical Systems Section.
He holds a Masters in Engineering Science degree from Monash University.
Gil Tadmor has served as our Vice President, Software Engineering since
March 1998. From April 1994 to March 1998, Mr. Tadmor served as an
Implementation Manager for Hughes Information Technology Systems
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(a division of Hughes Aircraft). During his employment with Hughes, Mr. Tadmor
was responsible for the development and deployment of large scale distributed
information systems. Mr. Tadmor received a Masters in Computer Science from
Johns Hopkins University in 1994 and an Engineering degree from the Technion in
Haifa, Israel in 1985.
Raymond Zanoni, Ph.D. has served as an Executive Engineer since June 2000,
and as a Senior Engineer from March 1998 to April 2000. From September 1995
through February 1998, Dr. Zanoni served as a senior research scientist at SDL,
Inc., where he developed high power fiber amplifiers, high peak power fiber
lasers and high power fiber lasers. Dr. Zanoni was an associate professor and
an assistant professor with the Oklahoma State University Center for Laser
Research from August 1990 through August 1995. From 1988 through 1990, Dr.
Zanoni was a research assistant professor with the University of Arizona
Optical Sciences Center. Dr. Zanoni earned his Ph.D. and M.S. in physics from
the University of Arizona Department of Physics and his B.A. in physics from
Rutgers University.
Director Compensation
Our board of directors determines the amount of any fees, whether payable in
cash, shares of common stock or options to purchase common stock, and expense
reimbursement that directors receive for attending meetings of the board of
directors or committees of the board. To date, we have not paid any fees to our
directors, but we have reimbursed them for their expenses incurred in
connection with attending meetings. On May 13, 1998, we granted options to
purchase 480,000 shares of common stock at an exercise price of $2.00 per share
to Frank Bonsal in consideration of his services as a Director. We granted
options to purchase 80,000 shares of common stock at an exercise price of
$14.00 per share that vest evenly over the next three years to each of
Messrs. Drendel and Hardiman. We have also agreed to pay each of
Messrs. Drendel and Hardiman $2,500 plus expenses for each meeting of the board
of directors attended in person.
Executive Compensation
The following table sets forth the annual salaries that we paid during the
year ended Janury 1, 2000 to our Chief Executive Officer and our four other
most highly compensated executive officers, whom we refer to as our Named
Executive Officers elsewhere in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation All Other
---------------------- Compensation
Name and Principal Position Salary ($) Bonus ($) ($)
--------------------------- ---------- --------- ------------
<S> <C> <C> <C>
David R. Huber............................. 260,000 -- --
Chairman of the Board, President and Chief
Executive Officer
Glenn M. Falcao............................ 70,443(1) 40,000 124,581(2)
Executive Vice President
Terence F. Unter........................... 165,000 -- 57,946(3)
Chief Operating Officer
Anne H. Stuart............................. 140,539(4) -- --
Senior Vice President, Chief Financial
Officer and Treasurer
Kim D. Larsen.............................. 125,000 -- --
Senior Vice President, General Counsel and
Secretary
</TABLE>
--------
(1) Reflects Mr. Falcao's pro rated salary since joining us in July 1999.
(2) Represents reimbursement for relocation expenses of $118,425 and cash
payments of $6,156 in place of our obligation to pay interest on a loan for
Mr. Falcao for a home purchase or home improvements.
(3) Represents reimbursement for relocation expenses of $1,318 and cash
payments of $56,628 in place of our obligation to pay interest on a loan
for Mr. Unter for a home purchase or home improvements.
(4) Reflects Ms. Stuart's pro rated salary since joining us in January 1999.
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Employment Agreements
On July 22, 1999, we entered into an employment agreement with Glenn M.
Falcao. The agreement provides that Mr. Falcao will receive (1) an annual
salary of $165,000, which we may increase at our discretion, (2) a one-time
bonus of $120,000, payable in 18 equal monthly installments, which is
contingent on his continued employment by us, (3) a one-time grant of options
to purchase 3,600,000 shares of common stock at an exercise price of $0.34 per
share, (4) a loan in the amount equal to the aggregate exercise price of his
stock options, (5) a guarantee of a loan for up to $200,000 for a home purchase
or home remodeling, the interest on which will be paid by us for two years, and
(6) a relocation allowance of $60,000 grossed-up for income taxes in respect of
such amount. The agreement also provides that we will indemnify Mr. Falcao for
up to $400,000 that he may be obligated to pay his former employer in
connection with his profits on stock options exercised by him within 12 months
preceding the date of his termination of employment with that former employer.
Mr. Falcao is obligated to return this amount to us upon a change in control of
the company or our initial public offering, depending on the success of those
transactions. Mr. Falcao is also eligible to participate in employee benefit
plans generally available to our employees. The agreement contains limited non-
compete and non-solicitation provisions, which are in effect until July 22,
2002.
If we terminate his employment before July 22, 2002 for any reason other
than for cause, Mr. Falcao will receive severance pay equal to his base salary
until the earliest of (1) July 22, 2002, (2) one year after his termination and
(3) the date that he begins full-time employment with another employer. If we
terminate Mr. Falcao's employment without cause before July 2001, his ownership
interest in shares not otherwise vested under his stock option agreement issued
under our 1997 Stock Option Plan will immediately vest for up to a total of $8
million in value of the shares less the value of any shares to which his
ownership rights have already vested. The value of all shares is to be
determined as of December 31, 1999. If we experience a change of control before
July 2000, Glenn Falcao's ownership interest with respect to 12.5% of the
shares subject to his stock option agreement will vest in full.
On September 30, 1998, we entered into an employment agreement with Terence
F. Unter. The agreement provides that Dr. Unter will receive (1) an annual
salary of $165,000, which may increase at our discretion, (2) a one-time bonus
of $20,000, (3) a one-time grant of options to purchase 4,200,000 shares of
common stock at an exercise price of $0.019 per share, and (4) standard
relocation expenses, including a payment of $369,000 for the sale of his former
residence. Dr. Unter is also eligible to participate in employee benefit plans
generally available to our employees. The agreement contains limited non-
compete and non-solicitation provisions, which are in effect until September
30, 2001. If we terminate his employment for any reason other than for cause,
Dr. Unter will receive severance pay equal to his base salary until the earlier
of (1) one year after his termination and (2) the date that he begins full-time
employment with another employer.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price Appreciation
for Option
Individual Grants Term($)(4)
------------------------------------------------------ -------------------
Percent of
Number of Total Options/
Securities SARs Granted to Exercise
Underlying Employees Price Expiration
Name Options/SARs(1) in Fiscal Year(2) ($/Sh)(3) Date 5% 10%
---- --------------- ----------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David R. Huber.......... -- -- -- -- -- --
Glenn M. Falcao......... 3,600,000 16.6% $0.34 7/26/09 $769,767 $1,950,741
Terence F. Unter........ -- -- -- -- -- --
Anne H. Stuart.......... 1,200,000 5.5% $0.02 1/7/09 14,465 36,656
Kim D. Larsen........... 180,000 0.8% $0.34 8/9/09 38,488 97,537
</TABLE>
The table below provides information regarding stock options granted to
Named Executive Officers in the year ended January 1, 2000.
--------
(1) These stock options were granted under the 1997 Stock Option Plan. The
options are immediately exercisable on the grant date, but we have a
repurchase right with respect to unvested shares that generally
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<PAGE>
entitles us to repurchase these shares at their original exercise price
upon termination of employment. The shares currently vest at a rate of
1/4th of the total number of shares on the first anniversary of the vesting
commencement date, and 1/36th of the remaining number of shares monthly
thereafter, as long as the recipient continues to provide services to us.
(2) Based on an aggregate of 21,583,800 options granted during the year ended
January 1, 2000 to our employees, directors and consultants.
(3) The options were granted at an exercise price equal to the fair market
value of our common stock determined in good faith by our board of
directors.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years). It is calculated assuming that the
fair market value of the common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and the shares of common stock
sold on the last day of its term for the appreciated stock price. If the
offering price of $36.00 per share was used to calculate the value of the
options, the above mentioned options would yield an estimated realizable
value of $128,376,000 for Mr. Falcao, $43,176,000 for Ms. Stuart, and
$6,418,800 for Mr. Larsen.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
The following table provides summary information with respect to our Named
Executive Officers in 1999. As of January 1, 2000, all options granted to the
Named Executive Officers were granted under our 1997 Stock Option Plan and all
were immediately exercisable. The shares currently vest at a rate of 1/4th of
the total number of shares on the first anniversary of the vesting
commencement date and 1/36th of the remaining number of shares monthly
thereafter, as long as each continues to provide services to us.
<TABLE>
<CAPTION>
Number of Securities Value Of Unexercised
Underlying Unexercised In-The-Money
Options/SARs At Options/SARs At
Fiscal Year-End Fiscal Year-End
Shares Acquired ------------------------- -------------------------
Name on Exercise Value Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David R. Huber.......... -- $ -- -- -- $-- $--
Glenn M. Falcao......... 3,600,000 -- -- -- -- --
Terence F. Unter........ 4,200,000 1,347,500 -- -- -- --
Anne H. Stuart.......... 1,200,000 34,000 -- -- -- --
Kim D. Larsen........... 180,000 -- -- -- -- --
</TABLE>
--------
(1) Based on the fair market value of our common stock as of the date of
exercise of the options, as determined by the board of directors, minus
the per share exercise price, multiplied by the number of shares issued
upon exercise of the option.
Stock Plans
1997 Stock Option Plan
We have reserved a total of 103,600,000 shares of common stock for issuance
under the 1997 Stock Option Plan. As of July 1, 2000, options to purchase
42,472,732 shares of common stock were outstanding at a weighted average
exercise price of $2.38 per share, 39,737,960 shares had been issued upon the
exercise of outstanding options and 21,389,308 shares remain available for
future grants.
The 1997 Stock Option Plan provides for the grant of incentive stock
options to employees, including officers and directors, and of non-statutory
stock options to employees and consultants, including non-employee directors.
If not terminated earlier, the 1997 Stock Option Plan will terminate in July
2007.
The 1997 Stock Option Plan may be administered by the board of directors or
a committee of the board. The administrator determines the terms of the
options granted under the 1997 Stock Option Plan, including the number of
shares subject to the award, its exercise price, term and exercisability.
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The exercise price of all incentive stock options granted under the 1997
Stock Option Plan must be at least equal to the fair market value of the common
stock on the date of grant. The exercise price of any incentive stock option
granted to an optionee who owns stock representing more than 10% of the total
combined voting power of all classes of our outstanding capital stock or of any
of our parent or subsidiary corporations must equal at least 110% of the fair
market value of the common stock on the date of grant. The exercise price of a
non-statutory stock option granted under the 1997 Stock Option Plan will be
specified by the administrator at the time of grant, but in no event will be
less than par value, if any, of the common stock purchasable thereunder.
Payment of the exercise price may be made in cash or other consideration as
determined by the administrator.
The administrator determines the term of options, which may not exceed ten
years. Generally, no option may be transferred by the optionee other than by
will or the laws of descent or distribution. The administrator determines when
options become exercisable. Options granted under the 1997 Stock Option Plan
generally vest over a four-year period at a rate of 1/4th of the total number
of shares subject to the option twelve months after the vesting commencement
date and 1/36th of the remaining number of shares subject to the options each
month thereafter.
At the discretion of the board of directors, options can generally be
exercised at any time by the holder of the option, however, the shares received
on exercise remain subject to the vesting schedule. If an employee leaves us
before the option is exercised or vests, then the options are forfeited to us.
If an employee leaves us after exercising an option but before the vesting
schedule is satisfied, the employee forfeits the stock and the money paid upon
exercise of the option.
If we sell all or substantially all of our assets, merge with another
corporation or engage in specified reorganizations ("corporate transactions"),
each outstanding option will be assumed or an equivalent option substituted by
the successor corporation. The successor corporation does not have to assume an
option if we elect to maintain the plan or we or the successor corporation
elects to purchase all of the unvested shares. In addition, if in connection
with or within 24 months after a corporate transaction, an optionee's
employment or agreement with us is terminated by us other than for cause, any
unvested shares immediately vest; however, if an optionee's employment is
terminated by the optionee for good reason, only 50% of the optionee's unvested
shares vest.
Our board of directors has the authority to amend or terminate the 1997
Stock Option Plan as long as the amendment or termination does not adversely
affect any outstanding option and provided that stockholder approval is
obtained to the extent it (1) increases the number of shares authorized under
the 1997 Stock Option Plan, (2) decreases the price at which options may be
granted, (3) modifies the 1997 Stock Option Plan eligibility requirements or
(4) materially increases the benefits accruing to the optionees.
2000 Long Term Incentive Plan
Under our 2000 Long Term Incentive Plan, we may grant stock options, stock
appreciation rights, shares of common stock and performance units to our
employees and consultants. No awards may be made under the 2000 Plan more than
ten years after the date of this offering. The total number of shares of our
common stock that we may award under the 2000 Plan is initially 20,000,000. If
at the beginning of any calendar year during the life of the 2000 Plan the
number of shares of common stock with respect to which awards under the 2000
Plan may be granted is less than 5% of our outstanding common stock, we will
increase the number of shares of common stock we may award under the 2000 Plan
to the lesser of (a) 5% of our outstanding shares of common stock on that date
or (b) such other number of shares as our board of directors determines. The
maximum number of shares that may be subject to incentive stock options under
the 2000 Plan is 40,000,000. The number of shares and the price at which shares
of stock may be purchased under the 2000 Plan may be adjusted under certain
circumstances, such as a stock split or a corporate restructuring.
Our compensation committee administers our 2000 Plan. The 2000 Plan
essentially gives the compensation committee sole discretion and authority to
select those employees to whom awards will be made,
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<PAGE>
designate the number of shares covered by each award, establish vesting
schedules and terms of each award, specify all other terms of awards, and
interpret the 2000 Plan.
Options awarded under the 2000 Plan may be either incentive stock options or
nonqualified stock options; provided that incentive stock options may only be
awarded to our employees. Incentive stock options are intended to satisfy the
requirements of Section 422 of the Internal Revenue Code. Nonqualified stock
options are not intended to satisfy Section 422 of the Internal Revenue Code.
Stock appreciation rights may be granted in connection with options or may be
granted as free-standing awards. Exercise of an option will result in the
corresponding surrender of the attached stock appreciation right. The option
price is established by the compensation committee or by a method established
by the compensation committee at the time an option is granted. At a minimum,
the option price must be equal to the par value of a share of our common stock
on the grant date, and, in the case of an incentive stock option, the option
price must be at least equal to the fair market value of a share of our common
stock on the date of grant. Options and stock appreciation rights will be
exercisable in accordance with the terms set by the compensation committee when
granted and will expire on the date determined by the compensation committee.
All options and stock appreciation rights must expire within ten years after
they are granted under the 2000 Plan. If we issue a stock appreciation right in
connection with an option, the stock appreciation right will expire when the
related option expires. Special rules and limitations apply to stock options
which are intended to be incentive stock options.
Under our 2000 Plan, our compensation committee may grant common stock to
participants. During the period that a stock award is subject to restrictions
or limitations, the participants may receive dividend rights relating to the
shares.
The compensation committee may award participants performance units which
entitle the participant to receive value for the units at the end of a
performance period to the extent provided under the award. Our compensation
committee establishes the number of units, the performance measures and the
periods when it makes an award.
If, in connection with or within 24 months after we sell all or
substantially all of our assets, merge with another corporation or engage in
specified reorganizations, an optionee's employment or agreement with us is
terminated by us other than for cause, any unvested shares immediately vest;
however, if an optionee's employment is terminated by the optionee for good
reason, only 50% of the optionee's unvested shares vest.
Employee Stock Purchase Plan
All our employees and all employees of our participating subsidiaries may
participate in our Employee Stock Purchase Plan. We may issue up to 2,000,000
shares of common stock under the Employee Stock Purchase Plan each year, up to
a total of 10,000,000 shares during the life of the plan. The number of shares
available under the Employee Stock Purchase Plan may be adjusted under certain
circumstances, such as a stock split or a corporate restructuring.
