0000892569-01-500787.txt : 20011010
0000892569-01-500787.hdr.sgml : 20011010
ACCESSION NUMBER: 0000892569-01-500787
CONFORMED SUBMISSION TYPE: POS AM
PUBLIC DOCUMENT COUNT: 7
FILED AS OF DATE: 20011009
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: MRV COMMUNICATIONS INC
CENTRAL INDEX KEY: 0000887969
STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674]
IRS NUMBER: 061340090
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: POS AM
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-44536
FILM NUMBER: 1754045
BUSINESS ADDRESS:
STREET 1: 20415 NORDHOFF ST
CITY: CHATSWORTH
STATE: CA
ZIP: 91311
BUSINESS PHONE: 8187730900
MAIL ADDRESS:
STREET 1: 20415 NORDHOFF ST
CITY: CHATSWORTH
STATE: CA
ZIP: 91311
POS AM
1
v76157a1posam.txt
POST-EFFECTIVE AMENDMENT NO. 1 TO FORM S-4
1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION VIA EDGAR AS OF OCTOBER 9,
2001
REGISTRATION NO. 333-44536
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MRV COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3577/3674 06-1340090
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
20415 NORDHOFF STREET
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 773-0906 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
NOAM LOTAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20415 NORDHOFF STREET
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 773-0906 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
KIRKPATRICK & LOCKHART LLP
10100 SANTA MONICA BLVD. 7TH FLOOR
LOS ANGELES, CA 90067- 4104
TELEPHONE: (310) 552-5000
FACSIMILE: (310) 552-5001
ATTENTION: MARK A. KLEIN, ESQ. OR
PETER V. HOGAN, ESQ.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
2
NOTICE OF MERGER
OF
LUMINENT, INC.
WITH AND INTO
MRV MERGER SUB CORP.
To the former stockholders of Luminent, Inc.
Please take notice that, pursuant to Section 253 of the General Corporation
Law of the State of Delaware, the previously announced short-form merger of
Luminent, Inc., a Delaware corporation, with and into MRV Merger Sub Corp., a
Delaware corporation and a wholly-owned subsidiary of MRV Communications, Inc.
became effective on , 2001. This short-form merger is referred to in
this Notice and the accompanying prospectus supplement of MRV as "the Merger."
Under applicable Delaware law, the Merger was approved by the Boards of
Directors of MRV and MRV Merger Sub and no action was required by the board of
directors or stockholders of Luminent for the Merger to become effective.
Upon consummation of the Merger, MRV Merger Sub became the surviving
corporation and the corporate existence of Luminent ceased. Each outstanding
share of Luminent common stock, $0.001 par value per share (except for shares
held by MRV Merger Sub, which were cancelled, and shares held by Luminent
stockholders who perfect their statutory appraisal rights under Delaware law),
was converted in the Merger. Former Luminent stockholders whose shares were
converted are entitled to receive 0.43 of share of MRV common stock, $0.0017 par
value, for each share of Luminent common stock owned at the time of the Merger.
To receive certificates representing shares of MRV common stock issued in
the Merger, former Luminent stockholders must complete and execute the enclosed
Letter of Transmittal and deliver their certificates representing Luminent
common stock and the Letter of Transmittal to American Stock Transfer and Trust
Company, the exchange agent, either in person or by mail at the following
addresses:
By Mail: By Hand:
American Stock Transfer and Trust Company American Stock Transfer and Trust Company
59 Maiden Lane 59 Maiden Lane
New York, New York 10038 New York, New York 10038
Section 262 of the General Corporation Law of the State of Delaware
provides a procedure by which former holders of record Luminent common stock who
do not wish to accept the shares of MRV common stock to which they are entitled
under the terms of the Merger may seek a judicial appraisal of the fair value of
any or all of their Luminent common stock, exclusive of any element of value
arising from the expectation or accomplishment of the Merger. This procedure is
summarized in the accompanying prospectus supplement and the full text of
Section 262 of the General Corporation Law of the State of Delaware is attached
as Annex A to the accompanying prospectus supplement.
Sincerely yours,
MRV Merger Sub Corp.
/s/ NOAM LOTAN
Noam Lotan,
President
3
THE INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT IS NOT YET COMPLETE, AND
WE MAY SUPPLEMENT OR AMEND IT IN THE FINAL VERSION. WE HAVE FILED A POST-
EFFECTIVE AMENDMENT TO OUR REGISTRATION STATEMENT RELATING TO THE SECURITIES
DESCRIBED IN THIS PROSPECTUS SUPPLEMENT WITH THE SECURITIES AND EXCHANGE
COMMISSION. WE MAY NOT SELL THESE SECURITIES, OR ACCEPT OFFERS TO BUY THEM,
UNTIL THE POST-EFFECTIVE AMENDMENT BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT
IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO
BUY THEM, AND THESE SECURITIES WILL NOT BE SOLD IN, ANY STATE WHERE THEIR OFFER
OR SALE, OR SOLICITATIONS OF OFFERS TO BUY THEM, WOULD BE UNLAWFUL PRIOR TO
THEIR REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[PRELIMINARY PROSPECTUS NOTE: AS OF THE DATE OF THIS PRELIMINARY PROSPECTUS, THE
MERGER HAS NOT YET OCCURRED].
SUBJECT TO COMPLETION -- DATED OCTOBER 9, 2001
MRV COMMUNICATIONS, INC.
MRV Communications, Inc. is supplementing its prospectus dated September 6,
2000 for the issuance of 5,160,000 shares of its common stock in connection with
the Merger of Luminent, Inc. with and into MRV Merger Sub Corp., MRV's
wholly-owned subsidiary.
MRV is furnishing this prospectus supplement and the accompanying
prospectus to those persons who held common stock, $0.001 par value, of
Luminent, Inc., a Delaware corporation, immediately prior to the Merger of
Luminent with and into MRV Merger Sub. The Merger was effected on
, 2001. Upon consummation of the Merger, MRV Merger Sub became
the surviving corporation and the corporate existence of Luminent ceased. Each
outstanding share of Luminent common stock, $0.001 par value per share (except
for shares held by MRV Merger Sub, which were cancelled, and shares held by
Luminent stockholders who perfect their statutory appraisal rights under
Delaware law), was converted in the Merger. Former Luminent stockholders whose
shares were converted are entitled to receive 0.43 of share of MRV common stock,
$0.0017 par value, for each share of Luminent common stock owned at the time of
the Merger. In addition, MRV is assuming in the Merger options to purchase
Luminent common stock that are outstanding. These Luminent stock options will be
converted into options to purchase approximately 5,245,580 shares of MRV common
stock containing the same vesting provisions and intrinsic value.
Immediately prior to the Merger, MRV Merger Sub held approximately 92% of
the outstanding shares of Luminent common stock. The Merger was effected as a
short-form merger pursuant to resolutions adopted by the boards of directors of
MRV and MRV Merger Sub. No resolutions, vote or authorization from the board of
directors of Luminent or the stockholders of Luminent, MRV or MRV Merger Sub was
required to consummate the Merger. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY. Holders of Luminent common stock of record
immediately prior to the Merger have certain statutory appraisal rights under
Delaware law. Any holder who desires to exercise appraisal rights must file with
MRV Merger Sub written demand for appraisal after , 2001 and prior
to 2001. For information on how to make this demand, see the
section of this prospectus supplement entitled "The Merger -- Surrender of Stock
Certificates; Fractional Interests."
INVESTMENT IN MRV SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING AT PAGE 14.
MRV's common stock is listed on The Nasdaq National Market under the symbol
"MRVC." On September 10, 2001, the last trading day prior to the public
announcement of the planned Merger, the closing price of MRV's common stock on
The Nasdaq National Market was $3.23 per share. On , 2001, the
trading day immediately preceding consummation of the Merger, the closing price
of MRV's common stock on The Nasdaq National Market was $ per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 2001.
4
ABOUT THIS PROSPECTUS SUPPLEMENT
MRV is providing information to the former stockholders of Luminent about
this offering of shares of its common stock in two separate documents: (a) the
accompanying prospectus, which provides general information, some of which may
not apply to this offering, and (b) this prospectus supplement, which describes
the specific details regarding this offering.
If information in this prospectus supplement is inconsistent with the
prospectus, you should rely on this prospectus supplement.
You should read this prospectus supplement and the accompanying prospectus
carefully. Both documents contain information you should consider in connection
with your receipt of MRV common stock in exchange for your Luminent common
stock.
WHERE YOU CAN FIND MORE INFORMATION
MRV files, and prior to the Merger, Luminent filed, annual, quarterly and
special reports, proxy statements and other information with the SEC. This
information can be (1) read and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C., and at the SEC's Chicago Regional Office, 500 West Madison Street,
Chicago, Illinois; and (2) accessed via a Web site maintained by the SEC
(http://www.sec.gov). Copies of the material can also be obtained from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms, including
whether the SEC has made alternative arrangements for public reference
facilities since the destruction of its New York Regional Office located at 7
World Trade Center, New York, New York.
This prospectus supplement is a part of a registration statement MRV filed
with the SEC. This prospectus supplement does not contain all of the information
set forth in the registration statement. For more information about MRV and its
common stock, you should read the registration statement and its exhibits and
schedules. Copies of the registration statement, including its exhibits may be
obtained from the SEC's principal office in Washington, D.C. upon payment of the
fees prescribed by the SEC, or may be examined without charge at the offices of
the SEC.
2
5
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS SUPPLEMENT............................ 2
WHERE YOU CAN FIND MORE INFORMATION......................... 2
TABLE OF CONTENTS........................................... 3
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 4
SELECTED FINANCIAL INFORMATION.............................. 7
Selected MRV Financial Information........................ 7
Selected Luminent Financial Information................... 9
COMPARATIVE PER SHARE DATA.................................. 12
MARKET PRICE INFORMATION.................................... 13
FORWARD-LOOKING STATEMENTS.................................. 14
RISK FACTORS................................................ 14
THE MERGER.................................................. 26
Terms of the Merger....................................... 26
Regulatory Approvals...................................... 26
Background and Reasons for the Merger..................... 26
Federal Securities Consequences........................... 29
Surrender of Stock Certificates; Fractional Interests..... 29
Statutory Appraisal Rights................................ 30
Material United States Federal Income Tax Consequences.... 33
Interests of Certain Persons to the Merger................ 33
Accounting Treatment...................................... 33
Luminent Stock Options.................................... 33
OPINION OF FINANCIAL ADVISOR................................ 35
UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE MERGER.... 42
United States Federal Income Tax Consequences to Luminent
Stockholders........................................... 42
United States Federal Income Tax Consequences to MRV
Stockholders........................................... 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MRV.......................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF LUMINENT..................... 54
BUSINESS OF MRV............................................. 68
BUSINESS OF LUMINENT........................................ 82
DESCRIPTION OF LUMINENT CAPITAL STOCK....................... 93
DESCRIPTION OF MRV CAPITAL STOCK............................ 93
COMPARATIVE STOCKHOLDER RIGHTS.............................. 95
MANAGEMENT OF MRV FOLLOWING THE MERGER...................... 96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 100
PRINCIPAL STOCKHOLDERS...................................... 102
Principal Stockholders of MRV............................. 102
Principal Stockholders of Luminent........................ 103
LEGAL MATTERS............................................... 103
EXPERTS..................................................... 103
INDEX TO FINANCIAL STATEMENTS............................... F-1
3
6
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why is MRV effecting the Merger?
A: Due to the current slowdown in the telecommunications sectors, the market for
optical components is currently suffering from weak demand. Although this could
change in the future, MRV believes that the business of Luminent will be better
served when integrated into MRV. By applying MRV's system level know-how, a
higher level of integration of optical components and optical subsystems is
achieved. This is expected to enhance Luminent's optical transmission platforms,
thereby better supporting existing customers, while creating new market
opportunities. Unifying Luminent with MRV is expected to enhance MRV's and
Luminent's competitive position and generate substantial savings in the
consolidated results, by removing inefficiencies and duplications. This action
is expected to allow Luminent to invest and improve its technology and its
bottom line.
Q: Is my vote or a stockholders' meeting required to approve the merger?
A: No. Immediately prior to the Merger, MRV Merger Sub held approximately 92% of
the outstanding shares of Luminent common stock. Because MRV Merger Sub owned at
least 90% of Luminent's outstanding shares immediately prior to the Merger, it
effected the Merger as a short-form merger under Delaware law pursuant to
resolutions adopted by the boards of directors of MRV and MRV Merger Sub. No
resolutions, vote or authorization from the board of directors of Luminent or
the stockholders of Luminent, MRV or MRV Merger Sub was required to consummate
the Merger.
Q: Who are the parties to the Merger?
A:
MRV Communications, Inc.
20415 Nordhoff Street
Chatsworth, California 91311
Telephone: (818) 773-0900
MRV creates, acquires, finances and operates companies, and through them,
designs, develops, manufactures and markets products, which enable high-speed
broadband communications. MRV concentrates on companies and products devoted to
optical components and Internet infrastructure systems. MRV leveraged its early
experience in fiber optic technology into a number of well-focused operating
units specializing in advanced fiber optic components, switching, routing,
transaction management and wireless optical transmission systems which it has
created, financed or acquired.
MRV Merger Sub Corp.
c/o MRV Communications, Inc.
20415 Nordhoff Street
Chatsworth, California 91311
Telephone: (818) 773-0900
MRV Merger Sub is a wholly-owned subsidiary of MRV. MRV Merger Sub was
organized on July 25, 2001. It has been used by MRV solely for the purpose of
acquiring the shares of Luminent common stock owned by MRV, which MRV
transferred to MRV Merger Sub immediately prior to consummating the Merger. It
has not carried on any material activities other than organizational and to
receive the Luminent shares transferred to it by MRV. It is the corporation
surviving the Merger and immediately prior to it, owned approximately 92% of
Luminent's outstanding common stock.
4
7
Luminent, Inc.
20550 Nordhoff Street
Chatsworth, California 91311
Telephone (818) 773-9044
Luminent designs, manufactures and sells a comprehensive line of singlemode
active and passive fiber optic components for high-capacity data transmission in
the metropolitan and access markets. Leading network equipment manufacturers
have relied on Luminent to provide technical depth, responsive customer service
and volume manufacturing to meet the increasing requirements for transmission
capacity and speed between nationwide telecommunications networks and end users.
Q: As a stockholder of Luminent, what will I receive in the Merger?
A: You will receive 0.43 of a share of MRV common stock for each share of
Luminent common stock that you hold. MRV will not issue fractional shares of its
common stock. Instead, you will receive cash, without interest, equal to the
fraction multiplied by $ , which was the closing price of MRV common
stock on the Nasdaq National Market on the trading day immediately prior to the
day on which the Merger was consummated.
Example:
- If you currently own 50 shares of Luminent common stock, you will receive
21 shares of MRV common stock in connection with the Merger and a check
for the value of 0.5 of a share of MRV common stock, rounded to the
nearest one cent. The value of the shares of MRV common stock that you
receive will fluctuate as the price of a share of MRV common stock
changes.
Q: Was advice obtained as to the fairness from a financial point of view of the
merger exchange ratio in the Merger?
A. Yes. The board of directors of Luminent retained Duff & Phelps, LLC as its
independent financial advisor to make a determination as to the fairness from a
financial point view of the merger exchange ratio of 0.43 to the Luminent's
minority stockholders. Duff & Phelps rendered its opinion that the merger
exchange ratio is fair to the stockholders of Luminent (other than MRV Merger
Sub) from a financial point of view. The fairness opinion is reproduced in its
entirety in Annex B to this prospectus supplement, and former stockholders of
Luminent are urged to read the opinion carefully and in its entirety for a
description of the assumptions and qualifications made and other matters
considered by Duff & Phelps, in rendering its opinion. See the section entitled
"Opinion of Financial Advisor" later in this prospectus supplement.
Q: Should I send in my Luminent stock certificates now?
A: Yes. To receive certificates representing shares of MRV common stock issued
in the Merger, former Luminent stockholders must complete and execute the
accompanying Letter of Transmittal and deliver their certificates representing
Luminent common stock and the Letter of Transmittal to American Stock Transfer
and Trust Company, the exchange agent, at its address stated in the accompanying
Notice of Merger of Luminent, Inc. with and into MRV Merger Sub.
Q: What are the material United States federal income tax consequences of the
Merger?
A: The Merger is intended to qualify as a tax-free reorganization for U.S.
federal income tax purposes. If the Merger qualifies as a reorganization,
Luminent stockholders generally will not recognize gain or loss on the exchange
of their stock in the Merger, except for any gain or loss recognized in
connection with any cash received instead of a fractional share of MRV stock or
cash obtained through perfection of statutory appraisal rights. However, the tax
consequences of the Merger to you will depend on the facts of your particular
situation. MRV encourages you to contact your tax advisors to determine the tax
consequences
5
8
of the Merger to you. To review the tax consequences to MRV and Luminent
stockholders in greater detail, see the section entitled "United States Federal
Income Tax Treatment of the Merger" later in this prospectus supplement.
Q: Whom may I contact with any additional questions?
A: You may call Diana Hayden, of MRV's Investor Relations Department at (818)
886-6782 or email her at diana@mrv.com.
Q: What will happen to employee stock options held by Luminent employees?
A: The outstanding Luminent options will convert into options for MRV common
stock at the same 0.43 exchange ratio that applies to Luminent common stock.
Thus, for each share of Luminent common stock on which you have an option, you
will receive an option to purchase 0.43 of a share of MRV common stock. In
addition, the exercise price per share will be adjusted by dividing the current
exercise price by 0.43
Example:
- An option to purchase 1,000 shares of Luminent common stock at an
exercise price of $5.00 per share will convert to an option to purchase
430 shares of MRV common stock (1,000 x 0.43) at an exercise price of
$11.63 per share ($5.00 / 0.43)
6
9
SELECTED FINANCIAL INFORMATION
SELECTED MRV FINANCIAL INFORMATION
The following selected statement of operations data for the three years in
the period ended December 31, 2000 and the balance sheet data as of December 31,
1999 and 2000 are derived from MRV's consolidated financial statements and notes
thereto, included later in this prospectus supplement, have been audited by
Arthur Andersen LLP, independent public accountants, as set forth in their
report included later in this prospectus supplement. The selected condensed
consolidated statements of operations data for the two years in the period ended
December 31, 1997 and the condensed consolidated balance sheet data as of
December 31, 1996, 1997 and 1998 were derived from MRV's audited financial
statements, which are not included in this prospectus supplement. The selected
condensed consolidated statements of operations data for the six months ended
June 30, 2000 and 2001, were derived from MRV's unaudited consolidated financial
statements, which are included later in this prospectus supplement. In the
opinion of MRV's management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included to present fairly the financial
position and results of operations for each of the periods presented in the
unaudited financial statements. Historical results are not necessarily
indicative of results that may be expected for any future period. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of
7
10
Operations of MRV" and MRV's Consolidated Financial Statements and the Unaudited
Pro Forma Condensed Consolidated Financial Statements of MRV and Luminent,
including the related footnotes:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000(1)
-------- -------- -------- -------- --------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
DATA:
Revenues, net.............. $ 88,815 $165,471 $264,075 $288,524 $ 319,394 332,211
Cost of goods
sold(2)(3)(5)............ 51,478 94,709 165,385 197,442 203,371 216,203
Research and
development(2)(3)........ 8,201 13,093 25,817 35,319 74,078 82,612
Selling, general and
administrative(2)(3)..... 13,858 26,993 53,852 67,859 124,700 134,293
Purchased technology in
progress(4).............. 17,795 -- 20,633 -- -- --
Restructuring costs(3)..... 6,974 -- 15,671 -- -- --
Amortization of goodwill
and other intangibles.... 167 372 2,901 3,898 66,814 99,022
-------- -------- -------- -------- --------- ---------
Operating income (loss).... (9,658) 30,304 (20,184) (15,994) (149,569) (199,919)
Other income (expense),
net(3)(6)................ (4,204) 1,901 4,339 322 (9,578) (9,634)
-------- -------- -------- -------- --------- ---------
Income (loss) before
provision for income
taxes, minority interests
and extraordinary item... (13,862) 32,205 (15,845) (15,672) (159,147) (209,553)
Provision (benefit) for
income taxes............. (4,404) 9,474 5,707 (2,153) (5,398) (5,398)
Minority interests......... (196) (146) (1,345) 610 796 129
Gain repurchase of
convertible notes, net of
tax...................... -- -- 2,791 -- -- --
-------- -------- -------- -------- --------- ---------
Net income (loss).......... $ (9,654) $ 22,585 $(20,106) $(12,909) $(152,953) (204,026)
======== ======== ======== ======== ========= =========
Net income (loss) per
share -- Basic........... $ (0.24) $ 0.48 $ (0.38) $ (0.24) $ (2.33) (2.72)
======== ======== ======== ======== ========= =========
Net income (loss) per
share -- Diluted......... $ (0.24) $ 0.44 $ (0.38) $ (0.24) $ (2.33) (2.72)
======== ======== ======== ======== ========= =========
Shares used in per share
calculation --
Basic.................... 39,478 47,340 53,064 53,920 65,669 75,007
Diluted.................. 39,478 51,468 53,064 53,920 65,669 75,007
SIX MONTHS ENDED
JUNE 30,
-----------------------------------------
PRO FORMA
2000 2001 2001(1)
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
DATA:
Revenues, net.............. $139,007 $ 189,634 189,634
Cost of goods
sold(2)(3)(5)............ 88,529 155,156 155,156
Research and
development(2)(3)........ 26,649 50,787 50,787
Selling, general and
administrative(2)(3)..... 41,481 82,123 82,123
Purchased technology in
progress(4).............. -- -- --
Restructuring costs(3)..... -- -- --
Amortization of goodwill
and other intangibles.... 13,069 57,167 54,390
-------- --------- ---------
Operating income (loss).... (30,721) (155,599) (152,822)
Other income (expense),
net(3)(6)................ (1,678) (2,893) (2,893)
-------- --------- ---------
Income (loss) before
provision for income
taxes, minority interests
and extraordinary item... (32,399) (158,492) (155,715)
Provision (benefit) for
income taxes............. 883 (3,622) (3,622)
Minority interests......... (332) 6,439 (350)
Gain repurchase of
convertible notes, net of
tax...................... -- -- --
-------- --------- ---------
Net income (loss).......... $(33,614) $(148,431) (152,443)
======== ========= =========
Net income (loss) per
share -- Basic........... $ (0.56) $ (1.97) (1.90)
======== ========= =========
Net income (loss) per
share -- Diluted......... $ (0.56) $ (1.97) (1.90)
======== ========= =========
Shares used in per share
calculation --
Basic.................... 59,839 75,245 80,405
Diluted.................. 59,839 75,245 80,405
AT JUNE 30,
AT DECEMBER 31, --------------------------
--------------------------------------------------------- PRO FORMA
1996 1997 1998 1999 2000 2001 2001
------- -------- -------- -------- ---------- ----------- -----------
(IN THOUSANDS) (UNAUDITED) (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents....... $14,641 $ 19,428 $ 20,692 $ 34,330 $ 210,080 $ 174,887 $ 174,887
Working capital................. 56,973 111,559 115,318 106,425 366,752 305,772 305,772
Total assets.................... 96,943 236,236 320,192 314,533 1,096,771 1,023,147 995,373
Total long-term liabilities..... 18,892 2,853 94,317 94,409 154,504 155,182 155,182
Stockholders' equity............ 41,771 189,969 174,429 166,815 781,555 710,305 717,823
-------------------------
(1) The unaudited pro forma selected statements of operation data for the year
ended December 31, 2000 and for the six months ended June 30, 2001 were
derived from the unaudited pro forma financial statements of MRV included
later in this prospectus supplement. The December 31, 2000 unaudited pro
forma condensed consolidated statement of operations assumes that the Fiber
Optic Communications, Optronics, and AstroTerra acquisitions and the
purchase of the minority interest in Luminent occurred on January 1, 2000
and consolidates our consolidated statement of operations for the year ended
December 31, 2000 with the statements of operations for that year of Fiber
Optic
8
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Communications, Optronics, and Astroterra. The June 30, 2001 unaudited pro
forma condensed consolidated statement of operations assumes that the
purchase of the minority interest in Luminent occurred on January 1, 2000.
See "Unaudited Pro Forma Condensed Consolidated Financial Statements"
included later in this prospectus supplement.
(2) Includes amounts related to deferred stock compensation of: $8.3 million and
$4.8 million in "cost of goods sold"; $13.2 million and $7.6 million in
"research and development" expenses; and $38.4 million and $22.1 million in
"selling, general and administrative" expenses for the years ended December
31, 2000 and the six months ended June 30, 2001, respectively.
(3) Includes one-time charges of $29.3 million, $11.4 million, $501,000 and
$16,000 presented in "cost of sales", "selling, general and administrative",
"research and development" and "other income, net", respectively, for the
six months ended June 30, 2001, to write-down inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other non-recurring items. These charges resulted from the lower demand for
our products and pricing pressures stemming from the continuing downturn in
the communications equipment industry generally and the optical components
sector in particular.
(4) Purchased technology in progress and restructuring charges were incurred as
a result of acquisitions. Purchased technology in progress for the year
ended December 31, 1996, was in conjunction with the acquisition of
Fibronics. Restructuring costs during the year ended December 31, 1996, were
associated with a plan adopted by MRV on September 30, 1996, calling for the
reduction of workforce, closing of certain facilities, retraining of certain
employees and elimination of particular product lines. Purchased technology
in progress for the year ended December 31, 1998, was in conjunction with
the Xyplex acquisition. Restructuring costs during the year ended December
31, 1998, were associated with a plan adopted by MRV in March 1998, calling
for the reduction of workforce, closing of certain facilities, elimination
of particular product lines, settlement of distribution agreements and other
costs.
(5) For the years ended December 31, 1998 and 1999, includes amounts relating to
the writedown of discontinued products of $3.1 million and $13.8 million,
respectively.
(6) Interest expenses for the years ended December 31, 1996 and 1997 were in
connection with the private placement of $30.0 million principal amount of
debentures, the proceeds from which MRV used to finance the cash portion of
the Fibronics acquisition. Interest expenses for the year ended December 31,
1998 and 1999, were connected with the private placement of $100.0 million
principal amount of 5% Convertible Subordinated Notes. See Note 10 of notes
to the consolidated financial statements of MRV included later in this
prospectus supplement.
SELECTED LUMINENT FINANCIAL INFORMATION
The following selected condensed consolidated statements of operations data
for the three years ended December 31, 2000, and the condensed consolidated
balance sheet data as of December 31, 1999 and 2000, are derived from Luminent's
consolidated financial statements and notes thereto included later in this
prospectus supplement, which have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their report included with the
financial statements appearing in this prospectus supplement. The selected
condensed consolidated statements of operations data for the year ended December
31, 1997, and the condensed consolidated balance sheet data at December 31,
1998, were derived from Luminent's audited financial statements, which are not
included in this prospectus supplement. The selected condensed consolidated
statements of operations data for the year ended December 31, 1996, and the
condensed consolidated balance sheet data as of December 31, 1996 and 1997, were
derived from Luminent's unaudited financial statements, which are not included
in this prospectus supplement. The unaudited pro forma selected statement of
operations data for the year ended December 31, 2000, were derived from the
unaudited pro forma financial statements of Luminent, which are included later
in this prospectus supplement. The selected condensed consolidated statements of
operations data for the six months ended June 30, 2000 and 2001, were derived
from Luminent's
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unaudited consolidated condensed financial statements, which are included later
in this prospectus supplement. In the opinion of Luminent's management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the financial position and results of operations
for each of the periods presented in Luminent's unaudited financial statements.
Historical results are not necessarily indicative of results that may be
expected for any future period. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Luminent's Consolidated Financial Statements and the Unaudited
Pro Forma Condensed Consolidated Financial Statements of Luminent, including the
related footnotes.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------------------------------------------- JUNE 30,
PRO FORMA -------------------
1996 1997 1998 1999 2000 2000(1) 2000 2001
----------- -------- -------- -------- -------- ----------- -------- --------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net sales......................... $ 24,034 $ 35,081 $ 38,596 $ 65,264 $124,193 $ 137,317 $ 43,006 $ 89,344
Cost of sales(2)(3)............... 13,970 21,659 24,289 43,078 84,384 94,754 27,801 90,146
-------- -------- -------- -------- -------- --------- -------- --------
Gross profit.................. 10,064 13,422 14,307 22,186 39,809 42,563 15,205 (802)
Operating costs and expenses:
Selling, general and
administrative(2)(3).......... 1,160 2,102 2,642 5,675 38,768 44,653 8,084 39,528
Research and
development(2)(3)............. 2,179 3,520 4,974 8,693 18,204 21,185 6,624 10,030
Parent company allocations...... 787 797 808 885 588 588 -- --
Amortization of goodwill and
other intangibles............. -- -- -- -- 47,421 77,744 9,580 38,976
-------- -------- -------- -------- -------- --------- -------- --------
4,126 6,419 8,424 15,253 104,981 144,170 24,288 88,534
-------- -------- -------- -------- -------- --------- -------- --------
Operating income (loss)....... 5,938 7,003 5,883 6,933 (65,172) (101,607) (9,083) (89,336)
Other income (loss), net(3)....... -- -- -- 6 2,246 2,008 192 2,822
-------- -------- -------- -------- -------- --------- -------- --------
Income (loss) before provision
for income taxes and minority
interests..................... 5,938 7,003 5,883 6,939 (62,926) (99,599) (8,891) (86,514)
Provision for income taxes........ 2,297 2,789 2,343 2,764 2,766 2,766 1,469 1,854
Minority interest................. -- -- -- -- (707) (738) 318 (115)
-------- -------- -------- -------- -------- --------- -------- --------
Net income (loss)............... $ 3,641 $ 4,214 $ 3,540 $ 4,175 $(64,985) $(101,627) $(10,678) $(88,253)
======== ======== ======== ======== ======== ========= ======== ========
Earnings (loss) per share(4):
Basic and diluted income (loss)
per share....................... $ 0.03 $ 0.03 $ 0.02 $ 0.03 $ (0.45) $ (0.70) $ (0.07) $ (0.57)
Basic and diluted income average
shares.......................... 144,000 144,000 144,000 144,000 145,677 145,677 144,000 156,000
======== ======== ======== ======== ======== ========= ======== ========
AT DECEMBER 31, AT
------------------------------------------------ JUNE 30,
1996 1997 1998 1999 2000 2001
------- ------- ------- ------- -------- ------------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term investments......................... $ -- $ -- $ -- $ 220 $132,860 $ 93,118
Working capital......................................... 5,387 4,694 7,453 12,561 161,671 123,007
Total assets............................................ 11,779 13,305 14,742 23,127 605,380 541,625
Long-term debt net of current portion................... -- -- -- -- 9,550 8,596
-------------------------
(1) The unaudited pro forma selected statement of operation data for the year
ended December 31, 2000, were derived from the unaudited pro forma condensed
consolidated financial statements of Luminent included later in this
prospectus supplement. The unaudited pro forma condensed consolidated
statement of operations assumes that the Fiber Optic Communications,
Optronics and Quantum acquisitions occurred on January 1, 2000, and
consolidates Luminent's consolidated statement of operations for the year
ended December 31, 2000, with the statements of operations for that year of
Fiber Optic Communications, Optronics and Quantum. See "Unaudited Pro Forma
Condensed Consolidated Financial Information of MRV" included later in this
prospectus supplement.
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(2) Includes amounts related to deferred stock compensation of: $2.8 million and
$1.2 million in "costs of sales"; $21.7 million and $15.7 million in
"selling, general and administrative" expenses; and $4.3 and $2.0 million in
"research and development" expenses for the year ended December 31, 2000,
and the six months ended June 30, 2001, respectively.
