FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission file number 0-12751
Corvis Corporation
(Exact name of registrant as specified in its charter)
Delaware 52-2041343
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7015 Albert Einstein Drive, Columbia, Maryland 21046-9400
(Address of principal executive offices) (Zip Code)
(443) 259-4000
(Registrant's telephone number, including area code)
____________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ___X____ No_______
Number of shares of Common Stock, $0.01 par value, outstanding at April 28,
2001: 359,023,202
TABLE OF CONTENTS
Page
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Part I - Financial Information
Item 1. Financial Statements
Unaudited condensed consolidated balance sheets as of
December 30, 2000 and March 31, 2001........................ 3
Unaudited condensed consolidated statements of operations
for the three months April 1, 2000 and March 31, 2001....... 4
Unaudited condensed consolidated statements of cash flows
for the three months April 1, 2000 and March 31, 2001....... 5
Notes to unaudited condensed consolidated financial
statements.................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk........ 13
Part II - Other Information
Item 1. Legal Proceedings................................................ 14
Item 2. Changes in Securities and Use of Proceeds........................ 14
Item 3. Defaults Upon Senior Securities.................................. 15
Item 4. Submission of Matters to a Vote of Security Holders.............. 15
Item 5. Other Information................................................ 15
Item 6. Exhibits and Reports on Form 8-K................................. 15
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
December 30, March 31,
2000 2001
----------- ----------
ASSETS
------
Current assets:
Cash and cash equivalents............................... $1,024,758 $ 877,810
Trade accounts receivable............................... 16,085 63,741
Inventory, net.......................................... 219,414 231,191
Other current assets.................................... 26,802 33,265
---------- ----------
Total current assets............................... 1,287,059 1,206,007
Restricted cash, long-term................................... 46,292 46,292
Property and equipment, net.................................. 106,681 162,544
Goodwill and other intangible assets, net.................... 929,204 822,882
Other long-term assets, net.................................. 12,600 29,440
---------- ----------
Total assets....................................... $2,381,836 $2,267,165
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable, current portion.......................... $ 1,438 $ 1,359
Capital lease obligations, current portion.............. 1,841 3,310
Accounts payable........................................ 90,995 63,751
Deferred revenue........................................ 2,236 17,710
Accrued expenses and other liabilities.................. 18,509 41,687
---------- ----------
Total current liabilities.......................... 115,019 127,817
Noncurrent liabilities:
Notes payable, net of current portion................... 44,529 44,505
Capital lease obligations, net of current portion....... 1,380 2,246
Deferred lease liability................................ 4,315 4,166
---------- ----------
Total liabilities.................................. 165,243 178,734
Commitments and contingencies
Redeemable stock............................................. 30,000 30,000
Stockholders' equity:
Common stock--$0.01 par value; 425,121,094
shares authorized; 348,039,489 shares issued
and outstanding as of December 30, 2000;
358,625,041 shares issued and outstanding as of
March 31, 2001..................................... 3,478 3,584
Additional paid-in capital.............................. 2,497,773 2,526,607
Accumulated other comprehensive income:
Foreign currency translation adjustment............ 60,176 3,903
Accumulated deficit..................................... (374,834) (475,663)
---------- ----------
Total stockholders' equity.............................. 2,186,593 2,058,431
---------- ----------
Total liabilities, redeemable stock and
stockholders' equity............................... $2,381,836 $2,267,165
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
--------------------
April 1, March 31,
2000 2001
-------- ---------
Revenue .............................................................. $ $ 84,086
--
Costs of revenue ..................................................... -- 52,903
-------- ---------
Gross profit ..................................................... -- 31,183
Operating expenses:
Research and development, exclusive of equity-based expense ...... 20,121 40,975
Sales and marketing, exclusive of equity-based expense ........... 4,637 15,412
General and administrative, exclusive of equity-based expense .... 2,677 10,979
Equity-based expense:
Research and development ..................................... 745 12,775
Sales and marketing .......................................... -- 3,663
General and administrative ................................... -- 9,195
Amortization of intangible assets ................................ 91 52,245
-------- ---------
Total operating expenses ..................................... 28,271 145,244
-------- ---------
Operating loss ............................................... (28,271) (114,061)
Interest income, net ................................................. 1,440 13,232
-------- ---------
Net loss ......................................................... $(26,831) $(100,829)
======== =========
Other comprehensive loss -- Foreign currency translation adjustment .. -- (56,274)
-------- ---------
Comprehensive loss ............................................... $(26,831) $(157,103)
======== =========
Basic and diluted net loss per common share ...................... $ (0.65) $ (0.29)
======== =========
Weighted average number of common shares outstanding ............. 41,128 342,359
See accompanying notes to unaudited condensed consolidated financial statements.