Eligible employees choose to participate in our Employee Stock Purchase Plan
during offering periods by authorizing payroll deductions up to 15% of their
salaries, subject to limitations imposed by the Internal Revenue Code. A
participant may increase or decrease the amount of his or her payroll
deductions at any time during an offering period. Changes cannot be
retroactive. The first offering period will begin on the date of this
prospectus and continue until June 30, 2002. Subsequent periods will be six
months long, with the first subsequent period beginning on January 1, 2001. As
of the last business day of each offering period, called an "exercise date",
the participant's accumulated payroll deductions as of that date are used to
purchase shares of common stock. The purchase price per share of common stock
purchased as of this date is the lower of either (1) 85% of the fair market
value of a share of common stock on the first business day of the offering
period or (2) 85% of the fair market value of a share of common stock on the
exercise date.
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<PAGE>
Participants may withdraw from our Employee Stock Purchase Plan at any time
during the offering period. If an employee withdraws, he or she may not
participate again in the plan until the beginning of the next offering period.
Participation automatically terminates upon a participant's termination of
employment for any reason, except upon the participant's death or retirement.
Upon death or retirement, the participant's estate or the participant may elect
to continue participating through the offering period in which the death or
retirement occurred. If an employee withdraws or terminates participation in
our Employee Stock Purchase Plan, all accumulated payroll deductions will be
returned to the participant in cash without interest.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Sales of Stock
On July 17, 1997, we sold 21,600,000 shares of common stock at a price of
$0.008 per share to David R. Huber, in connection with our formation and in
exchange for certain intellectual property rights. On July 17, 1997, we sold
1,500,000 shares of Series A convertible preferred stock at a price of $1.88
per share to Dr. Huber in connection with our acquisition of certain
intellectual property rights from Dr. Huber.
On January 8, 1998, we granted the right to purchase 1,200,000 shares of
common stock at a price of $0.008 per share to Dr. Huber in connection with his
providing a bridge loan to us. On December 17, 1998, Dr. Huber and persons or
entities affiliated with him purchased all 1,200,000 shares.
On May 6, 1998, we sold 50,000 shares of Series A convertible preferred
stock at a price of $2.00 per share to Frank Bonsal.
On May 15, 1998, we sold 6,294,071 shares of Series B convertible preferred
stock at a price of $2.15 per share. Dr. Huber and persons or entities
affiliated with him purchased 1,860,465 of those shares, Vinod Khosla and
persons or entities affiliated with him purchased 2,325,582 of those shares and
Mr. Bonsal and persons or entities affiliated with him purchased 465,116 of
those shares.
On December 10, 1998, we sold 34,884 shares of Series B convertible
preferred stock at a price of $2.15 per share. Kim Larsen and persons or
entities affiliated with him purchased 11,628 of those shares.
On February 26, 1999, we granted warrants to purchase 76,527 shares of
Series C convertible preferred stock at a price of $9.147 per share in
connection with a convertible note that we issued. Dr. Huber and persons or
entities affiliated with him were granted warrants to purchase and subsequently
purchased 39,570 of those shares, Mr. Khosla and persons or entities affiliated
with him were granted warrants to purchase 18,875 of those shares, Mr. Bonsal
and persons or entities affiliated with him were granted warrants to purchase
4,587 of those shares and Mr. Larsen was granted warrants to purchase and
subsequently purchased 94 of those shares.
In two offerings on February 26, 1999 and April 20, 1999, we sold a total of
3,072,038 shares of Series C convertible preferred stock at a price of $9.147
per share. Dr. Huber and persons or entities affiliated with him purchased
848,796 of those shares, Mr. Khosla and persons or entities affiliated with him
purchased 403,895 of those shares, Cisco Systems and persons or entities
affiliated with Cisco Systems purchased 1,432,164 of those shares, Mr. Bonsal
purchased 98,146 of those shares and Mr. Larsen purchased 2,024 of those
shares.
On August 13, 1999, we sold 1,731,958 shares of Series F convertible
preferred stock at a price of $24.25 per share. Dr. Huber and persons or
entities affiliated with him purchased 284,189 of those shares, Mr. Khosla and
persons or entities affiliated with him purchased 134,577 of those shares,
Cisco Systems and persons or entities affiliated with Cisco Systems purchased
70,614 of those shares, Mr. Bonsal and persons or entities affiliated with him
purchased 32,703 of those shares and Mr. Larsen purchased 2,024 of those
shares.
On December 16, 1999, we sold 2,685,954 shares of Series H convertible
preferred stock at a price of $80.53 per share. Dr. Huber and persons or
entities affiliated with him purchased 24,833 of those shares.
Joint Venture
We have a 99% economic interest and a 49% voting interest in ACME Grating
Ventures, LLC ("ACME LLC"). The remaining economic interest and voting interest
are owned by ACME Gratings, Inc. ("ACME Corp."). Dr. Huber owns 100% of ACME
Corp. ACME Corp. has contributed to ACME LLC certain licensed intellectual
property and we have contracted with ACME LLC for its use of our facilities,
personnel, equipment and certain intellectual property. ACME LLC makes gratings
that we purchase at a unit cost that is consistent with the requirements of the
licensed intellectual property, which require that the gratings made with the
licensed technology be sold for no less than the fair market value of
comparable gratings that are available in the commercial marketplace.
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According to the operating agreement of ACME LLC, we receive 99% of the
profits and losses from the business, and ACME Corp. receives the remaining 1%;
however, $325,000 of ACME LLC-related start up costs incurred by ACME Corp.
will be returned to ACME Corp. out of the net profits of ACME LLC before any
distributions of net profits are made to us. Further, ACME Corp. is responsible
for paying royalties to the licensor of the licensed technology contributed by
ACME Corp., which vary in amounts ranging from 0.5% to 2.0% of the net invoice
cost of each grating sold by ACME LLC. In addition to 1% of the profits, ACME
LLC is obligated to pay to ACME Corp. an amount sufficient to pay the royalty
obligations of ACME Corp.
Purchases of Components
We have purchased approximately $200,000 of components from Redfern Fibres
Pty Ltd. In total, Dr. Huber and Mr. Larsen own approximately 7% of the stock
of Redfern. We believe that the terms of our purchases from Redfern were at
least as favorable as those that we could have obtained from an unaffiliated
third party. We anticipate that we will continue to purchase components from
Redfern in the future.
Loans to Officers
On August 11, 1999, we lent Glenn M. Falcao $1,224,000 to pay the aggregate
exercise price of the options granted to him under the 1997 Stock Option Plan.
This loan is secured by the shares of common stock acquired upon exercise of
those options. Mr. Falcao is obligated to repay this loan, plus a fixed market
rate of interest on the outstanding principal balance, on the earlier of (1)
120 days of a company change in control or our initial public offering,
provided Mr. Falcao has the opportunity to realize $4,000,000 from the sale of
shares purchased with the options granted to him under the 1997 Stock Option
Plan and (2) August 11, 2003.
We have agreed to guarantee a loan to Mr. Falcao of up to $200,000 for home
improvements or to purchase a new home and to make the interest payments on the
loan for two years. Mr. Falcao has not taken out such a loan. We have agreed,
however, to pay to Mr. Falcao a monthly amount equal to the interest on a loan
of $200,000 bearing interest at 8% per year for two years.
On August 1, 1999, we entered into an oral agreement with Terence F. Unter
to lend to him an amount sufficient to pay the federal and state income tax
liability arising from his exercise of options granted to him under the 1997
Stock Option Plan. On April 20, 2000, we lent Dr. Unter $350,000 to pay this
tax liability. The loan is due on or before April 20, 2002, bears a fixed rate
of interest and is secured by the shares of common stock acquired upon exercise
of the options granted to Dr. Unter.
Algety Acquisition
Ossama Hassanein, a nominee for Director, serves as managing general partner
or director of certain entities which were shareholders of Algety. As a general
partner and director, he may be deemed to beneficially own 4,733,062 shares of
our common stock. We may be required, under certain circumstances described
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Recent Acquisitions," to increase the purchase price we pay for
Algety, which would increase the amount received by these entities.
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RECENT SALES OF PREFERRED STOCK AND
THE CONCURRENT PRIVATE PLACEMENT
In a stock purchase agreement dated December 10, 1999 in which Williams
Communications agreed to purchase shares of our preferred stock, we agreed to
sell to Williams Communications $10 million of additional preferred stock if it
satisfied specified conditions, subject to our right to repurchase the stock
under certain circumstances. We also agreed to permit Williams Communications
to purchase $5 million of common stock in this offering or, if not permitted by
applicable securities laws, in a private placement concurrent with the closing
of this offering, in either case at the same price per share that the common
stock is being sold in this offering. On April 6, 2000, we waived the
conditions precedent to the purchase of the $10 million of preferred stock by
Williams Communications and, contingent upon agreeing to terms of a field trial
plan, our rights to repurchase the stock. We agreed to the terms of the field
trial plan, and on May 2, 2000 we sold to Williams Communications the
additional preferred stock in a private placement in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933.
In a letter agreement dated December 14, 1999, we agreed to sell to
Broadwing $30 million of our preferred stock if Broadwing satisfied specified
conditions. We also agreed to permit Broadwing to purchase $5 million of common
stock in this offering or, if not permitted by applicable securities laws, in a
private placement concurrent with the closing of this offering, in either case
at the same price per share that the common stock is being sold in this
offering. On May 2, 2000, we terminated the letter agreement and agreed to sell
$5 million of common stock to Broadwing concurrent with the closing of this
offering. On June 30, 2000, we sold $30 million of preferred stock to Broadwing
in a private placement in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933.
The sale of the $5 million of common stock at the closing of this offering
to Williams Communications and Broadwing will each be done in a private
placement in reliance on the exemption from registration provided by Section
4(2) of the Securities Act of 1933.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows the beneficial ownership of our common stock on
July 1, 2000 by:
. each person who we know beneficially owns more than 5% of our common
stock;
. our directors, director nominees and Named Executive Officers; and
. all of our directors, director nominees and executive officers as a
group.
The column entitled "Number of Shares Beneficially Owned" assumes:
. the acquisition of Algety;
. the sale of $40 million of convertible preferred stock to Broadwing and
Williams Communications;
. the issuance of 972,222 shares of our common stock, upon the exercise of
an outstanding warrant that is automatically exercised at the closing of
this offering for no additional cash consideration;
. the issuance of 3,961,500 shares of common stock upon the exercise of
outstanding warrants that, if not exercised by the holders, will expire
upon the closing of this offering at a weighted average exercise price
of $2.38 per share; and
. the automatic conversion of all outstanding shares of preferred stock
into 233,582,130 shares of common stock upon the closing of this
offering.
Beneficial ownership, which is determined in accordance with the rules and
regulations of the Securities and Exchange Commission, means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition of
our common stock. The number of shares of our common stock beneficially owned
by a person includes shares of common stock issuable with respect to options
and convertible securities held by the person which are exercisable or
convertible within 60 days. The percentage of our common stock beneficially
owned by a person assumes that the person has exercised all options and
converted all convertible securities, the person holds which are exercisable or
convertible within 60 days and that no other persons exercised any of their
options or converted any of their convertible securities. Except as otherwise
indicated, the business address for each of the following persons is 7015
Albert Einstein Drive, Columbia, Maryland 21046. Unless otherwise indicated,
all of the interests are owned directly, and the person has sole voting and
dispositive power.
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<PAGE>
<TABLE>
<CAPTION>
Shares Issuable
Pursuant to Options
Exercisable Within 60 Percentage
Number of Days of July 1, 2000 Beneficially Owned
Shares (Included in the --------------------
Beneficially Number Shown in the Before the After the
Owned First Column) Offering Offering
------------ --------------------- ---------- ---------
<S> <C> <C> <C> <C>
David R. Huber (1)...... 94,978,236 0 31.0% 28.1%
Glenn M. Falcao......... 3,960,000 360,000 1.3 1.2
Terence F. Unter........ 4,560,000 360,000 1.5 1.3
Anne H. Stuart.......... 1,560,000 360,000 0.5 0.5
Kim D. Larsen (2)....... 1,449,240 360,000 0.5 0.4
Frank Bonsal (3)........ 8,886,624 535,044 2.9 2.6
Vinod Khosla (4)........ 34,595,148 0 11.3 10.2
Joseph R. Hardiman...... 80,000 80,000 0.0 0.0
Frank M. Drendel........ 80,000 80,000 0.0 0.0
Ossama Hassanein (5).... 4,733,062 0 1.5 1.4
Kleiner Perkins Caufield
& Byers (4)............ 34,595,148 0 11.3 10.2
2750 Sand Hill Road
Menlo Park, California
94025
Cisco Systems, Inc...... 18,033,336 0 5.9 5.3
170 West Tasman Drive
San Jose, California
95134
MeriTech Capital
Associates, L.L.C. (6). 17,347,536 0 5.7 5.1
Meritech Capital
Partners
90 Middlefield Road
Suite 201
Menlo Park, California
94025
All directors, director
nominees and executive
officers as a group
(10 persons)........... 154,882,310 2,135,044 50.2 45.5
</TABLE>
--------
(1) Includes 13,661,316 shares held by HRLD Limited Partnership, 3,096,288
shares held by David R. Huber Grantor Retained Annuity Trust, 11,175,960
shares held by GGEP/HRLD Equity Partners, LLC and 297,996 shares held by
HRLD Venture Partners VI, L.P.
(2) Includes 120,000 shares held by The Larsen Family LLC, of which Mr. Larsen
is the managing member.
(3) Includes of 6,919,032 shares held by New Enterprise Associates VII, L.P.
NEA Partners VII, L.P. serves as general partner of this entity and may be
deemed the beneficial owner of the shares held by the entity. Mr. Bonsal is
a partner of New Enterprise Associates, a venture capital firm, which he
co-founded in 1978.
(4) Includes 31,882,908 shares held by Kleiner Perkins Caufield & Byers VIII,
L.P., 1,847,364 shares held by KPCB VIII Founders Fund and 864,876 shares
held by KPCB Information Sciences Zaibatsu Fund II, L.P. KPCB VIII
Associates, L.P. serves as general partner for each of these entities and
may be deemed the beneficial owner of the shares held by each of the
entities. Mr. Khosla is a general partner of KPCB VIII Associates, L.P. and
may be deemed to be the beneficial owner of the shares beneficially owned
by KPCB VIII Associates, L.P.
(5) Includes 1,113,844 shares held by Newbury Ventures, L.P., 1,037,049 shares
held by Newbury Ventures Cayman I, L.P., 1,401,009 shares held by Technocom
Ventures, 577,703 shares held by Technoventures, 300,145 shares held by
Newbury Ventures Associates, L.P. and 303,312 shares held by Newbury
Ventures Cayman, L.P. Mr. Hassanein serves as a managing general partner of
Newbury Ventures and is a director of Technoventures and may be deemed the
beneficial owner of these shares.
(6) Includes 17,069,976 shares held by MeriTech Capital Partners L.P. and
277,560 shares held by MeriTech Capital Affiliates L.P., MeriTech Capital
Associates, L.L.C. serves as the general partner of these entities and may
be deemed the beneficial owner of the shares held by each of these
entities.
62
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
1,900,000,000 shares of common stock, and 200,000,000 shares of undesignated
preferred stock. The following is a summary description of our capital stock.
Our bylaws and our Fourteenth Amended and Restated Certificate of
Incorporation, to be effective after the closing of this offering, provide
further information about our capital stock.
Common Stock
As of July 1, there were 62,537,960 shares of common stock outstanding.
After giving effect to the sale to the public of the shares of common stock
offered in this prospectus and the concurrent private placement, there will be
332,652,750 shares of common stock outstanding, assuming no exercise after
July 1, 2000 of outstanding options or warrants.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of common stock
are entitled to receive dividends, if any, that the board of directors may
from time to time declare out of funds legally available. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of
preferred stock then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common
stock to be issued upon completion of this offering will be fully paid and
nonassessable.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to fix the rights, preferences, privileges and related restrictions, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of the series. The issuance
of preferred stock may delay, defer or prevent a change in control of us
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of common stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the voting power
of the holders of common stock, including the loss of voting control to
others. At present, we have no plans to issue any of our preferred stock
following this offering.
Warrants
The following is a description of warrants that will remain outstanding
upon the completion of this offering.