(3) Includes one-time charges of $29.3 million, $11.4 million, $501,000 and
$16,000 presented in "cost of sales", "selling, general and administrative",
"research and development" and "other income, net", respectively, for the
six months ended June 30, 2001, to write-down inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other non-recurring items. These charges resulted from the lower demand for
Luminent's products and pricing pressures stemming from the continuing
downturn in the communications equipment industry generally and the optical
components sector in particular.
(4) See note 2 of notes to Luminent's audited consolidated financial statements
at December 31, 2000, and for each of the three years in the period then
ended and note 1 to Luminent's unaudited consolidated financial statements
at June 30, 2001 and for the six months ended June 30, 2000 and 2001, for an
explanation of how the number of shares used in calculating this per share
data was determined. These financial statements are included later in this
prospectus supplement.
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COMPARATIVE PER SHARE DATA
The following table reflects (a) the historical net loss and book value per
share of MRV common stock and the historical net loss and book value per share
of Luminent common stock in comparison with the unaudited pro forma net loss and
book value per share after giving effect to the Merger, and (b) the equivalent
pro forma net loss and book value per share attributable to 0.43 of a share of a
MRV common stock which will be issued for each share of Luminent.
For MRV and Luminent, the historical book value per share is computed by
dividing their respective stockholders' equity as of December 31, 2000 and June
30, 2001, respectively, by their actual common shares outstanding.
The pro forma per share loss from continuing operations is computed by
dividing the pro forma loss from continuing operations by the pro forma weighted
average number of shares outstanding, assuming MRV had acquired Luminent at the
beginning of the earliest period presented. The pro forma combined book value
per share is computed by dividing the total pro forma stockholders' equity by
the pro forma number of common shares outstanding at December 31, 1999, assuming
the Merger had occurred on that date. The Luminent equivalent pro forma combined
per share amounts are calculated by multiplying the MRV pro forma combined per
share amounts by the exchange ratio of 0.43.
The following information should be read in conjunction with the separate
selected audited historical consolidated financial statements and related notes
of MRV and Luminent, the selected unaudited interim condensed consolidated
financial statements of MRV, the unaudited pro forma condensed combined
financial information and related notes of MRV, and the selected historical and
selected unaudited pro forma financial data included elsewhere in this
prospectus supplement. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
as of the beginning of the respective periods presented, nor is it necessarily
indicative of the future operating results or financial position of the combined
companies.
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
2000 JUNE 30, 2001
------------ ----------------
(UNAUDITED)
HISTORICAL MRV:
Net loss from continuing operations per share -- basic and
diluted................................................... $(2.33) $(1.97)
Book value per share at the end of the period............... $10.67 $ 9.19
HISTORICAL LUMINENT:
Net loss from continuing operations per share -- basic and
diluted................................................... $(0.45) $(0.57)
Book value per share at the end of the period............... $ 3.51 $ 3.05
PRO FORMA COMBINED (UNAUDITED):
Pro forma net loss from continuing operations per MRV
share -- basic and diluted................................ $(2.17) $(1.93)
Pro forma net loss from continuing operations per equivalent
Luminent share -- basic and diluted....................... $(0.93) $(0.83)
Pro forma book value per MRV share at the end of the
period.................................................... $10.22 $ 8.71
Pro forma book value per equivalent Luminent share at the
end of the period......................................... $ 4.39 $ 3.74
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MARKET PRICE INFORMATION
MRV's common stock is traded in the over-the-counter market and has been
included in the Nasdaq National Market since February 28, 1994 under the symbol
"MRVC." The following table sets forth the high and low closing sale prices of
MRV's common stock for the periods indicated as reported by the Nasdaq National
Market. The prices have been adjusted to give retroactive effect to the
two-for-one stock split effected on May 11, 2000.
HIGH LOW
------ ------
1999
First Quarter............................................... $ 4.94 $ 2.97
Second Quarter.............................................. 7.03 2.97
Third Quarter............................................... 12.41 6.31
Fourth Quarter.............................................. 32.81 9.72
2000
First Quarter............................................... $95.25 $25.88
Second Quarter.............................................. 67.25 23.44
Third Quarter............................................... 80.38 45.31
Fourth Quarter.............................................. 49.25 11.06
2001
First Quarter............................................... $21.38 $ 6.22
Second Quarter.............................................. 12.90 5.38
Third Quarter............................................... 8.79 2.43
Fourth Quarter (through October 5, 2001).................... 3.10 2.85
Luminent's common stock has traded on the Nasdaq National Market since
November 9, 2000 under the symbol "LMNE." The following table sets forth the
high and low closing sale prices of Luminent's common stock for the periods
indicated as reported by the Nasdaq National Market
HIGH LOW
------ -----
2000
Fourth Quarter (from November 9, 2000)...................... $12.25 $4.31
2001
First Quarter............................................... $10.38 $2.31
Second Quarter.............................................. 6.16 2.44
Third Quarter............................................... 3.96 1.20
Fourth Quarter (through October 5, 2001).................... 2.03 1.93
As of September 30, 2001, MRV had 3,426 stockholders of record, as
indicated on the records of its transfer agent, and Luminent had 146
stockholders of record, as indicated on the records of its transfer agent, who
held, MRV believes, for approximately 6,000 beneficial holders.
The table below sets forth the high and low sale prices per share of MRV
common stock on the Nasdaq National Market on September 10, 2001, the last
completed trading day prior to the public announcement of the proposed Merger,
and on , 2001, the effective date of the Merger. Also set forth is
the implied equivalent value of one share of Luminent common stock on each
respective date, using an exchange ratio of 0.43 of a share of MRV common stock
for each share of Luminent common stock.
APPROXIMATE
LUMINENT
MRV COMMON COMMON STOCK
STOCK EQUIVALENT
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
September 10, 2001.................................. $3.23 $3.02 $1.39 $1.30
, 2001..................................
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FORWARD-LOOKING STATEMENTS
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS SUPPLEMENT THAT MAY NOT
PROVE TO BE ACCURATE.
This prospectus supplement contains forward-looking statements including
statements regarding, among other items, our and Luminent's business strategy,
growth strategy and anticipated trends in our business. We may make additional
written or oral forward-looking statements from time to time in filings with the
Securities and Exchange Commission or otherwise. When we use the words
"believe," "expect," "anticipate," "project" and similar expressions, this
should alert you that this is a forward-looking statement. These forward-looking
statements are largely based on our expectations. They are subject to a number
of risks and uncertainties, some of which cannot be predicted or quantified and
are beyond our control. Future events and actual results could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements. Statements in this prospectus supplement, including those set forth
below in "Risk Factors," describe factors, among others, that could contribute
to or cause these differences. In light of these risks and uncertainties, there
can be no assurance that the forward-looking information contained in this
prospectus supplement will in fact transpire or prove to be accurate. All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by this
section.
RISK FACTORS
Investment in shares of MRV common stock involves a high degree of risk.
Set forth below and elsewhere in this prospectus supplement are risks and
uncertainties that could cause MRV's actual results to differ materially from
the results contemplated by the forward-looking statements contained in this
prospectus supplement and in public statements and press releases we make from
time to time. As used in this Risk Factors section, the pronouns "we," "our" and
"us" refers to MRV and its consolidated subsidiaries.
WE INCURRED A NET LOSS IN THE YEAR ENDED DECEMBER 31, 2000 AND DURING THE
SIX-MONTH PERIOD ENDED JUNE 30, 2001, PRIMARILY AS A RESULT OF THE AMORTIZATION
OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION CHARGES FROM RECENT
ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE
FUTURE.
We reported a net loss of $153.0 million for the year ended December 31,
2000 and $148.4 million for the six months ended June 30, 2001. A major
contributing factor to the net losses was the amortization of goodwill and other
intangibles and deferred stock compensation related to our acquisitions of Fiber
Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's former President and Luminent's Chief
Financial Officer. We will continue to record amortization of goodwill and other
intangibles and deferred stock compensation relating to these acquisitions and
the employment arrangements with these executives going forward. Effective
January 1, 2002, with the adoption of SFAS 142, we will stop amortization of
goodwill, however, we may be required to record an impairment charge (see
Recently Issued Accounting Standards). As a consequence of goodwill and other
intangibles and deferred stock compensation charges, we do not expect to report
net income in the foreseeable future.
OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND
RELATED UNCERTAINTIES.
Weaker economic conditions worldwide, particularly in the U.S. and Europe,
have contributed to the current technology industry slowdown and impacted our
business resulting in:
- reduced demand for of our products, particularly Luminent's fiber optic
components;
- increased risk of excess and obsolete inventories;
- increased price competition for our products;
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- excess manufacturing capacity under current market conditions; and
- higher overhead costs, as a percentage of revenues.
These unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2001 to date, and appear to
continue to affect these industries in the third quarter of 2001 and may affect
them for the balance of 2001 and thereafter. Announcements by industry
participants and observers indicate there is a slowdown in industry spending and
participants are seeking to reduce existing inventories and we are experiencing
these reductions in our business. As a result of these factors, we have recorded
in the second quarter of 2001, consolidated one-time charges from our
subsidiary, Luminent, which include the write-off of inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other unusual items. The aggregate one-time charges recorded during the second
quarter were $41.2 million. These charges are the result of the lower demand for
Luminent's products and pricing pressures stemming from the continuing downturn
in the communications equipment industry generally and the optical components
sector in particular.
Additionally, these economic conditions are making it very difficult for
MRV, Luminent and our other companies, our customers and our vendors to forecast
and plan future business activities. This level of uncertainty severely
challenges our ability to operate profitably or to grow our businesses. In
particular, it is difficult to develop and implement strategy, sustainable
business models and efficient operations, and effectively manage manufacturing
and supply chain relationships. Many analysts are predicting a further downturn
in the U.S. economy in the aftermath of the terrorist attacks on the World Trade
Center in New York and the Pentagon in Washington DC in September 2001. As
discussed below in the section of these Risk Factors entitled, "We may have
difficulty managing our business," we have lost a key member of our management
team in the attack on the World Trade Center and that loss has already had and
may in the future have adverse consequences on our business. However, we do not
know how the consequences of these attacks will additionally affect our
business. If the economic or market conditions continue or further deteriorate,
or if the economic downturn is exacerbated as a result of political, economic or
military conditions associated with current domestic and world events, our
businesses, financial condition and results of operations could be further
impaired.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective transmission
capacity, or bandwidth, increases. Our future performance will depend on the
successful development, introduction and market acceptance of new and enhanced
products that address these changes as well as current and potential customer
requirements. The introduction of new and enhanced products may cause our
customers to defer or cancel orders for existing products. We have in the past
experienced delays in product development and these delays may occur in the
future. Therefore, to the extent customers defer or cancel orders in the
expectation of a new product release or there is any delay in development or
introduction of our new products or enhancements of our products, our operating
results would suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements, or to license
these technologies from third parties. Product development delays may result
from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical personnel;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with contract manufacturers;
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- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to deliver
products to customers that are highly reliable, operate with its existing
equipment, lower the customer's costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological changes would significantly harm our business.
DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those our companies and we offer, may contain
undetected software or hardware errors when we first introduce them or when we
release new versions. The occurrence of these errors in the future, and our
inability to correct these errors quickly or at all, could result in the delay
or loss of market acceptance of our products. It could also result in material
warranty expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. Any of these or other eventualities
resulting from defects in our products could cause our sales to decline and have
a material adverse effect on our business, operating results and financial
condition.
OUR GROWTH RATE MAY BE LOWER THAN HISTORICAL LEVELS AND OUR RESULTS COULD
FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our revenues may grow at a slower rate in the future than we have
experienced in previous periods and, on a quarter-to-quarter basis, our growth
in revenue may be significantly lower than our historical quarterly growth
rates. Our operating results for a particular quarter are extremely difficult to
predict. Our revenue and operating results could fluctuate substantially from
quarter to quarter and from year to year. This could result from any one or a
combination of factors such as:
- the cancellation or postponement of orders;
- the timing and amount of significant orders from our largest customers;
- our success in developing, introducing and shipping product enhancements
and new products;
- the mix of products we sell;
- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions or deferred compensation
charges;
- new product introductions by our competitors;
- pricing actions by our competitors or us;
- the timing of delivery and availability of components from suppliers;
- changes in material costs; and
- general economic conditions.
Moreover, the volume and timing of orders we receive during a quarter are
difficult to forecast. From time to time, our customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below these forecasts or if customers do not
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control inventories effectively, they may cancel or reschedule shipments
previously ordered from us. Our expense levels during any particular period are
based, in part, on expectations of future sales. If sales in a particular
quarter do not meet expectations, our operating results could be materially
adversely affected.
Our success is dependent, in part, on the overall growth rate of the fiber
optic components and networking industry. We can give no assurance that the
Internet or the industries that serve it will continue to grow or that we will
achieve higher growth rates. Our business, operating results or financial
condition may be adversely affected by any decreases in industry growth rates.
In addition, we can give no assurance that our results in any particular period
will fall within the ranges for growth forecast by market researchers.
Because of these and other factors, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that, in future periods, our results of
operations may be below the expectations of public market analysts and
investors. This failure to meet expectations could cause the trading price of
our common stock to decline. Similarly, the failure by our competitors or
customers to meet or exceed the results expected by their analysts or investors
could have a ripple effect on us and cause our stock price to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be subjected
to lifetime and reliability testing, which also can take months or more. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales and marketing and research and development
expenses to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Even
after acceptance of orders, our customers often change the scheduled delivery
dates of their orders. Because of the evolving nature of the optical networking
and network infrastructure markets, we cannot predict the length of these sales,
development or delivery cycles. As a result, these long sales cycles may cause
our net sales and operating results to vary significantly and unexpectedly from
quarter-to-quarter, which could cause volatility in our stock price.
THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely volatile.
The market price of our common stock is likely to continue to be highly volatile
and could be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results;
- announcements of technological innovations or new product introductions
by us or our competitors;
- changes of estimates of our future operating results by securities
analysts;
- developments with respect to patents, copyrights or proprietary rights;
and
- general market conditions and other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies in particular, and
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that have been unrelated to the operating performance of these companies. These
factors, as well as general economic and political conditions, may materially
adversely affect the market price of our common stock in the future. Similarly,
the failure by our competitors or customers to meet or exceed the results
expected by their analysts or investors could have a ripple effect on us and
cause our stock price to decline. Additionally, volatility or a lack of positive
performance in our stock price may adversely affect our ability to retain key
employees, all of whom have been granted stock options.
OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES.
We have created several start-up companies and formed independent business
units in the optical technology and Internet infrastructure areas. We account
for these investments in affiliates according to the equity or cost methods as
required by accounting principles generally accepted in the United States. The
market value of these investments may vary materially from the amounts shown as
a result of business events specific to these entities or their competitors or
market conditions. Actual or perceived changes in the market value of these
investments could have a material impact on our share price and in addition
could contribute significantly to volatility of our share price.
OUR DECISION TO ABANDON THE SPIN-OFF OF LUMINENT TO OUR STOCKHOLDERS AND TO
ELIMINATE PUBLIC OWNERSHIP OF LUMINENT'S COMMON STOCK COULD HARM THE MARKET
PRICE OF OUR COMMON STOCK.
In 2000, we announced our intention to distribute to our stockholders the
outstanding common stock of Luminent that we owned assuming certain conditions
were met. While we informed our stockholders that we were not obligated to make
this distribution and might not if economic, market or other conditions caused
our board to decide against it, stockholders and analysts may react negatively
to our decision to abandon the distribution or to eliminate public ownership of
Luminent's common stock through the Merger. On September 17, 2001, the first
trading day following the announcement of our decision to abandon the
distribution and effect the Merger the closing price of our stock decreased from
$3.23 to $2.43. While September 17, 2001, was the first day of the reopening of
the stock market in the United States following the terrorists events of
September 11, 2001, the decrease in the market price of our stock could reflect
a negative reaction to the news of the Merger and, depending on investors'
continuing assessment of the impact of these events on our company, this
reaction could be sustained or cause the market price of our shares drop lower.
We can give you no assurance that the market price of our shares will not be
lower than the market price of the comparable number of Luminent's shares held
by former Luminent stockholders prior to the Merger.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking products are
intensely competitive and subject to frequent product introductions with
improved price/performance characteristics, rapid technological change and the
continual emergence of new industry standards. We compete and will compete with
numerous types of companies including companies that have been established for
many years and have considerably greater financial, marketing, technical, human
and other resources, as well as greater name recognition and a larger installed
customer base, than we do. This may give these competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. In addition, many of our large competitors offer
customers broader product lines, which provide more comprehensive solutions than
our current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of these price decreases
may have an adverse impact on our results of operations or financial condition.
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There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
that industry consolidation may provide stronger competitors that are better
able to compete. This could have a material adverse effect on our business,
operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES.
We have grown rapidly in recent years, with revenues increasing from $88.8
million for the year ended December 31, 1996, to $319.4 million for the year
ended December 31, 2000. Our growth, both internally and through the
acquisitions we have made has placed a significant strain on our financial and
management personnel and information systems and controls. As a consequence, we
must continually implement new and enhance existing financial and management
information systems and controls and must add and train personnel to operate
these systems effectively. Our delay or failure to implement new and enhance
existing systems and controls as needed could have a material adverse effect on
our results of operations and financial condition in the future. Our intention
to continue to pursue a growth strategy can be expected to place even greater
pressure on our existing personnel and to compound the need for increased
personnel, expanded information systems, and additional financial and
administrative control procedures. We can give no assurance that we will be able
to successfully manage operations if they continue to expand.
Edmund Glazer, our Vice President of Finance and Administration and Chief
Financial Officer was killed on September 11, 2001 in the terrorists' attack on
the World Trade Center. His death has created a void in our management team that
will exist until a suitable replacement or replacements are found. Until a
successor or successors to Mr. Glazer are found and begin performing duties he
previously handled and managed, we may face difficulties in compiling, reviewing
and releasing financial information and this could result in delays in releasing
this information to the public and our meeting deadlines to file the reports
required of a public company. These difficulties could adversely affect the
marketplace's perception of MRV resulting in decreases in our stock price.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of our
operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the periods indicated
below:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ------------
1998 1999 2000 2000 2001
----- ----- ----- ---- ----
Percent of total revenue from foreign sales....... 59% 58% 63% 60% 63%
We have companies and offices in, and conduct a significant portion of our
operations in and from, Israel. We are, therefore, directly influenced by the
political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and other conditions affecting Taiwan and
People's Republic of China. Currently there is significant political tension
between Taiwan and People's Republic of China, which could lead to hostilities.
Risks we face due to international sales and the use of overseas manufacturing
include:
- greater difficulty in accounts receivable collection and longer
collection periods;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
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- seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe or in the winter months in
Asia when the Chinese New Year is celebrated;
- certification requirements;
- potentially adverse tax consequences;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- trade restrictions;
- limited protection of intellectual property rights;
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
The majority of our sales are currently denominated in U.S. dollars and to
date our business has not been significantly affected by currency fluctuations
or inflation. However, as we conduct business in several different countries,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in these countries could increase our expenses. The Single
European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. We have made and
expect to continue to make changes to our internal systems in order to
accommodate doing business in the Euro. Any delays in our ability to be Euro-
compliant could have an adverse impact on our results of operations or financial
condition. Due to numerous uncertainties, we cannot reasonably estimate at this
time the effects a common currency will have on pricing within the European
Union and the resulting impact, if any, on our financial condition or results of
operations.
To date, we have not hedged against currency exchange risks. In the future,
we may engage in foreign currency denominated sales or pay material amounts of
expenses in foreign currencies and, in that event, may experience gains and
losses due to currency fluctuations. Our operating results could be adversely
affected by currency fluctuations or as a result of inflation in particular
countries where material expenses are incurred.
WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND
THEREFORE COULD FACE DELAYS HARMING OUR SALES.
We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large number
of contract manufacturers that we can use for outsourcing, we have elected to
use a limited number of vendors for a significant portion of our board assembly
requirements in order to foster consistency in quality of the products and to
achieve economies of scale. These independent third-party manufacturers also
provide the same services to other companies. Risks associated with the use of
independent manufacturers include unavailability of or delays in obtaining
adequate supplies of products and reduced control of manufacturing quality and
production costs. If our contract manufacturers failed to deliver needed
components timely, we could face difficulty in obtaining adequate supplies of
products from other sources in the near term. We can give no assurance that our
third party manufacturers will provide us with adequate supplies of quality
products on a timely basis, or at all. While we could outsource with other
vendors, a change in vendors may require significant lead-time and may result in
shipment delays and expenses. Our inability to obtain these products on a timely
basis, the loss of a vendor or a change in the terms and conditions of the
outsourcing would have a material adverse effect on our business, operating
results and financial condition.
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WE MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR
NEEDS.
Our companies currently purchase several key components used in the
manufacture of our products from single or limited sources. We depend on these
sources to meet our needs. Moreover, we depend on the quality of the products
supplied to us over which we have limited control. We have encountered shortages
and delays in obtaining components in the past and expect to encounter shortages
and delays in the future. If we cannot supply products due to a lack of
components, or are unable to redesign products with other components in a timely
manner, our business will be significantly harmed. We have no long-term or
short-term contracts for any of our components. As a result, a supplier can
discontinue supplying components to us without penalty. If a supplier
discontinued supplying a component, our business may be harmed by the resulting
product manufacturing and delivery delays.
OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE
MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS.
We rely heavily on our own production capability for critical semiconductor
lasers and light emitting diodes used in our products. Because we manufacture
these and other key components at our own facilities and these components are
not readily available from other sources, any interruption of our manufacturing
processes could have a material adverse effect on our operations. Furthermore,
we have a limited number of employees dedicated to the operation and maintenance
of our wafer fabrication equipment, the loss of any of whom could result in our
inability to effectively operate and service this equipment. Wafer fabrication
is sensitive to many factors, including variations and impurities in the raw
materials, the fabrication process, performance of the manufacturing equipment,
defects in the masks used to print circuits on the wafer and the level of
contaminants in the manufacturing environment. We can give no assurance that we
will be able to maintain acceptable production yields and avoid product shipment
delays. In the event adequate production yields are not achieved, resulting in
product shipment delays, our business, operating results and financial condition
could be materially adversely affected.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects
that would complement our existing companies and products, augment our market
coverage and distribution ability or enhance our technological capabilities.
Future acquisitions could have a material adverse effect on our business,
financial condition and results of operations because of the following:
- possible charges to operations for purchased technology and restructuring
similar to those incurred in connection with our acquisition of Xyplex in
1998;
- potentially dilutive issuances of equity securities;
- incurrence of debt and contingent liabilities;
- incurrence of amortization expenses and impairment charges related to
goodwill and other intangible assets and deferred compensation charges
similar to those arising with the acquisitions of Fiber Optic
Communications, Optronics, Quantum Optech, Jolt and Astroterra in 2000
(see Recently Issued Accounting Standards);
- difficulties assimilating the acquired operations, technologies and
products;
- diversion of management's attention to other business concerns;
- risks of entering markets in which we have no or limited prior
experience;
- potential loss of key employees of acquired organizations; and
- difficulties in honoring commitments made to customers by management of
the acquired entity prior to the acquisition.
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We can give no assurance as to whether we can successfully integrate the
companies, products, technologies or personnel of any business that we might
acquire in the future.
WE CANNOT PREDICT THE IMPACT OF POTENTIAL ACTIONS BY THE SEC WITH RESPECT TO OUR
VALUATION METHODOLOGY FOR IN-PROCESS RESEARCH AND DEVELOPMENT RELATED TO
BUSINESS COMBINATIONS.
Actions and comments from the SEC have indicated it has been reviewing the
valuation methodology of in-process research and development related to business
combinations. We believe we are in compliance with all of the existing rules and
related guidance as applicable to our business operations. However, the SEC may
change these rules or issue new guidance applicable to our business in the
future. There can be no assurance that the SEC will not seek to reduce the
amount of in-process research and development previously expensed by us. This
would result in the restatement of our previously filed financial statements and
could have a material adverse effect on our operating results and financial
condition for periods subsequent to the acquisitions.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications will
be approved, that any patents that may be issued will protect our intellectual
property or that third parties will not challenge any issued patents. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us. We cannot be certain that the steps
we have taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Any of this kind of litigation,
regardless of outcome, could be expensive and time consuming, and adverse
determinations in any of this kind of litigation could seriously harm our
business.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard, in March 1999,
we received a written notice from Lemelson Foundation Partnership in which
Lemelson claimed to have patent rights in our vision and automatic
identification operations, which are widely used in the manufacture of
electronic assemblies. In April 1999, we received a written notice from Rockwell
International Corporation in which Rockwell claimed to have patent rights in
certain technology related to our metal organic chemical vapor deposition, or
MOCVD, processes. In October 1999, we received written notice from Lucent
Technologies, Inc. in which Lucent claimed we have violated certain of Lucent's
patents falling into the general category of communications technology, with a
focus on networking functionality. In October 1999, we received a written notice
from Ortel Corporation, which has since been acquired by Lucent, in which Ortel
claimed to have patent rights in certain technology related to our photodiode
module products. In January 2001, we were advised that Lucent had assigned
certain of its rights and claims to Agere Systems, Inc., including the claim
made on the Ortel patent. To date, we have not been contacted by Agere regarding
this patent claim. In July 2000, we received written notice from Nortel
Networks, which claimed we violated Nortel's patent relating to technology
associated with local area networks. In May 2001, we received written notice
from IBM, which claims that several of our optical components and Internet
infrastructure products make use of inventions covered by certain patents
claimed by IBM. We are evaluating the patents noted in the letters. Others'
patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's and
IBM's, may be determined to be valid, or some of our products may ultimately be
determined to infringe the Lemelson, Rockwell, Lucent, Agere, Nortel or IBM
patents, or those of other companies.
Lemelson, Rockwell, Lucent, Agere, Nortel or IBM, or other companies may
pursue litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. In the event of an
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adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required to
obtain licenses to the infringing technology, to pay substantial damages under
applicable law, to cease the manufacture, use and sale of infringing products or
to expend significant resources to develop non-infringing technology. Licenses
may not be available from third parties, including Lemelson, Rockwell, Lucent,
Ortel, Nortel or IBM, either on commercially reasonable terms or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
Accordingly, any infringement claim or litigation against us could significantly
harm our business, operating results and financial condition.
IN THE FUTURE, WE MAY INITIATE CLAIMS OR LITIGATION AGAINST THIRD PARTIES FOR
INFRINGEMENT OF OUR PROPRIETARY RIGHTS TO PROTECT THESE RIGHTS OR TO DETERMINE
THE SCOPE AND VALIDITY OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF
COMPETITORS. THESE CLAIMS COULD RESULT IN COSTLY LITIGATION AND THE DIVERSION OF
OUR TECHNICAL AND MANAGEMENT PERSONNEL.
Necessary licenses of third-party technology may not be available to us or
may be very expensive, which could adversely affect our ability to manufacture
and sell our products. From time to time we may be required to license
technology from third parties to develop new products or product enhancements.
We cannot assure you that third-party licenses will be available to us on
commercially reasonable terms, if at all. The inability to obtain any
third-party license required to develop new products and product enhancements
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, either of which could seriously harm our ability
to manufacture and sell our products.
WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.
We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of
the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered into
employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of
key man life insurance policies in the amounts of $1.0 million each on their
lives. However, we can give no assurance that the proceeds from these policies
will be sufficient to compensate us in the event of the death of either of these
individuals, and the policies are not applicable in the event that either of
them becomes disabled or is otherwise unable to render services to us.
OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to develop, manufacture and market our products, run our
companies and our ability to compete with our current and future competitors
depends, and will depend, in large part, on our ability to attract and retain
qualified personnel. Competition for executives and qualified personnel in the
networking and fiber optics industries is intense, and we will be required to
compete for that personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, that have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives,
including a new executive or executives to assume the duties previously handled
and managed by Edmund Glazer, our recently deceased Vice President of Finance
and Administration and Chief Financial Officer. If we should be unable to
attract and retain qualified personnel, our business could be materially
adversely affected. We can give no assurance that we will be able to attract and
retain qualified personnel.
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure by
us to
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comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, these kinds of
regulations could restrict our ability to expand our facilities or could require
us to acquire costly equipment or to incur other significant expenses to comply
with environmental regulations. We cannot assure you that these legal
requirements will not impose on us the need for additional capital expenditures
or other requirements. If we fail to obtain required permits or otherwise fail
to operate within these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. It is very important that we accurately predict both
the demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier requirements,
the size of the order, contract terms and current market demand for the
components. For substantial increases in production levels, some suppliers may
need six months or more lead time. If we overestimate our component and material
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component and material requirements, we may have inadequate
inventory, which could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would negatively impact our
net sales.
Current softness in demand and pricing in the communications market have
necessitated a review of our inventory, facilities and headcount. As a result,
we and Luminent recorded in the second quarter of 2001, a one-time charge, to
write-down inventory to realizable value and inventory purchase commitments of
approximately $28.5 million.
WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the volatility and potential volatility of our stock price or the
volatility of Luminent's stock price following its initial public offering, we
may be the target of securities litigation in the future. Additionally, while
Luminent and we informed investors that we were under no obligation to, and
might not, make the distribution to our stockholders of our Luminent common
stock and that we could and might eliminate public ownership of Luminent through
a short-form merger with us, our decisions to abandon our distribution of
Luminent's common stock to our stockholders or to eliminate public ownership of
Luminent's common stock through the Merger may result in securities or other
litigation. Securities or other litigation could result in substantial costs and
divert management's attention and resources.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and may
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. The Investment Company Act of 1940 requires
registration for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading in securities. A company may
be deemed to be an investment company if it owns "investment securities" with a
value exceeding 40% of the value of its total assets (excluding government
securities and cash items) on an unconsolidated basis, unless an exemption or
safe harbor applies. Securities issued by companies other than majority-owned
subsidiaries are generally counted as investment securities for purposes of the
Investment Company Act. Investment companies are subject to registration under,
and compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company, we
would become subject to the requirements of the Investment Company Act. As a
consequence, we would
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be prohibited from engaging in business or issuing our securities as we have in
the past and might be subject to civil and criminal penalties for noncompliance.
In addition, certain of our contracts might be voidable.
Registration as an investment company would subject us to restrictions that
are inconsistent with our fundamental business strategy of equity growth through
creating, acquiring, building and operating optical components and network
infrastructure companies. Although our investment securities currently comprise
substantially less than 40% of our total assets, fluctuations in the value of
these securities or of our other assets, or the sale of one or more of companies
in exchange for the securities of the purchaser, may cause this limit to be
exceeded. In that case, unless an exclusion or safe harbor was available to us,
we would have to attempt to reduce our investment securities as a percentage of
our total assets. This reduction can be attempted in a number of ways, including
the disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we otherwise would. These sales may be at depressed prices and
we may never realize anticipated benefits from, or may incur losses on, these
investments. We may be unable to sell some investments due to contractual or
legal restrictions or the inability to locate a suitable buyer. Moreover, we may
incur tax liabilities when we sell assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not be
able to identify and acquire suitable assets and businesses or the terms on
which we are able to acquire these assets may be unfavorable.
DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.
We are authorized to issue up to 1,000,000 shares of preferred stock. This
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any series of preferred stock may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividend, liquidation, conversion and redemption rights and
sinking fund provisions. No preferred stock is currently outstanding. The
issuance of any preferred stock could materially adversely affect the rights of
the holders of our common stock, and therefore, reduce the value of our common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with, or sell our assets
to, a third party and thereby preserve control by the present management.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline.
