UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
¨ 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 0-30989
Corvis Corporation
(Exact name of registrant as specified in its charter)
| Delaware | 52-2041343 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No ¨
Number of shares of Common Stock, $0.01 par value, outstanding at April , 2004: .
2
Item 1. Financial Statements.
CORVIS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| December 31, 2003 |
March 31, 2004 |
|||||||
| ASSETS | (unaudited) | |||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 256,490 | $ | 447,803 | ||||
| Short-term investments |
27,135 | 32,469 | ||||||
| Trade accounts receivable, net |
57,385 | 53,437 | ||||||
| Inventory, net |
772 | 497 | ||||||
| Other current assets |
17,817 | 22,135 | ||||||
| Total current assets |
359,599 | 556,341 | ||||||
| Restricted cash, non-current |
7,033 | 8,520 | ||||||
| Long-term investments |
13,197 | 16,823 | ||||||
| Property and equipment, net |
116,588 | 110,689 | ||||||
| Intangible assets, net |
24,883 | 23,843 | ||||||
| Other non-current assets, net |
7,315 | 8,890 | ||||||
| Total assets |
$ | 528,615 | $ | 725,106 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current liabilities: |
||||||||
| Notes payable, net of discounts, and capital lease obligations, current portion |
$ | 610 | $ | 75,659 | ||||
| Accounts payable |
21,791 | 23,222 | ||||||
| Accrued communication service costs |
30,560 | 25,855 | ||||||
| Accrued expenses and other liabilities |
31,462 | 32,930 | ||||||
| Deferred revenue |
13,087 | 12,947 | ||||||
| Accrued restructuring and other charges |
8,488 | 4,687 | ||||||
| Total current liabilities |
105,998 | 175,300 | ||||||
| Noncurrent liabilities: |
||||||||
| Notes payable, net of discounts, and capital lease obligations, net of current portion |
2,500 | 121,645 | ||||||
| Deferred revenue |
17,684 | 17,279 | ||||||
| Other long-term liabilities |
4,764 | 5,851 | ||||||
| Total liabilities |
130,946 | 320,075 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock—$0.01 par value; 1,900,000,000 shares authorized; 493,276,234 shares issued and 480,994,434 shares outstanding as of December 31, 2003; 497,581,883 shares issued and 485,300,083 shares outstanding as of March 31, 2004 |
4,927 | 4,971 | ||||||
| Additional paid-in capital |
2,923,403 | 2,964,610 | ||||||
| Treasury Stock, 12,281,800 shares, at cost |
(9,512 | ) | (9,512 | ) | ||||
| Accumulated other comprehensive income: |
||||||||
| Unrealized investment gains |
9 | 35 | ||||||
| Accumulated deficit |
(2,521,158 | ) | (2,555,073 | ) | ||||
| Total stockholders’ equity |
397,669 | 405,031 | ||||||
| Total liabilities and stockholders’ equity |
$ | 528,615 | $ | 725,106 | ||||
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 |
||||||||
| March 29, 2003 |
March 31, 2004 |
|||||||
| Revenue: |
||||||||
| Communication services |
$ | — | $ | 141,679 | ||||
| Equipment |
1,517 | 5,108 | ||||||
| Total revenue |
1,517 | 146,787 | ||||||
| Operating expenses: |
||||||||
| Cost of revenue: |
||||||||
| Communication services (excluding depreciation and amortization) |
— | 97,750 | ||||||
| Equipment |
1,161 | 1,150 | ||||||
| Total cost of revenue |
1,161 | 98,900 | ||||||
| Research and development, excluding equity-based expense |
20,013 | 5,587 | ||||||
| Sales, general and administrative expense, excluding equity-based expense |
11,628 | 56,993 | ||||||
| Depreciation |
6,590 | 9,086 | ||||||
| Amortization |
1,784 | 1,040 | ||||||
| Equity-based expense: |
||||||||
| Research and development |
3,354 | 1,708 | ||||||
| Sales, general and administrative |
2,027 | 2,683 | ||||||
| Restructuring and other charges |
3,784 | 194 | ||||||
| Total operating expenses |
50,341 | 176,191 | ||||||
| Operating loss |
(48,824 | ) | (29,404 | ) | ||||
| Interest expense |
(143 | ) | (7,410 | ) | ||||
| Other income and expense, net |
1,937 | 2,899 | ||||||
| Net loss |
$ | (47,030 | ) | $ | (33,915 | ) | ||
| Other comprehensive income (loss): |
||||||||
| Foreign currency translation adjustment |
(135 | ) | — | |||||
| Unrealized investment gains (losses) |
(38 | ) | 26 | |||||
| Comprehensive loss |
$ | (47,203 | ) | $ | (33,889 | ) | ||
| Basic and diluted net loss per common share |
$ | (0.12 | ) | $ | (0.07 | ) | ||
| Weighted average number of common shares outstanding |
402,463 | 484,162 | ||||||
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 |
||||||||
| March 29, 2003 |
March 31, 2004 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (47,030 | ) | $ | (33,915 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
9,198 | 10,126 | ||||||
| Equity-based expense |
5,381 | 4,391 | ||||||
| Deferred financing and original issue discount amortization |
— | 2,690 | ||||||
| Restructuring and other charges |
278 | 264 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Decrease in accounts receivable |
1,445 | 3,948 | ||||||
| Increase in inventory, net |
(3,893 | ) | (262 | ) | ||||
| Decrease (increase) in other assets |
858 | 1,357 | ||||||
| Decrease in accounts payable, accrued expenses and other |
(16,133 | ) | (5,186 | ) | ||||
| Net cash used in operating activities |
(49,896 | ) | (16,587 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment |
(235 | ) | (3,171 | ) | ||||
| Proceeds from the sale of property and equipment |
— | 627 | ||||||
| Purchases and sale of investments, net |
1,852 | (8,933 | ) | |||||
| Net cash provided by (used in) investing activities |
1,617 | (11,477 | ) | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from notes payable and associated warrants |
— | 217,750 | ||||||
| Repayments of notes payable and capital lease obligations |
(1,283 | ) | (224 | ) | ||||
| Decrease in deposits and other non-current assets |
— | (1,487 | ) | |||||
| Purchase of treasury stock |
(5,107 | ) | — | |||||
| Proceeds from the issuance of stock |