In December 1998, we issued warrants to purchase a total of 356,976 shares
of Series B convertible preferred stock, at an exercise price of $2.15 per
share, to Comdisco, Inc. in connection with a lease line of credit and a loan
to us from Comdisco to acquire equipment. Following this offering, this
warrant will represent the right to purchase 4,283,712 shares of common stock
at an exercise price of $0.18 per share. Unless previously exercised, the
warrants will expire on July 2, 2005. Each warrant contains provisions for the
adjustment of the exercise price and the total number of shares issuable upon
the exercise of each warrant under certain circumstances, including mergers,
consolidations, reclassifications, stock splits, reverse stock splits and
stock dividends.
In January 1999, we issued warrants to purchase 66,079 shares of Series C
convertible preferred stock, at an exercise price of $4.54 per share, and
32,798 shares of Series C convertible preferred stock, at an exercise price of
$9.147 per share, to Comdisco in connection with a lease line of credit and a
loan to us from Comdisco to acquire equipment. Following this offering, this
warrant will represent the right to purchase 792,948 and 393,576 shares of
common stock at an exercise price of $0.38 and $0.76, respectively per share.
63
<PAGE>
Unless previously exercised, the warrants will expire on January 14, 2006. Each
warrant contains provisions for the adjustment of the exercise price and the
total number of shares issuable upon the exercise of each warrant under certain
circumstances, including mergers, consolidations, reclassifications, stock
splits, reverse stock splits and stock dividends.
In May and June 1999, we issued warrants to purchase a total of 641,121
shares of Series E convertible preferred stock, at an exercise price of $9.147
per share, to the lenders under our amended and restated loan agreement.
Following this offering, this warrant will represent the right to purchase
7,693,452 shares of common stock at an exercise price of $0.76 per share.
Unless previously exercised, the warrants will expire on June 30, 2004. Each
warrant contains provisions for the adjustment of the exercise price and the
total number of shares issuable upon the exercise of each warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications, consolidations and certain dilutive issuances of securities
at prices below the then existing warrant exercise price.
In November 1999, we issued a warrant to purchase up to 5,270,856 shares of
common stock at $2.85 per share to a strategic investor. The warrant is
immediately exercisable and will expire on December 21, 2004. The warrant
contains provisions for the adjustment of the exercise price and the total
number of shares issuable upon the exercise of the warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications, consolidations and certain dilutive issuances of securities
at prices below the then existing warrant exercise price.
Registration Rights
As described below, the investor rights agreement provides for both demand
registration rights and piggyback registration rights.
Piggyback Registration Rights. The holders of 232,172,760 shares of common
stock issuable upon conversion or exercise of other securities (the
"registrable securities") have rights to have their shares registered for
resale under the Securities Act if we register any of our securities, either
for our own account or for the account of other security holders, subject to
the right of underwriters to limit the number of shares included in an
underwritten offering; and
Demand Registration Rights. The holders of 224,479,308 registrable
securities have rights, at their request, to have their shares registered for
resale under the Securities Act.
In addition, certain holders of the registrable securities may require that
we register their shares for public resale on Form S-3 or similar short-form
registration provided the value of the securities to be registered is at least
$500,000. These rights cannot be exercised (1) before the end of the six-month
period immediately following the offering and (2) more than twice in a twelve-
month period.
All holders with registrable securities have agreed not to exercise their
demand registration rights until 180 days following the date of this prospectus
without the consent of Credit Suisse First Boston Corporation.
We will bear all fees, costs and expenses of these registrations and the
holders of the securities being registered will bear all selling expenses,
including underwriting discounts, selling commissions and stock transfer taxes,
relating to the registrable securities.
Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years of the business combination did own,
15% or more of the corporation's voting stock.
64
<PAGE>
The certificate of incorporation and by-laws to be effective on the closing
of this offering provide:
. that the board of directors be divided into three classes, as nearly
equal in size as possible, with staggered three-year terms;
. that directors may be removed only for cause by the affirmative vote of
the holders of at least 66 2/3% of the shares of our capital stock
entitled to vote; and
. that any vacancy on the board of directors, however occurring, including
a vacancy resulting from an enlargement of the board, may only be filled
by vote of a majority of the directors then in office.
These provisions could make it more difficult for a third party to acquire
us or discourage a third party from acquiring us.
The certificate of incorporation and by-laws also provide that:
. any action required or permitted to be taken by the stockholders at an
annual meeting or special meeting of stockholders may only be taken if
it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting; and
. special meetings of the stockholders may only be called by the chairman
of the board of directors, the president, or by the board of directors.
Our by-laws provide that in order for any matter to be considered "properly
brought" before a meeting, a stockholder must comply with requirements
regarding advance notice to us. These provisions could delay stockholder
actions which are favored by the holders of a majority of our outstanding
voting securities until the next stockholders meeting. These provisions may
also discourage another person or entity from making a tender offer for our
common stock, because such person or entity, even if it acquired a majority of
our outstanding voting securities, would be able to take action as a
stockholder (such as electing new directors or approving a merger) only at a
duly called stockholders meeting and not by written consent.
Our certificate of incorporation empowers our board of directors when
considering a tender offer or merger or acquisition proposal to take into
account, in addition to potential economic benefits to stockholders, factors
such as:
. a comparison of the proposed consideration to be received by
stockholders in relation to the then current market price of our capital
stock, our estimated current value in a freely negotiated transaction
and our estimated future value as an independent entity; and
. the impact of the transaction on our employees, suppliers and customers
and its effect on the communities in which we operate.
Our certificate of incorporation also provides that "business combinations"
with an "interested stockholder" require the approval of 80% of the outstanding
shares entitled to vote, unless the "business combination" has been approved by
a majority of the disinterested directors, in which case the "business
combination" requires the approval of a majority of the outstanding shares
entitled to vote. A "business combination" includes mergers, asset sales and
other transactions resulting in an increase in the ownership interest held by
the "interested stockholder." An "interested stockholder" is a person who,
together with affiliates or associates, owns, or within two years of the
business combination did own, 15% or more of the corporation's voting stock.
The approval required by this provision is in addition to any affirmative vote
required by law. The provisions described above could make it more difficult
for a third party to acquire control of us and, furthermore, could discourage a
third party from making any attempt to acquire control of us.
Delaware's corporation law provides that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our certificate of incorporation requires the affirmative vote of
the holders of at least 80% of the shares of our capital stock entitled to vote
to amend or repeal any of the foregoing provisions of our certificate of
incorporation. Our by-
65
<PAGE>
laws may be amended or repealed by a majority vote of the board of directors or
the holders of at least 66 2/3% of the shares of our capital stock issued and
outstanding and entitled to vote. The stockholder vote would be in addition to
any separate class vote that might in the future be required pursuant to the
terms of any series preferred stock that might be outstanding at the time any
such amendments are submitted to stockholders.
Our certificate of incorporation and by-laws do not provide for cumulative
voting in the election of directors. Cumulative voting allows for a minority
stockholder to vote a portion or all of its shares for one or more candidates
for seats on the board of directors. Without cumulative voting, a minority
stockholder will not be able to gain as many seats on our board of directors,
based on the number of shares of our stock that such stockholder holds, than if
cumulative voting were permitted. The elimination of cumulative voting makes it
more difficult for a minority stockholder to gain a seat on our board of
directors and to influence the board of directors' decision regarding a
takeover. The authorization of undesignated preferred stock makes it possible
for the board of directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to change the
control of Corvis. These and other provisions may deter hostile takeovers or
delay changes in control or management of Corvis.
66
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has not been any public market for common stock,
and we cannot predict the effect, if any, that market sales of shares of common
stock or the availability of shares of common stock for sale will have on the
market price of the common stock. Nevertheless, sales of substantial amounts of
common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of our common stock and could
impair our future ability to raise capital through the sale of equity
securities.
Upon completion of this offering and the concurrent private placement, we
will have a total of 332,652,750 shares of common stock outstanding without
giving effect to any warrants which remain outstanding at the closing of this
offering and assuming no exercise of outstanding options or warrants. Shares
sold in this offering will be freely tradeable, except that any shares held by
our "affiliates", as that term is defined in Rule 144 promulgated under the
Securities Act of 1933, may only be sold in compliance with the limitations
described below. The remaining 301,027,750 shares of common stock will be
deemed "restricted securities" as defined under Rule 144. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, summarized below.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale,
pledge, disposition or filing, without the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus, except (a) grants of options to purchase shares of common stock
under our stock option plans and issuances pursuant to the exercise of employee
stock options outstanding on the date hereof and (b) any additional shares
issued to the holders of Algety in connection with our acquisition thereof.
Our officers and directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any such aforementioned transaction is to be settled by delivery of our
common stock or such other securities, in cash or otherwise, or publicly
disclose the intention to make any such offer, sale, pledge or disposition, or
to enter into any such transaction, swap, hedge or other arrangement without,
in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus. If (1)
the reported last sale price of our common stock on the Nasdaq National Market
is at least twice the offering price per share for 20 of the 30 trading days
ending on the last trading day preceding the 90th day after the date of this
prospectus, and (2) a fiscal quarter has ended at least 45 days after the date
of this prospectus, then 25% of the shares of our common stock owned by the
officers, directors and stockholders described above subject to the 180-day
restriction described above, or 70,612,983 shares, will be released from these
restrictions. The release of these shares will occur on one of the following
dates:
. if we publicly release our financial results for the above-mentioned
fiscal quarter prior to 88 days after the date of this prospectus, it
will occur on the 90th day after the date of this prospectus; or
. if such release occurs on or after the 88th day after the date of this
prospectus, it will occur on the second trading day following the public
release of our financial results for the above-mentioned fiscal quarter.
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<PAGE>
Under the lock-up agreements described above and the provisions of Rules
144, 144(k) and 701, additional shares will be available for sale in the public
market as follows:
<TABLE>
<CAPTION>
Maximum
Number of
Shares Date
--------- ----
<C> <S>
31,625,000 After the date of this prospectus
70,612,983 After 90 days from the date of this prospectus
184,567,610 After 180 days from the date of this prospectus (subject, in
some cases, to volume limitations and contractual vesting
schedules)
</TABLE>
In addition, as of July 1, 2000, options to purchase a total of 42,472,732
shares of common stock are outstanding, all of which will be exercisable
concurrent with this offering (without regard to the above mentioned lock up
period) and 18,434,544 shares of common stock will be issuable upon the
exercise of outstanding warrants.
Rule 144. In general, under Rule 144 as currently in effect, a person,
including an affiliate, who has beneficially owned shares for at least one year
is entitled to sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
(1) 1% of the then outstanding shares of common stock (approximately 3,326,528
shares immediately after this offering) or (2) the average weekly trading
volume in the common stock during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions.
Rule 144(k). In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) regardless of the
requirements described above. To the extent that shares were acquired from our
affiliate, the acquiror's holding period for the purpose of selling under Rule
144 commences on the date of transfer from the affiliate. Notwithstanding the
foregoing, to the extent the shares were acquired through the cashless exercise
of a stock option or a warrant, the acquiror's holding period for effecting a
sale under Rule 144 commences on the date the option or warrant was granted.
Rule 701. In general, under Rule 701 as currently in effect, any of our
employees, consultants or advisors who purchased our shares in connection with
a compensatory stock or option plan or other written agreement is eligible to
resell such shares after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.
Shortly after the closing of this offering, we intend to file a registration
statement to register for resale all shares of common stock issued or issuable
under our 1997 Stock Option Plan, our Employee Stock Purchase Plan and our 2000
Long Term Incentive Plan and not otherwise freely transferable. Accordingly,
shares covered by that registration statement will be eligible for sale in the
public markets, unless those options are subject to vesting restrictions.
Following this offering, under certain circumstances and subject to certain
conditions, the holders of 224,479,308 shares of common stock will have demand
registration rights with respect to their shares of common stock (subject, in
certain cases, to the lock-up arrangements described above) to require us to
register their shares of common stock under the Securities Act, and they will
have rights to participate in any of our future registrations of securities by
us. All holders with registration rights have agreed not to exercise their
demand registration rights until 180 days following the date of this prospectus
without the consent of Credit Suisse First Boston Corporation. See "Description
of Capital Stock--Registration Rights."
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated July 27, 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc., Banc of America Securities LLC, Chase Securities Inc., J.P.
Morgan Securities Inc. and CIBC World Markets Corp. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation........................... 13,466,498
FleetBoston Robertson Stephens Inc............................... 3,029,963
Banc of America Securities LLC................................... 3,029,963
Chase Securities Inc............................................. 3,029,963
J.P. Morgan Securities Inc....................................... 3,029,963
CIBC World Markets Corp.......................................... 1,346,650
ABN AMRO Incorporated............................................ 293,250
Sanford C. Bernstein & Co., Inc.................................. 293,250
Cazenove Incorporated............................................ 293,250
Dain Rauscher Incorporated....................................... 293,250
Deutsche Bank Securities Inc..................................... 293,250
Donaldson, Lufkin & Jenrette Securities Corporation.............. 293,250
A.G. Edwards & Sons, Inc......................................... 293,250
E* Offering Corp................................................. 293,250
Invemed Associates LLC........................................... 293,250
Edward D. Jones & Co., L.P....................................... 293,250
Lehman Brothers Inc.............................................. 293,250
Merrill Lynch, Pierce, Fenner & Smith Incorporated............... 293,250
UBS Warburg LLC.................................................. 293,250
U.S. Bancorp Piper Jaffray Inc................................... 293,250
Thomas Weisel Partners LLC....................................... 293,250
Wit SoundView Corporation........................................ 293,250
----------
Total.......................................................... 31,625,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased.
The underwriting agreement also provides that if an underwriter defaults the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $1.52 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay. The compensation we will pay to the underwriters will consist solely
of the underwriting discount, which is equal to the public offering price per
share of common stock less the amount the underwriters pay to us per share of
common stock.
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Underwriting Discounts and Commissions paid by us....... $ 2.52 $ 79,695,000
Expenses payable by us.................................. $ 0.05 $ 1,600,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
69
<PAGE>
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act relating
to, any additional shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this prospectus, except (a) grants of
options to purchase shares of common stock under our stock option plans and
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof and (b) any additional shares issued to the holders of Algety in
connection with our acquisition thereof.
Our officers and directors and substantially all of our stockholders have
agreed that they will not offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any such aforementioned transaction is to be settled by delivery of our
common stock or such other securities, in cash or otherwise, or publicly
disclose the intention to make any such offer, sale, pledge or disposition, or
to enter into any such transaction, swap, hedge or other arrangement without,
in each case, the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus. If (1)
the reported last sale price of our common stock on the Nasdaq National Market
is at least twice the offering price per share for 20 of the 30 trading days
ending on the last trading day preceding the 90th day after the date of this
prospectus, and (2) a fiscal quarter has ended at least 45 days after the date
of this prospectus, then 25% of the shares of our common stock owned by the
officers, directors and stockholders described above subject to the 180-day
restriction described above, or 70,612,983 shares, will be released from these
restrictions. The release of these shares will occur on one of the following
dates:
. if we publicly release our financial results for the above-mentioned
fiscal quarter prior to 88 days after the date of this prospectus, it
will occur on the 90th day after the date of this prospectus; or
. if such release occurs on or after the 88th day after the date of this
prospectus, it will occur on the second trading day following the public
release of our financial results for the above-mentioned fiscal quarter.
The underwriters have reserved for sale, at the initial public offering
price, up to 1,575,100 shares of common stock for employees, directors and
other persons associated with us who have expressed an interest in purchasing
common stock in the offering. The number of shares available for sale to the
general public in the offering will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
Our common stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "CORV."
FleetBoston Robertson Stephens Inc. beneficially owns 62,089 shares of
Series H convertible preferred stock which will convert into 745,068 shares of
our common stock upon the closing of this offering. Banc of America Securities
LLC beneficially owns 49,671 shares of Series H convertible preferred stock
which will convert into 596,052 shares of our common stock upon the closing of
this offering.
Before this offering, there has been no public market for our common stock.
The initial public offering price was determined by negotiation between us and
the underwriters. The principal factors considered in determining the public
offering price included:
. the information set forth in this prospectus and otherwise available to
the underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
70
<PAGE>
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market following the offering or that an active trading market for the common
stock will develop and continue after the offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format will be made available on the websites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make Internet distributions on the
same basis as other allocations.