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THE MERGER
TERMS OF THE MERGER
On , 2001, which was the effective date of the Merger, Luminent
merged with and into MRV Merger Sub, the surviving corporation. On the effective
date of the Merger, Luminent ceased to exist, and MRV Merger Sub assumed all of
the assets and liabilities of Luminent. Each outstanding share of Luminent
common stock (except for shares owned by MRV Merger Sub, which were cancelled,
and shares owned by stockholders who perfect their statutory appraisal rights
under Delaware law) was converted in the Merger. Former Luminent stockholders
whose shares were converted are entitled to receive 0.43 of a share of MRV
common stock for each share of Luminent common stock owned on the effective date
of the Merger. Included with this prospectus supplement is a Letter of
Transmittal for use in exchanging certificates which formerly represented
Luminent common stock for certificates representing MRV common stock and cash,
if any, to be paid in lieu of fractional shares. See the section of this
prospectus supplement entitled "The Merger -- Surrender of Stock Certificates;
Fractional Interests".
The Merger was a short form merger pursuant to Section 253 of the Delaware
General Corporation Law and was therefore effected pursuant to resolutions of
the boards of directors of MRV and MRV Merger Sub without any vote, approval or
authorization from the stockholders of Luminent or MRV or the board of directors
of Luminent. Luminent stockholders have certain statutory appraisal rights under
Delaware law. See the section below entitled "The Merger -- Statutory Appraisal
Rights".
MRV's board of directors resolved to effect a short-form merger with
Luminent, subject to the satisfaction of certain conditions, including that the
Merger would be subject to effectiveness of the Post-Effective Amendment to the
Registration Statement of which this prospectus supplement is a part and to the
receipt of a legal opinion with respect to the validity of the shares to be
issued in the Merger to be filed as an exhibit to the Registration Statement.
REGULATORY APPROVALS
No federal or state regulatory approval was required in connection with the
Merger.
BACKGROUND AND REASONS FOR THE MERGER
BACKGROUND
Luminent designs, manufactures and sells a comprehensive line of fiber
optic components that enable communications equipment manufacturers to provide
optical networking equipment for the metropolitan and access segments of the
communications network. Directly and through its subsidiaries, MRV designs,
manufactures and sells data networking products, including networking and
Internet infrastructure products such as switching and router management
systems, and through Luminent, MRV is engaged in the fiber optics components
business. Luminent's fiber optic components business was the original business
of MRV when MRV began operations in July 1988. In March 2000, Luminent was
incorporated in Delaware as a wholly-owned subsidiary of MRV. In April 2000,
Luminent began doing business under the Luminent trade name. From inception in
1988 until September 2000, when MRV completed the contribution and transfer to
Luminent of its business, Luminent operated as a division of MRV.
In November 2000, Luminent completed an initial public offering, or IPO, of
12,000,000 shares of its common stock. From the completion of the IPO until
immediately prior to the Merger, MRV continued to own 144,000,000 shares, or
approximately 92%, of Luminent's outstanding common stock. MRV had planned to
distribute its remaining Luminent shares to MRV's stockholders following
Luminent's IPO, although Luminent and MRV made clear to stockholders in their
various public filings that MRV was not obligated to do so. Among the conditions
recited for making the distribution were:
- the receipt of a private letter ruling from the Internal Revenue Service
that MRV's distribution of its shares of Luminent common stock to the
holders of MRV common stock will be tax-free to MRV and its stockholders
for United States federal income tax purposes;
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- MRV's redemption or repayment of its outstanding convertible subordinated
notes; and
- nothing must have happened in the intervening time between the time of
Luminent's IPO and the distribution, including changes in market or
economic conditions or in Luminent's or MRV's business and financial
condition or in the relative market prices of Luminent's common stock and
MRV's common stock, that would cause MRV's board of directors to conclude
that the distribution was not in MRV's best interest or the best interest
of MRV's stockholders.
MRV received a private letter from the Internal Revenue Service stating
that MRV's distribution of its shares of Luminent common stock to the holders of
MRV common stock would be tax-free to MRV and its stockholders for United States
federal income tax purposes, provided the distribution occurred by November 8,
2001.
However, due to the deterioration of market conditions in the
telecommunications industry since Luminent's IPO, the market for optical
components is currently suffering from both reduced demand, as well as ample
supply, resulting from the abundance of new competitors that have recently
entered the market. Industry analysts have estimated that in 2001 and in 2002
the optical component sector will decline substantially, compared with 2000.
This is a result of weak demand and excess component inventory already in the
hands of telecommunication equipment vendors, including Luminent's customers.
Specifically, the sector continues to suffer severely from weak system demand
and from a $4.3 billion component inventory overhang. Luminent has been impacted
by a significant deterioration in the outlook of two of its largest customers,
Cisco Systems and Marconi. Furthermore, near term visibility is poor, reflecting
both uncertainty about the global economy, consumer confidence as well
uncertainty about the future of the telecommunications industry. According to
industry analysts, visibility into the recovery remains "nonexistent". The
health of the emerging carriers continues to deteriorate and so is demand for
data services. Carrier's capital spending is expected to decline at a greater
rate in 2002 than in 2001. Accordingly, industry sources anticipate that demand
for optical components will remain depressed for several quarters. In addition,
it is expected that even when the economy in general and the telecommunications
sector eventually recovers, a robust recovery for optical components will occur
only after the carriers and equipment vendors recover.
The decline of MRV's stock price following Luminent's IPO paralleled the
decline in Luminent's stock price during the same period and reflected the
overall decline in the telecommunications industry generally and the optical
components sector particularly. The principal amount of MRV's outstanding
convertible subordinated notes is approximately $89.6 million. These notes are
convertible, at the option of the holders, into MRV common stock at a conversion
price of approximately $13.52 per share. By their terms, these notes became
redeemable on or after June 15, 2001, at 102% of their face amount, or
approximately $91.4 million, if redeemed before June 15, 2002 and at 101% of
their face amount, or approximately $90.5 million, if redeemed on or after June
15, 2002 and prior to maturity, in either case plus accrued interest to the date
of redemption.
MRV had planned to redeem the Notes prior to the distribution but wanted
holders to convert them into common stock rather than accept payment of the
redemption price. However, from and after June 15, 2001, when MRV could redeem
its notes, MRV's share price was, and thereafter remained well below the
conversion price of the notes rendering nil any expectation that redemption
would result in conversion. Accordingly, MRV's board concluded that the use of
over $90 million in cash, even if available, to effect the redemption and
thereafter complete the distribution would not be in the best interests of MRV's
stockholders.
MRV's board also considered proceeding with the distribution without
redeeming MRV's outstanding notes. However, this would result in an adjustment
to the number of MRV shares into which the notes would be convertible. MRV's
board concluded that the effect of that adjustment, namely substantial dilution
to existing MRV stockholders, would also not be in their best interests.
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REASONS FOR THE MERGER
Reflecting the overall deterioration in the industry, Luminent, like others
engaged in the fiber optics components business, has also suffered a substantial
decline in its business. For example, Luminent's revenue has decreased by more
than 50%, from approximately $48.2 million during the quarter ended March 2001
to an estimated $20 to $21 million during the quarter ended September 30, 2001.
Management believes that current prospects point to further deterioration
of economic conditions in the telecommunications industry and Luminent's
business in 2002. This is based on announcements by industry participants, the
substantial reduction in sales during 2001, the excess component inventories
held by Marconi and Cisco, Luminent's largest customers, decreases in the
average selling prices for some of Luminent's products, and management's
experience that as products in the optical networking market have become a
commodity, the average selling price of these products have and will continue to
decrease in response to competitive pricing pressures and new product
introductions by industry participants.
Management believes that failure to unite MRV and Luminent can be
detrimental to both MRV and Luminent. In MRV's case, MRV's cash position is
constantly being eroded by its funding of several development stage companies,
which consume rather than generate cash. Because of current market conditions,
MRV's ability to raise cash through traditional capital markets or through the
sale of one or more of its portfolio companies is considered remote. Even when
the capital markets recover, MRV does not expect to be able to raise capital on
as favorable of terms if Luminent is kept as separate publicly traded company
since virtually all of MRV's value is reflected solely by its holdings in
Luminent and without regard to its other businesses. Management believes that
when the capital markets recover, the unification of Luminent with MRV will
facilitate MRV's ability to raise capital at values more fully reflective of its
other businesses in addition to Luminent.
In Luminent's case, given the perceived dim prospects for a quick recovery,
management believes that a different strategy and a new direction are needed for
Luminent. Luminent needs to develop and introduce new products, broaden its
product line toward a new direction, relying less on products such as fiber
optic transceivers. These products have become commodities in the industry for
which the economies of scale and manufacturing advantages of Luminent's larger
competitors make it difficult for Luminent to compete against. Management
believes that a new product direction, which will emphasize a higher level of
integration of optical components, such as transceivers and integrated circuits,
is needed. Management further believes that forward-integration of optical and
electronic technologies will provide added value and product differentiation,
which will result in a more competitive and potentially higher-margin product
offerings. MRV offers vast system level expertise and know-how in data
communication systems and the substantial experience and ability in the
development of application specific integrated circuits and software, which,
management believes, will facilitate and foster a higher and more rapid level
integration of optical components and electronic subsystems than Luminent can
achieve on its own. This is expected to result in new optical transmission
platforms with system level capabilities, able to perform complex networking
functions such as network management and protocol level agility. The resulting
products are expected to achieve not only higher reliability and performance,
but also to reduce production costs.
MRV's board of directors considered the expected facilitation of MRV's
access to the capital markets and Luminent's ability to produce new products
more rapidly and with higher levels of integration of optical components and
electronic subsystems in determining that the Merger was in the best interests
of MRV's stockholders. In addition, MRV's board of directors took into account,
among other things, that:
- the Merger would result in cost savings by eliminating expenses
associated with maintaining Luminent as a public company and by providing
Luminent with from various economies of scale including shared global
administrative functions, facilities and volume purchase discounts not
available to Luminent as a stand-alone entity;
- the Merger would eliminate actual and potential conflicts of interest
between MRV and Luminent;
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- alternatives to the Merger, such as pursuing a sale of its Luminent
shares to, or a business combination involving Luminent and, a third
party was expected to yield less benefits and more disadvantages to MRV
than the proposed Merger;
- the Merger would generally be tax free to Luminent's stockholders;
- Luminent's stockholders would receive MRV common stock with greater
market liquidity than Luminent common stock;
- Luminent stockholders would receive an equity interest in a much larger
and more diversified business entity;
- Luminent stockholders, through their ownership of MRV common stock, would
have a continuing interest in the business and assets previously owned by
Luminent; and
- based on the advice of Duff & Phelps LLC, Luminent's financial advisor,
the exchange ratio was fair to Luminent's stockholders from a financial
point of view.
In view of the number and wide variety of factors considered in connection
with its evaluation of the Merger and the complexity of these matters, MRV's
board of directors did not find it practicable to, nor did it attempt to,
quantify, rank or otherwise assign relative weights to the specific factors that
it considered. In addition, the board of directors did not undertake to make any
specific determination as to whether any particular factor was favorable or
unfavorable to the board of directors' ultimate determination or assign any
particular weight to any factor, but conducted an overall analysis of the
factors described above, including discussions with and questioning of MRV's
management and management's analysis of the proposed Merger. In considering the
factors described above, individual members of MRV's board of directors may have
given different weight to different factors. MRV's board of directors considered
all these factors together and, on the whole, considered them to be favorable
to, and to support, its determination.
FEDERAL SECURITIES CONSEQUENCES
This prospectus supplement and the prospectus do not cover any resales of
MRV common stock to be received by Luminent's stockholders upon completion of
the Merger. No person is authorized to make any use of this document in
connection with a resale of that type.
All shares of MRV common stock that Luminent stockholders receive in the
Merger will be freely transferable. However, shares of MRV common stock received
by persons who are deemed to be "affiliates" of Luminent under the Securities
Act and the related SEC rules and regulations at the time of Merger will be
restricted securities. These affiliates may resell their shares of MRV common
stock only in transactions permitted by Rule 145 or other provisions under the
Securities Act. Persons who may be deemed to be affiliates of Luminent for these
purposes generally include individuals or entities that control, are controlled
by, or are under common control with Luminent and may include officers,
directors and principal stockholders of Luminent.
The shares of MRV common stock issued in the Merger are listed on the
Nasdaq National Market.
SURRENDER OF STOCK CERTIFICATES; FRACTIONAL INTERESTS
Enclosed with this prospectus supplement is a Letter of Transmittal to be
used by former Luminent stockholders in surrendering to American Stock Transfer
and Trust Company, the Exchange Agent certificates that represented shares of
Luminent common stock prior to the Merger. The Letter of Transmittal contains
instructions concerning the surrender of certificates. The Letter of Transmittal
should be completed by each former Luminent stockholder (other than stockholders
who choose to perfect their statutory appraisal rights) and returned to the
Exchange Agent, along with all stock certificates that represented shares of
Luminent common stock. Each former Luminent stockholder (other than stockholders
who choose to perfect their statutory appraisal rights) is entitled to receive,
upon surrender, a certificate registered in the former Luminent stockholder's
name representing the number of whole shares
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of MRV common stock to which the holder of the surrendered certificates is
entitled pursuant to the Merger.
If the MRV common stock is to be issued to a person other than the person
in whose name a surrendered certificate is registered, the certificate so
surrendered must be endorsed and otherwise be in proper form for transfer, and
the person requesting a transfer must pay to MRV any required transfer taxes or
must prove to the satisfaction of MRV that transfer taxes have either been paid
or are not payable. The Exchange Agent will issue the MRV common stock
attributable to any certificate that has been lost or destroyed only upon
receipt of satisfactory evidence of ownership of the shares of Luminent common
stock formerly represented thereby and after appropriate indemnification.
To avoid the application of backup federal income tax withholding
provisions to payments of cash in lieu of fractional shares of MRV common stock
issued pursuant to the Merger, each Luminent stockholder must provide the
Exchange Agent with his or her correct taxpayer identification number in
accordance with the instructions in the Letter of Transmittal.
Holders of certificates that represented Luminent common stock (except for
shares of Luminent common stock owned by MRV Merger Sub, which were cancelled,
and shares owned by stockholders who perfect their statutory appraisal rights
under Delaware law) no longer have any rights with respect to the shares of
Luminent common stock except the right to receive the MRV common stock issued in
the Merger (and cash in lieu of fractional shares). See section of this
prospectus supplement entitled "The Merger -- Statutory Appraisal Rights" below.
In addition, former Luminent stockholders will not be entitled to vote the
shares of MRV common stock to which they are entitled or to receive any
dividends payable to holders of record of MRV common stock until the
certificates are surrendered to the Exchange Agent accompanied by a properly
executed Letter of Transmittal. After surrender of the certificates, those
holders will succeed to their rights as holders of MRV common stock.
No fractional shares of MRV common stock will be issued. In lieu of any
fractional shares, and upon surrender of the holders' certificates evidencing
Luminent common stock accompanied by a properly executed Letter of Transmittal,
each holder of Luminent common stock entitled to receive a fractional share of
MRV common stock will receive instead an amount in cash, without interest, equal
to the value of that fractional share based on the closing sales price of MRV
common stock on the effective date of the Merger, which was $ per share.
STATUTORY APPRAISAL RIGHTS
The following discussion of the provisions of Section 262 of the General
Corporation Law of the State of Delaware is not intended to be a complete
statement of these provisions and is qualified in its entirety by reference to
the text of Section 262, which is reproduced in full as Annex A to this
prospectus supplement.
Former stockholders who held Luminent common stock on the effective date of
the Merger and who follow the procedures specified in Section 262 will be
entitled to have their shares of Luminent common stock appraised by the Delaware
Court of Chancery and to receive payment of the fair value of these shares,
exclusive of any element of value arising from the accomplishment or
expectations of the Merger, as determined by the Delaware Court of Chancery. The
procedures set forth in Section 262 should be strictly complied with. Failure to
follow any of those procedures may result in a termination or waiver of
appraisal rights under Section 262.
Any stockholder entitled to appraisal rights may, after , 2001
and prior to , 2001, demand from MRV Merger Sub the appraisal of any
or all of his or her shares of Luminent common stock by delivering a written
demand for an appraisal to Noam Lotan at MRV Merger Sub c/o MRV Communications,
Inc., 20415 Nordhoff Street, Chatsworth, California 91311. Failure to deliver
that written demand will constitute a waiver of the stockholder's appraisal
rights. This demand will be sufficient if it reasonably informs MRV Merger Sub
of the identity of the stockholder and that the
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stockholder intends by the notice to demand the appraisal of his, her or its
shares. Demand is necessary if the stockholder is to perfect his, her or its
appraisal rights.
The written demand for appraisal must be made by or for the holder of
record of Luminent common stock registered in his, her or its name. Accordingly,
the demand should be executed by or for the stockholder of record, fully and
correctly, as that stockholder's name appears on his, her or its stock
certificates. If the applicable shares of Luminent common stock were owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in that capacity, and if the applicable
shares of Luminent common stock were owned of record by more than one person, as
in a joint tenancy or tenancy in common, the demand should be executed by or for
all joint owners. An authorized agent, including one of two or more joint
owners, may execute the demand for appraisal for a stockholder of record.
However, the agent must identify the record owner(s) and expressly disclose the
fact that, in executing the demand, he or she is acting as agent for the record
owner(s). If a stockholder held shares of Luminent common stock through a broker
who in turn held the shares through a central securities depository nominee such
as Cede & Co., a demand for appraisal of the shares must be made by or on behalf
of the depository nominee and must identify the depository nominee as the holder
of record
A record owner may exercise appraisal rights with respect to all or less
than all of the shares held of record. If the record owner desires to exercise
appraisal rights as to a portion of his, her or its shares, the written demand
should set forth the number of shares covered by it. Where no number of shares
is expressly mentioned, the demand will be presumed to cover all shares of
Luminent common stock standing in the name of the record owner.
Within 120 days after the effective date of the Merger, i.e., by
, 2002, MRV Merger Sub or any stockholder of Luminent who has
complied with the demand requirements and who is otherwise entitled to appraisal
rights, may file a petition in the Delaware Court of Chancery demanding a
determination of the value of the Luminent common stock of all former
stockholders of Luminent who have complied with the demand requirements and who
are otherwise entitled to appraisal rights. Notwithstanding the foregoing, at
any time within 60 days after the effective date of the Merger, i.e., by
, 2001, any stockholder has the right to withdraw his, her or its
demand for appraisal and to accept the terms offered in the Merger. If no
petition demanding a determination of value is filed, appraisal rights will be
lost for all stockholders who had previously demanded appraisal of their
Luminent common stock. Holders of Luminent common stock seeking to exercise
appraisal rights should not assume that MRV Merger Sub will file a petition with
respect to the appraisal of the value of their Luminent common stock or that MRV
Merger Sub will initiate any negotiations with respect to the fair value of
their Luminent common stock. Accordingly, stockholders should regard it as their
obligation to take all steps necessary to perfect their appraisal rights in the
manner prescribed in Section 262.
Within 120 days after the effective date of the Merger, i.e., by
, 2002, any stockholder who is entitled to and has perfected his,
her or its appraisal rights will be entitled to receive upon written request
from MRV Merger Sub a statement setting forth the aggregate number of shares
with respect to which demands for appraisal have been received and the aggregate
number of holders of those shares. This written statement must be mailed to the
requesting stockholder within 10 days after his, her or its written request for
the statement is received by MRV Merger Sub as the surviving corporation, or
within 10 days after the expiration of the period for delivery of demands for
appraisals, whichever is later.
Upon the filing of a petition by a stockholder, service of a copy of that
petition must be made upon MRV Merger Sub as the surviving corporation. Within
20 days after that service, MRV Merger Sub must file in the Office of the
Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by MRV Merger Sub. If the petition is originally filed by MRV
Merger Sub, it must be accompanied by that duly verified list. After the filing
of a petition for appraisal, the Register in Chancery, if ordered by the
Delaware Court of Chancery, must give notice of the time and place fixed for
hearing by registered or certified mail to both MRV Merger
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Sub and to the stockholders shown on the list at the addresses stated on the
list. This notice must also be given by one or more publications at least one
week before the day of the hearing in a newspaper of general circulation
published in the City of Wilmington, Delaware or those publications as the
Delaware Court of Chancery deems advisable. The forms of the notices by mail and
by publication must be approved by the Delaware Court of Chancery, and the costs
of mailing and publication will be borne by MRV Merger Sub.
At the hearing on the petition, the Delaware Court of Chancery will
determine the stockholders who have complied with Section 262 of the Delaware
General Corporation Law and who have thus become entitled to appraisal rights.
The Delaware Court of Chancery may require the stockholders who have demanded an
appraisal for their shares to submit to the Register in Chancery their
certificates that formerly represented Luminent common stock for notation
thereon of the pendency of the appraisal proceedings. If any stockholder fails
to comply with that direction, the Delaware Court of Chancery may dismiss the
proceedings as to the stockholder.
If a petition for an appraisal is timely filed, after a hearing on the
petition the Delaware Court of Chancery will determine the stockholders entitled
to appraisal rights and will appraise the value of the Luminent common stock
owned by those stockholders, determining the fair value the stock exclusive of
any element of value arising from the accomplishment or expectation of the
Merger. The Delaware Court of Chancery will direct payment of the fair value of
the shares of Luminent common stock with a fair rate of interest, if any, on the
fair value to stockholders entitled thereto upon surrender to MRV Merger Sub of
stock certificates. Upon application of a stockholder, the Delaware Court of
Chancery may, in its discretion, order that all or a portion of the expenses
incurred by any stockholder in connection with an appraisal proceeding,
including without limitation, reasonable attorneys' fees and the fees and
expenses of experts, be charged pro rata against the value of all the shares of
Luminent common stock entitled to appraisal.
No representation is made as to the outcome of the appraisal of fair value
as determined by the Delaware Court of Chancery, and stockholders should
recognize that an appraisal could result in a determination of a value higher or
lower than, or the same as, the value of the shares of MRV common stock issued
in the Merger. Moreover, MRV Merger Sub reserves the right to assert, in any
appraisal proceeding, that, for purposes of Section 262, the fair value of a
share of Luminent common stock is less than the value of the 0.43 of a share of
MRV common stock issued in the Merger.
In determining the fair value of the shares of Luminent common stock, the
Delaware Court of Chancery is required to take into account all relevant
factors. Therefore, the determination could be based upon a number of
considerations, including the market value of shares of Luminent common stock
and the asset value and earning capacity of Luminent. In Weinberger v. UOP,
Inc., et al (decided February 1, 1983), the Delaware Supreme Court stated, among
other things, that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court", should be considered in an appraisal proceeding. Section
262 provides that "fair value" is to be "exclusive of any element of value
arising from the accomplishment or expectation of the Merger". In Weinberger,
the Delaware Supreme Court held that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the Merger and not the product of speculation, may be considered". In
Glassman v. Unocal Exploration Corp. (decided July 25, 2001) the Delaware
Supreme Court reaffirmed Weinberger in the context of a short form merger
undertaken pursuant to Section 253 of the Delaware General Corporation Law.
From and after the effective date of the Merger, no stockholder who has
demanded his, her or its appraisal rights will be entitled to vote the MRV
common stock to which the stockholder would have been entitled had he, she or it
chosen not to exercise appraisal rights, nor will he, she or it be entitled to
payments of dividends, if any, or other distributions on the stock (except
dividends, if any, or other distributions payable to Luminent stockholders of
record on a date that is prior to the effective date of the Merger); provided,
however, that if no petition for an appraisal has been filed within the time
provided by Delaware law, or if the stockholder delivers to MRV Merger Sub a
written withdrawal of his, her or its
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demand for an appraisal and an acceptance of the Merger, either within 60 days
after the effective date of the Merger or thereafter with written approval of
MRV Merger Sub (which MRV Merger Sub reserves the right to give or withhold in
its discretion), then the right of the stockholder to an appraisal will cease,
and (upon surrender of certificates formerly representing Luminent common stock
together with a properly completed Letter of Transmittal) the stockholder will
receive the shares of MRV common stock into which the shares of Luminent common
stock were converted in the Merger. Notwithstanding the foregoing, no appraisal
proceeding in the Delaware Court of Chancery will be dismissed as to any
stockholder without the approval of the Delaware Court of Chancery, and the
approval may be conditioned upon whatever terms the Delaware Court of Chancery
deems just.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The Merger is intended to qualify as a tax-free reorganization for U.S.
federal income tax purposes. If the Merger so qualifies, stockholders of
Luminent common stock will generally not recognize any gain or loss on the
exchange of their Luminent stock for MRV common stock in the Merger, except for
any gain or loss recognized in connection with any cash received instead of a
fractional share of MRV stock or pursuant a Luminent stockholder's statutory
appraisal rights. The companies themselves, as well as current stockholders of
MRV common stock, will not recognize gain or loss as a result of the Merger. To
review the tax consequences to MRV and Luminent stockholders in more detail, see
the section entitled "United States Federal Income Tax Treatment of the Merger"
later in this prospectus supplement.
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES DESCRIBED ABOVE MAY NOT
APPLY TO ALL HOLDERS OF LUMINENT COMMON STOCK. YOUR TAX CONSEQUENCES WILL DEPEND
ON YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL
UNDERSTANDING OF THE TAX CONSEQUENCES OF THE MERGER TO YOU.
INTERESTS OF CERTAIN PERSONS TO THE MERGER
Immediately, prior to the Merger, MRV Merger Sub, a wholly owned subsidiary
of MRV, owned an aggregate of 144,000,000 shares of Luminent common stock.
Luminent's board of directors consisted of members of the boards of directors of
MRV and MRV Merger Sub and a director independent of MRV, MRV Merger Sub and
Luminent. MRV Merger Sub succeeded to all of the assets and liabilities of
Luminent upon consummation of the Merger.
Executive officers and directors of MRV Merger Sub, MRV and their
affiliates with management responsibilities for Luminent and MRV who owned
Luminent common stock would receive the same benefits from the Merger as were
received by other Luminent stockholders. As of effective date of the Merger,
none of these persons owned any outstanding Luminent common stock nor had any
rights to purchase or acquire Luminent common stock. These persons collectively
owned less than 6.5 percent of the outstanding MRV common stock immediately
prior to the effective date of the Merger.
ACCOUNTING TREATMENT
The exchange of MRV common stock for publicly held Luminent common stock in
the Merger will be accounted for as a purchase for financial reporting purposes.
LUMINENT STOCK OPTIONS
At the effective time of the Merger, each outstanding Luminent stock option
shall be deemed to constitute an option to acquire, on the same terms and
conditions as were applicable under the option, the same number of shares of MRV
common stock as the holder of the option or warrant would have been entitled to
receive pursuant to the Merger agreement, had the holder exercised the Luminent
option in full immediately prior to the effective time of the Merger, rounded to
the nearest whole number, unless rounding down is necessary to preserve the
status of incentive stock options as described below. The exercise price per
share shall equal: the aggregate exercise price for the Luminent shares
otherwise
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purchasable pursuant to the option, divided by the aggregate number of whole MRV
shares purchasable pursuant to the Luminent option in accordance with the
foregoing. In the case of any stock option that qualifies as an incentive stock
option under the Internal Revenue Code, the option price, number of shares
purchasable pursuant to the option and the terms and conditions of the exercise
of the option shall be determined in order to comply with Section 424(a) of the
Internal Revenue Code.
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OPINION OF FINANCIAL ADVISOR
On September 24, 2001, Luminent's Board of Directors engaged Duff & Phelps,
as its independent financial advisor, to make a determination as to whether the
Merger Exchange Ratio of .43 shares of MRV common stock for each share of
Luminent stock not held by MRV (the "Merger Exchange Ratio") is fair to the
minority common stockholders of Luminent from a financial point of view.
Duff & Phelps rendered a written opinion (the "Opinion") to the Board of
Directors of Luminent that, as of October 4, 2001, the Merger Exchange Ratio is
fair to the minority stockholders of Luminent from a financial point of view.
Duff & Phelps' opinion is attached as Annex B and is incorporated herein by
reference. LUMINENT STOCKHOLDERS ARE ENCOURAGED TO READ THIS OPINION IN ITS
ENTIRETY.
Duff & Phelps is a nationally recognized investment banking firm that is
regularly engaged to render financial opinions in connection with mergers and
acquisitions, tax matters, corporate planning, and other purposes. Previously,
Duff & Phelps has not provided financial advisory services to Luminent, MRV or
its subsidiary companies.
In connection with its Opinion, Duff & Phelps made such reviews, analyses
and inquiries as it deemed necessary and appropriate under the circumstances.
Among other things, Duff & Phelps (a) met with certain members of senior
management of Luminent to discuss the history, financial condition, future
prospects and projected performance of Luminent and toured their facilities in
Chatsworth, California; (b) met with certain members of senior management of MRV
to discuss the history, financial condition, future prospects and projected
performance of MRV and its divisions and subsidiaries and toured the MRV's
facilities in Chatsworth, California; (c) met with certain members of senior
management of MRV's subsidiaries, Nbase-Xyplex, Inc. and Optical Access, Inc.,
at MRV's headquarters, to discuss the history, financial condition, future
prospects and projected performance of these subsidiaries; (d) met with certain
members of senior management of Broadband Highway, Inc. to discuss the history,
financial condition, future prospects and projected performance of Broadband
Highway, Inc. and toured their facilities in Woodland Hills, California; (e) met
with certain members of senior management of Zuma Networks, Inc. to discuss the
history, financial condition, future prospects and projected performance of Zuma
Networks, Inc. and toured their facilities in West Hills, California; (f) met
with representatives from Arthur Andersen LLP, auditor for both Luminent and
MRV, to discuss the historical financial statements and consolidating statements
for both Luminent and MRV; (g) reviewed Luminent's financial statements and SEC
filings, including the annual report on Form 10-K for the year ended December
31, 2000, and quarterly report on Form 10-Q the six-month period ended June 30,
2001; (h) reviewed MRV's financial statements and SEC filings, including the
annual report on Form 10-K for the year ended December 31, 2000, and quarterly
report on Form 10-Q for the six-month period ended June 30, 2001; (i) reviewed
MRV's internally generated consolidating financial statements for the fiscal
year ended December 31, 2000, and six-month period ended June 30, 2001; (j)
reviewed revenue estimates for third quarter 2001 provided by Luminent and MRV
management; (k) reviewed the historical trading price and trading volume of
Luminent and MRV common stock; (l) reviewed certain articles and press releases
regarding Luminent and MRV; (m) reviewed other operating and financial
information provided by management of Luminent and MRV; and (n) reviewed
economic and industry information and conducted such studies, analyses and
investigations as Duff & Phelps deemed appropriate.
Duff & Phelps' Opinion is based upon an analysis of the foregoing in light
of its assessment of the general, economic and financial market conditions, as
they can be evaluated by Duff & Phelps, as of October 4, 2001. Events occurring
after October 4, 2001 could materially affect the assumptions used in preparing
its Opinion.
In connection with its Opinion, with Luminent's permission and without any
independent verification, Duff & Phelps assumed that all information reviewed by
it with respect to Luminent, MRV and the Merger, whether supplied by Luminent,
MRV or its advisors, or obtained by Duff & Phelps from publicly available
sources, is true, correct and complete in all material respects and does not
contain any untrue statements of material fact or omit to state a material fact
necessary to make the information supplied to
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Duff & Phelps not misleading. Duff & Phelps did not make an independent
valuation or appraisal of the assets or liabilities of Luminent or MRV and was
not furnished with such valuation or appraisal. Any inaccuracies in or omissions
from the information on which Duff & Phelps relied could materially affect its
Opinion.
Set forth below is a summary of the analyses performed by Duff & Phelps in
reaching its Opinion as of October 4, 2001.