4
CORVIS CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
---------------------
April 1, March 31,
2000 2001
-------- ----------
Cash flows from operating activities:
Net loss ................................................................... $(26,831) $ (100,829)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .......................................... 1,475 60,269
Equity-based expense ................................................... 745 25,633
Amortization of deferred financing fees ................................ 372 --
Changes in operating assets and liabilities:
Increase in accounts receivable .................................... -- (47,656)
Increase in inventory, net ......................................... (13,484) (11,777)
Increase in other assets ........................................... (1,319) (8,153)
Increase in accounts payable and accrued expenses .................. 7,065 10,296
-------- ----------
Net cash used in operating activities .......................... (31,977) (72,217)
-------- ----------
Cash flows from investing activities:
Purchase of property and equipment ..................................... (7,688) (59,715)
Decrease (increase) in deposits and other non-current assets ........... 179 (15,151)
-------- ----------
Net cash used in investing activities .............................. (7,509) (74,866)
-------- ----------
Cash flows from financing activities:
Repayments of notes payable and capital lease obligations............... .(3,738) (976)
Proceeds from the issuance of stock .................................... 174 3,307
-------- ----------
Net cash provided by (used in) financing activities ................ (3,564) 2,331
-------- ----------
Effect of exchange rate changes on cash and cash equivalents ....... -- (2,196)
-------- ----------
Net decrease in cash and cash equivalents .......................... (43,050) (146,948)
Cash and cash equivalents--beginning ....................................... 244,597 1,024,758
-------- ----------
Cash and cash equivalents--ending .......................................... $201,547 $ 877,810
======== ==========
Supplemental disclosure of cash flow information:
Interest paid .......................................................... $ 2,252 $ 880
======== ==========
Supplemental disclosure of noncash activities:
Financed leasehold improvements ........................................ $ -- $ 964
======== ==========
Obligations under capital lease ........................................ $ -- $ 3,208
======== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
5
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(1) Summary of Significant Accounting Policies and Practices
(a) Basis of Presentation
The unaudited condensed consolidated financial statements included herein
for Corvis Corporation and subsidiaries (the "Company") have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
consolidated financial statements included in this report reflect all normal
recurring adjustments which the Company considers necessary for the fair
presentation of the results of operations for the interim periods. Certain
information and footnote disclosures normally included in the annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to understand the information
presented. The operating results for interim periods are not necessarily
indicative of the operating results for the entire year.
These financial statements should be read in conjunction with the Company's
December 30, 2000 audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed on March 28, 2001.
(b) Revenue and Cost of Revenue
Revenue from product sales is recognized upon execution of a contract and
the completion of all delivery obligations provided that there are no
uncertainties regarding customer acceptance and collectibility is deemed
probable. If uncertainties exist, revenue is recognized when such uncertainties
are resolved.
Revenue from installation services is recognized as the services are
performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the accompanying condensed consolidated balance sheets.
Cost of revenue includes the costs of manufacturing the Company's products
and other costs associated with warranty and other contractual obligations,
inventory obsolescence costs and overhead related to the Company's
manufacturing, engineering, finishing and installation. Warranty reserves are
determined based upon actual warranty cost experience, estimates of component
failure rates and management's industry experience.
6
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(c) Uses of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that effect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(2) Inventory
Inventories are comprised of the following:
December 30, March 31,
2000 2001
------------ --------
Raw materials...................................... $131,983 $ 161,290
Work-in-process.................................... 50,161 37,377
Finished goods..................................... 51,119 53,066
-------- ---------
233,263 251,733
Less reserve for excess inventory and obsolescence. (13,849) (20,542)
-------- ---------
Inventory, net................................ $219,414 $ 231,191
======== =========
(3) Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share are computed as follows (in thousands,
except per share data):
Three Months Ended
------------------------
April 1, March 31,
2000 2001
------------ ---------
Net loss................................... $(26,831) $(100,829)
Basic and diluted weighted average shares.. 41,128 342,359
Basic and diluted net loss per share....... $ (0.65) $ (0.29)
Options and warrants outstanding as of March 31, 2001 to purchase
51,520,816 and 7,634,676 shares of common stock, respectively, and 12,590,067
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three month period ended March
31, 2001 as their inclusion would be anti-dilutive.