71
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (1) the purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under the securities laws, (2) where required
by law, such purchaser is purchasing as principal and not as agent, and (3)
such purchaser has reviewed the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or recession or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canadian courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
72
<PAGE>
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Mayer, Brown & Platt, Chicago, Illinois. Shearman & Sterling,
New York, New York, will pass on certain legal matters for the underwriters.
EXPERTS
The consolidated financial statements and schedule of Corvis Corporation and
subsidiaries as of December 31, 1998 and January 1, 2000, and for the period
from June 2, 1997 (date of inception) to December 31, 1997, the years ended
December 31, 1998 and January 1, 2000, and the period from June 2, 1997 (date
of inception) to January 1, 2000 have been included herein and in the
registration statement in reliance upon the reports of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
PricewaterhouseCoopers, independent certified public accountants, have
audited the consolidated financial statements of Algety Telecom S.A. as of
December 31, 1999 and for the period from April 17, 1999 (inception) to
December 31, 1999, as set forth in their report. We have included Algety's
financial statements in this prospectus and elsewhere in the registration
statement in reliance on PricewaterhouseCoopers report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
shares of common stock offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and its
exhibits and schedules. Particular items are omitted in accordance with the
rules and regulations of the Securities and Exchange Commission. For further
information with respect to us and the common stock offered by this prospectus,
reference is made to the registration statement and its exhibits and schedules.
A copy of the registration statement, and its exhibits and schedules, may be
inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Securities and Exchange Commission's
regional offices located at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Securities and Exchange Commission. The Securities and Exchange Commission
maintains a website that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
73
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Corvis Corporation
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and January 1, 2000,
and April 1, 2000 (unaudited)............................................ F-3
Consolidated Statements of Operations for the period from June 2, 1997
(date of inception) to December 31, 1997 and the years ended December 31,
1998 and January 1, 2000 and the period from June 2, 1997 (date of
inception) to January 1, 2000, and the three months ended April 3, 1999
and April 1, 2000 (unaudited), and the period from June 2, 1997 (date of
inception) to April 1, 2000 (unaudited).................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from June 2, 1997 (date of inception) to December 31, 1997 and the years
ended December 31, 1998 and January 1, 2000, and the three months ended
April 1, 2000 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows for the period from June 2, 1997
(date of inception) to December 31, 1997 and the years ended December 31,
1998 and January 1, 2000, and the period from June 2, 1997 (date of
inception) to January 1, 2000, and the three months ended April 3, 1999
and April 1, 2000 (unaudited), and the period from June 2, 1997 (date of
inception) to April 1, 2000 (unaudited).................................. F-6
Notes to Consolidated Financial Statements................................ F-7
Algety Telecom S.A.
Report of Independent Accountants......................................... F-21
Balance Sheet at December 31, 1999........................................ F-22
Statement of Operations for the period from inception (April 17, 1999)
through December 31, 1999 and for the three month period ended March 31,
2000 (unaudited)......................................................... F-23
Statement of Stockholders' Equity for the period from inception (April 17,
1999) through December 31, 1999 and for the three month period ended
March 31, 2000 (unaudited)............................................... F-24
Statement of Cash Flows for the period from inception (April 17, 1999)
through December 31, 1999 and for the three month period ended March 31,
2000 (unaudited)......................................................... F-25
Notes to Financial Statements............................................. F-26
Unaudited Pro Forma Condensed Consolidated Financial Statements
Unaudited Pro Forma Condensed Consolidated Financial Data................. F-32
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of April 1,
2000..................................................................... F-33
Unaudited Pro Forma Condensed Consolidated Statements of Operations for
the year ended January 1, 2000 and the three months ended April 1, 2000.. F-34
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.. F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Corvis Corporation:
We have audited the accompanying consolidated balance sheets of Corvis
Corporation and Subsidiaries (a development stage company) as of December 31,
1998 and January 1, 2000, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the period from
June 2, 1997 (date of inception) to December 31, 1997, the years ended December
31, 1998 and January 1, 2000, and the period from June 2, 1997 (date of
inception) to January 1, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corvis
Corporation and Subsidiaries (a development stage company) as of December 31,
1998 and January 1, 2000 and the results of their operations and their cash
flows for the period from June 2, 1997 (date of inception) to December 31,
1997, the years ended December 31, 1998 and January 1, 2000, and the period
from June 2, 1997 (date of inception) to January 1, 2000, in conformity with
generally accepted accounting principles.
KPMG LLP
McLean, Virginia
February 25, 2000, except as to
Note 12, which is as of
July 21, 2000.
F-2
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, January 1, April 1,
1998 2000 2000
------------ ------------ ------------
(unaudited)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 4,040,631 $244,597,280 $201,547,421
Restricted cash.................... -- 2,102,626 2,102,626
Inventory, net..................... -- 15,869,235 29,353,646
Other current assets............... 58,236 1,640,720 2,959,583
------------ ------------ ------------
Total current assets............. 4,098,867 264,209,861 235,963,276
Restricted cash...................... -- 15,000,000 15,000,000
Property and equipment, net.......... 3,905,511 22,355,486 28,653,598
Deposits and intangible assets, net.. 284,540 2,148,080 1,883,708
Deferred financing fees, net......... 199,343 3,566,030 3,193,706
------------ ------------ ------------
Total assets..................... $ 8,488,261 $307,279,457 $284,694,288
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Notes payable, current portion..... $ 571,239 $ 15,286,742 $ 15,793,831
Stockholder note payable........... 1,653,195 -- --
Capital lease obligations, current
portion........................... 579,780 1,587,130 1,625,094
Accounts payable................... 1,811,578 6,823,545 14,422,158
Accrued expenses................... 956,802 3,673,846 3,211,159
------------ ------------ ------------
Total current liabilities........ 5,572,594 27,371,263 35,052,242
Noncurrent liabilities:
Notes payable, net of current
portion........................... 4,428,761 35,807,006 31,895,524
Capital lease obligations, net of
current portion................... 1,371,639 2,964,205 2,592,433
Deferred lease liability........... 82,895 1,512,139 1,440,463
------------ ------------ ------------
Total liabilities................ 11,455,889 67,654,613 70,980,662
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Series A convertible preferred
stock; $0.01 par value; 1,550,000
shares authorized; 1,550,000
issued and outstanding
(liquidation preference of
$3,100,000)....................... 15,500 15,500 15,500
Series B convertible preferred
stock; $0.01 par value; 6,685,931
shares authorized; 6,328,955
issued and outstanding
(liquidation preference of
$13,607,339)...................... 63,290 63,290 63,290
Series C convertible preferred
stock; $0.01 par value; 3,270,819
shares authorized; 3,120,118
issued and outstanding as of
January 2, 2000; 3,122,979 issued
and outstanding as of April 1,
2000 (unaudited) (liquidation
preference of $28,539,719 and
$28,565,889 (unaudited) as of
January 1, 2000 and April 1, 2000,
respectively)..................... -- 31,201 31,230
Series D convertible preferred
stock; $0.01 par value; 273,314
shares authorized; 211,928 issued
and outstanding (liquidation
preference of $1,938,505)......... -- 2,119 2,119
Series E convertible preferred
stock; $0.01 par value; 641,121
shares authorized; none issued and
outstanding (liquidation
preference of $0)................. -- -- --
Series F convertible preferred
stock; $0.01 par value; 1,946,906
shares authorized; 1,898,406
issued and outstanding
(liquidation preference of
$46,036,370)...................... -- 18,984 18,984
Series G convertible preferred
stock; $0.01 par value; 573,989
shares authorized; 292,825 issued
and outstanding (liquidation
preference of $9,999,973)......... -- 2,928 2,928
Series H convertible preferred
stock; $0.01 par value; 3,186,710
shares authorized; 2,685,954
issued and outstanding
(liquidation preference of
$216,299,876)..................... -- 26,860 26,860
Common stock--$0.01 par value;
425,121,094 shares authorized;
23,946,012 and 61,114,020 shares
issued and outstanding as of
December 31, 1998 and January 1,
2000, respectively; 61,378,676
issued and outstanding as of April
1, 2000 (unaudited)............... 237,460 609,140 611,787
Stockholder note receivable........ -- (1,224,000) (1,224,000)
Additional paid-in capital......... 16,669,631 331,301,973 332,218,750
Deficit accumulated during
development stage................. (19,953,509) (91,223,151) (118,053,822)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (2,967,628) 239,624,844 213,713,626
------------ ------------ ------------
Total liabilities and
stockholders' equity (deficit).. $ 8,488,261 $307,279,457 $284,694,288
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
June 2, 1997
(date of June 2, 1997 June 2, 1997
inception) Year ended (date of Three Months Ended (date of
to -------------------------- inception) to -------------------------- inception) to
December 31, December 31, January 1, January 1, April 3, April 1, April 1,
1997 1998 2000 2000 1999 2000 2000
------------ ------------ ------------ ------------- ------------ ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development,
exclusive of equity-
based expense........ 249,483 15,260,451 39,673,958 55,183,892 8,411,027 19,061,850 74,245,742
Sales and marketing,
exclusive of
equity-based expense. -- 166,864 3,419,471 3,586,335 283,101 4,630,061 8,216,396
General and
administrative....... 267,731 3,146,896 18,319,090 21,733,717 1,699,727 2,358,121 24,091,838
Equity-based expense:
Research and
development.......... -- -- 126,050 126,050 -- 745,304 871,354
Sales and marketing... -- -- 4,845,159 4,845,159 -- -- 4,845,159
Depreciation and
amortization......... 19,726 528,139 2,739,577 3,287,442 342,358 1,475,482 4,762,924
---------- ------------ ------------ ------------ ------------ ------------ -------------
Total operating
expenses............. 536,940 19,102,350 69,123,305 88,762,595 10,736,213 28,270,818 117,033,413
---------- ------------ ------------ ------------ ------------ ------------ -------------
Operating loss........ (536,940) (19,102,350) (69,123,305) (88,762,595) (10,736,213) (28,270,818) (117,033,413)
Interest income
(expense), net....... 43,256 (357,475) (2,146,337) (2,460,556) (425,708) 1,440,147 (1,020,409)
---------- ------------ ------------ ------------ ------------ ------------ -------------
Net loss.............. $ (493,684) $(19,459,825) $(71,269,642) $(91,223,151) $(11,161,921) $(26,830,671) $(118,053,822)
========== ============ ============ ============ ============ ============ =============
Basic and diluted net
loss per common share. $ (0.02) $ (0.86) $ (2.33) $ (0.41) $ (0.65)
========== ============ ============ ============ ============
Weighted average number
of common shares
outstanding........... 21,600,000 22,638,375 30,599,460 27,209,004 41,128,092
Pro forma basic and
diluted net loss per
common share
(unaudited)........... $ (0.39) $ (0.11)
============ ============
Pro forma weighted
average number of
common shares
outstanding
(unaudited)........... 184,318,825 252,787,468
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-----------------------------------------------------------------------------------------------------
Series A Series B Series C Series D Series F Series G
----------------- ----------------- ----------------- -------------- ----------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------- --------- ------- --------- ------- ------- ------ --------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
2, 1997.......... -- $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
Private
placement........ 1,500,000 15,000 -- -- -- -- -- -- -- -- -- --
Net Loss........ -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------ --------- ------- ------- ------
Balance at
December 31,
1997............. 1,500,000 15,000 -- -- -- -- -- -- -- -- -- --
Private
placement--
Series A
preferred stock.. 50,000 500 -- -- -- -- -- -- -- -- -- --
Private
placement--
Series B
preferred stock.. -- -- 6,328,955 63,290 -- -- -- -- -- -- -- --
Issuance of
common stock..... -- -- -- -- -- -- -- -- -- -- -- --
Exercise of stock
options.......... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
warrants......... -- -- -- -- -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------ --------- ------- ------- ------
Balance at
December 31,
1998............. 1,550,000 15,500 6,328,955 63,290 -- -- -- -- -- -- -- --
Private
placement--
series C
preferred stock.. -- -- -- -- 3,075,736 30,757 -- -- -- -- -- --
Private
placement--
series D
preferred stock.. -- -- -- -- -- -- 211,928 2,119 -- -- -- --
Private
placement--
series F
preferred stock.. -- -- -- -- -- -- -- -- 1,898,406 18,984 -- --
Private
placement--
series G
preferred stock.. -- -- -- -- -- -- -- -- -- -- 292,825 2,928
Private
placement--
series H
preferred stock.. -- -- -- -- -- -- -- -- -- -- -- --
Exercise of stock
options and
warrants......... -- -- -- -- 44,382 444 -- -- -- -- -- --
Issuance of
warrants......... -- -- -- -- -- -- -- -- -- -- -- --
Equity-based
expense.......... -- -- -- -- -- -- -- -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------ --------- ------- ------- ------
Balance at
January 1, 2000.. 1,550,000 15,500 6,328,955 63,290 3,120,118 31,201 211,928 2,119 1,898,406 18,984 292,825 2,928
Exercise of stock
options and
warrants
(unaudited)...... -- -- -- -- 2,861 29 -- -- -- -- -- --
Equity based
expense
(unaudited)...... -- -- -- -- -- -- -- -- -- -- -- --
Net loss
(unaudited)...... -- -- -- -- -- -- -- -- -- -- -- --
--------- ------- --------- ------- --------- ------- ------- ------ --------- ------- ------- ------
Balance at April
1, 2000
(unaudited)...... 1,550,000 $15,500 6,328,955 $63,290 3,122,979 $31,230 211,928 $2,119 1,898,406 $18,984 292,825 $2,928
========= ======= ========= ======= ========= ======= ======= ====== ========= ======= ======= ======
<CAPTION>
Deficit
accumulated Total
Series H Common Stock Additional Stockholder during stockholders'
----------------- ------------------- paid-in note development equity
Shares Amount Shares Amount capital receivable stage (deficit)
--------- ------- ---------- -------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
2, 1997.......... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Private
placement........ -- -- 21,600,000 216,000 2,769,000 -- -- 3,000,000
Net Loss........ -- -- -- -- -- -- (493,684) (493,684)
--------- ------- ---------- -------- ------------ ------------ -------------- --------------
Balance at
December 31,
1997............. -- -- 21,600,000 216,000 2,769,000 -- (493,684) 2,506,316
Private
placement--
Series A
preferred stock.. -- -- -- -- 99,500 -- -- 100,000
Private
placement--
Series B
preferred stock.. -- -- -- -- 13,543,962 -- -- 13,607,252
Issuance of
common stock..... -- -- 1,200,000 10,000 -- -- -- 10,000
Exercise of stock
options.......... -- -- 1,146,012 11,460 21,565 -- -- 33,025
Issuance of
warrants......... -- -- -- -- 235,604 -- -- 235,604
Net loss......... -- -- -- -- -- -- (19,459,825) (19,459,825)
--------- ------- ---------- -------- ------------ ------------ -------------- --------------
Balance at
December 31,
1998............. -- -- 23,946,012 237,460 16,669,631 -- (19,953,509) (2,967,628)
Private
placement--
series C
preferred stock.. -- -- -- -- 28,103,001 -- -- 28,133,758
Private
placement--
series D
preferred stock.. -- -- -- -- 1,936,386 -- -- 1,938,505
Private
placement--
series F
preferred stock.. -- -- -- -- 46,017,386 -- -- 46,036,370
Private
placement--
series G
preferred stock.. -- -- -- -- 9,997,045 -- -- 9,999,973
Private
placement--
series H
preferred stock.. 2,685,954 26,860 -- -- 216,273,016 -- -- 216,299,876
Exercise of stock
options and
warrants......... -- -- 37,168,008 371,680 2,603,838 (1,224,000) -- 1,751,962
Issuance of
warrants......... -- -- -- -- 9,575,620 -- -- 9,575,620
Equity-based
expense.......... -- -- -- -- 126,050 -- -- 126,050
Net loss......... -- -- -- -- -- -- (71,269,642) (71,269,642)
--------- ------- ---------- -------- ------------ ------------ -------------- --------------
Balance at
January 1, 2000.. 2,685,954 26,860 61,114,020 609,140 331,301,973 (1,224,000) (91,223,151) 239,624,844
Exercise of stock
options and
warrants
(unaudited)...... -- -- 264,656 2,647 171,473 -- -- 174,149
Equity based
expense
(unaudited)...... -- -- -- -- 745,304 -- -- 745,304
Net loss
(unaudited)...... -- -- -- -- -- -- (26,830,671) (26,830,671)
--------- ------- ---------- -------- ------------ ------------ -------------- --------------
Balance at April
1, 2000
(unaudited)...... 2,685,954 $26,860 61,378,676 $611,787 $332,218,750 $(1,224,000) $(118,053,822) $213,713,626
========= ======= ========== ======== ============ ============ ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 2, 1997 June 2, 1997 June 2, 1997