Current Status of Luminent's Business. Duff & Phelps considered Luminent's
historical and projected revenues and cash flows, historical stock price
performance, current cash position and future prospects for the optical
component industry, among other factors, to determine the fairness of the Merger
Exchange Ratio.
Luminent's revenues grew steadily from 1996 through 2000, increasing from
$24.0 million to $124.2 million. Furthermore, Luminent's revenues for the six
months ended June 30, 2001 were $89.3 million, relative to $43.0 million for the
same period in 2000. However, on September 26, 2001, due to a drop in demand for
its products, Luminent management reduced its revenue estimates for the third-
quarter 2001 to $20 million to $21 million. In addition, Luminent's largest
clients, Marconi Communications and Cisco Systems, are facing weaker orders. As
a result, Duff & Phelps has projected Luminent's revenues in the near and medium
term future to be considerably lower than their historical levels.
During the fiscal years 1996 through 2000, after adjusting for non-cash
charges including depreciation and amortization expenses, Luminent had positive
pro-forma net income. Furthermore, for the six month period ended June 30, 2001,
after adjusting for approximately $59 million in non-cash charges, such as
depreciation, amortization and deferred compensation, and adding back $41.2
million of one-time charges related to the write-down of inventory,
restructuring costs and other non-recurring items, Luminent had positive
pro-forma net income. Future profitability from operations will be more
difficult to achieve due to lower revenue levels.
Luminent sold 12 million shares in an IPO for $12 per share on November 9,
2000, raising a net $132.3 million. As of October 4, 2001, the cash and
equivalents account for Luminent was approximately $90 million.
Luminent's stock price declined significantly after its IPO. By the end of
November 2000, it had dropped by 50% to $6 per share. Since then, Luminent's
stock price has fluctuated from approximately $10 per share, to a low of $1.20
per share. As of September 10, 2001, the last trading day prior to the
announcement of the proposed the Merger, Luminent's stock priced closed at $1.35
per share.
There are significant business issues facing Luminent. Over the past six
months there has been significant turnover in Luminent's senior management team,
including the departure of its president, William R. Spivey.
Marconi Communications, which represented 40% of Luminent's fiscal 1999
sales and 18% of fiscal 2000 sales, appears to be having significant financial
difficulties. Marconi PLC's stock price closed on October 1, 2001 at $.44 per
share, down from a high of $28.19 on October 20, 2000. Marconi's financial
difficulties could result in the cancellation or postponement of its orders to
Luminent and could potentially create difficulty in collecting on current
Marconi accounts receivables.
The telecommunications components market is currently flooded with
competitors. Furthermore, there is a surplus of inventory throughout the
industry. These factors are impacting sales volume, pricing and profitability
for all companies operating in this sector.
Current Status of MRV's Business. Duff & Phelps considered MRV's
historical and projected revenues and cash flows, current cash position, the
current market for development stage companies in the telecommunications sector,
and the historical trading price of MRV, among other factors, to determine the
fairness of the Merger Exchange Ratio.
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For purposes of Duff & Phelps' analysis, MRV was broken down into three
separate components: (1) MRV's 92.3% interest in Luminent; (2) the start-up,
development stage businesses; and (3) the other MRV divisions, which includes
Optical Access, Inc; iTouch Communications, Inc.; Nbase-Xyplex, Inc.; Cescomm,
Inc.; Appointech, Inc. and the European subsidiaries (the "MRV Divisions").
The start-up, development stage companies of MRV do not generate revenue
and require ongoing cash infusions. A number of these companies, such as
Charlotte's Networks, Inc. and Zuma Networks, Inc. have technologies that
warrant significant valuations, even in today's soft market. It is, however,
difficult to find buyers for development stage companies and realize these
valuations.
The MRV Divisions have stable and growing revenues. While certain of the
companies within the MRV Divisions are profitable, analyzed as a group, the MRV
Divisions generate losses and are cash flow negative. Therefore, the MRV
Divisions require ongoing cash infusions. Certain companies within the MRV
Divisions, such as Optical Access, Inc., warrant significant valuations even in
today's soft market. It is difficult, however, find buyers for companies in the
telecommunications sector today.
MRV's revenues grew steadily from 1996 through 2000, increasing from $88.8
million to $319.4 million. MRV's revenues, excluding Luminent, were
approximately $64.8 million in fiscal 1996 and $195.2 million in fiscal 2000.
MRV's revenues for the six months ended June 30, 2001 were $189.6 million,
relative to $139 million for the same period in 2000. Excluding Luminent, MRV's
revenues for the six-month period ended June 30, 2001 were $104.9 million. MRV's
non-Luminent business is projected to generate revenues during the last two
quarters of fiscal 2001 that are relatively similar to the first two quarters.
Furthermore, due to the fact that MRV's businesses are not as affected by the
economic recession as Luminent's business, revenues are projected to grow into
the future.
MRV has been unprofitable every year since 1998, both including and
excluding Luminent. For the six-month period ended June 30, 2001, after
adjusting for noncash charges including depreciation and amortization, MRV's
operations, excluding Luminent, had an operating loss of 4.1 million. Due to the
development stage businesses in MRV's portfolio, MRV's non-Luminent businesses
are projected to be unprofitable into the near-term future.
As of October 4, 2001, MRV, excluding Luminent, had a relatively weak cash
position, with an estimated $62 million in cash and equivalents plus an
additional $52 million in restricted cash. Furthermore, MRV had $50 million in
long-term debt and $89.6 million in convertible debentures. Due to the fact that
MRV's non-Luminent businesses, in aggregate, are cash flow negative, they will
most likely require continued cash infusions in the near to medium term future.
Over the past twelve month period, MRV's common stock price ranged from a
high of $49.25 as of October 5, 2000, to a low of $2.43 as of September 17,
2001. The deterioration of MRV's stock price reflects the depressed state of the
telecommunications sector. As of September 10, 2001, the last trading day prior
to the announcement of the proposed Merger, MRV's stock priced closed at $3.23
per share.
On September 11, 2001, MRV's Chief Financial Officer, Edmund Glazer, died
on Flight 11 from Boston to Los Angeles. There is a significant void in MRV's
management team without Mr. Glazer.
FUNDAMENTAL VALUATION OF ANALYSIS OF LUMINENT'S COMMON STOCK
To determine the fair market value of Luminent's common stock, Duff &
Phelps utilized a comparable public company analysis and a discounted cash flow
analysis, as follows:
Comparable Public Company Analysis. Duff & Phelps compared selected
financial and other operating ratios for Luminent to the corresponding ratios of
certain publicly traded fiber-optic component companies. These comparable public
companies were as follows: Agere Systems, Inc.; Avanex Corporation; Bookham
Technology PLC; Finisar Corporation; JDS Uniphase Corporation; New Focus, Inc.;
Oplink Communications, Inc.; Optical Communication Products; and Stratos
Lightwave, Inc. The ratios analyzed included enterprise value-to-sales and
enterprise value-to-cash. For purposes of Duff & Phelps' analysis, enterprise
value is defined as market value of equity plus book value of interest bearing
debt. The statistics
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were generally based on financial and operating data at or for the twelve months
ended June 30, 2001, and market prices as of October 1, 2001.
Other commonly used valuation multiples, such as enterprise value-to-cash
flow and equity value-to-net income, were not applicable since the large
majority of the comparable public companies had negative cash flow and negative
earnings. Furthermore, price-to-book value multiples were not applicable due to
the fact that many of the comparable public companies have a significant portion
of their asset value in goodwill. Since the time the goodwill was booked, there
has most likely been significant goodwill impairment. Due to the fact that the
goodwill has not been written down to reflect its current fair market value,
this approach is not meaningful.
Enterprise value as a multiple of latest twelve months' revenues for the
comparable companies ranged from 0.8x to 3.8x with a median of 1.8x. Based on a
risk analysis of Luminent relative to the comparable public companies, Duff &
Phelps determined that a reasonable multiple to apply to Luminent's latest
twelve months revenues was 1.5x, resulting in an enterprise value indication for
Luminent of $256 million.
Enterprise value as a multiple of cash and equivalents for the comparable
companies ranged from 0.4x to 6.2x with a median of 1.8x. Based on a risk
analysis of Luminent relative to the comparable public companies, Duff & Phelps
determined that a reasonable multiple to apply to Luminent's $90 million in cash
was 1.8x, resulting in an enterprise value indication for Luminent of $162
million.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted cash
flow analysis of Luminent based on projections developed by Duff & Phelps,
relying on industry reports regarding the outlook for optical components
companies in the telecommunications industry and information provided by
Luminent's management during Duff & Phelps' due diligence investigation. The
terminal value of Luminent was estimated by capitalizing projected 2005 revenue.
The projected cash flows and terminal value were discounted to the present value
using a discount rate of 20%, which represents Duff & Phelps' estimate of
Luminent's weighted average cost of capital (WACC). The resulting indication of
Luminent's enterprise value was $120 million.
Determination of Luminent's Equity Value. Duff & Phelps weighted each of
the three valuation indications of Luminent's enterprise value equally,
resulting in a concluded value of $180 million. As of June 30, 2001, Luminent
had approximately $23.6 million in interest bearing debt. Deducting the debt
from the concluded enterprise valuation results in a valuation of Luminent's
equity, on a marketable minority interest basis, of $156.4 million.
Luminent has approximately 12.2 million stock options issued and
outstanding, with exercise prices ranging from $2.63 to $12.00 per share. Based
on the Black-Scholes option pricing model, the aggregate fair market value of
the options is $2.37 million. Deducting the aggregate value of the options from
the concluded equity value results in the fair market value of the common equity
of $154 million. Based on 156 million shares of Luminent common stock issued and
outstanding, the fair market value of Luminent's common stock, on a marketable
minority interest basis, is approximately $1.00 per share.
Premium for Control. Duff & Phelps analyzed control transactions that have
closed since December 31, 1999, for (1) companies in the telecommunications
equipment and components industry; (2) other communications related companies;
and (3) electronics companies. The median control premium paid for companies in
the telecommunications equipment and components industry was 89.9%. The median
control premium paid for companies in the other communications related
businesses was 52.9%. The average control premium paid for companies in the
electronics industry was 70.3%. Based on these control premiums, Duff & Phelps
concluded that an appropriate control premium to apply to the concluded
marketable minority interest value of Luminent's common stock was 80%. Applying
the 80% control premium to the $1.00 minority interest value conclusion for
Luminent results in the fair market value of Luminent, on a controlling interest
basis, of $1.80 per share.
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FUNDAMENTAL VALUATION ANALYSIS OF MRV'S COMMON STOCK
Start-up Company Valuations. MRV has numerous investments in development
stage, start-up companies. To determine the fair market value of each of these
companies, Duff & Phelps analyzed MRV's historical investment in each company,
and held discussions with MRV management regarding (1) the technologies at each
company, (2) the historical private placement valuations for certain of these
companies, (3) management's ongoing discussions with potential buyers of certain
of these companies, and (4) management's estimate of the current fair market
value of each of the start-up companies. To the estimates of value for the
minority-owned positions held by MRV, Duff & Phelps applied discounts for
minority interest ranging from 20% to 25%. For all but one of the majority-owned
and minority-owned companies, to reflect the relative illiquidity of these types
of companies in today's market, Duff & Phelps applied a discount for lack of
marketability of 40%. Due to the fact that Charlotte's Network, Inc. holds
sufficient cash within the company to fund its cash needs for approximately two
years, the discount for lack of marketability was reduced to 25%. After applying
these discounts, the aggregate fair market value of the MRV majority-owned and
minority-owned start-up company investments was $142.3 million.
Valuation of other MRV Divisions. The other MRV Divisions include Optical
Access, Inc.; iTouch Communications, Inc.; Nbase-Xyplex, Inc.; Cescomm, Inc.;
Appointech, Inc. and the European subsidiaries. The MRV Divisions were valued
using a comparable public company analysis and a discounted cash flow analysis.
Comparable Public Company Analysis. Duff & Phelps compared selected
financial and other operating ratios for the MRV Divisions to the corresponding
ratios of certain publicly traded companies in the telecommunications industry.
These comparable public companies were as follows: Avici Systems, Inc.; Corvis
Corporation; Enterasys Networks Inc.; Extreme Networks, Inc.; Foundry Networks,
Inc.; ONI Systems Corporation; Redback Networks, Inc.; Riverstone Networks,
Inc.; and Sycamore Networks, Inc. The ratios analyzed were the enterprise
value-to-sales multiples. The statistics were generally based on financial and
operating data for the twelve months ended June 30, 2001, and market prices as
of October 1, 2001.
Other commonly used valuation multiples, such as enterprise value-to-cash
flow and equity value-to-net income, were not applicable since the large
majority of the comparable public companies had negative cash flow and negative
earnings. Furthermore, price-to-book value multiples were not applicable due to
the fact that many of the comparable public companies have a significant portion
of their asset value in goodwill. Since this goodwill was booked, there has
likely been significant goodwill impairment. Due to the fact that the goodwill
has most likely not been written down to reflect its current fair market value,
this approach is not meaningful. Furthermore, the enterprise value-to-cash
multiples were not analyzed, as the MRV Divisions had insufficient cash to
produce a meaningful valuation indication.
Enterprise value as a multiple of latest twelve months' revenues for the
comparable companies ranged from 1.2x to 5.3x with a median of 2.0x. Based on a
risk analysis of the MRV Divisions relative to the comparable public companies,
and given the MRV Division's relatively low level of cash, Duff & Phelps
determined that a reasonable multiple to apply to MRV's Division's latest twelve
months revenues of $199.5 million was 1.0x, which is below the bottom of the
range of multiples. This results in an enterprise value indication for the MRV
Divisions of $200 million.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted cash
flow analysis of the MRV Divisions based on projections developed by Duff &
Phelps, relying on industry reports regarding the outlook for companies in the
telecommunications industry and information provided by MRV's management during
Duff & Phelps' due diligence investigation. The terminal value of the MRV
Divisions was estimated by capitalizing projected 2005 revenue. The projected
cash flows and terminal value were discounted to the present value using a
discount rate of 30%, which represents Duff & Phelps' estimate of MRV's weighted
average cost of capital (WACC). The resulting indication of enterprise value
using the discounted cash flow approach for the MRV Divisions was $200 million.
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Determination of MRV Division's Equity Value. Duff & Phelps weighted the
two valuation indications of the MRV Divisions equally, resulting in a concluded
value of $200 million. As of June 30, 2001, the MRV Divisions had approximately
$2.8 million in interest bearing debt. Deducting the debt from the concluded
enterprise valuation results in a valuation of the MRV Divisions' equity, on a
marketable minority interest basis, of $197.2 million.
MRV's 92.3% Interest in Luminent. MRV owns approximately 92.3% of
Luminent. Based on Duff & Phelps' analysis of the fair market value of Luminent,
on a marketable minority interest basis, of $154 million (or $1.00 per share),
and applying MRV's 92.3% ownership position, results in the fair market value of
MRV's interest in Luminent of $142.1 million.
Determination of MRV's Equity Value. To determine the fair market value of
MRV's total enterprise, Duff & Phelps aggregated the fair market value of (1)
the start-up companies of $142.3 million; (2) the MRV Divisions of $197.2
million; and (3) MRV's 92.3% interest in Luminent of $142.1 million, resulting
in a total enterprise valuation for MRV of $481.6 million. To determine the fair
market value of MRV's equity, the face value of the interest bearing debt of
$140 million was deducted. This results in the fair market value of MRV's equity
of $342 million.
MRV has approximately 16.8 million stock options and warrants issued and
outstanding, with exercise prices ranging from $2.54 to $33.00 per share. Based
on the Black-Scholes option pricing model, the aggregate fair market value of
the options and warrants is $33.4 million. Deducting the aggregate value of the
options from the concluded equity value results in the fair market value of the
common equity of $308.5 million. Based on 72.5 million shares of MRV common
stock issued and outstanding, the fair market value of MRV's common stock, on a
marketable minority interest basis, is $4.26 per share.
MERGER EXCHANGE RATIO ANALYSIS
Duff & Phelps tested the reasonableness of the Merger Exchange Ratio of .43
shares of MRV stock for every share of Luminent stock not held by MRV based on
(1) a fundamental valuation analyses of the common stock of Luminent and MRV,
(2) the relative stock prices for MRV and Luminent prior to the announcement of
the proposed Merger, and (3) the historical relative stock prices of Luminent
and MRV prior to the announcement date of the Merger.
Fundamental Valuation Analysis. Duff & Phelps' fundamental valuation of
Luminent's common stock of $1.80 per share, on a controlling interest basis, and
its fundamental valuation of MRV's common stock of $4.26 per share, on a
marketable minority interest basis, implies a merger exchange ratio of 42%. The
Merger Exchange Ratio of 43% appears reasonable in light of the Duff & Phelps'
fundamental valuation analysis.
Relative Pre-announcement Prices. On September 10, 2001, Luminent's
closing stock price was $1.35 per share, and MRV's closing stock price was $3.23
per share, implying a merger exchange ratio of 42%. The Merger Exchange Ratio of
43% appears reasonable in light of the relative pre-announcement prices for
Luminent common stock and MRV common stock.
Relative Historical Prices. From November 9, 2000 (Luminent's IPO date) to
September 10, 2001 (the last trading date prior to the Merger announcement), the
merger exchange ratios implied from Luminent's and MRV's stock prices tended to
range from 40% to 50%, with a low of 34% and a high of 60%. The Merger Exchange
Ratio of 43% appears reasonable in light of the historical relative stock
trading prices of Luminent and MRV.
Based on the foregoing analysis, Duff & Phelps concluded that the Merger
Exchange Ratio of .43 shares of MRV common stock for every share of Luminent
common stock not held by MRV is fair to the minority stockholders of Luminent
from a financial point of view as of the date of its Opinion.
No company or transaction used in the above analyses is identical to
Luminent, MRV or the Merger. Accordingly, an analysis of the results of the
foregoing is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the
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companies and other facts that could affect the public trading value of the
companies to which they are being compared.
The material analyses performed by Duff & Phelps have been summarized
above. Nonetheless, the summary set forth above does not purport to be a
complete description of the analyses performed by Duff & Phelps. The preparation
of a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances. Therefore, such an opinion is not readily
susceptible to a summary description. Duff & Phelps did not form a conclusion as
to whether any individual analysis, considered in isolation, supported or failed
to support an opinion as to fairness. Rather, in reaching its conclusion, Duff &
Phelps considered the results of the analyses in light of each other and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Duff & Phelps did not place a particular reliance or weight on any
particular analysis, but instead concluded that its analyses, taken as whole,
supported its determination.
In performing its analyses, Duff & Phelps made numerous assumptions with
respect to Luminent's and MRV's performance, general business and economic
conditions and other matters. The analyses performed by Duff & Phelps are not
necessarily indicative of future actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. The
analyses do not purport to be appraisals or to reflect prices at which a company
might actually be sold or the prices at which any securities may trade at the
present time or at any time in the future. Duff & Phelps developed projections
of future performance for Luminent and MRV based on discussions with management
of Luminent and MRV and industry research. The projections were based on
numerous variables and assumptions which are inherently unpredictable and must
be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those assumed in the projections and any
related analyses. Duff & Phelps' opinion does not address the relative merits of
the Merger as compared to any alternative business strategies that might exist
for Luminent or the effect of any other business combination in which Luminent
might engage.
Pursuant to the terms of the engagement of Duff & Phelps, Luminent has
agreed to pay Duff & Phelps a fee of $125,000 for financial advisory services in
connection with the Merger, including the rendering of its opinion. Luminent has
also agreed to reimburse Duff & Phelps for reasonable out-of-pocket expenses and
to indemnify Duff & Phelps against certain expenses and liabilities, including
liabilities under the Federal securities law, incurred in connection with the
performance of its duties under the engagement.
Duff & Phelps' opinion to the Board of Directors of Luminent was one of
many factors taken into consideration by the Board of Directors of Luminent in
making its determination to approve the Merger.
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UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE MERGER
The Merger will be treated for U.S. federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code. MRV, MRV Merger Sub and Luminent will each be a party to that
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. None of MRV, MRV Merger Sub or Luminent will recognize any gain or loss
for U.S. federal income tax purposes as a result of the Merger.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO LUMINENT STOCKHOLDERS
For U.S. federal income tax purposes:
- A holder of Luminent common stock will not recognize any gain or loss
upon its exchange in the Merger of its shares of Luminent common stock
for shares of MRV common stock;
- If a holder of Luminent common stock receives cash instead of a
fractional share of MRV common stock, the holder will be required to
recognize a gain or loss, measured by the difference between (1) the
amount of cash received instead of that fractional share, and (2) the
portion of the tax basis of that holder's shares of Luminent common stock
allocable to that fractional share. This gain or loss will be a capital
gain or loss and will be a long-term capital gain or loss if the share of
Luminent common stock exchanged for that fractional share of MRV common
stock was held for more than one year at the effective time of the Merger
and short-term capital gain or loss if the share of Luminent common stock
exchanged for that fractional share of MRV common stock was held for one
year or less at the effective time of the Merger;
- A holder of Luminent common stock will have a tax basis in the MRV common
stock received in the Merger equal to (1) the tax basis of the Luminent
common stock surrendered by that holder in the Merger, less (2) any tax
basis of the Luminent common stock surrendered that is allocable to any
fractional share of MRV common stock for which cash is received by that
holder; and
- The holding period for shares of MRV common stock received in exchange
for shares of Luminent common stock in the Merger will include the
holding period for the shares of Luminent common stock surrendered in the
Merger.
A holder of Luminent common stock who exercises appraisal rights with
respect to a share of Luminent common stock and who receives payment for the
stock in cash will generally recognize capital gain or loss, measured by the
difference between (1) the stockholder's tax basis in that share, and (2) the
amount of cash received.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO MRV STOCKHOLDERS
For U.S. federal income tax purposes, holders of MRV common stock will not
recognize a gain or loss as a result of the Merger.
This discussion of material U.S. federal income tax consequences is
intended to provide only a general summary and is not a complete analysis or
description of all potential U.S. federal income tax consequences of the Merger.
This discussion does not address tax consequences that may vary with, or are
contingent on, individual circumstances. In addition, it does not address any
non-income tax or any foreign, state or local tax consequences of the Merger.
ACCORDINGLY, MRV STRONGLY ENCOURAGES EACH LUMINENT STOCKHOLDER TO CONSULT HIS OR
HER OWN TAX ADVISOR TO DETERMINE THE PARTICULAR UNITED STATES FEDERAL, STATE,
LOCAL OR FOREIGN INCOME OR OTHER TAX CONSEQUENCES TO THE STOCKHOLDER AS A RESULT
OF THE MERGER.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MRV
OVERVIEW
MRV creates, acquires, finances and operates companies, and through them,
designs, develops, manufactures and markets products, which enable high-speed
broadband communications. MRV concentrates on companies and products devoted to
optical components and network infrastructure systems. MRV has leveraged its
early experience in fiber optic technology into a number of well-focused
operating units specializing in advanced fiber optic components, switching,
routing, transaction management and wireless optical transmission systems which
MRV has created, financed or acquired.
During 2000, MRV completed several strategic acquisitions. These
acquisitions were made to expand MRV's product offerings, enhance its
technological expertise and expand its manufacturing capabilities. The table
below summarizes the more notable acquisitions.
DATE OF TOTAL FORM OF CONSIDERATION
ACQUIRED COMPANY ACQUISITION CONSIDERATION AND OTHER NOTES TO ACQUISITION
---------------- -------------- -------------- ------------------------------
Fiber Optic Communications, April 24, 2000 $310.4 million $48.6 million in cash and 5.4
Inc. million shares of common stock
and options issued;
approximately 97% of capital
stock assumed; goodwill and
other intangibles recorded of
$261.6 million; deferred stock
compensation recorded of $14.1
million
Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill and other intangibles
recorded of $33.7 million;
deferred stock compensation
recorded of $25.0 million
Quantum Optech Inc. July 12, 2000 $36.2 million 1.2 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill and other intangibles
recorded of $27.9 million;
deferred stock compensation
recorded of $2.7 million
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DATE OF TOTAL FORM OF CONSIDERATION
ACQUIRED COMPANY ACQUISITION CONSIDERATION AND OTHER NOTES TO ACQUISITION
---------------- -------------- -------------- ------------------------------
AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill and other intangibles
recorded of $108.3 million;
deferred stock compensation
recorded of $50.0 million
Optronics International Corp. July 21, 2000 $124.3 million 4.2 million shares of common
stock and options issued;
approximately 99% of capital
stock assumed; goodwill and
other intangibles recorded of
$99.5 million; deferred stock
compensation recorded of $13.4
million
Each of these acquisitions was accounted for using the purchase method and
therefore, the results of operations of the acquired businesses have been
included in MRV's consolidated financial statements from the respective dates of
acquisition. Goodwill and other intangibles from these acquisitions totaled
$463.9 million. Goodwill and other intangibles from these acquisitions totaled
$346.1 million as of June 30, 2001. For the year ended December 31, 2000, MRV
recorded amortization of goodwill and other intangibles from these acquisitions
of $60.6 million and for the six months ended June 30, 2001, MRV recorded
amortization of goodwill and other intangibles from these acquisitions of $57.2
million. MRV expects to record amortization charges of goodwill and other
intangibles for these acquisitions of approximately $29.0 million per quarter
until December 31, 2001. At January 1, 2002, MRV intends to implement SFAS No.
142, "Goodwill and Other Intangible Assets" (see Recently Issued Accounting
Standards, below).
In connection with these acquisitions, a portion of the purchase prices
paid represented deferred stock compensation relating to options to purchase
MRV's common stock. The fair values of these options were $105.2 million and
have been recorded as deferred stock compensation. Deferred stock compensation
amortization expense for the year ended December 31, 2000, relating to these
stock options was approximately $42.7 million. Deferred stock compensation
amortization expenses for the six months ended June 30, 2001, relating to these
stock options was approximately $33.8 million, compared with $7.3 million for
the six months ended June 30, 2000. MRV expects to incur approximately $78.8
million of total deferred stock compensation, which will be fully amortized by
2004. Deferred stock compensation is being amortized using the graded method
using an estimated employment period of four years.
In July 2000, MRV and Luminent, entered into employment agreements with
Luminent's former President and Chief Executive Officer and its Vice President
of Finance and Chief Financial Officer. The agreements provide for annual
salaries, performance bonuses and combinations of stock options to purchase
shares of MRV's common stock and Luminent's common stock. The stock options were
granted to Luminent's executives at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation from these
stock option grants reported for the year ended December 31, 2000, was $54.2
million. Deferred stock compensation from these stock option grants reported for
the six months ended June 30, 2001, was $13.0 million, and MRV will incur
additional deferred stock compensation of approximately $25.0 million through
2004. Luminent's President and Chief Executive Officer resigned in September
2001. Dr. Spivey's resignation was considered by the parties to be a termination
other than for cause under his employment agreement entitling him to the
severance benefits of his employment agreement, including payment over a one
year period of an amount equal to two times the sum of his annual salary plus
bonus and the vesting of all of his unvested Luminent options. Dr. Spivey's MRV
and Luminent stock options are now exercisable through September 11, 2003.
During
44
47
the quarter ended September 30, 2001, the Company will record a charge of $1.0
million to reflect severance expense and an immediate write-down of deferred
stock compensation expense of $18.9 million.
Fiber Optic Communications, Quantum Optech and Optronics International were
acquired and contributed to Luminent as part of MRV'S original plan to complete
an initial public offering of its fiber optics components business and
eventually spin-off this business to MRV's stockholders. This plan was
terminated in September 2001 when MRV decided not to complete the spin-off of
Luminent and to merge Luminent with MRV Merger Sub, MRV's wholly-owned
subsidiary, thereby eliminating public ownership of Luminent. Fiber Optic
Communications develops and manufactures passive fiber optic components for
wavelength division multiplexing. Quantum Optech specializes in developing and
manufacturing optical thin film coating and filters for dense wavelength
division multiplexing. Optronics focuses on developing and manufacturing high
temperature semiconductor lasers, transceivers and detectors for optical
networks. These acquisitions also provided additional manufacturing capabilities
for future growth.
AstroTerra and Jolt were acquired and contributed to MRV's subsidiary,
Optical Access, which focuses on optical wireless products that deliver
high-speed communications traffic to the so-called last mile portion of the
communications network and eventually spin-off this business to MRV's
stockholders. AstroTerra develops and manufactures free-space optical wireless
communication systems to connect data and telecommunications networks. Jolt
develops and manufactures multi-port wireless optics communications equipment.
These acquisitions provided strategic components and technology for Optical
Access' wireless optical solution.
On October 6, 2000, MRV's wholly-owned subsidiary, Optical Access, filed a
registration statement with the Securities and Exchange Commission for the
initial public offering of its common stock. Because of the time lapse since the
initial filing, MRV expensed in the quarter ended June 30, 2001, all costs ($1.0
million) of this offering. Optical Access designs, manufactures and markets an
optical wireless solution that delivers high-speed communications traffic to the
portion of the communications network commonly know as the last mile, which
extends from the end user to the service provider's central office.
MRV reported a net loss of $153.0 million for the year ended December 31,
2000, and $148.4 million for the six months ended June 30, 2001. A significant
portion of the net loss was due to the amortization of goodwill and other
intangibles and deferred stock compensation related to MRV's recent acquisitions
and its employment arrangements with Luminent's former President and its Chief
Financial Officer. MRV will continue to record amortization of goodwill and
other intangibles through 2005, and deferred stock compensation through 2004,
relating to these acquisitions and Luminent's employment arrangements with its
executives. Effective January 1, 2002, the adoption of SFAS 142 will stop
amortization of goodwill, however, it may require the Company to record an
impairment charge (see Recently Issued Accounting Standards). As a consequence
of these charges, MRV does not expect to report net income in the foreseeable
future. See discussion of the impact on the amortization of goodwill and other
intangibles due to the adoption of SFAS 142 as of January 1, 2002 (see Recently
Issued Accounting Standards).
On November 10, 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12.00 per share for net proceeds
of approximately $132.3 million. Luminent designs, manufactures and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking equipment for the rapidly
growing metropolitan and access segments of the communications networks. While
MRV had planned to distribute all of its shares of Luminent common stock to its
stockholders, unfavorable business and economic conditions in the fiber optic,
data networking and telecommunications industries and the resulting adverse
effects on the market prices of the common stock of MRV and Luminent, has caused
MRV to determine to abandon the distribution and merge Luminent into MRV Merger
Sub, MRV's wholly-owned subsidiary, thereby eliminating public ownership of
Luminent. See the section entitled "The Merger -- Reasons for the Merger"
earlier in this prospectus supplement.
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MARKET CONDITIONS AND CURRENT OUTLOOK
Macroeconomic factors, such as an economic slowdown in the U.S. and abroad,
have detrimentally impacted demand for optical components. The unfavorable
economic conditions and reduced capital spending has detrimentally affected
sales to service providers, network equipment companies, e-commerce and Internet
businesses, and the manufacturing industry in the United States during 2001 to
date, and may continue to affect them for the remainder of 2001 and thereafter.
Announcements by industry participants and observers indicate there is a
slowdown in industry spending and participants are seeking to reduce existing
inventories.