Convertible Preferred Stock outstanding as of April 1, 2000, convertible
into 211,692,564 shares of common stock, options and warrants to purchase
20,367,024 and 17,554,394 shares of common stock, respectively, and 23,200,188
unvested shares acquired through the exercise of options were not included in
the computation of diluted loss per share for the three month period ended April
1, 2000 as their inclusion would be anti-dilutive.
7
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands except per share amounts)
(4) Legal Matters
In July 2000, Ciena Corporation ("Ciena") informed the Company of its
belief that there is significant correspondence between products that the
Company offers and several U.S. patents held by Ciena relating to optical
networking systems and related dense wavelength division multiplexing
communications systems technologies. On July 19, 2000, Ciena filed a lawsuit in
the United States District Court for the District of Delaware alleging that the
Company is willfully infringing three of Ciena's patents. Ciena is seeking
injunctive relief, an unspecified amount of damages including treble damages, as
well as costs of the lawsuit, including attorneys' fees. On September 8, 2000,
the Company filed an answer to the complaint, as well as counter-claims
alleging, among other things, invalidity and/or unenforceability of the three
patents in question. On March 5, 2001, a motion was granted, allowing Ciena to
amend its complaint to include allegations that the Company is willfully
infringing two additional patents. The litigation is currently in the discovery
phase and a trial date has been set for April 1, 2002. Based on the status of
the litigation, the Company cannot reasonably predict the likelihood of any
potential outcome.
On May 7, 2000, Paul Felzen, as Trustee of the Louise Laskin 1991 Revocable
Trust, filed a class action lawsuit in the Southern District of New York. The
complaint names Corvis, our directors and officers who signed the registration
statement in connection with our initial public offering, and Credit Suisse
First Boston Corporation as defendants. The complaint alleges that the
registration statement and prospectus relating to our initial public offering
contained material misrepresentations and/or omissions in that those documents
did not disclose (1) that Credit Suisse First Boston Corporation had solicited
and received undisclosed fees and commissions and other economic benefits from
some investors in connection with the distribution of Corvis' common stock in
the initial public offering and (2) that Credit Suisse First Boston had entered
into arrangements with some investors that were designed to distort and/or
inflate the market price for Corvis' common stock in the aftermarket following
the initial public offering. The complaint asks the court to award to members of
the class the right to rescind their purchases of Corvis common stock (or to be
awarded rescissory damages if the class member has sold its Corvis stock) and
prejudgment and post-judgment interest, reasonable attorneys' and experts
witness' fees and other costs. The complaint was only recently filed and we are
still in the process of reviewing the allegations. We intend to vigorously
defend ourselves and our officers and directors. Therefore, it is the position
of the Company's management that, at this time, it is not possible to estimate
the amount of a probable loss, if any, that might result from this matter.
Accordingly, no provision for this matter has been made in the Company's
condensed consolidated financial statements.
(5) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the value of
these derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Certain Hedging Activities -
Deferral of the Effective Date for SFAS No. 133," and by SFAS No. 138,
"Accounting for Derivative Instruments and Certain Hedging Activities, an
Amendment of SFAS No. 133," was adopted on January 1, 2001. The adoption of SFAS
No. 133, SFAS No. 137 and SFAS No. 138 did not have a material effect on our
consolidated financial statements.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis along with our
unaudited condensed consolidated financial statements and the notes to those
statements included elsewhere in this report.
Overview
We design, manufacture and market high performance optical communications
systems that lower the overall cost of network ownership for service providers.
Our all-optical products enable a fundamental shift in the design and efficiency
of backbone networks by allowing for the transmission, switching and management
of communications traffic entirely in the optical domain. Our products enable
the creation of all-optical backbone networks that support transmission over
long distances and eliminate the need for expensive and bandwidth-limiting
electrical regeneration and switching equipment.