(date of Year ended (date of Three Months Ended (date of
inception) to -------------------------- inception) to -------------------------- inception) to
December 31, December 31, January 1, January 1, April 3, April 1, April 1,
1997 1998 2000 2000 1999 2000 2000
-------------- ------------ ------------ -------------- ------------ ------------ -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash flows from
operating
activities:
Net loss........... $ (493,684) $(19,459,825) $(71,269,642) $(91,223,151) $(11,161,921) $(26,830,671) $(118,053,822)
Adjustments to
reconcile net loss
to net cash used
in operating
activities:
Depreciation and
amortization...... 19,726 528,139 2,739,577 3,287,442 342,358 1,475,482 4,762,924
Equity-based
expense........... -- -- 4,971,209 4,971,209 -- 745,304 5,716,513
Amortization of
deferred financing
fees.............. -- 600,259 2,197,230 2,797,489 252,983 372,324 3,169,813
Changes in
operating assets
and liabilities:
Increase in
inventory........ -- -- (15,869,235) (15,869,235) -- (13,484,411) (29,353,646)
Increase in other
current assets... (8,858) (49,378) (1,466,354) (1,524,590) (257,348) (1,318,863) (2,843,453)
Increase in
accounts payable. 50,085 1,761,493 4,737,276 6,548,854 1,882,153 7,598,613 14,147,467
Increase
(decrease) in
other current
liabilities...... 25,368 380,215 2,206,568 2,612,151 1,219,877 (534,363) 2,077,788
---------- ------------ ------------ ------------ ------------ ------------ -------------
Net cash used in
operating
activities...... (407,363) (16,239,097) (71,753,371) (88,399,831) (7,721,898) (31,976,585) (120,376,416)
---------- ------------ ------------ ------------ ------------ ------------ -------------
Cash flows used in
investing
activities:
Purchase of
property and
equipment......... (888,281) (1,542,594) (14,180,216) (16,611,091) (1,935,734) (7,688,121) (24,299,212)
Cash acquired in
business
combination....... -- -- 37,432 37,432 -- -- 37,432
Increase (decrease)
in deposits and
other long-term
assets............ (84,566) (200,940) 167,317 (118,189) -- 178,899 60,710
---------- ------------ ------------ ------------ ------------ ------------ -------------
Net cash used in
investing
activities...... (972,847) (1,743,534) (13,975,467) (16,691,848) (1,935,734) (7,509,222) (24,201,070)
---------- ------------ ------------ ------------ ------------ ------------ -------------
Cash flows from
financing
activities:
Restricted cash.... -- -- (17,102,626) (17,102,626) -- -- (17,102,626)
Proceeds from
issuance of note
payable........... -- -- 49,091,144 49,091,144 -- -- 49,091,144
Proceeds from
stockholder note
payable........... -- 1,653,195 8,346,805 10,000,000 8,346,805 -- 10,000,000
Proceeds from note
payable with
detachable
warrants.......... -- 5,000,000 -- 5,000,000 -- -- 5,000,000
Private placements. 3,000,000 13,717,252 290,469,958 307,187,210 6,999,998 -- 307,187,210
Proceeds from stock
options and
warrants
exercised......... -- 33,025 1,751,962 1,784,987 778,510 174,149 1,959,136
Payment of notes
payable........... -- -- (5,614,649) (5,614,649) -- (3,404,393) (9,019,042)
Payment of capital
lease obligations. -- -- (657,107) (657,107) -- (333,808) (990,915)
---------- ------------ ------------ ------------ ------------ ------------ -------------
Net cash provided
by (used in)
financing
activities...... 3,000,000 20,403,472 326,285,487 349,688,959 16,125,313 (3,564,052) 346,124,907
---------- ------------ ------------ ------------ ------------ ------------ -------------
Net increase
(decrease) in
cash and cash
equivalents..... 1,619,790 2,420,841 240,556,649 244,597,280 6,467,681 (43,049,859) 201,547,421
Cash and cash
equivalents--
beginning.......... -- 1,619,790 4,040,631 -- 4,040,631 244,597,280 --
---------- ------------ ------------ ------------ ------------ ------------ -------------
Cash and cash
equivalents--
ending............. $1,619,790 $ 4,040,631 $244,597,280 $244,597,280 $ 10,508,312 $201,547,421 $ 201,547,421
========== ============ ============ ============ ============ ============ =============
Supplemental
disclosure of cash
flow information:
Interest paid...... $ -- $ -- $ 563,998 $ 563,998 $ -- $ 2,251,501 $ 2,815,499
Supplemental
disclosure of
noncash activities:
Financed leasehold
improvements...... $ 70,155 $ 30,317 $ 3,163,780 $ 3,264,252 $ -- $ -- $ 3,264,252
Obligations under
capital lease..... -- 2,000,540 3,000,228 5,000,768 -- -- 5,000,768
Issuance of
warrants under
capital lease
obligation........ -- 49,119 94,493 143,612 -- -- 143,612
Conversion of
stockholder note
payable........... -- -- 10,000,000 10,000,000 10,000,000 -- 10,000,000
Stockholder note
received for
exercise of stock
options........... -- -- 1,224,000 1,224,000 -- -- 1,224,000
Purchase business
combination
consideration paid
with preferred
stock............. -- -- 1,888,344 1,888,344 -- -- 1,888,344
========== ============ ============ ============ ============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business and Basis of Presentation
Corvis Corporation, formerly known as Nova Telecommunications, Inc., (the
"Company"); was incorporated on June 2, 1997 to design, manufacture and market
products that enable a fundamental shift in the design and efficiency of
backbone communications networks by allowing for the transmission, switching
and management of traffic entirely in the optical domain.
As the Company has primarily engaged in conducting research and development
activities and has not yet commenced production, the Company is considered a
development stage enterprise.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
In 1999, the Company changed its year end from a calendar year end to a year
ending on the Saturday closest to December 31.
(b) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents include cash in banks and investments in overnight repurchase
agreements and commercial paper. As of January 1, 2000, investments in
overnight repurchase agreements totaled $13.1 million and investments in
commercial paper totaled $231.5 million. The Company considers these
investments as available-for-sale. As such, the securities are stated at their
fair market value. Unrealized gains and losses on available-for-sale securities
are recognized as a component of Other comprehensive income (loss). As of
January 1, 2000, the fair value of the marketable securities approximated the
carrying value.
As of January 1, 2000, restricted cash of $17.1 million is comprised of
approximately $2.1 million supporting outstanding letters of credit, and $15.0
million restricted under the terms of a long-term working capital facility.
(c) Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
(net realizable value).
(d) Property and Equipment
Internal network equipment, test and manufacturing equipment, furniture and
fixtures, and leasehold improvements are stated at cost or estimated fair
market value if acquired in a purchase business combination. Depreciation is
calculated using the straight-line method over estimated useful lives of three
to seven years for internal network equipment, test and manufacturing
equipment, and furniture and fixtures. Leasehold improvements and assets
acquired under capital leases are amortized over the shorter of the lease term
or the estimated useful life of the assets.
(e) Goodwill
The Company has classified as goodwill the cost in excess of fair value of
the net assets of companies acquired in purchase business combinations.
Goodwill is being amortized using the straight-line method over five years.
F-7
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Recovery of Long-lived Assets
The Company's policy is to review its long-lived assets, including goodwill
and other intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The Company recognizes an impairment loss when the sum of the
expected future undiscounted cash flows is less than the carrying amount of the
asset. The measurement of the impairment losses to be recognized is based upon
the difference between the fair value and the carrying amount of the asset.
(g) Deferred Financing Fees
Deferred financing fees include commitment fees and other costs related to
certain debt financing and capital lease transactions and are being amortized
using a method that approximates the effective interest method over the term of
the related debt instrument.
(h) Research and Development
Research and development costs are expensed as incurred.
(i) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting and
tax basis of assets and liabilities and are measured using the enacted tax
rates and laws in effect when the differences are expected to be recovered or
settled.
(j) Foreign Currency Translation
The assets and liabilities of the Company's self-contained foreign
operations for which the functional currency is the local currency are
generally translated into U.S. dollars at current exchange rates and revenue
and expenses are translated using average exchange rates for the period.
Resulting translation adjustments are reflected as a component of other
comprehensive income (loss). Foreign currency translation adjustments were not
significant as of and for the year ended January 1, 2000.
(k) Other Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive
Income. The comprehensive net loss for the period from June 2, 1997 (date of
inception) to January 1, 2000 and the years ended December 31, 1998 and January
1, 2000 and the period from June 2, 1997 (date of inception) to January 1, 2000
does not differ materially from net loss.
(l) Earnings (Loss) Per Common Share
The computations of basic and diluted earnings (loss) per common share are
based upon the weighted average number of common shares outstanding during the
period. Dilutive earnings per share give effect to all potentially dilutive
common securities. Potentially dilutive securities include convertible
preferred stock, stock options and warrants. Pro forma basic and diluted net
earnings (loss) per common share has been calculated assuming the conversion of
all shares of convertible preferred stock outstanding as of December 31, 1999
and April 1, 2000, respectively, into common stock, as if the shares had been
converted immediately upon their issuance.
F-8
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(m) 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(n) Stock Options and Warrants
The Company accounts for its stock options in accordance with the provisions
of SFAS No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair market value
of all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to apply the provisions of APB Opinion No. 25 and provide
pro forma net income disclosures for employee stock options granted as if the
fair value based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures of SFAS No. 123. Stock options and warrants granted to other
than employees are recognized at fair market value.
(o) Unaudited Interim Financial Information
The unaudited interim financial information as of April 1, 2000 and for the
three months ended April 3, 1999 and April 1, 2000, and for the period from
June 2, 1997 (date of inception) to April 1, 2000 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. In the opinion of management, such information contains all
adjustments, consisting of only normal recurring adjustments, considered
necessary for a fair presentation. The operating results for any interim period
are not necessarily indicative of the results for the entire year or for any
future periods.
(p) Reclassifications
Certain reclassifications have been made in the 1997 and 1998 consolidated
financial statements to conform to the January 1, 2000 presentation. Such
reclassifications had no effect on net loss or total stockholders' equity
(deficit).
(2) Inventory
Inventory as of January 1, 2000 consists primarily of component parts to be
used in the manufacturing process. Reserves for potentially obsolete and excess
inventories were approximately $1.8 million and $3.4 million (unaudited) as of
January 1, 2000 and April 1, 2000, respectively.
F-9
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ -----------
<S> <C> <C>
Test and manufacturing
equipment.................. $3,395,425 $15,657,525
Internal network equipment.. 711,725 2,179,204
Furniture and fixtures...... 4,575 1,960,643
Leasehold improvements...... 340,685 5,677,941
---------- -----------
Total................... 4,452,410 25,475,313
Less accumulated
depreciation and
amortization............... (546,899) (3,119,827)
---------- -----------
Net property and
equipment.............. $3,905,511 $22,355,486
========== ===========
</TABLE>
(4) Notes Payable
A summary of notes payable as of December 31, 1998 and January 1, 2000
follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ -----------
<S> <C> <C>
Secured equipment note due April 2001........... $5,000,000 $ 5,117,480
Secured equipment notes due May 2002............ -- 5,426,577
Secured equipment note due May 2002............. -- 2,615,057
Leasehold improvements loan due May 2009........ -- 1,181,170
Working capital facility due August 2002........ -- 36,587,364
Convertible note payable to stockholder......... 1,653,195 --
Other........................................... -- 166,100
---------- -----------
$6,653,195 $51,093,748
========== ===========
</TABLE>
During December 1998, the Company entered into a secured equipment note
payable agreement with detachable warrants to purchase 282,558 shares of the
Company's Series B convertible preferred stock for aggregate proceeds of $5.0
million. The note payable accrues interest at 11% and matures in April 2001.
Unpaid interest and principal on the maturity date is due in the form of a 17%
balloon payment. The warrants have an exercise price of $2.15 per share and
expire seven years from issuance. The fair market value of the warrants of
$186,488 has been recognized as deferred financing fees.
During December 1998, the Company entered into a convertible note payable
with a shareholder in the amount of approximately $1.7 million. During 1999,
additional convertible notes payable in the aggregate of approximately $8.3
million were issued to several parties, including stockholders. In
consideration for interest due under the convertible notes payable to
stockholders, the Company issued warrants to purchase 76,527 shares of Series C
convertible preferred stock. The notes were converted into 1,093,247 shares of
Series C convertible preferred stock on February 26, 1999. The warrants have an
exercise price of $9.147 per share and expire seven years from issuance, or
upon an initial public offering. The fair value of the warrants issued,
$498,197, has been recognized as interest expense on the notes.
F-10
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999, the Company executed long-term notes for equipment financing
with a lender for approximately $6.1 million. The notes bear interest at the
rate of 14.91%, and are secured by the underlying equipment. The debt is
repayable in 36 monthly installments of principal and interest beginning June
1999. In connection with the issuance of the notes, the Company issued 19,679
warrants to purchase Series C convertible preferred stock to the lender. The
warrants have an exercise price of $9.147 per share and expire three years from
issuance, or upon an initial public offering. The fair market value of the
warrants, $125,946, has been recognized as deferred financing fees.
During January 1999, the Company executed a long-term secured equipment note
with another lender for $3.0 million. The note bears interest at a rate of 11%.
The debt is repayable in 36 monthly installments of principal and interest
beginning June 1, 1999. In connection with the issuance of the notes, the
Company issued 32,798 warrants to purchase Series C convertible preferred stock
to the lender. The warrants have an exercise rate of $9.147 per share and
expire three years from issuance. The fair value of the warrants, $213,508, has
been recognized as deferred financing fees.
During July 1999, the Company entered into a loan agreement with a landlord
for tenant improvements associated with the lease of a new building in the
amount of $1.2 million. As of January 1, 2000, the Company has drawn the entire
$1.2 million commitment. The debt bears interest at a rate of 10.0%. The debt
is repayable in 120 monthly installments of principal and interest beginning
June 1999.
During 1999, the Company obtained a commitment for an aggregate of $40.0
million of debt financing from a syndicate of lenders. As of January 1, 2000,
the Company has drawn the entire $40.0 million commitment. The debt bears
interest at a rate of 8.5%. The debt is repayable in 36 monthly installments of
principal and interest beginning September 1999 and with aggregate balloon
payments of 14% at maturity. In connection with the issuance of the debt, the
Company issued 641,121 warrants to purchase Series E convertible preferred
stock to the lender. The warrants have an exercise price of $9.147 per share
and expire five years from issuance. The fair value of the warrants,
approximately $3.7 million, has been recognized as deferred financing fees.
Scheduled principal payments for all outstanding long-term debt are as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000......................... $15,286,742
2001......................... 18,280,465
2002......................... 16,609,973
2003......................... 107,284
2004......................... 118,519
Thereafter................... 690,765
-----------
$51,093,748
===========
</TABLE>
(5) Equity Transactions
In July 1997, the Company issued 1,500,000 shares of Series A convertible
preferred stock and 21,600,000 shares of Common Stock in a private placement
transaction for an aggregate price of $3,000,000.
In March 1998, the Company issued 1,200,000 shares of common stock in a
private placement transaction for an aggregate price of $10,000.
F-11
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1998, the Company issued 50,000 shares of Series A convertible
preferred stock for an aggregate price of $100,000 in a private placement
transaction.
In May 1998, the Company issued 6,294,071 shares of Series B convertible
preferred stock in a private placement transaction for an aggregate price of
$13.5 million.
In December 1998, the Company issued 34,884 shares of Series B convertible
preferred stock in a private placement transaction for an aggregate price of
$75,000.
In February 1999 and April 1999, the Company issued an aggregate of
1,978,791 shares of Series C convertible preferred stock for an aggregate price
of approximately $18.1 million in private placement transactions together with
the conversion of the convertible notes payable.