As a result of the current slowdown in the communications industry, MRV
recorded in its consolidated results for the six months ended June 30, 2001,
charges relating to Luminent's write-down of inventory, purchase commitments,
asset impairment, workforce reduction, restructuring costs and other
non-recurring items. These charges, totaling $41.2 million, resulted from the
lower demand for Luminent's products and pricing pressures stemming from the
continuing downturn in the communications equipment industry generally and the
optical components sector in particular. Luminent's restructuring activities
primarily involved employee severance costs, abandonment and non-utilization of
assets and other similar actions. Costs for restructuring activities were
limited to either incremental costs that directly result from the restructuring
activities and provide no future benefit or costs incurred under contractual
obligations that existed before the restructuring plan and will continue with
either no future benefit or become a penalty incurred for termination of the
obligation. Restructuring costs totaling $14.5 million consisting of severance
and outplacement of terminated employees and exit costs are included in the
results of operations. The restructuring activities as described above, resulted
in 150 layoffs during the six months ended June 30, 2001, and will result in
additional layoffs of approximately 450 personnel, bringing Luminent's total
workforce to approximately 1,200 employees. Affected employees will come from
all divisions and areas of Luminent. The majority of affected employees will be
in the manufacturing group. A summary of the restructuring costs as of June 30,
2001, consists of the following (in thousands):
REMAINING
PROVISION UTILIZED BALANCE
--------- ----------- ---------
(UNAUDITED)
Exit Costs
Asset impairment................................. $ 8,904 $8,904 $ --
Closed and abandoned facilities.................. 1,108 -- 1,108
Other commitments................................ 2,402 -- 2,402
Other............................................ 991 -- 991
------- ------ ------
13,405 8,904 4,501
Employee severance costs........................... 1,072 196 876
------- ------ ------
$14,477 $9,100 $5,377
======= ====== ======
In addition to the costs associated with the restructuring plan, Luminent
also recorded a one-time $26.1 million charge to write-down inventory to
realizable value and an additional $598,000 charge to bad debt.
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49
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, MRV's statements
of operations data expressed as a percentage of revenues.
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------------
PRO FORMA PRO FORMA
1998 1999 2000 2000(1) 2000 2001 2001
---- ---- ---- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
DATA:
Revenues, net.............. 100% 100% 100% 100% 100% 100% 100%
Cost of goods sold......... 63 68 64 65 64 82 82
Research and development... 10 12 23 25 19 27 27
Selling, general and
administrative........... 20 24 39 40 30 43 43
Purchased technology in
progress................. 8 -- -- -- -- -- --
Restructuring costs........ 6 -- -- -- -- -- --
Amortization of goodwill
and other intangibles.... 1 1 21 30 9 30 29
--- --- --- --- --- --- ---
Operating loss............. (8) (6) (47) (60) (22) (82) (81)
Other income (expense),
net...................... 2 -- (3) (3) (1) (2) (2)
--- --- --- --- --- --- ---
Loss before provision for
income taxes, minority
interests and
extraordinary items...... (6) (5) (50) (63) (23) (84) (82)
Provision (benefit) for
income taxes............. 2 (1) (2) (2) 1 (2) (2)
Minority interests......... 1 -- -- -- -- (3) --
Gain on extraordinary
items, net of tax........ 1 -- -- -- -- -- --
--- --- --- --- --- --- ---
Net income (loss).......... (8)% (4)% (48)% (61)% (24)% (78)% 80%
=== === === === === === ===
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales. MRV generally recognizes revenue upon shipment of its products,
at which time, customer acceptance of the products has been attained and
collection is considered probable. MRV defers revenue recognition on shipment of
products where return privileges exist until the products are sold to end-users.
Net sales for the six months ended June 30, 2001, were $189.6 million, compared
to net sales of $139.0 million for the six months ended June 30, 2000. The
change represented an increase of $50.6 million or 36.4% for the six months
ended June 30, 2001 over the six month period ended June 30, 2000. This increase
was due in part to an increase in its fiber optic components business,
specifically relating to existing business and growth through recent
acquisitions.
Gross Profit. Gross profit is equal to MRV's net sales less its cost of
sales. MRV's cost of sales includes materials, direct labor and overhead. Cost
of inventory is determined by the first-in, first-out method. Gross profit for
the six months ended June 30, 2001 was $34.5 million, compared to gross profit
of $50.5 million during the six months ended June 30, 2000. The changes
represented a decrease of $16.0 million or approximately 31.7% for the six
months ended June 30, 2001 over the six months ended June 30, 2000.
47
50
MRV's gross margins (defined as gross profit as a percentage of net sales)
are generally affected by price changes over the life of the products and the
overall mix of products sold. Higher gross margins are generally expected from
new products and improved production efficiencies as a result of increased
utilization. Conversely, prices for existing products generally will continue to
decrease over their respective life cycles. MRV's gross margin decreased to
18.2% for the six months ended June 30, 2001 compared to gross margins of 36.3%
in the six months periods ended June 30, 2000. The decrease in gross margin was
partially attributed to a write-off of inventory and other market-related
one-time charges of $29.3 million taken by Luminent during the six months ended
June 30, 2001. The decrease was also partially attributable to increased
deferred compensation amortization expense. Prior to Luminent's one-time charges
and deferred stock compensation expenses, gross margin would have been 35.8%,
for the six months ended June 30, 2001, compared to 36.3% for the six months
ended June 30, 2000.
Research and Development (R&D). R&D expenses increased 90.6% to $50.8
million for six months ended June 30, 2001, over the same six month period in
2000. R&D expenses of consolidated development stage enterprises reflects the
costs incurred by consolidated development stage enterprises. These expenses
were $18.7 million or 9.9% of revenues for the six months ended June 30, 2001,
as compared to $13.3 million or 9.6% of revenues for the six months ended June
30, 2000. This represents an increase of $5.4 million or 40.6% for the six month
period ended June 30, 2001 compared to the same period in 2000. Prior to
deferred stock compensation expenses, R&D expenses would have increased 28.2% to
$17.1 million during the six month period ended June 30, 2001. The increase in
R&D expenses of consolidated development stage enterprises is due to the
acceleration in the growth of those enterprises consistent with their objectives
of bringing new products to market.
Selling, General and Administrative (SG&A). SG&A expenses increased 98.0%
to $82.1 million for the six months ended June 30, 2001, over the same six month
period in 2000. SG&A expenses were 43.3% of net sales for the six months ended
June 30, 2001. Prior to deferred stock compensation expenses, SG&A would have
increased 31.9% to $45.0 million for the six months ended June 30, 2001. As a
percentage of sales, SG&A prior to deferred stock compensation expenses would
have been 23.8% in the six months ended June 30, 2001, compared to 24.6% of net
sales in the six months ended June 30, 2000. This decrease principally resulted
from MRV's recent acquisitions.
Amortization of Goodwill and Other Intangibles From
Acquisitions. Amortization of goodwill and other intangibles increased to $57.2
million for the six months ended June 30, 2001, from $13.1 million in the
corresponding period ending June 30, 2000. The increase in these costs was
affected by MRV's recent acquisitions. MRV expects to incur additional
amortization of goodwill and other intangibles resulting from these acquisitions
totaling approximately $29.0 million each quarter until December 1, 2001. At
January 1, 2002, MRV intends to implement SFAS No. 142, "Goodwill and Other
Intangibles Assets" (see Recently Issued Accounting Standards). Furthermore, as
MRV continues to engage in strategic acquisitions, additional goodwill and other
intangibles may be recorded.
Other Expense, Net. In June 1998, MRV issued $100.0 million principal
amount of 5% convertible subordinated notes due in 2003 (the "Notes"). The Notes
were offered in a 144A private placement to qualified institutional investors at
the stated amount, less a selling discount of 3%. In late 1998, MRV repurchased
$10.0 million principal amount of the Notes at a discount from the stated
amount. MRV incurred $2.3 million in interest expense relating to the Notes
during the six months ended June 30, 2001 and June 30, 2000.
The increase in other expenses, net, is primarily attributed to the costs
of MRV's unconsolidated development stage enterprises of $3.0 million for the
six months ended June 30, 2001, as compared to $1.0 million in the comparable
period in 2000. The remaining components of other expense, net, are primarily
interest income recognized from short-term and long-term investments.
Provision (Benefit) for Income Taxes. The benefit for income taxes for the
six months ended June 30, 2001 were $3.6 million, compared to a tax provision of
$883,000 for the six months ended June 30, 2000. The decrease in the provision
for income taxes in 2001 over 2000 was primarily attributable
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51
to a larger loss for tax purposes in 2001. MRV's income tax expense fluctuates
primarily due to the tax jurisdictions where it currently has operating
facilities and varying tax rates in those jurisdictions.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Revenues. Revenues for the year ended December 31, 2000 increased $30.9
million, or 11%, to $319.4 million from $288.5 million for the year ended
December 31, 1999. MRV's revenues were favorably impacted by growth in its fiber
optic components business, which offset MRV's decision in February 2000 to
discontinue the production and sale of its LAN switches for enterprise networks.
Further revenue growth was realized due to the greater acceptance of its
Internet infrastructure products, such as MRV's In-Reach(TM) product line, and
products acquired through MRV's recent acquisitions, such as passive fiber optic
components and products designed for wireless networks. None of the companies
MRV acquired during 2000 contributed 10% or more to its total revenues from the
date of their acquisition through December 31, 2000.
Gross Profit. Gross profit is equal to MRV's revenues less its cost of
goods sold. MRV's cost of goods sold includes materials, direct labor and
overhead. Cost of inventory is determined by the first-in, first-out method.
Gross profit for the year ended December 31, 2000 increased $24.9 million, or
27%, to $116.0 million from $91.1 million for the year ended December 31, 1999.
MRV's gross margins (defined as gross profit as a percentage of revenues)
increased to 36% for the year ended December 31, 2000, from 32% for the year
ended December 31, 1999. Prior to deferred stock compensation expenses, MRV's
gross margin would have increased to 39% for the year ended December 31, 2000.
MRV's margins increased due to a favorable shift in product mix toward higher
margin product lines, such as those for 3G wireless networks and other Internet
infrastructure products.
Research and Development (R&D). R&D expenses increased $38.8 million or
110%, to $74.1 million for the year ended December 31, 2000 from $35.3 million
for the year ended December 31, 1999. R&D expenses of consolidated development
stage enterprises represented a 108% increase to $41.5 million from $20.0
million for the year ended December 31, 1999. Prior to deferred stock
compensation expenses, R&D would have increased $25.5 million, or 73%, to $60.8
million for the year ended December 31, 2000. MRV's increased spending in R&D
illustrates its commitment to continued product development and technological
expansion. Additionally, R&D from MRV's consolidated development stage
enterprises continued to increase as those enterprises strive towards bringing
new products to market.
Selling, General and Administrative (SG&A). SG&A expenses increased $56.8
million, or 84%, to $124.7 million from $67.9 for the year ended December 31,
1999. SG&A expenses were 39% of revenue, during the year ended December 31, 2000
compared to 24% of revenue for the year ended December 31, 1999. Prior to
deferred stock compensation expenses, SG&A would have increased 27%, to $86.3
million for the year ended December 31, 2000. SG&A would have been 27% of net
sales for the year ended December 31, 2000. The increase in SG&A expenses is
primarily a result of MRV's recent acquisitions. MRV has also increased
personnel and related costs in its operating entities in response to MRV's
growth in business.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles increased $62.9 million to $66.8 million from $3.9 million
for the year ended December 31, 2000. Furthermore, as MRV continues to engage in
strategic acquisitions, additional goodwill and other intangibles will be
recorded.
Interest and Other Income and Expense. MRV incurred $4.5 million in
interest expense relating to the Notes for each year ended December 31, 2000 and
1999, respectively.
The increase in other income (expense), is primarily attributed to MRV's
share of losses from its unconsolidated development stage enterprises of $7.3
million for the year ended December 31, 2000. For the year ended December 31,
1999, these entities were included in MRV's consolidated statements of
operations based on its ownership in those enterprises. The remaining components
of other income (expense), principally represent interest income recognized from
short-term and long-term investments.
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52
Provision (Benefit) for Income Taxes. The benefit for income taxes for the
year ended December 31, 2000 was $5.4 million, compared to $2.2 million for the
year ended December 31, 1999. MRV's income tax expense fluctuates primarily due
to the tax jurisdictions where MRV currently has operating facilities and the
varying tax rates in those jurisdictions.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues. Revenues for the year ended December 31, 1999 increased 9%, to
$288.5 million from $264.1 million for 1998. Revenues from sales of networking
products and optical transmission products were 77% and 23%, respectively, of
total revenues during the year ended December 31, 1999 as compared to 82% and
19%, respectively, of total revenues during the year ended December 31, 1998.
Revenues increased as a result of greater marketing efforts and greater market
acceptance of MRV's products, both domestically and internationally.
International sales accounted for approximately 58% of revenues for the year
ended December 31, 1999, as compared to 59% of revenues for the year ended
December 31, 1998.
Gross Profit. Gross profit for the year ended December 31, 1999 decreased
$7.6 million, or 8%, to $91.1 million from $98.7 million for 1998. MRV's gross
margin decreased from 37% during the year ended December 31, 1998 to 32% for the
year ended December 31, 1999 as a result of its decision to exit the LAN
switching business. During the last two years, MRV endured intense price
competition from its larger competitors. MRV had planned to compensate for this
price competition by introducing new lower cost products during 1998. MRV began
shipping these products in the last quarter of 1998, however, the
commoditization of these products and the economy of scales and manufacturing
advantages of its larger competitors were too difficult for MRV to overcome.
Therefore MRV decided to exit the LAN switching business and in connection with
this decision recorded a charge of $13.8 million primarily to write-off
inventory.
Research and Development (R&D). R&D expenses increased $9.5 million, or
37%, to $35.3 million from $25.8 million for the year ended December 31, 1999.
R&D expenses as a percentage of revenues increased from 10% of revenues during
year ended December 31, 1998, to 12% of revenues for year ended December 31,
1999. This increase was primarily caused by additional development projects
commenced during the year and associated personnel costs as well as increased
expenses resulting from personnel added to existing projects. MRV intends to
continue to invest in the research and development of new products. MRV believes
that its ability to develop and commercialize new products is its key
competitive factor.
Selling, General and Administrative (SG&A). SG&A expenses increased $14.0
million, or 26%, to $67.9 million from $53.9 million for 1998. SG&A expenses
were 24% of revenues for the year ended December 31, 1999, compared to 20% of
revenue for the year ended December 31, 1998. The increases in SG&A expense,
both in absolute dollars and as a percentage of revenue were due primarily to
substantially increased marketing efforts as well as the addition of personnel
and overhead costs in additional and expanded locations.
Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the year ended December 31, 1998 was $20.6 million.
The purchased technology in 1998 was related to R&D projects of Xyplex in
progress at the time MRV acquired Xyplex on January 30, 1998, which had not yet
reached technological feasibility and for which MRV had no alternative future
use. Restructuring costs during the year ended December 31, 1998 were $15.7
million. The restructuring costs in 1998 were associated with MRV's plan adopted
in March 1998 calling for the reduction of workforce, closing of certain
facilities, elimination of particular product lines, settlement of distribution
agreements and other costs. The restructuring costs incurred in first quarter of
1998 were offset by a restructuring credit of $7.5 million booked during the
last quarter of 1998 in connection with MRV's decision to consolidate the Xyplex
and NBase organizations. This credit principally resulted from the renegotiation
of Xyplex' lease in Littletown, Massachusetts and a reevaluation reducing the
anticipated cost of discontinuing some of Xyplex' legacy products. MRV did not
incur these charges or receive a similar credit in 1999.
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Interest. In November 1998, MRV repurchased $10.0 million face amount of
the Notes at a discount from par resulting in a gain of $2.8 million recorded in
the fourth quarter of 1998. The outstanding Notes resulted in interest expense
of $2.5 million for the year ended December 31, 1998 and $4.5 million for the
year ended December 31, 1999.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth MRV's unaudited condensed consolidated
statements of operations data for each of the ten quarters ended June 30, 2001.
These statements should be read in conjunction with MRV's consolidated financial
statements and related notes appearing elsewhere in this prospectus. MRV has
prepared this unaudited consolidated information on a basis consistent with its
audited consolidated financial statements, and in the opinion of its management,
it reflects all normal recurring adjustments that MRV considers necessary for a
fair presentation of its financial position and operating results for the
quarters presented. You should not draw any conclusions about MRV's future
results from the operating results for any quarter.
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenues, net............ $70,116 $73,251 $71,254 $ 73,903 $65,072 $ 73,935
Costs and Expenses:
Cost of goods sold..... 46,366 47,595 44,653 58,828 42,736 45,793
Research and
development.......... 9,592 8,572 8,476 9,806 11,891 14,758
Selling, general and
administrative....... 14,718 14,750 15,581 22,474 16,028 26,467
Amortization of
goodwill and other
intangibles.......... -- 1,142 951 1,014 -- 12,055
------- ------- ------- -------- ------- --------
70,676 72,059 69,661 92,122 70,655 99,073
Operating income
(loss)............. (560) 1,192 1,593 (18,219) (5,583) (25,138)
Other income (expense),
net.................... 278 132 165 (253) (488) (1,190)
------- ------- ------- -------- ------- --------
Income before
(provision) benefit
for income taxes
and minority
interest........... (282) 1,324 1,758 (18,472) (6,071) (26,328)
(Provision) benefit for
income taxes........... (627) (782) (1,169) 4,731 494 (1,377)
Minority interest........ -- (17) (22) 649 (287) (45)
------- ------- ------- -------- ------- --------
Net income (loss).... $ (909) $ 525 $ 567 $(13,092) $(5,864) $(27,750)
======= ======= ======= ======== ======= ========
Basic and diluted income
(loss) per share....... $ (0.02) $ 0.01 $ 0.01 $ (0.24) $ (0.10) $ (0.44)
Basic weighted average
shares................. 53,300 53,472 53,868 55,082 56,850 62,764
======= ======= ======= ======== ======= ========
Diluted weighted average
shares................. 53,300 57,621 60,154 55,082 56,850 62,754
======= ======= ======= ======== ======= ========
FOR THE THREE MONTHS ENDED
----------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
2000 2000 2001 2001
------------- ------------ --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenues, net............ $ 82,720 $ 97,667 $100,104 $ 89,530
Costs and Expenses:
Cost of goods sold..... 47,910 66,932 66,391 88,765
Research and
development.......... 21,803 25,626 25,005 25,782
Selling, general and
administrative....... 52,699 29,506 38,412 43,711
Amortization of
goodwill and other
intangibles.......... 27,348 27,411 28,139 29,028
-------- -------- -------- ---------
149,760 149,475 157,947 187,286
Operating income
(loss)............. (67,040) (51,808) (57,843) (97,756)
Other income (expense),
net.................... (5,764) (2,136) (520) (2,373)
-------- -------- -------- ---------
Income before
(provision) benefit
for income taxes
and minority
interest........... (72,804) (53,944) (58,363) (100,129)
(Provision) benefit for
income taxes........... (1,005) 7,286 2,683 939
Minority interest........ (570) 1,698 1,388 5,051
-------- -------- -------- ---------
Net income (loss).... $(74,379) $(44,960) $(54,292) $ (94,139)
======== ======== ======== =========
Basic and diluted income
(loss) per share....... $ (1.06) $ (0.62) $ (0.73) $ (1.24)
Basic weighted average
shares................. 70,122 72,768 74,370 76,111
======== ======== ======== =========
Diluted weighted average
shares................. 70,122 72,768 74,370 76,111
======== ======== ======== =========
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LIQUIDITY AND CAPITAL RESOURCES
On November 10, 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12.00 per share and raising net
proceeds of approximately $132.3 million.
Cash and cash equivalents were $174.9 million at June 30, 2001, compared to
$210.1 million at December 31, 2000. As of June 30, 2001, MRV had working
capital of $305.8 million, compared with $366.8 million as of December 31, 2000.
The ratio of current assets to current liabilities at June 30, 2001 was 3.6 to
1, compared to 4.3 to 1 at December 31, 2000. These decreases are primarily
attributable to operating losses and capital expenditures. Cash and cash
equivalents were $210.1 million at December 31, 2000, compared to $34.3 million
at December 31, 1999. As of December 31, 2000, MRV had working capital of $366.8
million, compared with $106.4 million as of December 31, 1999. The ratio of
current assets to current liabilities at December 31, 2000 was 4.3 to 1,
compared to 3.1 to 1 at December 31, 1999. This is primarily due to the
consolidation of MRV's recent acquisitions, cash utilized for acquisitions and
the cash Luminent received from its initial public offering.
Cash used in operating activities was $43.5 million for the six months
ended June 30, 2001, compared to cash used in operating activities of $5.0
million for the six months ended June 30, 2000. Cash used in operating
activities was primarily impacted by MRV's net loss, partially offset by the
amortization of goodwill and amortization of deferred stock compensation. Cash
used in operating activities was $29.8 million for the year ended December 31,
2000, compared to cash provided by operating activities of $2.0 million for the
year ended December 31, 1999. Cash used in operating activities was primarily
impacted by MRV's net loss, partially offset by the amortization of goodwill and
other intangibles and amortization of deferred stock compensation. The increase
in cash used in operating activities was also a result of an overall increase in
MRV's current assets.
Cash used in investing activities was $15.0 million for the six months
ended June 30, 2001, compared to cash used in investing activities of $55.6
million for the six months ended June 30, 2000. MRV spent approximately $26.6
million on the purchase of property and equipment for business expansion and
increased manufacturing capacity. It received cash of $71.2 million from the
sale or maturity of investments. Cash provided by investing activities was $9.2
million for year ended December 31, 2000, compared to cash provided by investing
activities of $6.2 million for the year ended December 31, 1999. MRV spent
approximately $24.0 million on the purchase of property and equipment for
business expansion and increased manufacturing capacity. MRV purchased
approximately $21.6 million in investments primarily in partner companies. MRV
also received cash of $97.7 million from the sale of investments, which was
offset by net cash used in its recent acquisitions and equity purchases of $44.5
million.
Cash provided by financing activities was primarily generated through the
issuance of common stock and through short-term borrowings during the six months
ended June 30, 2001 and from proceeds from line of credit as well as through
short-term borrowings during the six months ended June 30, 2000. In June 1998,
MRV issued $100.0 million principal amount of 5% convertible subordinated notes
due 2003 (the Notes) in a private placement raising net proceeds of $96.4
million. The Notes are convertible into MRV's common stock at a conversion price
of $13.52 per share (equivalent to a conversion rate of approximately 73.94
shares per $1,000 principal amount of notes), representing an initial conversion
premium of 24%, for a total of approximately 7.4 million shares of MRV's common
stock. The Notes bear interest at 5% per annum, which is payable semi-annually
on June 15 and December 15 of each year. The Notes have a five-year term and are
callable by MRV on or after June 15, 2001. The premiums payable to call the
Notes are 102% of the outstanding principal amount during the 12 months ending
June 14, 2002 and 101% during the 12 months ending June 14, 2003, plus accrued
interest through the date of redemption.
MRV believes that its cash flows from operations will be sufficient to
satisfy its working capital, capital expenditure and research and development
requirements for at least the next 12 months. However, MRV may require or choose
to obtain additional debt or equity financing in order to finance acquisitions
or other investments in its business. MRV will continue to devote resources for
expansion and other business requirements. Its future capital requirements will
depend on many factors, including acquisitions, its rate of revenue growth, the
timing and extent of spending to support development of new products and
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expansion of sales and marketing, the timing of new product introductions and
enhancements to existing products and market acceptance of its products.
EFFECTS OF INFLATION
MRV believes that the relatively moderate rate of inflation in the United
States over the past few years has not had a significant impact on its sales or
operating results or on the prices of raw materials. However, in view of its
recent expansion of operations in Taiwan, Israel and other countries, which have
experienced substantial inflation, there can be no assurance that inflation will
not have a materially adverse effect on its operating results in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
MRV operates on an international basis. A majority of its revenues and
expenses are incurred in U.S. dollars, however, a significant portion of its
revenues and expenses are incurred in other currencies. Fluctuations in the
value of the currencies in which MRV conducts its business relative to the U.S.
dollar will cause U.S. dollar translation of these currencies to vary from one
period to another. MRV cannot predict the effect of exchange rate fluctuations
upon future operating results. However, because MRV has expenses as well as
revenues in each of the principal functional currencies, the exposure to its
financial results to currency fluctuations is reduced. MRV has not historically
attempted to reduce its currency risks through hedging instruments, however, MRV
may do so in the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138, which provides additional guidance for the application of SFAS No. 133
for certain transactions. MRV will adopt the statement in January 2001 and does
not expect the adoption of this statement to have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements," and related interpretations. SAB 101 summarized certain of the
Securities and Exchange Commission's views in applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. MRV has applied the provisions of SAB 101 in the consolidated
financial statements. The adoption of SAB 101 did not have a material impact on
its financial condition or results of operations.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on its financial position or results
of operations.
The FASB recently approved two pronouncements: SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", which
provide guidance on the accounting for business combinations to be accounted for
using the purchase method. Under the new rules, goodwill will no longer be
subject to amortization over its useful life. Rather, goodwill will be subject
to at least an annual impairment assessment. This assessment is a fundamentally
different two-step approach and is based on a comparison between a reporting
unit's fair value and its carrying value. Intangible assets have newly defined
criteria and will be accounted for separately from goodwill and will continue to
be amortized over their useful lives. MRV plans to adopt these pronouncements on
January 1, 2002. MRV is currently reviewing these standards to determine the
impact on its results of operations and its financial position. The most
significant anticipated effect on MRV's financial statements at adoption would
be the discontinuing of the amortization of goodwill and the possible impairment
loss measured as of the date of adoption.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF LUMINENT
MARKET CONDITIONS AND CURRENT OUTLOOK
Macroeconomic factors, such as an economic slowdown in the U.S. and abroad,
have detrimentally impacted demand for communications products, thereby
resulting in reduced demand for optical components in general. The unfavorable
economic conditions and reduced capital spending detrimentally affected sales to
service providers, network equipment companies, e-commerce and Internet
businesses, and the manufacturing industry in the United States during 2001 to
date, and may continue to affect them for the remainder of 2001 and thereafter.
Announcements by industry participants and observers indicate there is a
slowdown in industry spending and participants are seeking to reduce existing
inventories.
Luminent's two largest customers, Cisco and Marconi, recently announced
that they expect declining revenues and profitability in the near term due to
softening demand for telecommunications and networking equipment. This has
resulted in reductions and rescheduling by Cisco and Marconi in purchases from
their suppliers such as Luminent as they seek to reduce their existing
inventories and adjusts to reduced demand in the market. This will likely result
in lower sales to Cisco and Marconi, and could result in lower revenues overall.
Luminent's sales may decline significantly with resulting fluctuations or harm
to its operating results and financial condition if either Cisco or Marconi
cancels, reduces or delays purchases of Luminent's products or unduly delays
qualifying them.
During the six months ended June 30, 2001, Luminent recorded restructuring
and other one-time charges totaling $41.2 million, resulting from the lower
demand for its products and pricing pressures stemming from the continuing
downturn in the communications equipment industry generally and the optical
components sector in particular. These charges include the write-down of
inventory of $26.1 million, asset impairment charges of $8.9 million, and other
restructuring and unusual items related to the recent market conditions of $6.2
million. Additionally, Luminent began to reduce its workforce, which it expects
will result in layoffs of approximately 600 people, bringing its total workforce
to approximately 1,200 employees.
Furthermore, Luminent is undertaking a formal review of the goodwill
generated in its acquisitions based on the adoption of SFAS 142. Luminent plans
to adopt this statement effective January 1, 2002, (see Recently Issued
Accounting Standards).
OVERVIEW
Luminent designs, manufactures and sells a comprehensive line of fiber
optic components that enable communications equipment manufacturers to provide
optical networking equipment for the rapidly growing metropolitan and access
segments of the communications network. Luminent's fiber optic components
business was the original business of MRV when MRV began operations in July
1988. From inception in 1988 until Luminent's separation on September 8, 2000,
when MRV completed the contribution and transfer to Luminent of Luminent's
business, Luminent operated as a division of MRV and conducted business using
MRV's trade name. In March 2000, Luminent was incorporated in Delaware as a
wholly owned subsidiary of MRV. In April 2000, Luminent began operating under
the Luminent trade name. With MRV's decision to abandon its planned distribution
of Luminent's common stock to MRV's stockholders and the completion of the
Merger, Luminent will operate as a wholly-owned subsidiary of MRV.
On April 24, 2000, MRV acquired approximately 97% of the outstanding
capital stock of Fiber Optic Communications, a Taiwanese manufacturer of passive
fiber optic components with facilities in both Taiwan and the People's Republic
of China. The purchase price paid was approximately $310.4 million in cash,
common stock and options to purchase common stock of MRV, including amounts
recorded as deferred stock compensation. On July 12, 2000, MRV acquired all of
the outstanding capital stock of Quantum, a Taiwanese manufacturer of active and
passive fiber optic components. The purchase price paid was approximately $36.2
million in common stock and options to purchase common stock of MRV,
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including amounts recorded as deferred stock compensation. On July 21, 2000, MRV
acquired approximately 99% of the outstanding capital stock of Optronics, a
Taiwanese manufacturer of active fiber optic components. The purchase price paid
was approximately $124.3 million in common stock and options to purchase common
stock of MRV, including amounts recorded as deferred stock compensation. The
acquisitions were made to expand Luminent's product offerings, enhance its
technology experience and expand its manufacturing capabilities.
These acquisitions were accounted for using the purchase method and the
outstanding capital stock purchased by MRV in each of the acquisitions has been
contributed to Luminent as of the dates of acquisition. Therefore, the results
of operations of Fiber Optic Communications, Optronics and Quantum have been
included in Luminent's consolidated financial statements from April 25, 2000,
July 13, 2000 and July 22, 2000, respectively.
In connection with the acquisitions of Fiber Optic Communications,
Optronics and Quantum, a portion of the purchase prices paid represented
deferred stock compensation relating to options to purchase the common stock of
MRV. These options had fair values of approximately $14.1 million, $13.4 million
and $2.7 million for Fiber Optic Communications, Optronics and Quantum,
respectively. Deferred stock compensation amortization expense for the year
ended December 31, 2000 and the six months ended June 30, 2001 relating to these
stock options were approximately $12.5 million and $5.9 million, respectively.
In connection with these acquisitions, Luminent expects to incur an additional
$11.7 million of deferred stock compensation until fully amortized in 2004.
Deferred stock compensation is amortized using the graded method over a
four-year period.
Goodwill resulting from the Fiber Optic Communications, Optronics and
Quantum acquisitions totaled $261.6 million, $99.5 million and $27.9 million,
respectively. For the year ended December 31, 2000, Luminent recorded
amortization of goodwill of $35.9 million relating to the acquisition of Fiber
Optic Communications, $8.9 million relating to the acquisition of Optronics and
$2.6 million relating to the acquisition of Quantum. For the six months ended
June 30, 2001, Luminent recorded total amortization of goodwill of approximately
$39.0 million, relating to these acquisitions. Luminent expects to record
amortization of goodwill for Fiber Optic Communications, Optronics and Quantum
of approximately $19.5 million per quarter until December 31, 2001. At January
1, 2002, Luminent intends to implement SFAS No. 142 (see Recent Accounting
Pronouncements, below).
Fiber Optic Communications produces margins similar to us; however, it has
not experienced the growth in net sales or operating income that Luminent has
experienced during the last three fiscal years. Luminent is not aware of any
unusual trends specific to the businesses of its acquired companies, except that
they are experiencing the same softness in demand and pricing that Luminent and
the rest of Luminent's industry are experiencing.