We currently have three customers, Broadwing Communications, Inc., Williams
Communications, Inc. and Qwest Communications Corporation. During the first half
of 2000, we shipped, installed and activated laboratory trial systems and field
trial systems for both Broadwing and Williams Communications to allow for
customer testing and inspection. In July 2000, we successfully completed the
Broadwing Communications field trial and Broadwing agreed to purchase $200
million of our products and services over a two-year period. Throughout the
remainder of 2000, we began the deployment of both transmission and switching
equipment to Broadwing and built up finished goods inventory necessary to
support customer orders in early 2001.
In January 2001, the field trial system provided to Williams Communications
was accepted and Williams Communications agreed to purchase up to $300 million
of our products and services over a multi-year period.
Qwest has agreed to purchase $150 million of our products, some of which
are currently under development, over a two-year period. In April 2001, we
received a commitment of $110 million to purchase both transmission and
switching equipment under the aforementioned agreement with shipments commencing
during fiscal 2001. Qwest's acceptance of delivered equipment is contingent upon
passing Qwest's lab certification.
We are in discussions with other service providers to begin field trials
and to purchase our products and services.
Revenue. Revenue from product sales is recognized upon execution of a
contract and the completion of all delivery obligations provided that there are
no uncertainties regarding customer acceptance and collectibility is deemed
probable. If uncertainties exist, revenue is recognized when such uncertainties
are resolved.
Revenue from installation services is recognized as the services are
performed unless the terms of the supply contract combine product acceptance
with installation, in which case revenues for installation services are
recognized when the terms of acceptance are satisfied and installation is
completed. Revenues from installation service fixed price contracts are
recognized on the percentage-of-completion method, measured by the percentage of
costs incurred to date compared to estimated total costs for each contract.
Amounts received in excess of revenue recognized are included as deferred
revenue in the our consolidated balance sheets.
Research and Development, Excluding Equity-Based Expense. Research and
development, excluding equity-based expense consists primarily of salaries and
related personnel costs, test and
-9-
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.
Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing,
excluding equity-based expense consists primarily of salaries and related
personnel costs, laboratory trial systems provided to customers, trade shows,
other marketing programs and travel expenses. We intend to continue to adjust
our sales operations in order to increase market awareness and acceptance of our
products. We also expect to initiate additional marketing programs to support
our current products. Our success depends on establishing and maintaining key
customer relationships.
General and Administrative, Excluding Equity-Based Expense. General and
administrative, excluding equity-based expense consists primarily of salaries
and related personnel costs, information systems support, recruitment expenses
and facility demands associated with establishing the proper infrastructure to
support our organization. This infrastructure consists of executive, financial,
legal, information systems and other administrative responsibilities.
Results of Operations
Three months ended March 31, 2001 compared to three months ended April 1, 2000
Revenue. Revenue increased to $84.1 million for the three months ended
March 31, 2001 from zero for the three months ended April 1, 2000. The increase
in revenue is attributable to the acceptance of a field trial system and the
sale of network hardware and associated software for commercial use. Revenue for
the period is attributable to two customers.
Gross Profit. Costs of revenue consists of component costs, direct
compensation costs, warranty and other contractual obligations, inventory
obsolescence costs and overhead related to our manufacturing and engineering,
finishing and installation operations. Gross profit was $31.2 million for the
three months ended March 31, 2001. Gross margin as a percentage of revenues was
37.1%.
Research and Development, Excluding Equity-Based Expense. Research and
development expenses, excluding equity-based expense increased to $41.0 million
for the three months ended March 31, 2001 from $20.1 million for the three
months ended April 1, 2000. The increase in expenses was primarily attributable
to significant increases in headcount, as well as material costs associated with
prototype development and laboratory materials.
Sales and Marketing, Excluding Equity-Based Expense. Sales and marketing
expenses, excluding equity-based expense increased to $15.4 million for the
three months ended March 31, 2001 from $4.6 million for the three months ended
April 1, 2000. The increase in expenses was primarily attributable to
significant increases in headcount and increases in promotions and trade show
activities.
General and Administrative, Excluding Equity-Based Expense. General and
administrative expenses, excluding equity-based expense increased to $11.0
million for the three months ended March 31, 2001 from $2.7 million for the
three months ended April 1, 2000. The increase in expenses was primarily
attributable to salaries and related benefits due to the hiring of additional
personnel and increased costs associated with establishing the proper
infrastructure to support our organization.