In August 1999, the Company issued 3,698 shares of Series C convertible
preferred stock to an outside consultant as payment for services rendered with
an aggregate fair market value of $33,826.
In August 1999 and September 1999, the Company issued 1,731,958 and 164,948
shares, respectively, of Series F convertible preferred stock for an aggregate
price of approximately $46.0 million in private placement transactions.
In December 1999, the Company issued 1,500 shares of Series F convertible
preferred stock to an outside consultant as payment for services rendered with
an aggregate fair market value of $36,375.
In December 1999, the Company issued 292,825 shares of Series G convertible
preferred stock for an aggregate price of approximately $10.0 million in a
private placement transaction to a strategic investor. If certain minimum
purchases are not made by the holder of the Series G convertible preferred
stock on or before March 31, 2001, the Company has the right to repurchase the
shares at a price of $44.40 per share. In addition, the Company issued to the
strategic investor, the right to purchase up to an additional $10.0 million of
stock at a price equal to the most recently completed financing round subject
to meeting certain minimum purchase commitments and an additional $5.0 million
of common stock in the event of a qualified public offering.
Also in December 1999, the Company issued 2,685,954 shares of Series H
convertible preferred stock for an aggregate price of approximately $216.3
million in a private placement transaction.
(6) Convertible Preferred Stock
Each issued and outstanding share of Series A convertible preferred stock is
convertible into 24 shares of common stock subject to adjustment under certain
conditions. Each issued and outstanding share of Series B, Series C, Series D,
Series E, Series F, Series G, and Series H convertible preferred stock is
convertible into 12 shares of common stock subject to adjustment under certain
conditions. Each share of the Series A, Series B, Series C, Series D, Series E,
Series F, Series G, and Series H convertible preferred stock is convertible
into common stock: A) at the option of the holder; B) automatically upon the
consummation of a firm commitment for an underwritten public offering of common
stock with net proceeds of not less than $75.0 million and a per share price of
not less than $8.39 as adjusted for recapitalization events, and C)
automatically upon a change in control for a per share price of not less than
$13.42. The holders of Series A, Series B, Series C, Series E, Series F, Series
G, and Series H convertible preferred stock are entitled to one vote for each
share of common stock into which such shares are convertible. The holders of
Series D convertible preferred stock are not entitled to vote, until such
shares are converted to common stock.
F-12
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Further, the holders of the Series A convertible preferred stock, voting as
a single class, and the holders of the Series B convertible preferred stock,
voting as a single class, are each entitled to elect two members of the Board
of Directors. The holders of the Series C convertible preferred stock are
entitled to elect one member of the Board of Directors. All other stockholders
of the Company; except for Series D convertible preferred stock, voting as a
single class, are also entitled to elect one member of the Board of Directors.
The holders of all outstanding shares of the preferred stock vote as a separate
class, however, regarding among other things, the merger or dissolution of the
Company or sale of all or substantially all of the Company's property and
assets, each of such matters must be approved by the affirmative vote of the
holders of record of 66% of the shares of preferred stock.
Each of the Series A, Series B, Series C, Series D, Series E, Series F,
Series G, and Series H convertible preferred stock entitle the holder of record
to receive, when and if declared by the Board of Directors, non-cumulative
dividends in cash at the annual rate of $0.20, $0.215, $0.9147, $0.9147,
$0.9147, $2.425, $3.201 or $3.415, and $8.053 per share, respectively, as
adjusted for stock splits, stock dividends, recapitalizations,
reclassifications, and similar events. To date, no such dividends have been
declared.
(7) Acquisition
In July 1999, the Company purchased all of the outstanding common stock of
Corvis Canada, Inc. ("Corvis Canada"), a Canadian company (formerly known as
Kromafibre, Inc.), for 211,928 shares of Series D convertible preferred stock
valued at approximately $1.9 million. Corvis Canada develops certain enabling
fiber optic technology. The acquisition was accounted for as a purchase.
Accordingly, the operating results of Corvis Canada have been included in the
Company's results since the date of acquisition. The excess of the aggregate
purchase over the fair value of net assets acquired of approximately $1.7
million is being amortized on a straight-line basis over five years.
Additionally, the Company will release an additional 61,386 shares of Series
D convertible preferred stock valued at approximately $0.6 million to an
officer and shareholder of Corvis Canada. At the date of combination, these
shares were placed in escrow to be released over the term of a three-year
employment agreement. The Company is recognizing compensation expense over the
term of the employment agreement for the fair value of the shares issued.
(8) Stock Options
In July 1997, the Company adopted the 1997 Stock Option Plan (the "Plan")
pursuant to which the Company's Board of Directors may grant options to
purchase common stock to employees, officers, directors and consultants. The
Company has reserved 63,600,000 shares of common stock for issuance under the
Company's Stock Option Plan to employees, officers, directors and consultants
of the Company. Stock options are granted with an exercise price equal to the
estimated fair value of the common stock at the date of grant. The stock
options have a 10-year term, become fully exercisable when granted, and
ownership vests over four years from the date of grant. Common stock associated
with the exercise of options prior to vesting is placed into escrow and
released to the employee as the shares vest. Prepayments made by employees are
not refundable in the event of termination prior to vesting. As of January 1,
2000, 38,314,020 shares of common stock have been issued through the exercise
of options under the Plan and 12,249,036 shares have vested.
The Company applies APB Opinion No. 25 in accounting for the Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had compensation cost for the Company's
plan been determined based on the fair value at the date of grant, consistent
with the method
F-13
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of SFAS No. 123, the Company's net loss would have been increased to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
June 2, 1997 Year ended
(date of inception) -------------------------
to December 31, December 31, January 1,
1997 1998 2000
------------------- ------------ -----------
<S> <C> <C> <C>
Net loss:
As reported............. $493,684 $19,459,825 $71,269,642
Pro forma............... 498,547 19,506,239 71,952,610
======== =========== ===========
The per share weighted-average fair value of stock option activity during
1997, 1998 and 1999, was $0, $0.001, and $0.489, respectively, on the date of
grant with the following weighted-average assumptions:
<CAPTION>
June 2, 1997 Year ended
(date of inception) -------------------------
to December 31, December 31, January 1,
1997 1998 2000
------------------- ------------ -----------
<S> <C> <C> <C>
Expected dividend yield... 0% 0% 0%
Risk-free interest rate... 5.70% 4.56% 6.33%
Expected life............. 4 years 4 years 4 years
Volatility................ 70% 70% 70%
</TABLE>
The following is a summary of options granted:
<TABLE>
<CAPTION>
Weighted
Number Average
Outstanding Exercise Price
----------- --------------
<S> <C> <C>
June 2, 1997..................................
Granted....................................... 6,828,000 $.01
Exercised..................................... -- --
Canceled...................................... -- --
----------- ----
December 31, 1997............................. 6,828,000 .01
Granted....................................... 26,240,400 .02
Exercised..................................... (1,146,012) .01
Canceled...................................... -- --
----------- ----
December 31, 1998............................. 31,922,388 .02
Granted....................................... 21,583,800 .40
Exercised..................................... (37,168,008) .07
Canceled...................................... (68,400) .06
----------- ----
January 1, 2000............................... 16,269,780 $.39
=========== ====
</TABLE>
F-14
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about outstanding and exercisable
stock options at January 1, 2000:
<TABLE>
<CAPTION>
Weighted
Range of Average Number Number
Exercise Number Remaining Exercisable Exercisable
Prices Outstanding Contract Life (Vested) (Unvested)
-------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
$0.01 2,686,680 8.0 1,699,860 986,820
$0.02 2,276,400 8.8 438,044 1,838,356
$0.05 1,035,000 9.1 -- 1,035,000
$0.10 2,143,800 9.3 -- 2,143,800
$0.34 4,017,300 9.6 -- 4,017,300
$1.01 3,819,000 9.9 -- 3,819,000
$3.36 291,600 10.0 -- 291,600
---------- ---- --------- ----------
16,269,780 9.2 2,137,904 14,131,876
========== ==== ========= ==========
</TABLE>
(9) Basic and Diluted Earnings (Loss) Per Share
The following tables present the computations of basic and diluted earnings
(loss) per share:
<TABLE>
<CAPTION>
For the period from June 2, 1997
(date of inception) to
December 31, 1997
-----------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted loss per share:
Net loss to common stockholders..... $(493,684) 21,600,000 $(0.02)
========== ========== ======
</TABLE>
Convertible preferred stock outstanding as of December 31, 1997, convertible
into 36,000,000 shares of common stock, unexercised options to purchase
6,828,000 shares of common stock were not included in the computation of
diluted loss per share for the period from June 7, 1997 (date of inception) to
December 31, 1997 as their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
For the year ended December 31, 1998
-------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted loss per share:
Net loss to common stockholders.. $(19,459,825) 22,638,375 $(0.86)
============ =========== ======
Convertible preferred stock outstanding as of December 31, 1998, convertible
into 113,147,460 shares of common stock, options and warrants to purchase
31,922,388 and 4,283,712 shares of common stock, respectively, and 1,519,488
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the year ended December 31, 1998
as their inclusion would be anti-dilutive.
<CAPTION>
For the year ended January 1, 2000
-------------------------------------
Loss Shares Per share
(numerator) (denominator) amount
------------ ------------- ---------
<S> <C> <C> <C>
Basic and diluted loss per share:
Net loss to common stockholders.. $(71,269,642) 30,599,460 $(2.33)
------------ ----------- ------
Pro forma basic and diluted loss
per share (unaudited)............. $(71,269,642) 184,318,825 $(0.39)
============ =========== ======
</TABLE>
F-15
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Convertible Preferred Stock outstanding as of January 1, 2000, convertible
into 211,658,232 shares of common stock, options and warrants to purchase
16,269,780 and 17,598,770 shares of common stock, respectively, and 25,556,484
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the year ended January 1, 2000 as
their inclusion would be anti-dilutive.
<TABLE>
<CAPTION>
For the three months ended April
3, 1999
----------------------------------
Per
Loss Shares share
(numerator) (denominator) amount
------------ ------------- ------
<S> <C> <C> <C>
Basic and diluted loss per share
(unaudited):
Net loss to common shareholders
(unaudited)....................... $(11,161,921) 27,209,004 $(0.41)
============ ========== ======
</TABLE>
Convertible Preferred Stock outstanding as of April 3, 1999, convertible
into 135,507,504 (unaudited) shares of common stock, options and warrants to
purchase 37,051,044 (unaudited) and 6,330,828 (unaudited) shares of common
stock, respectively, and 22,807,860 (unaudited) unvested shares acquired
through the exercise of options were not included in the computation of diluted
loss per share for the three months ended April 3, 1999 as their inclusion
would be anti-dilutive.
<TABLE>
<CAPTION>
For the three months ended April
1, 2000
----------------------------------
Per
Loss Shares share
(numerator) (denominator) amount
------------ ------------- ------
<S> <C> <C> <C>
Basic and diluted loss per share
(unaudited):
Net loss to common shareholders
(unaudited)....................... $(26,830,671) 41,128,092 $(0.65)
------------ ----------- ------
Pro forma basic and diluted loss per
share (unaudited)................... $(26,830,671) 252,787,468 $(0.11)
============ =========== ======
</TABLE>
Convertible Preferred Stock outstanding as of April 1, 2000, convertible
into 211,692,564 (unaudited) shares of common stock, options and warrants to
purchase 20,367,024 (unaudited) and 17,554,394 (unaudited) shares of common
stock, respectively, and 23,200,188 (unaudited) unvested shares acquired
through the exercise of options were not included in the computation of diluted
loss per share for the three months ended April 1, 2000 as their inclusion
would be anti-dilutive.
(10) Income Taxes
The Company has incurred operating losses since its inception and has
recognized no current or deferred tax provision or benefit. The provision for
income taxes is different from that which would be obtained by applying the
statutory federal income tax rate to loss before income taxes. The items
causing this difference are as follows:
<TABLE>
<CAPTION>
Year ended
---------------------------
June 2, 1997
(date of inception) December 31, January 1,
to December 31, 1997 1998 2000
-------------------- ------------ -------------
<S> <C> <C> <C>
Expected tax benefit at
statutory rate......... $167,852 $ 6,810,939 $ 24,944,375
State tax, net of
federal benefit........ 23,993 885,422 3,197,720
Research and development
tax credits............ -- 1,526,045 1,030,088
Other, net.............. (122,069) (389,258) (440,130)
Increase in valuation
allowance.............. (69,776) (8,833,148) (28,732,053)
-------- ----------- -------------
$ -- $ -- $ --
======== =========== =============
</TABLE>
F-16
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Temporary differences and carryforwards that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, January 1,
1998 2000
------------ ------------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up and organization costs. $ 112,932 $ 112,932
Net operating loss carryforwards............ 7,263,947 32,259,959
Foreign net operating loss carryforward..... -- 323,188
Accrued expenses............................ -- 721,343
Research and development tax credit
carryforwards.............................. 1,526,045 2,556,133
Non-cash stock compensation................. -- 1,966,114
----------- ------------
Total gross deferred tax assets........... 8,902,924 37,939,669
Valuation allowance........................... (8,902,924) (37,634,977)
----------- ------------
Net deferred tax assets................... -- 304,692
Deferred tax liabilities--property and
equipment, net due to depreciation........... -- (304,692)
----------- ------------
Net deferred tax.......................... -- --
=========== ============
</TABLE>
The net change in the valuation allowance for the period from June 2, 1997
(date of inception) to December 31, 1997, and for the years ended December 31,
1998 and January 1, 2000 was an increase of approximately $70,000, $8.8
million and $28.7 million, respectively. The valuation allowances at December
31, 1998 and January 1, 2000 are a result of the uncertainty regarding the
ultimate realization of the tax benefits related to the deferred tax assets.
The net operating loss carryforward period expires commencing in 2017 through
the year 2019. Further, as a result of certain financing and capital
transactions, an annual limitation on the future utilization of a portion of
the net operating loss carryforward may occur. As a result, the net operating
loss carryforward may not be fully utilized before expiration.
(11) Commitments and Contingencies
(a) Leases
Minimum annual rental payments under noncancelable operating leases,
primarily for the rent of office space, are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
------------------------
<S> <C>
2000......................... $ 1,701,156
2001......................... 1,706,517
2002......................... 1,754,802
2003......................... 1,603,513
2004......................... 956,703
Thereafter................... 3,558,446
-----------
Total.................... $11,281,137
===========
</TABLE>
Rent expense under operating leases was approximately $27,000, $618,000 and
$1.7 million for the period from June 2, 1997 (date of inception) to December
31, 1997 and for the years ended December 31, 1998 and January 1, 2000,
respectively.
F-17
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is required to maintain several irrevocable letters of credit in
the aggregate amount of $2.1 million as additional security for the Company's
obligations under its office and manufacturing facilities leases.
The Company has equipment under capital lease which require payments of
principal and interest as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
------------------------ -----------
<S> <C>
2000......................................................... $ 1,956,202
2001......................................................... 1,956,202
2002......................................................... 1,055,208
2003......................................................... 224,516
-----------
Total payment............................................ 5,192,128
Less--amount attributable to interest........................ (640,793)
-----------
Capital lease obligation................................. 4,551,335
Less--current portion........................................ (1,587,130)
-----------
Long-term lease obligation............................... $ 2,964,205
===========
</TABLE>
Property and equipment includes approximately $5.0 million of test equipment
as of January 1, 2000 that was acquired under capital lease. Accumulated
amortization associated with this equipment totaled approximately $1.0 million.
In July 1998, the Company issued warrants to purchase 74,418 shares of
Series B convertible preferred stock with an exercise price of $2.15 per share
in connection with an equipment capital lease. The warrants are immediately
exercisable and expire seven years from the date of issuance. The Company has
recorded the estimated fair market value of $49,116 at grant date of the
warrants issued as deferred financing fees.
In January 1999, the Company issued warrants to purchase 66,079 shares of
Series C convertible preferred stock with an exercise price of $4.54 in
connection with an equipment capital lease. The Company recorded the estimated
fair value of $212,774 at grant date of the warrants issued as deferred
financing fees. The warrants are immediately exercisable and expire seven years
from the date of issuance.