567 | 3,338 | ||||||
| Net cash provided by (used in) financing activities |
(5,823 | ) | 219,377 | |||||
| Effect of exchange rate changes on cash and cash equivalents |
129 | — | ||||||
| Net increase (decrease) in cash and cash equivalents |
(53,973 | ) | 191,313 | |||||
| Cash and cash equivalents—beginning |
457,833 | 256,490 | ||||||
| Cash and cash equivalents—ending |
$ | 403,860 | $ | 447,803 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Interest paid |
$ | 81 | $ | 2,857 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
CORVIS CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business and Basis of Presentation
Corvis Corporation and subsidiaries (the “Company”) operates two divisions within the communications industry, a communications services division and a communications equipment division.
The communications services division of Corvis Corporation operates under Broadwing Communications, LLC (“Broadwing”). Broadwing is based in Austin, Texas and is a provider of data and Internet, broadband transport, and voice communications services throughout the United States. Broadwing is the result of a June 13, 2003 transaction in which Corvis Corporation acquired most of the assets and certain of the liabilities of Broadwing Communication Services, Inc., which had been one of the Company’s largest equipment customers. Excluding post-acquisition intercompany sales, Broadwing represented 61%, 43% and 12% of our total equipment revenue in 2001, 2002 and 2003, respectively.
The communications equipment division designs, manufactures and markets transmission, switching and network management equipment to communications carriers and the U.S. Federal Government.
The unaudited condensed consolidated financial statements included herein for Corvis Corporation and subsidiaries have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the condensed consolidated financial statements included in this report reflect all normal recurring adjustments which the Company considers necessary for the fair presentation of the results of operations for the interim periods. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to understand the information presented. The operating results for interim periods are not necessarily indicative of the operating results for the entire year.
These financial statements should be read in conjunction with the Company’s December 31, 2003 audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K/A filed on March 23, 2004 with the Securities and Exchange Commission.
(b) Communication Service Revenue and Cost of Revenue
Data transport service and other dedicated services are generally billed monthly in advance, with revenue being recognized when earned. Revenues from long-term arrangements are recognized ratably over the contract term. Switched voice and data are billed monthly in arrears, while the revenue is recognized as the services are provided. Service activation revenue is deferred and recognized over the appropriate customer life for the associated service.
Indefeasible right-of-use (“IRU”) agreements represent the lease of network capacity or dark fiber and are recorded as deferred revenue at the earlier of the acceptance of the applicable portion of the network by the customer or the receipt of cash. The buyer of IRU services typically pays cash upon execution of the contract, and the associated IRU revenue is then recognized over the life of the
6
agreement as the services are provided, beginning on the date of customer acceptance. In the event the buyer of an IRU terminates a contract prior to the contract expiration and releases the Company from the obligation to provide future services, the remaining unamortized deferred revenue is recognized in the period in which the contract is terminated. At the date of acquisition, the Company recorded the deferred revenue associated with IRUs at its fair value, which was substantially less than its historical book value. As a result, revenues from IRUs are significantly less than those previously reported by Broadwing Communications Services, Inc. IRU revenue in the three months ended March 31, 2004 comprised approximately 3% of total communications services revenue.
Communications services cost of revenue primarily reflects access charges paid to local exchange carriers and other providers and transmission lease payments to other carriers. Communications services cost of revenue excludes depreciation expense.
(c) Equipment and Related Services Revenue and Cost of Revenue
Revenue from equipment 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 equipment installation services is recognized as the services are performed unless the terms of the supply contract combine product acceptance with installation, in which case revenues for installation services are recognized when the terms of acceptance are satisfied and installation is completed. To the extent customer contracts include both product sales and installation services, revenues are recognized based on their respective fair values. Revenues from annual maintenance agreements are recognized on a straight-line basis over the service period.
Costs of equipment revenue include the costs of manufacturing the Company’s products, delivering services and other costs associated with warranty and other contractual obligations, inventory obsolescence costs and overhead related to the Company’s manufacturing, engineering, finishing and installation operations. Warranty reserves are determined based upon actual warranty cost experience, estimates of component failure rates and management’s industry experience.
(d) Stock Options and Warrants
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principals Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25,” issued in March 2000, to account for its stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards (SFAS) No.