-10-
Equity-based Expense. Equity-based expense related to research and
development, sales and marketing and general and administrative functions for
the three months ended March 31, 2001 increased to $25.6 million from $0.7
million in the three months ended April 1, 2000. The increase in equity-based
compensation primarily resulted from expenses associated with stock options
granted at an exercise price below fair value on the date of grant.
Amortization of Goodwill and Intangible Assets. Amortization of intangible
assets expenses increased to $52.2 million for the three months ended March 31,
2001 from $0.1 million for the three months ended April 1, 2000. The increase
was primarily attributable to the amortization of intangibles resulting from our
recent acquisitions.
Interest Income, Net. Interest income, net of interest expense, increased
to $13.2 million for the three months ended March 31, 2001 from $1.4 million for
the three months ended April 1, 2000. The increase was primarily attributable to
higher invested cash balances from the proceeds of the initial public offering
and various private placements, offset in part by interest expense incurred
under various credit facilities.
Liquidity and Capital Resources
Since inception through March 31, 2001, we have financed a significant
portion of our operations, capital expenditures and working capital primarily
through public and private sales of our capital stock, borrowings under credit
and lease facilities and cash generated from operations. At March 31, 2001, our
cash and cash equivalents totaled $877.8 million.
Net cash used in operating activities was $72.2 million for the quarter
ended March 31, 2001. Cash used in operating activities for the quarter ended
March 31, 2001 was primarily attributable to a net loss of $100.8 million and
$47.7 million of accounts receivable, partially offset by non-cash expense items
including depreciation and amortization of $60.3 million and equity-based
expense of $25.6 million.
Net cash used in investing activities for the quarter ended March 31, 2001
was $74.9 million which was primarily attributable to purchases of manufacturing
and test equipment, information systems and office equipment. We continue to
evaluate our need for production and administrative equipment and facilities to
accommodate our current and future operations. Capital expenditures for the
remainder of 2001 are expected to total between $50.0 million and $75.0 million.
Net cash provided by financing activities for the quarter ended March 31,
2001, was $2.3 million, primarily attributable to proceeds from the exercise of
warrants and employee stock options.
As of March 31, 2001, long-term restricted cash totaled $46.3 million, of
which $43.5 million represents cash held as security under a note payable. This
restriction will be released upon repayment of the note which is due in November
2002. In addition, as of March 31, 2001, we had outstanding irrevocable letters
of credit aggregating $2.8 million relating to lease obligations for various
manufacturing and office facilities and other business arrangements. These
letters of credit are collateralized by funds in our operating account. Various
portions of the letters of credit expire at the end of each respective lease
term or agreement term.
Currently, our industry is experiencing significant competitive pricing
pressures and a general slow down in telecommunication infrastructure spending.
As such, we expect gross margins for the remainder of the year to decrease from
previous levels. Lower gross margins are likely to
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result from several factors including, but not limited to, selling our products
to customers at lower prices, providing financing to customers and reduced
manufacturing efficiencies due to changes in volume.
In light of the current economic environment, we slowed expansion within
current operations during the first quarter of 2001 and are formulating plans to
strategically lower operating expenses for the remainder of the fiscal year.
Plans will include strategic personnel reductions, elimination of excess
facilities and other measures to streamline operating costs. If we are unable to
plan and execute these cost reduction measures effectively and in a timely
manner, or if margin pressures continue for longer than expected, our liquidity
and capital resources could be adversely effected.
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 three customers that could provide substantially all of our revenues for
the near future. The loss of any of these customers, any substantial reduction
in current or anticipated orders or an inability to attract new customers, could
materially adversely affect our liquidity and results of operations. We plan to
diversify our customer base by seeking new customers both domestically and
internationally.
We believe that our current cash and cash equivalents and cash generated
from operations will satisfy our expected working capital, capital expenditure,
and investment requirements through at least the next twelve months.
If cash on hand and cash generated from operations is insufficient to
satisfy our liquidity requirements, we may seek to sell additional equity or
debt securities. To the extent that we raise additional capital through the sale
of equity or debt securities, the issuance of such securities could result in
dilution to our existing shareholders. If additional funds are raised through
the issuance of debt securities, the terms of such debt could impose additional
restrictions on our operations. Additional capital, if required, may not be
available on acceptable terms, or at all. If we are unable to obtain additional
financing, we may be required to reduce the scope of our planned product
development and sales and marketing efforts, which could harm our business,
financial condition and operating results. Increasingly, as a result of the
financial demands of major network deployments, service providers are looking to
their suppliers for financing assistance. From time to time, we may provide or
commit to extend credit or credit support to our customers as we consider
appropriate in the course of our business.