In July 2000, MRV and Luminent entered into four-year employment agreements
with Luminent's former President and Chief Executive Officer and its Vice
President of Finance and Chief Financial Officer. The agreements provided for
annual salaries, performance bonuses and combinations of stock options to
purchase shares of MRV's common stock and Luminent's common stock. These options
to Luminent's executives were granted at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation related to
these individuals reported for the year ended December 31, 2000 was $16.3
million. Deferred stock compensation reported for the six months ended June 30,
2001 was $13.0 million, and Luminent will incur additional deferred stock
compensation of approximately $25.0 million through 2004. Luminent's President
and Chief Executive Officer resigned in September 2001. Dr. Spivey's resignation
was considered by the parties to be a termination other than for cause under his
employment agreement entitling him to the severance benefits of his employment
agreement, including payment over a one year period of an amount equal to two
times the sum of his annual salary plus bonus and the vesting of all of his
unvested Luminent options. Dr. Spivey's MRV and Luminent options are now
exercisable through September 11, 2003. During the quarter ended September 30,
2001, the Company will record $1.0 million in severance expense and an immediate
write-down of deferred stock compensation expense of $18.9 million.
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Although Luminent reported net income of $3.5 million and $4.2 million for
the years ended December 31, 1998 and 1999, respectively, it reported net losses
of $65.0 million for the year ended December 31, 2000 and $88.3 million for the
six months ended June 30, 2001. The net losses were primarily due to Luminent's
amortization of goodwill and other intangibles and deferred stock compensation
related to the acquisitions of Fiber Optic Communications, Optronics and Quantum
for the year ended December 31, 2000 and for the six months ended June 30, 2001,
Luminent's employment arrangements with its former President and Chief Executive
Officer and its Vice President of Finance and Chief Financial Officer for the
year ended December 31, 2000 and for the six months ended June 30, 2001 and
recording restructuring and other one-time charges totaling $41.2 million
resulting from the lower demand for Luminent's products and pricing pressures
stemming from the continuing downturn in the communications equipment industry
generally and the optical components sector in particular for the six months
ended June 30, 2001. These one-time charges include the write-down of inventory
of $26.1 million, asset impairment of $8.9 million, and other restructuring and
non-recurring items related to the recent market conditions of $6.2 million (see
Results of Operations, below). In addition, Luminent will record amortization of
goodwill and other intangible assets and deferred stock compensation relating to
the Fiber Optic Communications, Optronics and Quantum acquisitions and its
employment arrangements going forward. As a consequence of these amortization
charges, Luminent does not expect to report net income in the foreseeable
future.
Prior to Luminent's separation from MRV, Luminent entered into various
agreements related to interim and ongoing relationships with MRV. These
agreements provide for transitional services and support in the areas of data
processing and telecommunications services (such as voice telecommunications and
data transmission and information technology support services) for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement and other administrative functions. Services are
generally cost plus 5%, but may increase to cost plus 10% if the services extend
beyond a one-year period. Subsequent to the separation date, certain of these
services were discontinued, including accounting, financial management, payroll,
legal, procurement and other administrative functions. The transition period
varies depending on the agreement but is generally one year.
Although the fees provided for in the agreements are intended to represent
the fair market value of these services, Luminent cannot assure that these fees
necessarily reflect the costs of obtaining the services from unrelated third
parties or of its providing these services internally. However, Luminent
believes that purchasing these services from MRV provided an efficient means of
obtaining these services during the transition period. With the Merger, these
agreements have been terminated.
BASIS OF PRESENTATION
Luminent's consolidated financial statements have been carved out from the
consolidated financial statements of MRV using the historical results of
operations and historical bases of the assets and liabilities of the MRV
businesses that Luminent's company comprises. The consolidated condensed
financial statements through June 30, 2001 also include allocations to Luminent
of certain MRV corporate assets, liabilities and expenses, including centralized
legal, accounting, employee benefits, real estate, insurance services,
information technology services, treasury and other MRV corporate and
infrastructure costs. The expense allocations have been determined on bases that
MRV and Luminent considered to be a reasonable reflection of the utilization of
the services provided to MRV or the benefit received by us. The expense
allocation methods included relative sales, headcount, square footage,
transaction processing costs and adjusted operating expenses. No intercompany
interest income or expense has been allocated to, or included in, Luminent's
consolidated financial statements.
The financial information presented in this prospectus supplement is not
indicative of Luminent's financial position, results of operations or cash flows
in the future nor is it necessarily indicative of what its financial position,
results of operations or cash flows would have been had Luminent been a
separate, stand-alone entity for the periods presented. The financial
information presented in this prospectus supplement does not reflect many of the
significant changes that will occur in Luminent's funding and operations as a
result of its becoming a stand-alone entity and the distribution.
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RESULTS OF OPERATIONS
The following table sets forth selected condensed consolidated historical
financial data for the years and periods indicated, expressed as a percentage of
net sales:
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- JUNE 30,
PRO FORMA -------------
1998 1999 2000 2000 2000 2001
---- ---- ---- ----------- ---- -----
(UNAUDITED) (UNAUDITED)
Net sales.................................... 100% 100% 100% 100% 100% 100%
Cost of sales................................ 63 66 68 69 65 101
---- ---- ---- ---- ---- -----
Gross profit............................ 37 34 32 31 35 (1)
Operating costs and expenses:
Selling, general and administrative........ 7 9 31 33 19 44
Research and development................... 13 13 15 15 15 11
Parent company allocations................. 2 1 -- -- -- --
Amortization of goodwill................... -- -- 38 57 22 44
---- ---- ---- ---- ---- -----
22 23 84 105 56 99
---- ---- ---- ---- ---- -----
Operating income (loss)................. 15 11 (52) (74) (21) (100)
Other income (loss), net..................... -- -- 2 1 -- 3
---- ---- ---- ---- ---- -----
Income (loss) before provision for
income taxes and minority interests... 15 11 (50) (73) (21) (97)
Provision for income taxes................... 6 4 2 2 3 2
Minority interest............................ -- -- (1) 1 1 --
---- ---- ---- ---- ---- -----
Net income (loss)....................... 9% 6% (52)% (74)% (25)% (99)%
==== ==== ==== ==== ==== =====
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net Sales. Luminent recognizes revenue upon shipment of its products, at
which time, customer acceptance of the products has been attained and collection
is considered probable. Net sales for the six months ended June 30, 2001,
increased 108%, to $89.3 million from $43.0 million for the six months ended
June 30, 2000. The increase in net sales is primarily a result of the growth of
the Internet and e-commerce and the corresponding increased bandwidth
requirements.
The following table sets forth Luminent's net sales to certain customers as
a percentage of Luminent's total net sales during the six months ended June 30,
2000 and 2001:
SIX MONTHS ENDED
JUNE 30,
----------------
2000 2001
----- -----
(UNAUDITED)
Marconi Communications...................................... 17% 13%
Cisco Systems............................................... 14 11
Other....................................................... 69 76
--- ---
Net sales................................................... 100% 100%
=== ===
Luminent relies on one-time purchase orders rather than long-term contracts
with both Cisco and Marconi, and, as a result, Luminent cannot predict the size,
timing or terms of their incoming orders. Luminent has experienced variations in
the purchase patterns of Marconi and Cisco in the past, and Luminent may
experience continued variation in the future. Material reasons for historic
variations in the purchase patterns of these customers, particularly Marconi,
have included weather patterns that have delayed field installations of systems
that incorporate Luminent's products and delays by its customers in qualifying
Luminent's products that employ new components or features to assure
compatibility with the components of other suppliers that are integrated with
its products into Luminent's customers' systems.
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The timing of this qualification process is totally within the control of these
customers. Thus, even when Luminent's products prove compatible with the
components of other suppliers, as has typically been the case in the past,
delays by its customers in completing the qualification process has resulted in
corresponding delays in Luminent's receipt of orders for them.
Cisco and Marconi have recently announced that they expect declining
revenues and profitability in the near term due to softening demand for
telecommunications and networking equipment. This has resulted in reductions and
rescheduling by Cisco and Marconi in purchases from their suppliers such as
Luminent as they seek to reduce their existing inventories and adjust to reduced
demand in the market. This will likely result in lower sales to Cisco and
Marconi, and could result in lower revenues overall. Luminent's sales may
decline significantly with resulting fluctuations or harm to its operating
results and financial condition if either Cisco, Marconi or other material
customers cancel, reduce or delay purchases of Luminent's products or unduly
delays qualifying them.
Gross Profit. Gross profit is equal to Luminent's net sales less its cost
of sales. Luminent's cost of sales includes materials, direct labor and
overhead. Cost of inventory is determined by the first-in, first-out method.
Gross profit for the six months ended June 30, 2001, decreased 105%, down to a
loss of $802,000 from $15.2 million for the six months ended June 30, 2000. Pro
forma gross profit for the six months ended June 30, 2001, before inventory
write-downs and other market-related one-time charges of $29.3 million for the
three months ended June 30, 2001, and deferred compensation amortization expense
of $744,000 and $1.2 million for the six months ended June 30, 2000 and 2001,
respectively, would have increased 87%, to $29.8 million.
Luminent's pro forma gross margin, before restructuring charges, inventory
write-downs and other market-related one-time charges for the six months ended
June 30, 2001, and deferred compensation amortization expense for the six months
ended June 30, 2000 and 2001, decreased to 32% decreased to 33% for the six
months ended June 30, 2001, from 37% for the six months ended June 30, 2000.
Luminent's gross margins (defined as gross profit as a percentage of net sales)
are generally affected by price changes over the life of the products and
improved production efficiencies as a result of increased utilization. The
former effect will generally decrease gross margins over the products'
respective life cycles, whereas as the latter effect typically increases gross
margins. Prices for existing products are generally expected to continue to
decrease over their respective life cycles. Luminent's lower margin customers
typically operate in highly competitive markets where the price of its products
is a key factor. Although Luminent sacrifices margins to these customers,
Luminent's volumes are typically greater than the volumes achieved with higher
margin customers. As Luminent seeks to continue to diversify its customer base,
Luminent plans to target markets with improved margins and less competitive
end-markets. In the short term, Luminent expects margins to remain constant or
decline slightly due to the integration of the acquired companies with
historically lower margins. In the mid- to long term, Luminent expects margins
to improve due to increased operating efficiencies associated with capacity
utilization in Taiwan and People's Republic of China, diversification of sales
to higher margin customers, and a favorable shift towards a higher margin
customer base.
Operating Costs and Expenses.
Operating costs and expenses consist of selling, general and
administrative, research and development costs, costs associated with
acquisitions, and other operating related charges. Operating costs and expenses,
increased to 99% of net sales, or $88.5 million, for the six months ended June
30, 2001, from 56% of net sales, or $24.3 million, for the six months ended June
30, 2000. Pro forma operating costs and expenses for the six months ended June
30, 2001, before market-related one-time charges of $11.9 million for the three
months ended June 30, 2001, goodwill amortization of $9.6 million and $39.0
million and deferred compensation amortization expense of $2.2 million and $17.7
million for the six months ended June 30, 2000 and 2001, respectively, would
have increased 60%, to $20.0 million. Pro forma operating costs and expenses, as
a percentage of net sales, are lower for the six months ended June 30, 2001 than
the six months ended June 30, 2000 due to an effort to realize greater
efficiencies in the current down market.
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Selling, general and administrative expenses for the six months ended June
30, 2001, increased to 44% of net sales, or $39.5 million, from 19% of net
sales, or $8.1 million, for the six months ended June 30, 2000. Pro forma
selling, general and administrative expenses for the six months ended June 30,
2001, before market-related one-time charges of $11.4 million for the three
months ended June 30, 2001, deferred stock compensation expense of $1.1 million
and $15.7 million for the six months ended June 30, 2000 and 2001, respectively,
would have been 14% of net sales, or $12.4 million, an increase over the same
period in the prior year by $5.4 million. The main reason for the increases is
the inclusion of the new acquisitions of Fiber Optic Communications, Optronics
and Quantum.
Research and development expenses, decreased as a percentage of net sales
from 15% to 11% of net sales during the six months ended June 30, 2001,
respectively, from the same period in 2000. However, in terms of absolute
dollars, research and development expenses increased from the six months ended
June 30, 2000 to the six months ended June 30, 2001, from $6.6 million to $10.0
million, respectively. Pro forma research and development expenses for the six
months ended June 30, 2001, before market-related one-time charges of $501,000
for the three months ended June 30, 2001, and deferred stock compensation of
$1.2 million and 2.0 million for the six months ended June 30, 2000 and 2001,
respectively, would have increased to $7.6 million from $5.5 million from the
same period in 2000. Research and development expenses increased primarily due
to the addition of Fiber Optics Communications, Optronics and Quantum. During
the year ended December 31, 2000 Luminent began development of its next
generation products for applications such as fiber-to-the-home and
fiber-to-the-curb. Fiber-to-the-home and fiber-to-the-curb are industry terms
referring to the deployment of fiber optic cable for residential access to
communications networks. Research and development expenditures also included
additional development of Luminent's duplexers, triplexers and high-speed
transceivers. Luminent continues to invest heavily in areas targeted at
broadening its customer base, product lines and end-product applications.
Luminent expects absolute dollars spent on research and development to continue
to increase as Luminent invests in key technical personnel, expand its current
product lines and develop new product offerings.
During the six months ended June 30, 2001, Luminent incurred amortization
of goodwill and other intangibles and deferred stock compensation of $39.0
million and $5.9 million, respectively, relating to these acquisitions. Luminent
expects to incur additional amortization of goodwill and other intangibles from
these acquisitions of approximately $19.5 million each quarter through December
31, 2001. At January 1, 2002, Luminent intends to implement SFAS No. 142 (see
Recent Accounting Pronouncements, below). Deferred stock compensation charges
from these acquisitions will generate an additional $11.7 million of expense
through 2004. Deferred stock compensation is amortized using the graded method
over the related expected employee service period, in this case four years.
Provision for Income Taxes. The provision for income taxes was $1.9 million
for the six months ended June 30, 2001. The effective tax rate for the six
months ended June 30, 2001 was negative 2.1%, resulting from a tax provision
computed based on a net loss position. The rate was negatively impacted by the
amortization of goodwill and certain deferred stock compensation, which are not
tax deductible. Luminent's effective tax rates in future years may fluctuate due
to amortization of goodwill and deferred stock compensation partially offset by
favorable tax programs available in certain foreign tax jurisdictions where
Luminent currently has operating facilities.
YEARS ENDED DECEMBER 31, 2000 AND 1999, AND
PRO FORMA RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000
Net Sales. Net sales for the year ended December 31, 2000 increased 90%, to
$124.2 million from $65.3 million for the year ended December 31, 1999.
Luminent's growth is a result of the growth of the Internet and e-commerce and
the corresponding increased bandwidth requirements, and its recent acquisitions.
Approximately $23.5 million of this increase was due to the contribution of
Fiber Optic Communications' net sales for the period from April 25, 2000 through
December 31, 2000. Approximately $7.5 million of this increase was due to the
contribution of Optronics' net sales for the period from July 13, 2000 through
December 31, 2000 and approximately $2.5 million of this increase was due to the
contribution of Quantum's net sales for the period from July 22, 2000 through
December 31, 2000. Pro
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forma results for the year ended December 31, 2000 as presented in Selected
Financial Data, above, projects Luminent's results of operations as if we had
made the acquisitions of Fiber Optic Communications, Optronics and Quantum as of
January 1, 2000. Pro forma net sales for the year ended December 31, 2000 would
have been $137.3 million.
Luminent also experienced growth and increased acceptance in its
transceiver business for the data networking market. Finally, Luminent
experienced a significant improvement in customer diversification during year
ended December 31, 2000. Sales during the years ended December 31, 1998, 1999
and 2000 to Luminent's customers accounting for 10% or more of its net sales
during 2000 and to its other customers as a group are set forth below.
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
Marconi Communications...................................... 18% 40% 18%
Cisco Systems............................................... 5 6 11
Other....................................................... 77 54 71
--- --- ---
Net sales................................................... 100% 100% 100%
=== === ===
Gross Profit. Gross profit is equal to Luminent's net sales less its cost
of sales. Luminent's cost of sales includes materials, direct labor and
overhead. Cost of inventory is determined by the first-in, first-out method.
Gross profit for the year ended December 31, 2000, increased 79%, to $39.8
million from $22.2 million for the year ended December 31, 1999. Pro forma gross
profit for the year ended December 31, 2000 would have been $42.6 million. Gross
profit for the year ended December 31, 2000, before deferred compensation
amortization expense of $2.8 million, would have increased 92%, to $42.6
million. Luminent's gross margins (defined as gross profit as a percentage of
net sales) are generally affected by price changes over the life of the products
and improved production efficiencies as a result of increased utilization. The
former effect will generally decrease gross margins over the products'
respective life cycles, whereas the latter effect typically increases gross
margins. Prices for existing products are generally expected to continue to
decrease over their respective life cycles.
Luminent's gross margin decreased to 32% for the year ended December 31,
2000, from 34% for the year ended December 31, 1999. Pro forma gross margin for
the year ended December 31, 2000 would have been 31%. Gross margin would have
been 34% for the year ended December 31, 2000, before deferred compensation
amortization expense of $2.8 million. While Luminent's customer diversification
improved as a percentage of net sales, absolute dollars shipped to lower margin
customers increased for the year ended December 31, 2000. Luminent's lower
margin customers typically operate in highly competitive markets where the price
of its products is a key factor. Although Luminent sacrifices margins to these
customers, its volumes are greater than the volumes achieved with higher margin
customers. As Luminent seeks to continue to diversify Luminent's customer base,
Luminent plans to target markets with improved margins and less competitive
end-markets. Gross margins for Fiber Optic Communications, which primarily
supplies passive components, were 23% and 32%, for the years ended December 31,
2000 and 1999, respectively. Gross margins for Luminent's active components were
32% and 34%, for the years ended December 31, 2000 and 1999, respectively. In
the short term, Luminent expects margins to remain constant or decline slightly
due to the integration of the acquired companies with historically lower
margins. In the mid- to long-term, Luminent expects margins to improve due to
increased operating efficiencies associated with capacity utilization in Taiwan
and People's Republic of China, diversification of sales to higher margin
customers, and a favorable shift towards a higher margin customer base.
Operating Costs and Expenses.
Operating costs and expenses consist of selling, general and
administrative, research and development costs, costs associated with
acquisitions, and other operating related charges. Operating costs and expenses,
increased to 85% of net sales, or $105.0 million, for the year ended December
31, 2000, from 23% of net
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sales, or $15.3 million, for the year ended December 31, 1999. Pro forma
operation costs and expenses for the year ended December 31, 2000 would have
been $144.1 million. Operating costs and expenses, before deferred stock
compensation and amortization expense of $73.5 million, would have increased to
25% of net sales, or $31.5 million, for the year ended December 31, 2000.
Operating costs and expenses, as a percentage of net sales, are higher for the
year ended December 31, 2000 than previous levels due to the amortization of
goodwill and deferred stock compensation, the inclusion of Fiber Optic
Communications, Optronics and Quantum, greater focus on selling and marketing
efforts and an increase in spending on research and development. Fiber Optic
Communications accounted for $47.2 million of operating costs and expenses for
the year ended December 31, 2000. Approximately $14.2 million of the increase is
due to the inclusion of Optronics and approximately $4.0 million of the increase
is due to the inclusion of Quantum.
Selling, general and administrative expenses for the year ended December
31, 2000, increased to 31% of net sales, or $38.8 million, from 9% of net sales,
or $5.7 million, for the year ended December 31, 1999. Selling, general and
administrative expenses for the year ended December 31, 2000, before deferred
stock compensation expense of $21.7 million, would have increased to 14% of net
sales, or $17.0 million. Approximately $6.5 million of the increase is due to
the inclusion of Fiber Optic Communications. Approximately $3.1 million of the
increase is due to the inclusion of Optronics and approximately $928,000 of the
increase is due to the inclusion of Quantum. The balance of the increase in
expenditures was due primarily to the overall growth of Luminent's business. In
response to the growth of its markets, Luminent expanded its selling efforts and
established new sales offices in Asia.
Research and development expenses, increased to 15% of net sales, or $18.2
million, during the year ended December 31, 2000, from 13% of net sales, or $8.7
million, for the year ended December 31, 1999. Research and development
expenses, prior to deferred stock compensation of $4.3 million, would have
decreased to 11% of net sales, or $13.9 million, during the year ended December
31, 2000. Research and development expenses, as a percentage of net sales,
increased primarily due to the addition of Fiber Optics Communications,
Optronics and Quantum in the current period. During the year ended December 31,
2000 Luminent began development of its next generation products for applications
such as fiber-to-the-home and fiber-to-the-curb. Fiber-to-the-home and
fiber-to-the-curb are industry terms referring to the deployment of fiber optic
cable for residential access to communications networks. Research and
development expenditures also included additional development of its duplexers,
triplexers and high-speed transceivers. Luminent continues to invest heavily in
areas targeted at broadening its customer base, product lines and end-product
applications. Luminent expects absolute dollars spent on research and
development to continue to increase as Luminent invests in key technical
personnel, expand its current product lines and develop new product offerings.
During the year ended December 31, 2000, Luminent incurred amortization of
goodwill and other intangibles and deferred stock compensation of $47.4 million
and $12.5 million, respectively, relating to the acquisitions of Fiber Optic
Communications, Optronics and Quantum. Luminent expects to incur additional
amortization of goodwill and other intangibles from these acquisitions of
approximately $19.5 million each quarter through 2001 (see Recent Accounting
Pronouncements). Deferred stock compensation charges from these acquisitions
will generate approximately an additional $17.6 million in total expense through
2004. Deferred stock compensation is amortized over the related expected
employee service period, in this case four years.
Provision for Income Taxes. The provision for income taxes was $2.8
million in the years ended December 31, 2000 and 1999. The effective tax rate
for the year ended December 31, 2000 was negative 4%, causing a tax provision
computed off a net loss position. The rate was negatively impacted by the
amortization of goodwill and certain deferred stock compensation, which are not
tax deductible. The effective tax rate for 1999 was 40%. Its effective tax rates
in future years may fluctuate due to amortization of goodwill and deferred stock
compensation partially offset by favorable tax programs available in certain
foreign tax jurisdictions where Luminent currently has operating facilities.
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YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Net Sales. Net sales for 1999 increased 69%, to $65.3 million from $38.6
million in 1998. The growth in net sales in 1999 was primarily driven by
increased shipments of Luminent's duplexer and triplexer components to Marconi
Communications. In 1999, Luminent also experienced greater acceptance and demand
for its transceivers, which are designed for the data communications equipment
market.
Gross Profit. Gross profit for 1999 increased 55%, to $22.2 million from
$14.3 million in 1998. The gross margins for 1999 and 1998 were 34% and 37%,
respectively. The decline in gross margin was attributed to higher sales volume
of lower margin products to Marconi Communications.
Operating Costs and Expenses.
Operating costs and expenses for 1999 increased 81% to $15.3 million from
$8.4 million in 1998.
Selling, general and administrative expenses grew 115% in 1999 over 1998.
These increases reflect the investment Luminent made in hiring additional sales
and administrative personnel to support a larger sales volume. Selling, general
and administrative expenses increased rapidly in 1999 in order to facilitate the
current and future expansion in its business.
In 1999 and 1998, Luminent spent approximately $8.7 million, and $5.0
million, respectively, on research and development. The increase reflects an
increase in the number of personnel and an increase in engineering expense
related to design, development and testing of its transceiver, duplexer and
triplexer product lines.
Provision for Income Taxes. The provision for income taxes was $2.8
million in 1999 and $2.3 million in 1998. The effective tax rate for 1999 and
1998 remained constant at 40%.
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QUARTERLY RESULTS OF OPERATIONS
The following tables set forth Luminent's unaudited condensed consolidated
statements of operations data for each of the ten quarters ended June 30, 2001,
as well as that data expressed as a percentage of Luminent's net sales for the
quarters presented. You should read this information in conjunction with
Luminent's consolidated financial statements and related notes appearing
elsewhere in this prospectus. Luminent has prepared this unaudited consolidated
information on a basis consistent with its audited consolidated financial
statements, and in the opinion of its management, it reflects all normal
recurring adjustments that Luminent considers necessary for a fair presentation
of its financial position and operating results for the quarters presented. You
should not draw any conclusions about Luminent's future results from the
operating results for any quarter.
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000(1)
--------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Net sales.................... $ 12,342 $ 16,127 $ 18,215 $ 18,580 $ 14,899 $ 28,107
Cost of sales(1)(2).......... 7,911 10,595 12,040 12,532 9,654 18,147
-------- -------- -------- -------- -------- --------
Gross profit............. 4,431 5,532 6,175 6,048 5,245 9,960
-------- -------- -------- -------- -------- --------
Operating costs and expenses:
Selling, general and
administrative(1)(2)..... 1,111 1,262 1,440 1,862 1,985 5,711
Research and
development(1)(2)........ 1,889 2,121 2,363 2,320 2,449 4,175
Parent company
allocations.............. 221 221 221 222 193 195
Amortization of goodwill... -- -- -- -- -- 9,580
-------- -------- -------- -------- -------- --------
Total operating costs........ 3,221 3,604 4,024 4,404 4,627 19,661
-------- -------- -------- -------- -------- --------
Operating income
(loss)................. 1,210 1,928 2,151 1,644 618 (9,701)
Other income (expense),
net(2)..................... 3 7 5 (9) -- 192
-------- -------- -------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interests.............. 1,213 1,935 2,156 1,635 618 (9,509)
-------- -------- -------- -------- -------- --------
Provision for income taxes... 483 771 859 651 246 1,223
Minority interest............ -- -- -- -- 190 128
-------- -------- -------- -------- -------- --------
Net income (loss).... $ 730 $ 1,164 $ 1,297 $ 984 $ 182 $(10,860)
======== ======== ======== ======== ======== ========
Basic and diluted income
(loss) per share........... $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ -- $ (0.08)
Basic and diluted income
average shares............. 144,000 144,000 144,000 144,000 144,000 144,000
FOR THE THREE MONTHS ENDED
---------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
2000(1) 2000(1) 2001(2) 2001(1)(2)
--------- -------- --------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
Net sales.................... $ 35,958 $ 45,228 $ 48,241 $ 41,103
Cost of sales(1)(2).......... 25,866 30,717 32,212 57,934
-------- -------- -------- --------
Gross profit............. 10,092 14,511 16,029 (16,831)
-------- -------- -------- --------
Operating costs and expenses:
Selling, general and
administrative(1)(2)..... 12,826 18,246 15,372 24,156
Research and
development(1)(2)........ 6,128 5,452 5,196 4,834
Parent company
allocations.............. 200 -- -- --
Amortization of goodwill... 18,353 19,488 19,488 19,488
-------- -------- -------- --------
Total operating costs........ 37,507 43,186 40,056 48,478
-------- -------- -------- --------
Operating income
(loss)................. (27,415) (28,675) (24,027) (65,309)
Other income (expense),
net(2)..................... 334 1,719 1,850 972
-------- -------- -------- --------
Income (loss) before
provision for income
taxes and minority
interests.............. (27,081) (26,956) (22,177) (64,337)
-------- -------- -------- --------
Provision for income taxes... 1,240 57 100 1,754
Minority interest............ 73 (1,100) 21 (136)
-------- -------- -------- --------
Net income (loss).... $(28,394) $(25,913) $(22,298) $(65,955)
======== ======== ======== ========
Basic and diluted income
(loss) per share........... $ (0.20) $ (0.17) $ (0.14) $ (0.42)
Basic and diluted income
average shares............. 144,000 150,652 156,000 156,000
-------------------------
(1) The quarters ended June 30, September 30, December 31, 2000, March 31, 2001
and June 30, 2001, include amounts related to deferred stock compensation
of: $744,000, $1.2 million, $849,000, $683,000 and $566,000, respectively,
in "costs of sales"; $1.1 million, $9.0 million, $11.7 million, $8.7 million
and $7.0 million, respectively, in "selling, general and administrative"
expenses; and $1.2 million, $1.7 million, $1.3 million, $1.1 million and
$900,000 respectively, in "research and development" expenses.
(2) Includes one-time charges of $29.3 million, $11.4 million, $501,000 and
$16,000 presented in "cost of sales", "selling, general and administrative",
"research and development" and "other income, net", respectively, for the
three months ended June 30, 2001 to write-down inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other non-recurring items. These charges resulted from the lower demand for
Luminent's products and pricing pressures stemming from the continuing
downturn in the communications equipment industry generally and the optical
components sector in particular.
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FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 1999 2000 2000 2000
--------- -------- --------- -------- --------- -------- ---------
(UNAUDITED)
AS A PERCENTAGE OF NET SALES:
Net sales.............................. 100% 100% 100% 100% 100% 100% 100%
Cost of sales.......................... 64 66 66 67 65 65 72
--- --- --- --- --- --- ---
Gross profit....................... 36 34 34 33 35 35 28
--- --- --- --- --- --- ---
Operating costs and expenses:
Selling, general and
administrative..................... 9 8 8 10 13 20 36
Research and development............. 15 13 13 12 16 15 17
Parent company allocations........... 2 1 1 1 1 1 1
Amortization of goodwill............. -- -- -- -- -- 34 51
--- --- --- --- --- --- ---
Total operating costs.................. 26 22 22 24 31 70 104
--- --- --- --- --- --- ---
Operating income (loss)............ 10 12 12 9 4 (35) (76)
Other income (expense), net............ -- -- -- -- -- 1 1
--- --- --- --- --- --- ---
Income (loss) before provision for
income taxes and minority
interests.......................... 10 12 12 9 4 (34) (75)
--- --- --- --- --- --- ---
Provision for income taxes............. 4 5 5 4 2 4 3
Minority interest...................... -- -- -- -- 1 -- --
--- --- --- --- --- --- ---
Net income (loss).................. 6% 7% 7% 5% 1% (39)% (79)%
=== === === === === === ===
FOR THE THREE MONTHS ENDED
-------------------------------
DEC. 31, MARCH 31, JUNE 30,
2000 2001 2001
-------- --------- --------
(UNAUDITED)
AS A PERCENTAGE OF NET SALES:
Net sales.............................. 100% 100% 100%
Cost of sales.......................... 68 67 141
--- --- ----
Gross profit....................... 32 33 (41)
--- --- ----
Operating costs and expenses:
Selling, general and
administrative..................... 40 32 59
Research and development............. 12 11 12
Parent company allocations........... -- -- --
Amortization of goodwill............. 43 40 47
--- --- ----
Total operating costs.................. 95 83 118
--- --- ----
Operating income (loss)............ (63) (50) (159)
Other income (expense), net............ 4 4 2
--- --- ----
Income (loss) before provision for
income taxes and minority
interests.......................... (60) (46) (157)
--- --- ----
Provision for income taxes............. -- -- 4
Minority interest...................... (2) -- --
--- --- ----
Net income (loss).................. (57)% (46)% (160)%
=== === ====
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LIQUIDITY AND CAPITAL RESOURCES
Luminent received $132.3 million in net proceeds from the sale of
12,000,000 shares of its common stock in its initial public offering completed
in November 2000. Historically, MRV has managed cash on a centralized basis.
Prior to September 8, 2000 (the separation date), cash receipts associated with
Luminent's business were transferred to MRV on a daily basis, and MRV provided
funds to cover Luminent's disbursements. Cash and cash equivalents at December
31, 1999 represented positive cash flows generated from Luminent's subsidiary.
At December 31, 2000 and June 30, 2001, Luminent had cash and cash equivalents
on hand of $131.8 million and $93.0 million. During the year ended December 31,
2000, MRV provided advances to Luminent to cover payroll and other operating
expenses. Through December 31, 2000 these advances (which do not bear interest)
amounted to $6.5 million and were due on demand. As of December 31, 2000, using
cash generated from operations, Luminent repaid MRV for all amounts advanced.
On June 30, 2001, Luminent had working capital of $123.0 million, compared
with $161.7 million at December 31, 2000. The ratio of current assets to current
liabilities at June 30, 2001 was 3.2 to 1, compared to 4.4 to 1 at December 31,
2000.