(b) Strategic Investors
In September 1999, the Company entered into a series of agreements with a
strategic investor. Under a stock purchase agreement, the Company agreed to
issue 164,948 shares of Series F convertible preferred stock for aggregate
proceeds of approximately $4.0 million.
Concurrently with the stock issuance, the Company entered into an exclusive
license agreement with the investor for the use of certain intellectual
property and a non-exclusive license for certain other technology. As
consideration for the license, the Company agreed to make quarterly payments of
$250,000 over a four-year period. In addition, the Company granted the
strategic investor a warrant to receive common stock valued at $35.0 million
upon the consummation of an underwritten public offering of common stock with
net proceeds of not less than $35.0 million or a change of control event (a
qualifying IPO or a change of control event). The warrant expires on April 30,
2001. Upon a qualifying IPO or a change of control event, the Company has the
right to accept ownership of the license. If the Company declines ownership or
does not accept ownership of
F-18
<PAGE>
CORVIS CORPORATION
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the license before the end of a five year period beginning at the qualifying
IPO or a change of control event, the license is deemed to have terminated and
the Company will receive $2,000,000 from the strategic investor as a
termination payment. Throughout this agreement, the Company has the right to
receive 50% of all royalties received by the strategic investor related to
revenue derived from the intellectual property subject to certain limitations.
In the event of the expiration of the warrant, the license agreement will
become a perpetual non-exclusive license so long as the Company continues to
pay a license fee of $250,000 per quarter during the initial four-year period.
In November 1999, the Company issued warrants to purchase up to 5,270,856
shares of common stock at $2.85 per share to another strategic investor. A
certain percent of the warrants are immediately exercisable, with the remaining
amount contingent upon certain future purchases of the Company's products by
the strategic investor. These warrants expire in June 2001 if these conditions
are not met. Of the total 5,270,856 committed in this warrant, the rights to
purchase 2,635,428 shares will expire on December 31, 2004 and the rights to
purchase the remaining 2,635,428 shares will expire on June 30, 2006. The
Company has recorded equity-based sales and marketing expense of approximately
$1.8 million for the estimated fair value at grant date of the warrants which
are immediately exercisable.
In December 1999, the Company issued warrants to purchase 281,162 shares of
Series G convertible preferred stock at $32.01 per share to another strategic
investor. The warrants are immediately exercisable and will expire on the
earlier of a qualified public offering with a price per share of $8.39 and
gross proceeds to the Company of at least $75.0 million or December 31, 2000.
The Company has recorded equity-based sales and marketing expense of
approximately $3.1 million for the estimated fair value at grant date of the
warrants issued.
Also, in December 1999, the Company issued to this strategic investor, the
right to purchase up to an additional $30.0 million of stock at a price equal
to the most recently completed financing round subject to meeting certain
minimum purchase commitments of the Company's product, and an additional $5.0
million of common stock in the event of a qualified public offering.
(c) Litigation and Claims
The Company is a defendant in various suits and claims which arise in the
normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
financial position, liquidity or results of operations of the Company.
(12) Subsequent Events--Stock Splits
On February 8, 2000, the Company declared a 3-for-1 split of the common
stock. On July 21, 2000, the Company declared a further 4-for-1 split of its
common stock. All share and per share amounts of common stock in the
accompanying consolidated financial statements have been retroactively adjusted
to reflect the stock splits.
F-19
<PAGE>
(13) Subsequent Events (unaudited)
(a) Purchase Business Combination Commitments
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 is 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 will be 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 Company does
not anticipate that any of the purchase price will be allocated to in-process
technology. However, upon completion of the analysis, a portion of the purchase
price may be allocated to other intangibles, including in-process technology.
The excess of the aggregate purchase price over the fair value of net assets
acquired of approximately $0.1 million will be amortized on a straight-line
basis over five years. The Company will recognize compensation expense over the
term of the employment agreements equal to fair value of the shares to be
issued.
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 is a development stage company with no revenue. Algety had a net loss
of $1.8 million for the period from April 17, 1999 (date of inception) to
December 31, 1999, and $2.6 million for the three months ended March 31, 2000.
The acquisition price is equal to 1,301,822 shares of Series I convertible
preferred stock valued at $218.7 million. The Company may be required to
increase the purchase price up to an aggregate of 8.0% of the Company's
outstanding stock depending on certain conditions. The Company accounted for
the acquisition as a purchase. Accordingly, the operating results of Algety
will be 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 a preliminary
valuation of the assets and liabilities of Algety. Based upon the results of
the valuation, the Company allocated approximately $40.3 million of the
purchase price to in-process technology. The excess of the aggregate purchase
price over the fair value of net assets acquired of approximately $164.2
million, based on the preliminary purchase price allocation, will be amortized
on a straight-line basis over five years. The Algety acquisition is subject to
customary closing conditions and there can be no assurances that it will close.
(b) Modification of Contract Terms
In April and May 2000, the Company renegotiated the terms of certain
agreements which allowed strategic investors the right to purchase up to $40
million of convertible preferred stock based upon commitments to purchase a
specified amount of our products and services. The renegotiated agreements
eliminate such purchase commitments of the strategic investors as a condition
to the purchase of Series H Preferred Stock and the Company's rights to
repurchase Series G convertible preferred stock of one of the strategic
investors. In connection with the renegotiations, the Company and the strategic
investors agreed to set acceptance criteria for field trials of the Company's
products.
(c) Legal Matters
In July 2000, Ciena Corporation, a competitor ("Ciena"), filed a lawsuit
alleging that the Company infringed on certain 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 attorney's fees. The Company
intends to defend itself vigorously against such claims and the Company
believes that it will prevail in this litigation. Based on the information
currently available, the Company cannot reasonably predict the likelihood of
any potential outcome.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and the Board of Directors
of Algety Telecom S.A.:
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' equity and cash flows expressed in French Francs
present fairly, in all material respects, the financial position of Algety
Telecom S.A. (a development stage company), at December 31, 1999, and the
results of its operations and its cash flows for the period from inception
(April 17, 1999) to December 31, 1999 in conformity with U.S. generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
Rennes, France
April 27, 2000
F-21
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
----------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................... Frf 20,426 Frf 100,094
Other current assets........................ 6,425 13,301
Prepaid expenses............................ 476 774
---------- -----------
Total current assets...................... 27,327 114,169
Intangible assets, net........................ 4,778 4,504
Property and equipment, net................... 3,217 19,022
Other assets.................................. 71 71
---------- -----------
Total assets.............................. Frf 35,393 Frf 137,766
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank overdraft.............................. Frf -- Frf 8,341
Trade accounts payable...................... 7,661 2,836
Other accounts payable...................... -- 12,307
Other current liabilities................... 2,014 2,363
---------- -----------
Total current liabilities................. 9,675 25,847
Long term debt................................ 3,936 8,659
Other long-term liability..................... 6,576 6,576
---------- -----------
Total liablities.......................... 20,187 41,082
---------- -----------
Stockholders' equity:
Common stock, Frf 65.60 par value, 220,026
shares authorized issued and outstanding... 9,513 14,840
Less unpaid capital......................... -- (1,641)
Additional paid in capital.................. 20,471 116,816
Accumulated deficit......................... (14,778) (33,331)
---------- -----------
Total stockholders' equity................ 15,206 96,684
---------- -----------
Total liabilities and stockholders'
equity................................... Frf 35,393 Frf 137,766
========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Period from inception Period from inception
(April 17, 1999) Three months (April 17, 1999)
through ended through
December 31, 1999 March 31, 2000 March 31, 2000
--------------------- -------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues................ Frf -- Frf -- Frf --
Cost of revenues........ -- -- --
Gross profit............ -- -- --
Operating expenses:
Research and
development.......... 15,745 17,305 33,050
Sales and marketing .. 1,212 1,386 2,598
General and
administrative....... 1,403 1,203 2,606
Other Income.......... -- (1,307) (1,307)
------------ ----------- ------------
Total operating
expense ........... 18,360 18,587 36,947
------------ ----------- ------------
Loss from operations.... (18,360) (18,587) (36,947)
Interest income, net.... 362 34 396
Income tax benefit...... 3,220 -- 3,220
------------ ----------- ------------
Net loss............ Frf (14,778) Frf (18,553) Frf (33,331)
============ =========== ============
Basic net loss per
share.................. Frf 67.17 Frf 81.34
Weighted average shares
used in computing...... 220 228.1
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------- paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Initial Issuance of
common stock,
April 1999............. 90 Frf 984 Frf -- Frf -- Frf 984
Issuance of common
stock, May 1999........ 130.02 8,529 20,471 -- 29,000
Net loss................ -- -- -- (14,778) (14,778)
------ ---------- ----------- ----------- ----------
Balance, December 31,
1999................... 220.02 9,513 20,471 (14,778) 15,206
Issuance of common
stock, March 2000
(unaudited)............ 81.21 5,327 96,345 -- 101,672
Unpaid capital
(unaudited)............ -- (1,641) -- -- (1,641)
Net loss (unaudited).... -- -- -- (18,553) (18,553)
------ ---------- ----------- ----------- ----------
Balance, March 31, 2000
(unaudited)............ 301.23 Frf 13,199 Frf 116,816 Frf (33,331) Frf 96,684
====== ========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from inception Period from inception
(April 17, 1999) Three months (April 17, 1999)
through period ended through
December 31, 1999 March 31, 2000 March 31, 2000
--------------------- -------------- ---------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flow from operating
activities:
Net loss.............. Frf (14,778) Frf (18,553) Frf (33,331)
Adjustment to
reconcile net loss to
net cash used in
operating activities.
Depreciation and
amortization ........ 1,009 1,001 2,010
Changes in depreciation
and amortization,
operating assets and
liabilities:
Prepaid and other
current assets....... (6,901) (7,174) (14,075)
Trade accounts
payables............. 7,661 (4,825) 2,836
Accrued expenses and
other current
liabilities.......... 2,014 349 2,363
Other accounts
payable.............. -- 12,307 12,307
----------- ----------- -----------
Net cash used in
operating
activities......... (10,995) (16,895) (27,890)
Cash flows from
investing activities:
Purchase of property
and equipment........ (3,549) (16,532) (20,081)
Purchase of intangible
assets............... (5,453) -- (5,453)
Increase in other
assets............... (73) -- (73)
----------- ----------- -----------
Net cash used in
investing
activities......... (9,075) (16,532) (25,607)
Cash flow from financing
activities:
Proceeds from issuance
of common stock...... 29,984 100,031 130,015
Proceeds from loan.... 3,936 4,723 8,659
Proceeds from long
term liability....... 6,576 -- 6,576
Bank overdraft........ -- 8,341 8,341
----------- ----------- -----------
Net cash provided by
financing
activities......... 40,496 113,095 153,591
Net increase in cash
and cash
equivalent......... 20,426 79,668 100,094
Cash and cash
equivalent, beginning
of period.............. -- 20,426 --
----------- ----------- -----------
Cash and cash
equivalent, end of
period................. Frf 20,426 Frf 100,094 Frf 100,094
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(in thousands except share and per share data)
1. Nature of the Business:
Algety Telecom, S.A. (the "Company") was incorporated in France on April 17,
1999. The Company develops and markets networking products that enable
telecommunications service providers to quickly and cost effectively provide
bandwidth and create new high-speed data services. Through December 31, 1999,
the Company was considered to be in the development stage and was principally
engaged in research and development, raising capital and building its
management team. The Company has not yet commenced manufacturing.
The Company is subject to risks common to technology-based companies
including, but not limited to, the development of new technology, development
of markets and distribution channels, dependence on key personnel, and the
ability to obtain additional capital as needed to move its product plans. The
Company has a limited operating history and has never achieved profitability.
To date the Company has been funded principally by private equity financing.
The Company's ultimate success is dependent upon its ability to raise
additional capital to successfully develop and market its product.
2. Significant Accounting Policies:
The accompanying financial statements of the Company reflect the application
of certain significant accounting policies as described below:
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents, and
investment with original maturity dates greater than three months but less than
12 months to be short-term investments.
Revenue Recognition
Revenue from product sales is recognized upon shipment provided that a
purchase order has been received or a contract has been executed, there are no
uncertainties regarding customer acceptance, the fee is fixed and determinable
and collectibility is deemed probable. If uncertainties regarding customer
acceptance exist, revenue is recognized when such uncertainties are resolved.
Property and Equipment
Property and equipment is carried at cost and depreciated over the estimated
useful lives of the assets using the straight-line method, based upon the
following asset lives:
<TABLE>
<S> <C>
Manufacturing and research equipment.......................... 3 to 5 years
Computer software............................................. 3 to 5 years
Furniture and office equipment................................ 3 to 5 years
</TABLE>
The cost of significant additions and improvements is capitalized and
depreciated while expenditures for maintenance and repairs are charged to
expense as incurred. Upon retirement or sale, the cost and related accumulated
depreciation of the assets are removed from the accounts and any resulting
gains or loss is reflected in the determination of net income or loss.
F-26
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share data)
Intangible assets:
Intangible assets are stated net of accumulated amortization. They comprise
acquired intellectual property (including patents, technology, know-how, trade
marks and licenses) and other similar identifiable rights. They are initially
recorded at their acquisition cost and are amortized using the straight-line
basis over their estimated economic lives for a period of up to 5 years from
the date of acquisition.
Research and Development
The Company's products are highly technical in nature and require a large
and continuing research and development effort. All research and development
costs are expensed as incurred. Development costs incurred prior to the
establishment of technological feasibility are charged to expense.
Technological feasibility is demonstrated by the completion of a working model.
To date, the period between achieving technological feasibility and the general
availability of the related products has been short and systems development and
qualifying for capitalization have not been material. Accordingly, the Company
has not capitalized any development costs.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recorded based on
temporary differences between the financial statement amounts and the tax bases
of assets and liabilities measured using enacted tax rates in effect for the
year in which the differences are expected to reverse. The Company periodically
evaluates the reliability of its net deferred tax assets and records a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents. The
Company invests in excess cash primarily in deposits with commercial banks.
Other Comprehensive Income
The Company reports comprehensive income (loss) in accordance with Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive Income" (FAS
130). The comprehensive net loss for the period from inception (April 17, 1999)
through December 31, 1999 does not differ from the reported net loss.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss for the period
by 220,026 shares representing the number of shares of common capital issued
and paid since the share capital increase decided at the general shareholders'
meeting held on May 21, 1999.
F-27
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share data)
Stock Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("AFB No. 25") and complies with
the disclosure provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123").
Segment Information
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
requires companies to report selected information about operating segments, as
well as enterprise-wide disclosures about products, services, geographic areas,
and major customers. Operating segments are determined based on the way
management organizes its business for making operating decisions and assessing
performance. To date, the Company has determined that it conducts its
operations in one business segment and operates in one geographic area, France.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, (collectively referred to
as derivatives) and for hedging activities. The Company will adopt SFAS No. 133
as required by SFAS No. 137, "Deferral of the effective date of the FASB
Statement No. 133," in fiscal year 2001. The adoption of SFAS No. 133 is not
currently expected to have an impact on the Company's financial condition or
results of operations.
3. Property and Equipment
Property and equipment consisted of the following at December 31, 1999:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Computer software............................................... Frf 847
Manufacturing and Research equipment............................ 1,282
Furniture and office equipment.................................. 1,420
---------
3,549
Less accumulated depreciation and amortization.................. (332)
---------
Frf 3,217
=========
4. Intangible assets
Intangible assets consisted of the following on December 31, 1999:
Patents, know how, trade marks, licences ....................... Frf 5,453
Less accumulated amortization................................... (675)
---------
Frf 4,778
=========
</TABLE>
F-28
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share data)
5. Long term debt
In 1999, the Company entered into a research program agreement with the
State research valuation agency (ANVAR).
The program aims at financing the feasibility process of the Solicon optical
transmission system.
Under the agreement, the Company is entitled to receive an interest free
loan of Frf 10,823 to finance a research and development program amounting to
Frf 21,772.
An initial portion of the loan amounting to Frf 3,936 was outstanding at
December 31, 1999. The remaining portion will be made available in two portions
before the completion of the program no later than May 31, 2001.