Litigation
On July 19, 2000, Ciena Corporation ("Ciena") filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, an unspecified amount of damages including treble damages, as well as
costs of the lawsuit, including attorneys' fees. On September 8, 2000, we filed
an answer to the complaint, as well as counter-claims alleging, among other
things, invalidity and/or unenforceability of the three patents in question. On
March 5, 2001, a motion was granted, allowing Ciena to amend its complaint to
include allegations that we are willfully infringing two additional patents. We
are currently in the discovery phase of the litigation and a trial date has been
set for April 1, 2002. We intend to defend ourselves vigorously against these
claims and we believe that we will prevail in this litigation. An adverse
determination in, or settlement of, the Ciena litigation could involve the
payment of significant amounts by us, or could include terms in addition to
payments, such as a redesign of some of our products, which could have a
material adverse effect on our business, financial condition and results of
operations. If we are required to redesign our products, we have to stop selling
our current products until they have been redesigned. We believe that defense of
the lawsuit may be costly and may divert the time and attention of some members
of our management.
On May 7, 2000, Paul Felzen, as Trustee of the Louise Laskin 1991 Revocable
Trust, filed a class action lawsuit in the Southern District of New York. The
complaint names Corvis, our directors and officers who signed the registration
statement in connection with our initial public offering, and Credit Suisse
First Boston Corporation as defendants. The complaint alleges that the
registration statement and prospectus relating to our initial public offering
contained material misrepresentations and/or omissions in that those documents
did not disclose (1) that Credit Suisse First Boston Corporation had solicited
and received undisclosed fees and commissions and other economic benefits from
some investors in connection with the distribution of Corvis' common stock in
the initial public offering and (2) that Credit Suisse First Boston had entered
into arrangements with some investors that were designed to distort and/or
inflate the market price for Corvis' common stock in the aftermarket following
the initial public offering. The complaint asks the court to award to members of
the class the right to rescind their purchases of Corvis common stock (or to be
awarded rescissory damages if the class member has sold its Corvis stock) and
prejudgment and post-judgment interest, reasonable attorneys' and experts
witness' fees and other costs. The complaint was only recently filed and we are
still in the process of reviewing the allegations. We intend to vigorously
defend ourselves and our officers and directors.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in interest rates and
foreign currency exchange rates. We do not use derivative financial instruments
for speculative or trading purposes.
Interest Rate Sensitivity
We maintain a portfolio of cash equivalents in a variety of securities
including: commercial paper, certificates of deposit, money market funds and
government and non-government debt securities. Substantially all amounts are in
money market funds, the value of which is generally not subject to interest rate
changes. The other available-for-sale securities are subject to interest rate
risk and may fall in value if market interest rates increase, however, because
of the short-term nature of these investments, we do not believe the risk is
significant. Our long-term debt obligations bear fixed interest rates. As such,
we have minimal cash flow exposure due to general interest rate changes
associated with our long-term debt obligations.
Exchange Rate Sensitivity
We have two wholly owned subsidiaries which use a foreign currency as their
functional currency and are translated into U.S. dollars. The functional
currency of Algety is the French Franc and Corvis Canada's functional currency
is the Canadian dollar. As such, we are exposed to risk related to the adverse
movements in foreign currency exchange rates. These exposures may change over
time and could have a material adverse impact on our financial results. For the
three months ended March 31, 2001, we recognized a foreign currency translation
loss of $56.3 million as part of other comprehensive loss.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
By letter dated July 10, 2000, Ciena Corporation ("Ciena") informed us of
its belief that there is significant correspondence between products that we
offer and several U.S. patents held by Ciena relating to optical networking
systems and related dense wavelength division multiplexing communications
systems technologies. On July 19, 2000, Ciena filed a lawsuit in the United
States District Court for the District of Delaware alleging that we are
willfully infringing three of Ciena's patents. Ciena is seeking injunctive
relief, an unspecified amount of damages including treble damages, as well as
costs of the lawsuit, including attorneys' fees. On September 8, 2000, we filed
an answer to the complaint, as well as counter-claims alleging, among other
things, invalidity and/or unenforceability of the three patents in question. On
March 5, 2001, a motion was granted, allowing Ciena to amend its complaint to
include allegations that we are willfully infringing two additional patents. We
are currently in the discovery phase of the litigation and a trial date has been
set for April 1, 2002.