Cash used by operating activities was $3.7 million and $23.0 million for
the six months ended June 30, 2000 and 2001, respectively. Cash flows from
operating activities were adversely affected by Luminent's net loss of $88.3
million for the six months ended June 30, 2001, increases in inventory for the
three months ended March 31, 2001, increase in accounts receivable and deferred
income taxes, payment of accounts payables, and establishing short-term deposits
for capital acquisitions, all offset by non-cash charges for the amortization of
goodwill of $19.5 million and $39.0 million for the six months ended June 30,
2001, deferred stock compensation of $18.9 million for the six months ended June
30, 2001, and restructure and other one-time charges incurred as a result of the
current slowdown in the communication industry for the three months ended June
30, 2001. Inventory levels increased during the three months ended March 31,
2001 in anticipation of increased sales. However, due to the dramatic downturn
in demand for communications equipment, Luminent wrote-off $26.1 million of
inventory during the next three months ended June 30, 2001. The increase in
accounts receivable was due primarily to increased sales. Capital expenditures
for property and equipment represent the majority of cash used in investing
activities. The capital expenditures for the six months ended June 30, 2001 of
$13.7 million, plus another $9.0 million, in short-term deposits for the
acquisition of capital assets, reflect Luminent's investment in expanding
production and research and development capacity.
Cash provided by operating activities was $13.4 million for the year ended
December 31, 2000, compared to $748,000 for the year ended December 31, 1999.
Cash flows from operating activities was affected by Luminent's net loss of
$65.0 million offset by non-cash charges for the amortization of goodwill of
$47.4 million and deferred stock compensation of $28.8 million. Cash provided by
operating activities was $748,000 in 1999 and $1.8 million in 1998. Luminent
experienced a decrease in operating cash flows from 1999 over 1998 despite an
increase in net income year-over-year, due primarily to net accounts receivable
of $10.5 million in 1999 compared to $6.4 million in 1998. The increase in
accounts receivable was due primarily to increased sales. This increase in
accounts receivable was partially offset by an increase in accounts payable.
Inventory levels increased in anticipation of increased sales. Capital
expenditures for property and equipment represent all of Luminent's cash used in
investing activities in 1999 and 1998, and a significant portion of cash used in
investing activities in 2000. Cash used by investing activities also included
purchases of other assets and short-term investments offset by proceeds from the
sale of short-term investments and property and equipment. The capital
expenditures reflect Luminent's investment in expanding production and research
and development capacity. Capital expenditures for property and equipment were
$14.8 million for the year ended December 31, 2000. These expenditures are
consistent with Luminent's future growth strategy. Furthermore, in connection
with the acquisitions of Fiber Optic Communications, Optronics and Quantum,
Luminent received net cash of $5.5 million.
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Luminent believes that cash on hand, along with its cash flows from
operations, will be sufficient to satisfy its working capital, capital
expenditure and research and development requirements for at least the next 12
months. However, Luminent may require or choose to obtain additional debt or
equity financing in order to finance acquisitions or other investments in its
business. Luminent expects to continue to devote resources to purchases of
capital equipment as Luminent continues to build and relocate its manufacturing
capabilities and continue to expand Luminent's research and development
programs. Luminent's future capital requirements will depend on many factors,
including Luminent's rate of revenue growth, the timing and extent of spending
to support development of new products and expansion of sales and marketing, the
timing of new product introductions and enhancements to existing products and
market acceptance of Luminent's products.
FOREIGN CURRENCY
Luminent operates on an international basis. A majority of Luminent's
revenues and cost of sales are incurred in U.S. dollars. For the year ended
December 31, 2000, approximately 31% and 29% of Luminent's revenues and cost of
sales, respectively, were incurred in currencies other than the U.S. dollar. For
the quarter ended March 31, 2001, approximately 36% and 39% of Luminent's
revenues and cost of sales, respectively, were incurred in currencies other than
the U.S. dollar. For the year ended December 31, 2000 and quarter ended March
31, 2001, approximately 63% and 65%, respectively, of Luminent's operating
expenses were incurred in currencies other than the U.S. dollar, including the
non-cash charges for deferred compensation expense and goodwill amortization
incurred with the foreign subsidiary acquisitions. For the year ended December
31, 2000 and quarter ended March 31, 2001, the New Taiwan dollar is the most
significant of these currencies.
The New Taiwan dollar has been relatively stable in relation to the U.S.
dollar in recent years, and accordingly, Luminent has not experienced any
significant fluctuations in operating results due to exchange rate fluctuations
in the New Taiwan dollar in relation to the U.S. dollar.
Fluctuations in the value of the currencies in which Luminent conducts its
business relative to the U.S. dollar will cause U.S. dollar translation of these
currencies to vary from one period to another. Luminent cannot predict the
effect of exchange rate fluctuations upon future operating results. However,
because Luminent has expenses as well as revenues in each of the principal
functional currencies, the exposure to its financial results to currency
fluctuations is reduced. Luminent has not historically attempted to reduce
Luminent's currency risks through hedging instruments, however, Luminent may do
so in the future.
INFLATION
Luminent believes that its revenue and results of operations has not been
significantly impacted by inflation during the last three years.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138 which provides additional guidance for the application of SFAS No. 133
for certain transactions. Luminent adopted this statement on January 1, 2001 and
the adoption of this statement did not have a material impact on its financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," as
amended. SAB 101 summarizes certain of the Securities and Exchange Commission's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. Luminent has applied the provisions of SAB
101 in the consolidated financial statements. The adoption of SAB 101 did not
have a material impact on Luminent's financial condition or results of
operations.
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In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation, (an interpretation of APB
Opinion No. 25)." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on Luminent's financial position or
results of operations.
The FASB recently approved two pronouncements: SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", which
provide guidance on the accounting for business combinations to be accounted for
using the purchase method. Under the new rules, goodwill will no longer be
subject to amortization over its useful life. Rather, goodwill will be subject
to at least an annual impairment assessment. This assessment is a fundamentally
different two-step approach and is based on a comparison between a reporting
unit's fair value and its carrying value. Intangible assets have newly defined
criteria and will be accounted for separately from goodwill and will continue to
be amortized over their useful lives. Luminent plans to adopt these
pronouncements on January 1, 2002. Luminent is currently reviewing these
standards to determine the impact on its results of operations and its financial
position. The most significant anticipated effect on Luminent's financial
statements at adoption would be the discontinuing of the amortization of
goodwill and the possible impairment loss measured as of the date of adoption.
MARKET RISK
Luminent does not hold any derivative securities. The majority of its net
proceeds from the initial public offering are currently maintained in money
market funds, which are subject to limited interest rate risk.
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BUSINESS OF MRV
OVERVIEW
MRV Communications, Inc. creates, acquires, finances and operates
companies, and through them, designs, develops, manufactures and markets
products, which enable high-speed broadband communications. MRV concentrates on
companies and products devoted to optical components and Internet infrastructure
systems. MRV has leveraged its early experience in fiber optic technology into a
number of focused operating units specializing in advanced fiber optic
components, switching, routing, transaction management and wireless optical
transmission systems which it has created, financed or acquired.
MRV's principal operating units that constituted wholly or majority owned
subsidiaries at September 30, 2001 were:
- LUMINENT, INC. Luminent designs, manufactures and sells a comprehensive
line of singlemode active and passive fiber optic components for
high-capacity data transmission in the metropolitan and access markets.
Prior to the Merger, MRV owned approximately 92% of the outstanding stock
of Luminent. For further information about Luminent, see "Business of
Luminent" later in this prospectus supplement.
- OPTICAL ACCESS, INC. Optical Access designs, manufactures and markets
optical wireless products that enable the delivery of high-speed
communications traffic to the portion of the communications network
commonly known as the last mile, which extends from the end user to the
service provider's central office. Optical Access' solutions to the
last-mile bottleneck bypass the incumbent carrier's copper access network
with a comprehensive, integrated access solution, using optical wireless
technology. The building blocks of Optical Access' solution include the
TereScope(TM), for optical wireless links, and the OptiSwitch(TM), for
switching, provisioning and mesh enabling. At September 30, 2001, we
owned all of the outstanding capital stock of Optical Access.
- CESCOMM, INC. CEScomm (formerly Creative Electronic Systems SA or CES) is
developing and providing equipment to manufacturers of cellular network
infrastructure equipment and mobile operators and service providers for
the third generation of wireless solutions commonly known as 3G. 3G is
the generic term used for the next generation of mobile communications
systems. These new systems provide enhanced services to those available
today i.e., voice, text and data. CEScomm specializes in products that
provide the real-time conversion of radio signals generated by Internet
ready mobile devices into asynchronous transfer mode, or ATM, traffic
streams. At September 30, 2001, MRV owned all of the outstanding capital
stock of CEScomm.
- ITOUCH COMMUNICATIONS, INC. iTouch Communications, Inc. provides
next-generation Internet infrastructure solutions that enable service
providers and carriers to deliver and monitor, on a real-time basis,
high-speed Internet services. iTouch's products combine transaction
management with Internet protocol, or IP, routing and wide-area network,
or WAN, technologies, which allow for faster development of feature rich
high-speed data acquisition and management systems. At September 30,
2001, MRV owned all of the outstanding capital stock of iTouch.
- NBASE-XYPLEX, INC. NBase-Xyplex provides products and services, such as
the Fiber Driver, to enhance network infrastructures for city carriers,
service providers, cable operators and campus and enterprise networks.
Its products and technologies have been utilized in metropolitan area
fiber-based networks, enabling smart access to the WAN, as well as in
local area network, or LAN, switching, building enterprise/corporate data
networks. At September 30, 2001, MRV owned all of the outstanding capital
stock of NBase-Xyplex.
MRV's development stage companies, which MRV founded or have invested in as
of September 30, 2001 were:
- CHARLOTTE'S NETWORKS, INC. Charlotte's Networks is a start-up company
that is developing a core router for large service providers and
carriers. The Aranea core router is Charlotte's first product. The Aranea
router is capable of carrying both IP packets and time-division
multiplexing,
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or TDM, voice traffic and enables the current WAN to grow in high orders
of magnitude both in processing power and rate of transmission. In
addition, the router provides multi-services required by
telecommunication companies for efficient and flexible transmission of
voice over data networks. At September 30, 2001, MRV owned approximately
53% of the outstanding capital stock of Charlotte's Networks on a fully
diluted basis.
- ZUMA NETWORKS, INC. Zuma Networks is a startup company that is developing
a next generation Gigabit Ethernet switch router platform. At September
30, 2001, MRV owned all of the outstanding capital stock of Zuma
Networks.
- OPTICAL CROSSING INC. Optical Crossing designs, develops and manufactures
advanced fiber optic communication components and systems for the
telecommunications industry. At September 30, 2001, MRV owned
approximately 60% of the outstanding capital stock of Optical Crossing on
a fully diluted basis.
- ZAFFIRE, INC. Zaffire is focused on developing a next-generation, optical
services networking system for service providers. At September 30, 2001,
MRV owned approximately 22% of the outstanding capital stock of Zaffire
on a fully diluted basis. In July 2001, Zaffire reached an agreement with
Centerpoint Broadband Technologies, Inc., under which Centerpoint would
acquire Zaffire in an all stock transaction. Upon completion of the
acquisition, MRV expects to own less than 10% of Centerpoint. Centerpoint
develops high capacity transport systems that maximize network
performance for both optical and wireless networks. These highly
scalable, dynamically flexible systems allow service providers advanced
levels of bandwidth efficiency, capacity and high service velocity.
- REDC OPTICAL NETWORKS, INC. RedC has developed a complete line of optical
modules used for operating, monitoring and protecting optical networks
including: optical amplifiers, add/drop modules, protection and
restoration modules and dense wave division multiplexing, or DWDM,
monitoring. At September 30, 2001, MRV owned approximately 35% of the
outstanding capital stock of RedC on a fully diluted basis.
- HYPERCHANNEL LTD. Hyperchannel, which does business under its trademark
Hyporium is an independent Internet market maker for the information
technology, or IT, industry, enabling IT vendors, distributors and
resellers to trade online. Hyporium offers an alternative route to market
through an online trading hub and reseller web storefronts. At September
30, 2001, MRV owned approximately 42% of the outstanding capital stock of
Hyperchannel on a fully diluted basis.
BACKGROUND
MRV was organized in July 1988 as MRV Technologies, Inc., a California
corporation and reincorporated in Delaware in April 1992, at which time it
changed its name to MRV Communications, Inc. MRV's initial focus was in the
design, manufacture and marketing of semiconductor laser diodes, light emitting
diodes, or LEDs, and fiber optic transmitting and receiving modules for the
transmission of large amounts of information at high speeds over long distances
and LAN switching products for the computer networking industry. From 1995 to
1998, MRV made several acquisitions involving companies making networking
equipment, including:
- in 1995 of certain assets and the distribution businesses of Galcom
Networking, Ltd. and Ace 400 Communications Ltd, both network equipment
companies located in Israel, which provided MRV with experienced
personnel and technology for the networking markets;
- in 1996 certain of the liabilities and assets of Fibronics Ltd. and its
subsidiaries, including its technology in progress and existing
technology, its marketing channels, its GigaHub family of computer
networking products and other rights, relating to Fibronics' computer
networking and telecommunications businesses in Germany, the United
States, the United Kingdom, the Netherlands and Israel, enabling MRV to
enhance the development of Fast Ethernet and Gigabit Ethernet functions,
to offer a broader range of networking products and to benefit from
combined
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distribution channels and sales in both the United States and Europe and
greater product development capability; and
- in 1998 of the outstanding capital stock of the entity owning the
outstanding capital stock of Xyplex, Inc., a leading provider of access
solutions between enterprise networks and wide area network and/or
Internet service providers, or ISPs. This acquisition enabled MRV to
expand its product lines with products that had WAN and remote access
capabilities, permitting MRV to offer these solutions not only to MRV's
own existing base of customers, but also to the customer base added by
Xyplex. The acquisition of Xyplex (now known as iTouch Communications)
also increased MRV's sales force, distribution channels and customer
support and service capabilities.
During 2000, MRV completed several strategic acquisitions. These
acquisitions were made to expand MRV's product offering, enhance its
technological experience and expand MRV's manufacturing capabilities. The table
below summarizes MRV's more notable acquisitions in that year.
DATE OF TOTAL FORM OF CONSIDERATION
ACQUIRED COMPANY ACQUISITION CONSIDERATION AND OTHER NOTES TO ACQUISITION
---------------- -------------- -------------- ----------------------------------
Fiber Optic Communications, Inc. April 24, 2000 $310.4 million $48.6 million in cash and 5.4
million shares of common stock and
options issued; approximately 97%
of capital stock assumed; goodwill
and other intangibles recorded of
$261.6 million; deferred stock
compensation recorded of $14.1
million
Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock
and options issued; 100% of
capital stock assumed; goodwill
and other intangibles recorded of
$33.7 million; deferred stock
compensation recorded of $25.0
million
Quantum Optech Inc. July 12, 2000 $36.2 million 1.2 million shares of common stock
and options issued; 100% of
capital stock assumed; goodwill
and other intangibles recorded of
$27.9 million; deferred stock
compensation recorded of $2.7
million
AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock
and options issued; 100% of
capital stock assumed; goodwill
and other intangibles recorded of
$108.3 million; deferred stock
compensation recorded of $50.0
million
Optronics International Corp. July 21, 2000 $124.3 million 4.2 million shares of common stock
and options issued; approximately
99% of capital stock assumed;
goodwill and other intangibles
recorded of $99.5 million;
deferred stock compensation
recorded of $13.4 million
Each of these acquisitions was accounted for using the purchase method and
therefore, the results of operations of the acquired businesses have been
included in MRV's consolidated financial statements from the respective dates of
acquisition.
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Fiber Optic Communications is a Taiwanese manufacturer of passive fiber
optic components for wavelength division multiplexing and has facilities in both
Taiwan and the People's Republic of China. Quantum Optech is a Taiwanese
manufacturer of passive fiber optic components specializing in developing and
manufacturing optical thin film coating and filters for dense wavelength
division multiplexing. Optronics International is a Taiwanese manufacturer of
active fiber optic components focused on developing and manufacturing high
temperature semiconductor lasers, transceivers and detectors for optical
networks. Fiber Optic Communications, Quantum Optech and Optronics International
were acquired and contributed to Luminent in September 2000, prior to Luminent's
initial public offering of its common stock.
AstroTerra develops and manufactures free-space optical wireless
communication systems to connect data and telecommunications networks. Jolt
develops and manufactures multi-port wireless optics communications equipment.
These acquisitions provided strategic components and technology for Optical
Access' wireless optical solution. AstroTerra and Jolt were acquired and
contributed to MRV's subsidiary, Optical Access, which focuses on optical
wireless products that deliver high-speed communications traffic to the
so-called last mile portion of the communications network.
INDUSTRY BACKGROUND
As e-commerce and the Internet continued to proliferate, business
enterprises became increasingly reliant on communications networks and software
applications as critical strategic assets. Communications networks are being
expanded to deliver new services and distribute mission critical computing
applications such as customer network management, transaction processing,
enterprise resource planning, large enterprise databases, and sophisticated
on-line connections with vendors, and the increased use of traditional
applications, such as e-mail and video conferencing, to suppliers, customers and
employees. Bandwidth intensive applications that contain voice, video and
graphics through intranets and extranets, and growth in business-to-business
e-commerce and other on-line transactions are encumbering the optical networking
and internet infrastructure environment. Due to the significant growth of
network users who increasingly rely on secure access for higher speed and
quality of communications networks, even small network delays can result in lost
revenue, decreased employee productivity and customer dissatisfaction. As a
result, businesses and network service providers realize the critical nature of
network and application performance and the requirement for optical networking
and fiber optic equipment that increases capacity through high speed and more
efficient transmission technologies.
Optical networking and internet infrastructure systems enhance the carrier
and network service provider networks by handling bandwidth and providing
enhanced services. Fiber optic transmission components enhance the functionality
of enterprise and residential access networks by enabling high-speed
transmission of voice, video and data across fiber optic cable. Network service
providers and carriers rely on higher value data centric network services and
accordingly began deploying next generation solutions to accommodate the data
service requirements.
Growth in the use and availability of wide area networks was stimulated by
many factors including the need to share information between centralized
repositories and remote enterprise locations, to access and use the Internet for
communications and marketing and to electronically access external resources
used by the enterprise. Growth was also being fueled by the increasing
availability of more cost-effective WAN services such as Frame Relay and
Integrated Service Digital Network, or ISDN, making it more affordable for many
organizations to set up a WAN or expand an existing one. The growth in the use
and availability of the Internet coupled with increasing use, power, speed and
complexity of metropolitan area networks and WANs resulted in the increasing
need for equipment that permits high speed connections throughout the
infrastructure of the Internet.
Optical Networking and Internet Infrastructure Environment
The Internet has evolved into a network of hundreds of public and private
networks interconnected using Internet Protocol, or IP. Industry analysts expect
continued dramatic growth worldwide in Internet
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use and Internet traffic. As the Internet continues to explode, business
enterprises are increasingly reliant on communications networks and software
applications as strategic assets that are critical to business success.
Communications networks are being expanded to deliver new services and
distribute computing applications such as customer networks management, e-mail,
video, conferencing, and Voice Over Internet Protocol to suppliers, customers
and employees.
While consumers use the Internet for education and communication, business
and service providers are realizing the critical nature of network and
application performance.
To meet the growth in the demand for high-speed data services, service
providers are invested heavily to construct and upgrade the transmission
foundation of the public network infrastructure worldwide. The public network
infrastructure, which was originally built for voice traffic, is inadequate to
handle data and must be rapidly upgraded. Expenditures are spread across fiber
deployment, dense wavelength division multiplexing, or DWDM, products,
Synchronous Optical Network, or SONET, transmission equipment, and more
recently, and intelligent optical networking solutions.
Advances in emerging intelligent optical networking market should
fundamentally change the architecture of the public network and create a host of
new opportunities in infrastructure development, service delivery and
applications. Intelligent optical networking offers a solution to public network
scaling and high-speed service delivery.
Intelligent optical networking will eventually deliver high speed data
services provisioned over wavelengths and intelligent optical light paths. The
flexibility and scalability of wave service is expected to offer service
providers the ability to satisfy this demand for increased bandwidth while
creating competitive differentiation in their service portfolio with
"just-in-time" provisioning capability.
Fiber Optic Environment
Fiber optic cable can generally carry more information at less expense and
with greater signal quality than copper wire. The higher the speed of
transmission, the greater the capacity and the larger the span of the network,
the more essential is fiber optic transmission. Fiber has long replaced copper
as the preferred technology for long distance communications and major backbone
telephony and data transmissions. Due to its advantages, fiber optic technology
is also increasingly used to enhance performance and capacity within enterprise
networks and access networks.
Demand for fiber optic transmission components is driven by four factors:
- fiber applications have expanded beyond traditional telephony
applications and are being deployed in enterprise network backbones to
support high-speed data communications;
- within access networks, fiber is rapidly expanding downstream toward
end-users as access networks deploy "Fiber-in-the-Loop" and fiber to the
curb, or FTTC architectures to support services such as fast Internet
access and interactive video;
- the growth of cellular communications and PCs requires fiber to be
deployed both within and between cells; and
- the usage of fiber in short distances increases the demand for components
as more are used per mile of fiber. As the size, number and complexity of
these fiber networks increases, management expects that the demand for
fiber optic components will grow significantly.
Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission becomes
an essential element in computer networks. For transmission speeds of 100 Mbps
and higher, and transmission distances of 100 meters and longer, fiber optic
transmission must be deployed. Virtually all high-speed transmission standards,
such as Fiber Distributed Data Interface, Asynchronous Transfer Mode, or ATM,
Fast Ethernet and Gigabit Ethernet, specify fiber optic media as the most
practical technology for transmission. The steady rise in high-speed
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connections and the growth in the span of networks, including the need to
connect remote workgroups, has been driving the deployment of fiber optic cable
throughout enterprise networks.
Fiber Optic Transmission in Access Networks. To meet end users' increased
demand for content, software and services, network operators must acquire
additional bandwidth by either enhancing their existing networks or constructing
new ones. Cable TV operators are increasingly seeking to provide general
telecommunication services, high-speed Internet access and video-on-demand. As a
result, they are now faced with the need to transmit "upstream," from customer
premises to the cable TV operator and to send different signals to individual
end-users. Similarly, local exchange carriers are implementing new technological
standards, such as SONET and fiber-intensive architectures such as FTTC to
enable high-speed Internet access and the delivery of cable TV and Internet
services to the home. Management believes that deployment of and upgrades to
these systems will increase the demand for MRV's fiber optic components that
typically are better able to endure environmental factors, such as rain, snow,
heat and wind, cost-effectively. In addition, communications involving cellular
and personal communication services, or PCS, represent a fast emerging market
for fiber optic networks, including their usage in the backbone and landline
portion of wireless networks.
RECENT ECONOMIC SLOWDOWN
Macroeconomic factors, such as an economic slowdown in the U.S. and abroad,
have detrimentally impacted demand for communications products, thereby
resulting in reduced demand for optical components and equipment. The
unfavorable economic conditions and reduced capital spending has detrimentally
affected sales to service providers, network equipment companies, e-commerce and
Internet businesses, and the manufacturing industry in the United States during
2001 to date, and may continue to affect them for the remainder of 2001 and
thereafter. Announcements by industry participants and observers indicate there
is a slowdown in industry spending and participants are seeking to reduce
existing inventories. For information, on charges MRV and Luminent have taken to
their financial results as a result of these conditions, please see the
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations of MRV -- Market Conditions and Current Outlook" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Luminent -- Market Conditions and Current Outlook."
MRV'S CONCENTRATION
MRV creates, acquires, finances and operates companies, and through them,
designs, develops, manufactures and market products, which enable high-speed
broadband communications. MRV concentrates on companies and products devoted to
optical components and network infrastructure systems. MRV has leveraged its
early experience in fiber optic technology into a number of focused operating
units specializing in advanced fiber optic components, switching, routing,
transaction management and wireless optical transmission systems which it has
created, financed or acquired. Products and product developments of MRV's wholly
or majority owned subsidiaries include the following:
Luminent, Inc.
Luminent provides an extensive offering of active and passive singlemode
fiber optic components that support a wide range of requirements for the
metropolitan and access networks. It is currently shipping a variety of active
and passive fiber optic components. Active components are the core technology
for optical networks and require electrical power to generate, boost or
transform optical signals. Luminent's passive fiber optic components are used to
direct, split and merge optical signals without the use of electricity. These
components have become critical due to the use of fiber amplifiers, passive
networks and WDM technology. For further information concerning Luminent's
business, see "Business of Luminent" later in this prospectus supplement.
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Optical Access, Inc.
Optical Access is an optical networking and Internet infrastructure company
that designs, manufactures and markets optical wireless products enabling
service providers to offer high-speed broadband access within the last mile of
the communications network in a cost effective and timely manner. Optical
Access' products are designed to be deployed in a switched mesh architecture,
which means that its products allow transmission of data between any two points
on the network and enable full re-routing of traffic around a transmission link
or equipment failure. In addition, its products feature a backup wireless radio
frequency option, which reduces problems associated with adverse weather
conditions. Optical Access offers the TereScope family of products, which
provide optical wireless links, and OptiSwitch(TM) products, which enable
switching, provisioning and aggregation. All of these products can be remotely
managed through Optical Access' MegaVision network management system. Because
each of its products can perform independently, Optical Access's customers can
also purchase products separately with no performance degradation.
TereScope. TereScope products are optical wireless links that utilize
high-powered optics, which allow for high-speed, long distance optical wireless
transmission of data. By installing its TereScope products in a mesh
configuration with a minimum of two connections into each building and utilizing
Optical Access' OptiSwitch(TM) switching technology, Optical Access' products
enable full re-routing of traffic around a link or equipment failure. Optical
Access believes that its TereScope products offer one of the first commercially
available wireless optic systems with built-in auto fallback to radio frequency
links.
TereScope devices can be installed on a building's rooftop or side or in an
office behind a window rather than a radio tower. They are constructed with a
transmitter, which emits light that does not damage the human eye, and a
receiver that detects light. Optical Access offers a range of TereScope
products, the smallest of which looks like a security camera and the largest of
which is the size of a computer monitor. The products feature a number of
recently developed technologies to account for issues that have historically
limited the use of optical wireless systems, including a system that enables
them to compensate for misalignment due to building movements or interference
caused by flying objects such as birds. In addition, TereScope products feature
high power laser transmitters and large optical receivers to permit connectivity
over longer distances. The TereScope ranges in list price from approximately
$4,000 to $120,000, depending on data rate and maximum range, with an additional
$5,000 to $10,000 for a 10 megabit per second radio frequency backup.
OptiSwitch(TM). Optical Access' family of OptiSwitch(TM) products enables a
mesh architecture, bandwidth distribution, provisioning and termination for
all-IP networks. The OptiSwitch is designed to provide customer premise
connectivity to business users, smart aggregation and to enable execution of any
service level agreement by advanced features and capabilities of traffic
classification and quality of service. Direct connection of the OptiSwitch(TM)
ports to TereScope products allow service providers to offer a complete
cost-effective metropolitan solution. The system is designed to manage optical
wireless mesh topology management and subscriber management in Ethernet
broadband networks. The OptiSwitch(TM) products range in price from $1,400 to
$190,000, depending upon data rate and number of ports.
MegaVision. Optical Access' MegaVision management system provides software
based graphical network management and monitoring that is fully integrated with
its optical transmission and switching products. The MegaVision network
management system allows service providers to provision their networks from a
centralized location. With the graphical interface offered by Optical Access,
the provider receives a comprehensive view of the network as well as fault
isolation, configuration, performance and security management of the network.
CEScomm, Inc. (formerly Creative Electronic Systems SA or CES)
CEScomm is developing and providing products for manufacturers of cellular
network infrastructure equipment and mobile operators and service providers for
the third generation of wireless solutions commonly known as 3G. 3G is the
generic term used for the next generation of mobile communications systems.
These new systems provide enhanced wireless services to those available today
i.e., voice, text and
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data. CEScomm specializes in products that provide the real-time conversion of
radio signals generated by Internet ready mobile devices into asynchronous
transfer mode, or ATM, traffic streams. Its products are based on distributed
architectures that cluster super computer multi-processing capabilities between
the radio access network and the Internet protocol, or IP, core network.
CEScomm's products make it possible for 3G mobile network operators and
equipment vendors to deliver more efficient service with enhanced options. End
users of CEScomm's products include leading 3G wireless network operators such
as NTT DoCoMo, the cellular telephone arm of Nippon Telegraph and Telephone
Corporation in Japan, and European operators using the Universal Mobile
Telecommunications System, or UMTS. CEScomm sells its products to leading
cellular equipment vendors, including Lucent Technologies, Nortel Networks and
Ericsson.
iTouch Communications, Inc.
iTouch provides next-generation Internet infrastructure solutions that
enable service providers and carriers to deliver and monitor, on a real-time
basis, high-speed Internet services. iTouch's products utilize internet
protocol, or IP, routing and wide area network, or WAN, technologies, which
allow for faster development of feature rich high-speed data acquisition and
management systems.
iTouch's In-Reach product suite supports network element management and
out-of-band management applications for large, heterogeneous communication
networks. In-Reach products offer console, alarm, sensor and power management
solutions and possess features ranging from simple network management protocol,
or SNMP, -based discrete alarm signal collection and distribution to remote
console management of routers, switches, and equipment from Sun Microsystems and
other providers. Standalone and chassis-based In-Reach products enable upgrades
at central sites and downloads of software to thousands of remote network
elements.
NBase-Xyplex, Inc.
NBase-Xyplex provides products and services, such as the Fiber Driver
family of products, to enhance network infrastructures for city carriers,
service providers, cable operators and campus and enterprise networks. The Fiber
Driver family of products focuses on providing more effective usage of
fiber-optic cables for carriers, service providers, cable operators and campus
and enterprise networks. The Fiber Driver product line is designed to address
the growing need for connecting networks of different media and speed into
today's expanding fiber optic infrastructure.
The Fiber Driver family consists of over 150 different converters,
repeaters, switches, distance extenders and coarse wave division multiplexer
modules, all of which operate on the same modular, and scalable platform. Each
module provides a different solution and together the family covers almost every
communication protocol. The family includes a base chassis in one, two, four and
16 slot varieties and is fully managed through any network management system
based on simple network management protocol, or SNMP, including the MegaVision
network management system discussed above under Optical Access.
Charlotte's Networks, Inc.
Charlotte's Networks is developing a core router for large service
providers and carriers. The Aranea core router is Charlotte's Networks' first
product. The Aranea router is capable of carrying both IP packets and
time-division multiplexing, or TDM, voice traffic and enables the current WAN to
grow in high orders of magnitude both in processing power and rate of
transmission. The router has the ability to emulate a class 4 or 5 switch,
enabling its voice traffic capability. It offers various interfaces and allows
multiple Aranea machines to be clustered into a single virtual router for
ultra-high speed. This feature allows construction of a machine with an
aggregate bandwidth of multiple terabits per second. The Aranea can be
configured to combine up to 16 port interfaces of any kind into a single dense
wavelength division multiplexing link of up to 40 Gbps. The clustered machines
may be managed as a single virtual router through the operating system called
"AROS." The Aranea is designed to meet the exact requirements of new generation
telecommunication service providers in terms of bandwidth, differentiated
services,
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scalability and reliability and is positioned to take advantage of the explosive
growth predicted for the WAN or terabit router segment of the router market.
Zuma Networks, Inc.