In case of technical failure, the Company will have to repay a lump sum of
Frf 2,220. In case of technical success of the program, the Company will repay
the loan according to the following schedule:
<TABLE>
<S> <C>
.No later than June 30, 2002.................................... Frf 3,279
.No later than June 30, 2003.................................... 3,279
.No later than June 30, 2004.................................... 4,265
----------
Frf 10,823
==========
</TABLE>
6. Other long term liability
The Company has acquired certain intangible assets from France Telecom. The
agreed upon payment conditions stipulate that the Company will pay the
consideration, Frf 6,576, simultaneously with the exercise of the associated
issued equity warrants (See note 8) i.e. not earlier than May 21, 2003.
Although the debt does not bear interest, it has been recorded at historical
value.
7. Commitments and Contingencies
Knowhow Concession and Patent License Subject to Future Royalty Payments
In 1999, the Company entered into a ten year exclusive knowhow concession
and exclusive patent licence agreement with France Telecom. Under the
agreement, royalty payments will be due to France Telecom, from the date of
first sales of manufactured products using the licensed rights, and according
to the following conditions:
<TABLE>
<S> <C>
.Year 1....................................... 2.00% of total Company sales
.Year 2....................................... 1.50% of total Company sales
.Year 3....................................... 1.00% of total Company sales
</TABLE>
8. Stockholders' Equity
Common Stock
The Company has authorized and issued 220,026 shares of common stock,
Frf 65.60 par value. The holders of the common stock are entitled to one vote
for each share held. The Board of Directors (the
F-29
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share data)
"Board") may declare dividends from lawfully available funds, subject to any
preferential dividend rights of any outstanding preferred stock and
restrictions under the Company's loan agreements. Holders of the common stock
are entitled to receive all assets available for distribution on the
dissolution or liquidation of the Company, subject to any preferential rights
of any outstanding preferred stock.
In May 1999, the Company declared a 6-for-1 stock split of the common stock.
All share and per share amounts of common stock in the accompanying financial
statements have been retroactively adjusted to reflect the stock split.
1999 Stock Incentive Plan
In November 1999, the 1999 Stock Incentive Plan (the "Plan") was adopted by
the Board and received stockholders approval on March 22, 2000. A total of
27,500 shares of common stock have been reserved for issuance under the Plan.
The Plan provides for the grant of incentive stock options and nonstatutory
stock options, to officers, employees and directors of the Company. Options may
be granted at an exercise price less than, equal to or greater than the fair
market value on the date of grant. The Board determines the term of each
option, the option exercise price, and the vesting terms. Stock options
generally expire ten years from the date of grant and vest over four years.
Therefore no compensation expense has been recorded.
In December 1999, the Board has approved the issuance of 7,500 shares under
the Plan. The four years vesting period is defined according to the following
schedule:
. A first third of the options can be exercised after 12 months from the
date of grant.
. A second third of the options can be exercised after 12 months following
the initial 12 months period mentioned above.
. 8.33% of the options can be exercised at the expiration of each quarter
following the second 12 months period mentioned above.
. The remaining options can be exercised after the fourth quarter
following the second 12 months period mentioned above.
According to the Plan the exercise price, Frf 223.03 equals the fair market
value of the shares i.e., the value prevailing at the most recent share capital
increase dated May 21, 1999.
Equity warrants:
In May 1999, the Company granted 4,075 equity warrants to France Telecom
Technologies. The exercise price, Frf 223.06, equals the then fair market value
of the shares, defined as being the value prevailing for the share capital
increase which occurred simultaneously to the issuance of the warrants.
The warrants can be exercised during the fifth year following the date of
grant. This period might be reduced by the beneficiaries in case of Initial
Public Offering (IPO) of the Company, merger, disposal of more than 50% of the
voting rights, receivership situation.
9. Income Tax
No provision for taxes has been recorded since the Company has incurred
losses since inception. On a yearly basis, the Company is entitled to a tax
credit based on certain research and development expenses. The credit is
redeemable from the Tax Authorities. As at December 31, 1999 the Company has
recorded a tax credit amounting to Frf 3,221.
F-30
<PAGE>
ALGETY TELECOM S.A.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands except share and per share data)
The components of the net deferred tax assets as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
1999
---------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.............................. Frf 5,675
Depreciation carried forwards................................. 404
---------
6,079
Deferred tax liabilities:....................................... --
---------
Net deferred tax asset...................................... 6,079
Valuation allowance............................................. (6,079)
---------
Net deferred tax asset...................................... Frf 0
=========
</TABLE>
At December 31, 1999, the Company has available net operating loss
carryforwards for income tax purposes of approximately Frf 15.2 million
available to off set future taxable income out of which Frf 14.2 million expire
in 2004 and Frf 1 million is carried forward indefinitely. As required by
statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," the management of the Company has evaluated the positive and negative
evidence bearing upon the realizability of its deferred tax assets and has
established a full valuation allowance for such assets which are comprised of
net operating loss carryforwards. Management re-evaluates the positive and
negative evidence periodically.
10. Other income
In 1999, the Company has been granted subsidies amounting to Frf 2,800 by
Local Authorities subject to certain job creations and fixed assets
acquisitions. As these conditions were not fully met at December 31, 1999, the
income has not been recognized. The cash received has been accounted for as
deferred income and is included in Other Current Liabilities at December 31,
1999.
11. Subsequent event: Issuance of common stock (unaudited)
The issuance of 81,211 shares of common stock Frf 65.60 par value comprising
two types of equity warrants each as defined below has been authorized by the
shareholders' meeting held on March 22, 2000.
. Type #1 equity warrants either allow the beneficiaries to subscribe, at any
time from the date of grant until September 30, 2000, or oblige the
beneficiaries to subscribe, if certain technical steps duly defined are
achieved at any time from July 1, 2000 to July 10, 2000, to a common share,
Frf 65.60 par value, at an exercise price of Frf 1,251.96.
. Type #2 equity warrants could be exercised by the beneficiaries if within
the five year period from the date of grant if the following events occurs:
i) new shares paid in cash or equivalent securities are issued;
ii) a majority stake of the Company is sold; or
iii) the Company is merged; or
iv) if the market value of the common shares is reduced to less than Frf
1,251.96,
Each type #2 equity warrant would entitle the beneficiary to subscribe to a
number of shares at par value, in proportion to the difference, between Frf
1,251.96 and the actual value prevailing at the date of occurrence of the
above mentioned events.
F-31
<PAGE>
Unaudited Pro Forma Condensed Consolidated Financial Data
The following Unaudited Pro Forma Condensed Consolidated Financial Data
consists of an Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
April 1, 2000 and Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended January 1, 2000 and the three months ended April
1, 2000 (collectively, the "Pro Forma Statements"). The Unaudited Pro Forma
Condensed Consolidated Balance Sheet gives effect to the Algety acquisition as
if it occurred on April 1, 2000 and the Unaudited Pro Forma Condensed
Consolidated Statements of Operations give effect to the Algety acquisition as
if it occurred on April 17, 1999 (date of inception of Algety).
Management believes that, on the basis set forth herein, the Pro Forma
Statements reflect a reasonable estimate of the Algety acquisition based on
currently available information. The pro forma financial data is presented for
informational purposes only and does not purport to represent what the
Company's financial position or results of operations would have been had the
Algety acquisition in fact occurred on the dates assumed or that may result
from future operations. The pro forma data should be read in conjunction with
the Company's Consolidated Financial Statements and Algety Telecom, S.A.'s
financial statements and related notes thereto, both of which are included
elsewhere in the Prospectus.
F-32
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
As of April 1, 2000
-------------------------------------------------------------
The Company Pro
forma for the
The Company Algety(A) Adjustments(B) Algety Acquisition
------------- ----------- -------------- ------------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents........... $ 201,547,421 14,609,000 (1,000,000) 215,156,421
Other current assets... 34,415,855 2,055,000 -- 36,470,855
------------- ----------- ------------ ------------
Total current assets... 235,963,276 16,664,000 (1,000,000) 251,627,276
Deposits and intangible
assets, net............ 1,883,708 667,000 1,050,000
164,245,012 167,845,720
Property and equipment
and other non-current
assets, net............ 46,847,304 2,776,000 -- 49,623,304
------------- ----------- ------------ ------------
$ 284,694,288 20,107,000 164,295,012 469,096,300
============= =========== ============ ============
Liabilities and
Stockholders' Equity
(Deficit)
Current liabilities:
Notes payable, current
portion............... $ 15,793,831 -- -- 15,793,831
Accounts payable....... 14,422,158 414,000 -- 14,836,158
Other current
liabilities........... 4,836,253 3,358,000 -- 8,194,253
------------- ----------- ------------ ------------
Total current
liabilities........... 35,052,242 3,772,000 -- 38,824,242
Noncurrent liabilities:
Notes payable, net of
current portion....... 31,895,524 1,264,000 -- 33,159,524
Other non-current
liabilities........... 4,032,896 960,000 4,992,896
------------- ----------- ------------ ------------
Total liabilities...... 70,980,662 5,996,000 -- 76,976,662
------------- ----------- ------------ ------------
Stockholders' equity
(deficit)
Convertible preferred
stock................. 160,911 -- 13,018 173,929
Common stock........... 611,787 2,166,000 (2,166,000) 611,787
Stockholder note
receivable............ (1,224,000) -- -- (1,224,000)
Additional paid-in
capital............... 332,218,750 16,810,000 201,882,994 550,911,744
Deficit accumulated
during development
stage................. (118,053,822) (4,865,000) (35,435,000) (158,353,822)
------------- ----------- ------------ ------------
Total stockholders'
equity (deficit)...... 213,713,626 14,111,000 164,295,012 392,119,638
------------- ----------- ------------ ------------
Total liabilities and
stockholders' equity
(deficit)............. $ 284,694,288 $20,107,000 $164,295,012 $469,096,300
============= =========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended January 1, 2000
------------------------------------------------------------
The Company
Pro forma for the
The Company Algety (C) Adjustments Algety Acquisition
------------ ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenue $ -- -- -- --
Operating expenses:
Research and
development........... 39,673,958 2,515,000 -- 42,188,958
Sales and marketing,
exclusive of equity
based expense......... 3,419,471 194,000 -- 3,613,471
General and
administrative........ 18,319,090 224,000 -- 18,543,090
Equity-based expenses.. 4,971,209 -- 7,562,653(E) 12,533,862
Depreciation and
amortization.......... 2,739,577 -- 23,648,604(D) 26,388,181
------------ ---------- ----------- ------------
Total operating
expenses.............. 69,123,305 2,933,000 31,211,257 103,267,562
------------ ---------- ----------- ------------
Operating loss......... (69,123,305) (2,933,000) (31,211,257) (103,267,562)
------------ ---------- ----------- ------------
Other income (expense),
net................... (2,146,337) 572,000 -- (1,574,337)
------------ ---------- ----------- ------------
Net loss............... $(71,269,642) (2,361,000) (31,211,257) (104,841,899)
============ ========== =========== ============
Loss per common share.. $ (2.33) $ (3.43)
============ ============
Weighted average number
of common shares
outstanding........... 30,599,460 30,599,460
<CAPTION>
Three Months ended April 1, 2000
------------------------------------------------------------
The Company
Pro forma for the
The Company Algety(C) Adjustments Algety Acquisition
------------ ---------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenue
Operating expenses:
Research and
development........... $ 19,061,850 2,603,000 -- 21,664,850
Sales and marketing,
exclusive of equity
based expense......... 4,630,061 208,000 -- 4,838,061
General and
administrative........ 2,358,121 181,000 -- 2,539,121
Equity-based expenses.. 745,304 -- 2,646,929(E) 3,392,233
Depreciation and
amortization.......... 1,475,482 -- 8,277,012(D) 9,752,494
------------ ---------- ----------- ------------
Total operating
expenses.............. 28,270,818 2,992,000 10,923,941 42,186,759
------------ ---------- ----------- ------------
Operating loss......... (28,270,818) (2,992,000) (10,923,941) (42,186,759)
------------ ---------- ----------- ------------
Other income (expense),
net................... 1,440,147 202,000 -- 1,642,147
------------ ---------- ----------- ------------
Net loss............... $(26,830,671) (2,790,000) (10,923,941) (40,544,612)
============ ========== =========== ============
Loss per common share.. $ (0.65) $ (0.99)
============ ============
Weighted average number
of common shares
outstanding........... 41,128,092 41,128,092
</TABLE>
F-34
<PAGE>
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Consolidated Balance Sheet:
A. To reflect the historical balance sheet of Algety.
B. To reflect the Algety acquisition at the initial closing, which is to
occur no later than September 30, 2000, the Company has agreed to
deliver to the Algety shareholders shares of Series I convertible
preferred stock which will automatically convert into 5.4% of the
Company's common stock as of the date of the initial closing. Upon the
occurrence of certain events, the number of shares issuable to the
Algety shareholders could increase to 8.0% of the Company's common
stock.
Algety is a development stage company that is developing a new
generation of solutions for optical networks. A portion of Algety's
technology has been developed to the point where there is value
associated with it in relation to potential future sales. As of the date
of our agreement with Algety, the design of certain of its future
product subsystems had been completed. However, several key subsystems
had not been completed. In addition, none of the subsystems had been
tested together. Siginificant future costs are anticipated to complete
the technology. Material net cash inflows are not expected before 2002.
The initial consideration was 1,301,822 shares of Series I convertible
preferred stock, with an estimated fair value of approximately $218.7
million, which shares will convert into 15,621,858 shares of common
stock at the closing of this offering. In addition, Corvis incurred
approximately $1 million of transaction costs. In addition, shares with
an estimated fair value of approximately $31.9 million will be issued
contingent upon satisfaction of certain minimum employment terms for
certain Algety employees.
We will account 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 allocation of the purchase price to the
fair value of the assets acquired and liabilities assumed is preliminary
and will be finalized following completion of a full valuation of the
assets and liabilities of Algety. The excess of the aggregate purchase
price over the fair value of net assets acquired of approximately $164.2
million based upon the preliminary purchase price allocation will be
amortized on a straight-line basis over five years. Based upon
preliminary results of the valuation we expect that approximately $40.3
million of the purchase price will be allocated to in-process
technology.
<TABLE>
<S> <C>
Current assets................................................ $ 16,664
Fixed assets and other non-current assets..................... 3,443
Current liabilities........................................... (3,772)
Long-term liabilities......................................... (2,224)
In-process technology......................................... 40,300
Workforce in-place............................................ 1,050
Goodwill...................................................... 164,245
--------
Total purchase price........................................ $219,706
========
</TABLE>
The above purchase price allocation is based upon a preliminary
valuation and may change upon final determination of the fair value of
assets and liabilities acquired. The preliminary valuation indicates
that a portion of the purchase price should be allocated to in-process
technology. Such amounts will be expensed immediately following the date
of acquisition.
F-35
<PAGE>
The Company utilized the percentage of completion method to value in-
process technology. Significant assumptions used to appraise the in-
process technology include:
<TABLE>
<S> <C>
Expected commencement of net cash inflows from in-process
technology.............................................. December 2002
Risk adjusted discount rate.............................. 25%
Expect period of cash inflows from in-process technology. 6 years
</TABLE>
The following adjustments have been reflected in the Unaudited Pro Forma
Condensed Consolidated Statements of Operations:
C. To reflect the historical results of operations of Algety for the
periods presented. The statements of operations are translated using the
average exchange rate of 6.261 French Francs per US Dollar from April
17, 1999 (Algety's date of inception) to December 31, 1999, and 6.649
French Francs per US Dollar for the period from January 1, 2000 to March
31, 2000.
D. To reflect the incremental amortization of goodwill and other intangible
assets resulting from the Algety acquisition. The acquisition will be
accounted for using the purchase method whereby the net tangible and
identifiable intangible assets acquired and liabilities assumed are
recognized at their estimated fair values at the date of acquisition. A
preliminary amortization period for goodwill and other intangibles of
three to five years has been used for purposes of the pro forma
financial information. However, the amortization period may change upon
completion of a full valuation. In connection with the Algety
acquisition, the Company acquired in-process technology estimated to be
approximately $40.3 million. Such amount is not reflected in the
accompanying unaudited pro forma condensed consolidated statements of
operations due to the non-recurring nature of the charge.
E. To reflect equity-based compensation expense associated with shares
earned by former employees of Algety over a period of 3 years of
required employment with the Company.
F-36
<PAGE>
[LOGO OF CORVIS CORPORATION]