We have designed our products in an effort to respect the intellectual
property rights of others. We intend to defend ourselves vigorously against
these claims and we believe that we will prevail in this litigation. However,
there can be no assurance that we will be successful in the defense of the
litigation, and an adverse determination in the litigation could result from a
finding of infringement of only one claim of a single patent. We may consider
settlement due to the costs and uncertainties associated with litigation in
general, and patent infringement litigation in particular, and due to the fact
that an adverse determination in the litigation could preclude us from producing
some of our products until we were able to implement a non-infringing
alternative design to any portion of our products to which such a determination
applied. Even if we consider settlement, there can be no assurance that we will
be able to reach a settlement with Ciena. An adverse determination in, or
settlement of, the Ciena litigation could involve the payment of significant
amounts by us, or could include terms in addition to payments, such as a
redesign of some of our products, which could have a material adverse effect on
our business, financial condition and results of operations.
We believe that defense of the lawsuit may be costly and may divert the
time and attention of some members of our management. Further, Ciena and other
competitors may use the existence of the Ciena lawsuit to raise questions in
customers' and potential customers' minds as to our ability to manufacture and
deliver our products. There can be no assurance that questions raised by Ciena
and others will not disrupt our existing and prospective customer relationships.
On May 7, 2000, Paul Felzen, as Trustee of the Louise Laskin 1991 Revocable
Trust, filed a class action lawsuit in the Southern District of New York. The
complaint names Corvis, our directors and officers who signed the registration
statement in connection with our initial public offering, and Credit Suisse
First Boston Corporation as defendants. The complaint alleges that the
registration statement and prospectus relating to our initial public offering
contained material misrepresentations and/or omissions in that those documents
did not disclose (1) that Credit Suisse First Boston Corporation had solicited
and received undisclosed fees and commissions and other economic benefits from
some investors in connection with the distribution of Corvis' common stock in
the initial public offering and (2) that Credit Suisse First Boston had entered
into arrangements with some investors that were designed to distort and/or
inflate the market price for Corvis' common stock in the aftermarket following
the initial public offering. The complaint asks the court to award to members of
the class the right to rescind their purchases of Corvis common stock (or to be
awarded rescissory damages if the class member has sold its Corvis stock) and
prejudgment and post-judgment interest, reasonable attorneys' and experts
witness' fees and other costs. The complaint was only recently filed and we are
still in the process of reviewing the allegations. We intend to vigorously
defend ourselves and our officers and directors.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) During January 2001, a warrant holder exercised 356,976 Series B warrants,
convertible into 4,283,712 shares of common stock, through a cashless
exercise election at an aggregate exercise price of $0.8 million, resulting
in the net issuance of 4,247,664 shares of common stock. The transaction is
exempt from the registration requirements pursuant to Section 4(2) of the
Securities Act.
During January 2001, a warrant holder exercised 98,877 Series C warrants,
convertible into 1,186,524 shares of common stock, through a cashless
exercise election at an aggregate exercise price of $0.6 million, resulting
in the net issuance of 1,158,348 shares of common stock. The
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transaction is exempt from the registration requirements pursuant to
Section 4(2) of the Securities Act.
During January 2001, warrant holders exercised 225,485 Series E warrants,
convertible into 2,705,820 shares of common stock, through a cashless
exercise election at an aggregate exercise price of $2.1 million, resulting
in the net issuance of 2,624,904 shares of common stock. The transaction is
exempt from the registration requirements pursuant to Section 4(2) of the
Securities Act.
(d) Not applicable.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) No exhibits are required to be filed herewith.
(b) On January 16, 2001, we filed a Current Report on Form 8-K dated January 9,
2001. Attached as an exhibit to that report was a copy of Amendment No. 3
to the Procurement Agreement between Williams Communications, LLC and
Corvis Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Corvis Corporation
Date: May 11, 2001 /s/ Anne H. Stuart
----------------------------------
Anne H. Stuart
Senior Vice President, Chief Financial
Officer and Treasurer
Date: May 11, 2001 /s/ Timothy C. Dec
-----------------------------------
Timothy C. Dec
Vice President, Chief Accounting
Officer and Corporate Controller
16