Zuma is developing a next generation gigabit Ethernet switch router
platform. The platform is distinguished by very high gigabit Ethernet port
density in a single chassis, outstanding packet forwarding performance; a
multi-processor, multi-component hardware architecture supporting carrier class
survivability; and a multi-processor software architecture supporting the
coupling of wire speed switch routing functions with wire speed network services
in a single platform. This router, named Zuma LightReef(TM) entered beta trials
in December 2000 and shipments began in April 2001.
Optical Crossing
Optical Crossing's core experience is in free-space laser communications
and semiconductor optoelectronic components. Optical Crossing has three internal
product groups -- Optoelectronics Products, Optical Wireless Products and
Networking Products and Services -- that address multiple aspects of optical
wireless technology, from components to architectural implementation of
all-optical networks. Products are currently in the prototyping and development
stage.
European Subsidiaries.
MRV maintains European subsidiaries and branch offices in France, Germany,
the United Kingdom, Italy, Switzerland, Sweden, Norway and Finland, which are
involved in sales, services and distribution of data networking products. The
activities of these companies include system design, integration and support as
well as product sales to enterprise customers and carriers, including service
providers. Products sold include products manufactured by other MRV companies or
divisions, as well as products manufactured by third party vendors supplied as
part of network system integration and distribution services. Such
specialization allows MRV to penetrate targeted vertical and regional markets.
As of September 30, 2001, MRV owned approximately 80% of its European
subsidiaries.
OTHER KEY TECHNOLOGY INTERESTS
In addition to its wholly owned and majority owned companies, MRV has
significant interests in other key technology companies, including Zaffire, Inc.
RedC Optical Networks and Hyperchannel Ltd.
Zaffire is focused on developing a next-generation, optical services
networking system for regional and metropolitan telecommunications networks.
Zaffire offers a packet-enabled, DWDM optical solution designed specifically for
deployment in metropolitan and regional-area networks. In July 2001, Zaffire
reached an agreement with Centerpoint Broadband Technologies, Inc., under which
Centerpoint would acquire Zaffire in an all stock transaction. Upon completion
of the acquisition, MRV expects to own less than 10% of Centerpoint. Centerpoint
develops high capacity transport systems that maximize network performance for
both optical and wireless networks. These highly scalable, dynamically flexible
systems allow service providers advanced levels of bandwidth efficiency,
capacity and high service velocity.
RedC Optical Networks has developed a complete line of optical modules used
for operating, monitoring and protecting optical networks including: optical
amplifiers, add/drop modules, protection and restoration modules and DWDM
monitoring.
Hyperchannel, which does business under its trademark Hyporium is an
independent net market maker for the information technology, or IT, industry,
enabling IT vendors, distributors and resellers to trade online. Hyporium offers
an alternative route to market through an online trading hub and reseller web
storefronts.
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SALES AND MARKETING
Each MRV operating company maintains its own separate sales and marketing
staffs, enabling the sales personnel to develop strong customer relationships
and expertise in their respective areas. Each company has established its own
direct sales force experienced in each subsidiary's business to address the new
and evolving requirements of their business arena.
MRV and its companies have sold their products worldwide to over 500
diverse customers in a wide range of industries; primarily, data communications,
telecommunications and cable. No customer accounted for more than 10% of MRV's
consolidated revenues in 1998, 1999 or 2000.
MRV and its companies employ various methods, such as public relations,
advertising, and trade shows to build awareness of their products. Public
relations activities are conducted both internally and through relationships
with outside agencies. Major public relation activities are focused around new
product introductions, corporate partnerships and other events of interest to
the market. MRV supplements its public relations through media advertising
programs and attendance at various trade shows throughout the year, both in the
United States and internationally.
SALES, SUPPORT AND DISTRIBUTION
MRV continually seeks to augment and increase its distribution channels and
sales forces to accelerate growth. Products are sold through MRV and its
operating companies' direct sales forces, VARs, systems integrators,
distributors, manufacturer's representatives and OEM customers. Sales and
distribution divisions are organized along the following primary lines: direct
sales, including OEM; domestic and international distributors; value-added
resellers, or VARs, and systems integrators; and manufacturer's representatives.
Direct Sales. MRV's companies employ worldwide direct sales forces
primarily to sell their products to large OEM accounts and in some cases to end
users. MRV believes that a direct sales force can best serve large customers by
allowing salespeople to develop strong, lasting relationships, which can
effectively meet the customers' needs. Direct sales staffs are located across
the United States, Europe and Israel.
Domestic and International Distributors. MRV and its companies work with
both domestic and international distributors. Geographic exclusivity is normally
not awarded unless the distributor has demonstrated acceptable performance.
Distributors must successfully complete MRV's training programs and provide
system installation, technical support, sales support and follow-on service to
local customers. Generally, distributors have agreements with a one year term
subject to automatic renewal unless otherwise canceled by either party. In
certain cases with major distributors, the agreements are terminable on 30 days'
notice. MRV uses stocking distributors, which purchase its product and stock it
in their warehouse for immediate delivery, and non-stocking distributors, which
purchase its products after the receipt of an order. Internationally, MRV sells
through over 100 distributors in Asia, Africa, Europe, Australia, the Middle
East, Canada and Latin America.
Value-Added Resellers and Systems Integrators. MRV and its companies use a
select group of VARs and system integrators in the U.S., which are generally
selected for their ability to offer MRV's products in combination with related
products and services, such as system design, integration and support. This
specialization allows MRV to penetrate targeted vertical markets such as
telecommunications and cable TV. Generally, MRV uses a two-tier distribution
system to reach a broader range of customers, however VARs may purchase the
product directly from one or more of MRV's companies if the volume warrants a
direct relationship.
Manufacturers' Representatives. To supplement MRV's direct sales efforts,
manufacturer's representatives are assigned by territory in the United States
and work exclusively on commission.
Customer Support and Service. MRV and its companies are committed to
providing strong technical support to their customers. MRV operates customer
service groups, and provide support through
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engineering groups, sales staff, distributors, OEMs and VARs. Customer support
personnel are currently located at offices in California, Massachusetts,
Maryland, Germany, England, Italy and Israel.
International Sales. International sales accounted for approximately 59%,
58% and 63% of MRV's consolidated net revenues in 1998, 1999 and 2000,
respectively.
MANUFACTURING
MRV outsources the board-level assembly, test and quality control of its
Internet infrastructure products to third party contract manufacturers, thereby
allowing MRV to react quickly to market demand, to avoid the significant capital
investment required to establish and maintain manufacturing and assembly
facilities and to concentrate resources on product design and development. Final
assembly, burn-in, final testing and pack-out are performed by MRV's companies
and MRV and selected third-party contract manufacturers to maintain quality
control. MRV's manufacturing teams are experienced in advanced manufacturing and
testing, in engineering, in ongoing reliability/quality assurance and in
managing third party contract manufacturer's capacity, quality standards and
manufacturing process. Risks associated with the use of independent
manufacturers include unavailability of or delays in obtaining adequate supplies
of products and reduced control of manufacturing quality and production costs.
If MRV's contract manufacturers fail to deliver products in the future on a
timely basis, or at all, it would be extremely difficult for MRV to obtain
adequate supplies of products from other sources on short notice. There can be
no assurance that MRV's third party manufacturers will provide adequate supplies
of quality products on a timely basis, or at all. While MRV could outsource with
other vendors; a change in vendors may require significant time and result in
shipment delays and expenses. The inability to obtain MRV's key products on a
timely basis, the loss of a particular vendor or a change in the terms and
conditions of the outsourcing could have a material adverse effect on MRV's
business, operating results and financial condition.
MRV relies extensively on MRV's and its companies own production
capabilities for critical semiconductor lasers and LEDs used in MRV's products.
MRV's optical transmission production process involves:
- a wafer processing facility for semiconductor laser diode and LED chip
manufacturing under stringent and accurate procedures using
state-of-the-art wafer fabrication technology;
- high precision electronic and mechanical assembly; and
- final assembly and testing.
Relevant assembly processes include die attach, wire bond, substrate
attachment and fiber coupling. MRV also conducts tests throughout MRV's
manufacturing processes using commercially available and internally built
testing systems that incorporate proprietary procedures. MRV and its companies
perform final product tests on all of their products prior to shipment to
customers. Many of the key processes used in MRV's products are proprietary;
and, therefore, many of the key components of its products are designed and
produced internally. Because MRV and its companies manufacture these and other
key components of their products at their own facilities and they are not
readily available from other sources, any interruption of the manufacturing
process could have a material adverse effect on MRV's operations. Furthermore,
MRV and its companies have a limited number of employees dedicated to the
operation and maintenance of wafer fabrication equipment, the loss of any of
whom could result in their inability to effectively operate and service that
equipment. Wafer fabrication is sensitive to a wide variety of factors,
including variations and impurities in the raw materials, difficulties in the
fabrication process and performance of the manufacturing equipment. There can be
no assurance that MRV and its companies will be able to maintain acceptable
production yields and avoid product shipment delays. In the event adequate
production yields are not achieved resulting in product shipment delays, MRV's
business, operating results and financial condition could be materially
adversely affected. While MRV believes its companies have sufficient
manufacturing capacity for growth in the coming years, at various times there
have been shortages of parts in the electronics industry, and certain critical
components have been subject
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to limited allocations. Although shortages of parts and allocations have not had
a material adverse effect on MRV's results of operations, there can be no
assurance that any future shortages or allocations would not have that effect.
MRV and its companies are subject to a variety of federal, state, and local
governmental laws and regulations related to the storage, use, emission,
discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. There can be no assurance that environmental laws
and regulations will not result in the need for additional capital equipment or
other requirements. Further, these laws and regulations could restrict MRV's
ability to expand operations. Any failure by MRV or its companies to obtain
required permits for, control of use of, or adequately restrict the discharge,
emission or release of, hazardous substances under present or future laws and
regulations could subject MRV to substantial liability or could cause MRV's
manufacturing operations to be suspended. That liability or suspension of
manufacturing operations could have a material adverse effect on MRV's operating
results. To date, these environmental laws and regulations have not had a
material adverse effect on MRV's operating results.
COMPETITION
The communications equipment and component industry is intensely
competitive. MRV and its companies compete directly with a number of established
and emerging computer, communications and networking device companies. Direct
competitors in optical networking and Internet infrastructure, generally include
Cisco Systems, Lucent Technologies, Nortel Networks and 3Com Corporation. Direct
competitors for MRV's optical wireless technology include AirFiber, Canon and
TeraBeam. Direct competitors in fiber optic components include Agilent
Technologies, Corning Incorporated, Finisar Corporation, Fujitsu, Infineon AG,
International Business Machines Corporation, JDS Uniphase Corp., Lucent
Technologies, Inc., Sumitomo and Tyco International, Ltd. Many of MRV's
competitors have significantly greater financial, technical, marketing,
distribution and other resources and larger installed customer bases than MRV.
Several of these competitors have recently introduced or announced their
intentions to introduce new competitive products. Many of the larger companies
with which MRV competes offer customers a broader product line, which provides a
more comprehensive networking solution than the products of MRV and its
companies.
In addition to competitors competing with products that perform similar
functions there are also several alternative network technologies. For example,
in the local access market, MRV's products compete with telephone network
technology known as "ADSL," an acronym for asymmetric digital subscriber line.
In this technology, digital signals are transmitted through existing telephone
lines from the central office to the home. MRV also expects that competitive
pricing pressures could result in price declines for MRV and its companies and
their competitors' products. This increased competition, if not accompanied by
decreasing costs, could result in reduced margins and loss of market share which
would materially and adversely affect MRV's business, operating results and
financial condition.
The communications industry has become increasingly concentrated in recent
years as a result of consolidation. This consolidation is likely to permit MRV's
various competitors to devote significantly greater resources to the development
and marketing of new competitive products and the marketing of existing
competitive products to their larger installed bases. MRV expects that
competition will increase substantially as a result of these and other industry
consolidations and alliances, as well as the emergence of new competitors.
PROPRIETARY RIGHTS
To date, MRV and its companies have relied principally upon copyrights and
trade secrets to protect its proprietary technology. Generally, MRV enters into
confidentiality agreements with its employees and key suppliers and otherwise
seek to limit access to and distribution of the source code to software and
other proprietary information. There can be no assurance that these steps will
be adequate to prevent
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misappropriation of MRV's technologies or that a third party will not
independently develop technology similar or superior to any MRV possesses.
MRV has received notices from third parties alleging possible infringement
of patents with respect to product features or manufacturing processes. MRV
believes these kind of notices are common in the communications industry because
of the large number of patents that have been filed on these subjects. MRV's
policy is to discuss these notices with the senders in an effort to demonstrate
that its products and/or processes do not violate any patents. MRV is currently
involved in these kind of discussions with Lucent Technologies, Nortel Networks,
Ortel, Rockwell International Corporation and the Lemelson Medical, Education &
Research Foundation. MRV does not believe that any of MRV's or its companies'
products or processes violates any of the patents asserted by these parties and
further believes that it has meritorious defenses if any legal action is taken
by any of these parties. However, an assertion by one or more of these parties
of a claim that results in a conclusion unfavorable to MRV could materially and
adversely affect MRV's business, operating results and financial condition.
In the future, litigation may be necessary to protect trade secrets and
other intellectual property rights owned by MRV, to enforce any patents issued
to MRV or its companies, to defend against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any litigation of this kind could be costly and a diversion of the
attention of the management involved, which could have a material adverse effect
on MRV's business, operating results and financial condition. An adverse
determination in that litigation could further result in the loss of MRV's
proprietary rights, subject it to significant liabilities, require MRV to seek
licenses from third parties or prevent MRV and its companies from manufacturing
or selling their products, any of which could have a material adverse effect on
MRV's business, operating results and financial condition. MRV typically has
agreed to indemnify its customers and key suppliers for liability incurred in
connection with the infringement of a third party's intellectual property
rights.
EMPLOYEES
As of December 31, 2000, MRV and its consolidated companies employed a
total of approximately 2,600 full-time employees. None of MRV's employees is
represented by a union or governed by a collective bargaining agreement, and MRV
believes its employee relationships are satisfactory.
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PROPERTIES
MRV's principal administrative, sales and marketing, research and
development and manufacturing facility is located in Chatsworth, California. The
table below lists the locations, square footage and expiration dates of MRV's
owned and leased facilities for MRV's major operations.
SQUARE FOOTAGE LEASE
LOCATION OWNED/LEASED EXPIRATION DATES
-------- -------------- -----------------
Chatsworth, California, USA................................. 17,700 February 2004
Chatsworth, California, USA................................. 20,950 January 2003
Chatsworth, California, USA................................. 12,800 March 2002
Chatsworth, California, USA................................. 50,000 July 2004
Chatsworth, California, USA................................. 5,000 December 31, 2002
Chatsworth, California, USA................................. 22,200 December 2005
Ventura, California, USA.................................... 46,200 August 2008
Littleton, Massachusetts.................................... 101,000 September 2003
Yokneam, Israel............................................. 23,400 January 2002
Milan, Italy................................................ 46,600 March 2013
Hsinchu, Taiwan............................................. 165,910 March 2016
Hsinchu, Taiwan............................................. 12,712 Owned
Hsinchu, Taiwan............................................. 18,895 June 2001
Hsinchu, Taiwan............................................. 9,437 February 2001
Hsinchu, Taiwan............................................. 7,876 September 2000
Hsinchu, Taiwan............................................. 3,907 December 2001
Hsinchu, Taiwan............................................. 31,043 December 2001
Hsinchu, Taiwan............................................. 5,834 December 2001
Hsinchu, Taiwan............................................. 6,372 December 2001
Miao-Li County, Taiwan...................................... 24,398 Owned
Chu-Pei, Taiwan............................................. 15,989 Owned
Shanghai, People's Republic of China........................ 48,495 October 2047
Shanghai, People's Republic of China........................ 139,008 January 2049
Stockholm, Sweden........................................... 52,200 June 2003
Rome, Italy................................................. 15,700 December 2012
Paris, France............................................... 19,400 Owned
MRV believes that its facilities are sufficient to meet its current needs
and that adequate additional space will be available for lease when required.
We believe that our facilities are sufficient to meet our current needs and
that adequate space will be available for lease when required.
LEGAL PROCEEDINGS
MRV is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no matters pending that MRV expects to be
material in relation to MRV's business, consolidated financial condition,
results of operations or cash flows.
MRV has received notices from third parties alleging possible infringement
of patents with respect to product features or manufacturing processes. For a
discussion of these notices and the claims, see "Business of MRV -- Proprietary
Rights" earlier in this prospectus supplement.
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BUSINESS OF LUMINENT
OVERVIEW
Luminent designs, manufactures and sells a comprehensive line of fiber
optic components that enable communications equipment manufacturers to provide
optical networking equipment for the rapidly growing metropolitan and access
segments of communications networks. Luminent's products are designed to meet
the increasing bandwidth requirements between long-haul telecommunication
networks and end users. Luminent specializes in singlemode fiber optic
components and subsystems for high-capacity data transmission for long-reach
applications in the metropolitan and access markets. Luminent provides a broad
product line of high performance fiber optic components, the technical depth to
offer next generation optical components, a quick response to new requirements
and volume manufacturing for these components. Luminent's direct sales customers
include communications equipment manufacturers, such as Cisco Systems, General
Instrument, Marconi Communications and Pandacom. In addition, Luminent sells its
products to distributors who, in turn sell to customers such as Cabletron
Systems, Extreme Networks and Foundry Networks.
INDUSTRY BACKGROUND
For a discussion of the evolution of the demand for bandwidth and the
deployment of optical networks, see the section entitled "Business of
MRV -- Industry Background" earlier in this prospectus supplement.
Optical fiber is currently being deployed across the three major segments
of communications networks: long-haul, metropolitan and access.
Long-haul networks. Long-haul networks connect the communications networks
of metropolitan areas around the world and transport large amounts of data and
voice traffic. To solve congestion problems, service providers have invested
significant resources in the deployment of optical infrastructure including the
use of dense WDM. As a result, current long-haul networks provide very high
transmission capacity and speed, or bandwidth, for transmitting data over very
long distances. The build-out of long-haul networks represents an important step
in improving network infrastructure to support increased demand for new services
and greater traffic volumes.
Metropolitan networks. Metropolitan networks connect long-haul networks and
access networks. Due to the increase in data traffic and the demand for enhanced
services, the existing metropolitan network infrastructure has become a
bottleneck for the provision of communication services to businesses.
Accordingly, service providers have begun to invest in infrastructure to help
reduce capacity constraints in this portion of the network.
Access networks. Access networks include business and residential networks.
Business access networks connect metropolitan networks and businesses.
Traditional business access networks use existing copper based solutions, which
are slow compared to high-speed networks commonly used within businesses.
Established and new service providers are deploying new technologies in order to
provide high bandwidth connectivity to the business user.
Residential access networks provide connectivity between the metropolitan
network and the home. Currently, multiple services such as cable television,
satellite, telephony and high-speed data lines are being offered to home users
based on multiple copper solutions. As high data rates and new services become
widely available to the home user, copper solutions will become increasingly
insufficient to meet the consumer's demands. Service providers are beginning to
deploy fiber to neighborhoods, to the curb and to the home enabling the
residential user to obtain a wide range of current and future services.
Singlemode Optical Components
Singlemode components are coupled to singlemode optical fiber and have
superior transmission characteristics in high capacity, longer distance
applications as compared to multimode fiber. Singlemode
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fiber has physically pure pulses of light which do not overlap with each other
as quickly as the pulses of light on multimode fiber. Pulses of light that
overlap result in the information carried by the fiber being lost. As data
transmission speeds have increased, singlemode fiber has become necessary for
even relatively short transmission distances due to its superior performance. As
a result, singlemode fiber has progressed from being the fiber of choice in the
long-haul market to being accepted as the preferred fiber for most high-speed
transmission applications.
The increasing use of WDM technology in metropolitan and access markets has
also driven demand for singlemode fiber optic components. WDM systems require
extensive use of active and passive fiber optic components to enable
communication equipment manufacturers to increase system capacity by adding
additional light signals on a single optical fiber.
THE LUMINENT SOLUTION
Luminent designs, manufactures and sells a comprehensive line of singlemode
fiber optic components that enable communications equipment manufacturers to
build advanced fiber optic communications systems for the rapidly growing
metropolitan and access markets. Luminent's approach combines its extensive
research and development experience along with design, engineering and
manufacturing capabilities to deliver a wide array of high quality,
cost-effective and reliable, active and passive components. Luminent believes
its ability to integrate active and passive technologies, its years of
experience in fiber-to-the-curb and fiber-to-the-home components, Luminent's
ability to provide innovative customer solutions, its strong relationships with
key communication equipment manufacturers and its ability to scale manufacturing
to meet high volume customer requirements provide Luminent with competitive
advantages. Luminent believes its products provide the following key benefits to
Luminent's customers:
High performance, cost-effective components. Luminent's active and passive
products are designed to maximize both distance and bandwidth over singlemode
fiber while providing efficient and reliable transmission. Luminent offers high
performance and reliable components that can be tailored to meet a wide range of
customer specifications. Luminent's fiber optic components incorporate
proprietary technology that delivers high performance under demanding
environmental conditions. Luminent believes its high performance and reliable
singlemode fiber optic components have enabled it to advance Luminent's position
in the metro and access fiber optic markets.
Broad product offerings. Luminent offers a broad product line of active and
passive components in a variety of packaging configurations. Luminent's active
components include custom wavelength distributed feedback lasers, high
temperature lasers, vertical cavity surface emitting lasers, edge emitting light
emitting diodes, or LEDs, surface emitting LEDs and detectors with electrical
amplifiers. Luminent's passive components include WDM add/drop components, thin
film filters, high-speed external modulators, fiber amplifiers, fused biconical
couplers, fused biconical WDM couplers and WDM multiplexers, circulators,
isolators and collimators. These broad product offerings allow Luminent to
satisfy a wide array of customer requirements in metropolitan and access
networks. In addition, Luminent offers a number of products integrating active
and passive components.
Innovation and flexibility. Luminent's over a decade of experience in
device fabrication, packaging and integration provides Luminent with the
knowledge and capability to meet the changing needs of its customers. Luminent's
intellectual property and technical know-how enables Luminent to innovate next
generation products for its customers. Luminent was an early developer of
singlemode fiber WDM optical component technology for fiber-to-the-curb and
fiber-to-the-home applications. These components currently provide next
generation high-speed services to hundreds of thousands of homes. In addition,
Luminent offers coarse WDM components that enable communication equipment
manufacturers to implement WDM inside their equipment at a fraction of the cost
of dense WDM. Coarse WDM utilizes Luminent's experience in laser fabrication,
passive component fabrication, packaging and electronic design. As a result of
its manufacturing capabilities in all these areas, Luminent can reduce its time
to market for innovative product designs. Luminent has close working
relationships with many key customers, allowing
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Luminent to be involved in the initial stages of new designs. This exposure
provides Luminent with a better understanding of customer demands and helps
focus Luminent's development effort towards their evolving needs.
Strong manufacturing capabilities. Luminent's ability to manufacture a
broad range of active and passive components is key to Luminent's success and
enables Luminent to respond to customers' requirements with reduced lead times.
In addition, Luminent's advanced packaging process enables it to manufacture
high volume, cost-effective, singlemode components. Luminent believes that its
advanced laser fabrication facilities, its thin film deposition lab, its
wave-guide fabrication facilities and its proprietary packaging technology
provide Luminent with a competitive advantage for manufacturing fiber optic
components.
PRODUCTS
Luminent provides an extensive offering of active and passive singlemode
fiber optic components that support a wide range of requirements for the
metropolitan and access networks. Prior to the acquisition of Fiber Optic
Communications on April 24, 2000, Luminent's business consisted entirely of
active fiber optic components. The acquisitions of Fiber Optic Communications
and Quantum expanded Luminent's product offerings into passive components.
Active Components
Active components are the core technology for fiber optic networks and
require electrical power to generate, boost or transform optical signals.
Mixed signal, single fiber components. These components are capable of
transmitting bi-directional digital and analog information over a single fiber.
Luminent's products in this category are called duplexers and triplexers. A
duplexer transmits and receives light simultaneously and independently. A
triplexer is a component that both transmits and receives one wavelength of
light, while also receiving a second wavelength of light. These components offer
high performance in many critical parameters, including laser power, linearity,
receiver responsivity, receiver frequency response and cross talk between the
laser and receiver. These components are used to provide cable television,
satellite distribution, data services and telephony, all over a single fiber for
residential access.
Transceivers. A transceiver, the most common fiber optic data link, has
both a transmitter and receiver built into one unit. A transmitter converts
electrical signals into optical signals and launches them into the fiber. A
receiver receives the optical signal, converts it back to an electrical signal
and amplifies it.
Luminent offers a wide variety of transceivers designed for a number of
applications. This broad product line enables Luminent to meet a wide variety of
customer requirements for singlemode fiber-based transceivers. These
transceivers vary in package style, distance requirements, speed requirements
and protocols, including the most widely used protocols, asynchronous transfer
mode, Fiber Channel and Ethernet. Luminent has packaged several of its
transceivers to have advantages over its standard components. For example, the
small form factor transceiver allows an equipment manufacturer to achieve twice
the number of fibers connected from the equipment; the pluggable transceiver can
be removed and inserted in an operational network, which makes it well suited
for field upgrades; and the single fiber transceiver provides transceiver
functionality over one fiber instead of two. Luminent is also aggressively
adding next generation transceivers to this product line.
Due to high output power and high receiver sensitivity, Luminent's products
achieve long reach transmissions. Additional options include a wide operating
temperature range, lower operating voltages for reduced power consumption and a
wide range of wavelengths. Applications for custom wavelength transceivers
include optical network monitoring and management of coarse WDM.
Coarse WDM subsystems. Coarse WDM subsystems are a combination of active
and passive components that can be integrated into a communication equipment
vendor's product. These subsystems enable communications equipment manufacturers
to implement wavelength division multiplexing inside
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their equipment at a cost lower than that of dense WDM. Coarse WDM technology is
more cost-effective because it uses un-cooled transceivers that do not require
costly and power consuming thermoelectric coolers. Luminent offers coarse WDM
subsystems in multiple versions for varying transmission speeds.
LEDs for fiber optic communications. Luminent's light emitting diodes, or
LEDs, are used as a light source for fiber optic transmission because they
require less expensive control circuitry as compared to laser diodes. Luminent
manufactures two types of LEDs: surface emitting LEDs and edge emitting LEDs.
Luminent's surface emitting LEDs are designed for use in low cost, high volume,
high speed and short-reach transceivers. In some singlemode fiber low speed
applications, customers prefer to use edge emitting LEDs instead of laser
diodes, as they are easier to use. Luminent's edge emitting LEDs provide high
power performance for singlemode fiber.
Laser diodes. Laser diodes convert electrical signals to optical signals
and are the most widely used light sources for optical communications systems.
Luminent's cost-effective packaging technology currently supports high-speed
laser modulation for networks in its target market. Both cooled and un-cooled
devices can be configured with high suppression of reflection. Luminent's
extensive line of different packaging allows Luminent to provide flexible
solutions for the customer's applications.
Luminent provides distributed feedback and Fabry-Perot lasers that operate
at standard wavelengths, as well as special wavelengths. Distributed feed back
lasers use a mirror that reflects one wavelength while Fabry-Perot lasers use
mirrors that reflect all wavelengths. Luminent's high temperature lasers are
stable over a wide range of temperatures and can operate above 100 degrees
Centigrade. These un-cooled lasers are particularly suitable for use in
transceivers where heat dissipation is a concern and in uncontrolled
environments, such as those involved with fiber-to-the-curb.
Analog fiber optic links. Analog links, unlike digital links, do not use a
single, high-speed data stream. Instead, a typical analog link is made up of
multiple data streams. This, in turn, requires the laser and receiver to meet
more stringent performance criteria. Luminent's analog technologies are used in
cable television, cellular, satellite and wireless local area networks. In
addition, its analog links are utilized throughout the cable television industry
in both the downstream and upstream transmissions.
Luminent's analog fiber optic links avoid the high losses associated with
the transport of radio frequency signals over coaxial cables. Luminent's linear
lasers and high-speed receivers enable the components to be used in very
stringent analog applications. Luminent also offers high levels of integration
of its analog sub-assemblies, which it believes results in greater overall value
to its customers.
Photo detectors and receivers. Photo detectors convert optical signals into
electrical signals. In addition to photo detectors Luminent offers receivers
that include photo detectors with electrical amplifiers for greater
functionality. Luminent's packaging technology allows Luminent to improve
performance and increase speeds over standard products.
Electro-optic modulators. Lithium niobate electro-optic modulators are used
to transfer information onto a light signal without the modifying wavelength of
the light. These modulators enable data to travel extended transmission
distances compared to a directly modulated laser. Electro-optic modulators can
be used to modulate the phase or amplitude of an optical signal depending on the
design of the device.
Vertical cavity surface emitting lasers. Vertical cavity surface emitting
lasers are one of Luminent's few products targeted for multimode applications.
Vertical cavity surface emitting lasers emit light perpendicular to the
semiconductor surface. Luminent's devices have stable fiber-coupled power, good
high temperature characteristics and are designed for use in short reach gigabit
Ethernet transceivers. Vertical cavity surface emitting lasers are ideal for
applications involving short distances where they can be coupled to the fiber
through passive alignment techniques allowing for very high volume, low cost
manufacturing. Luminent's vertical cavity surface emitting lasers are carefully
designed and processed to avoid signal degradation that can occur when operated
at high speeds.
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Passive Components
Passive components are used to direct, split and merge optical signals
without the use of electricity. These components have become critical due to the
use of fiber amplifiers, passive networks and WDM technology.
Couplers. Couplers are used to combine and/or split optical signals.
Luminent offers a wide variety of singlemode and multimode fused biconical
couplers. A fused biconical coupler is made when the cores of two fibers are
fused together. By precisely controlling the manufacturing process not only can
different ratios of power from each fiber be controlled, but also the coupler
can act as a WDM element by coupling light of one wavelength over one fiber and
light of a separate wavelength over the other fiber.
Couplers are one of the most common components of any optical network, WDM
system, optical amplifier, or optical switch. Luminent's couplers provide low
reflection and low power loss and operate over a wide range of temperatures and
wavelengths. Luminent's couplers are designed for robust operation under
difficult environmental conditions.
Isolators. Isolators allow transmission of optical signals in one direction
but block transmission in the other direction. Luminent's high performance
isolators are used with fiber amplifiers and lasers to prevent reflections from
entering the device. Luminent's isolators are highly reliable and feature high
suppression of reflection with low power loss over wide ranges of temperatures
and wavelengths.
WDM thin film add/drop components. Thin film filters enable the
transmission of specific optical wavelengths and the reflection of others. These
filters consist of multiple layers of differing materials deposited in vacuum
chambers. Thin film filter add/drop components allow for the removal and
insertion of wavelengths in WDM systems with minimal power losses. These modules
are designed for building flexible solutions and for architectures where only a
few wavelengths are dropped at one location.
Luminent offers a family of thin film based WDM modules for band splitting,
bi-directional multiplexing and demultiplexing, supervisory add/drop and band
add/drop applications. Luminent's thin film filter products have important
features, including low power loss, uniform performance over a wavelength band
and high suppression of reflection.
Circulators. Optical circulators are used in wavelength management
applications to direct optical signals to the appropriate sections of the
system. These circulators enable new services such as adding or dropping
individual channels at defined points in the network. Luminent offers
fiber-coupled circulators with wide bandwidth, high suppression of reflection,
low polarization sensitivity and low power loss characteristics.
Variable fiber optic attenuators. Attenuators reduce the amplitude of a
signal without distorting the waveform. A variable fiber optical attenuator is a
component used to equalize the power between different WDM channels before being
amplified by a fiber amplifier. In addition, attenuators can protect receivers
from excessively strong signals that might otherwise increase error rates.
Fiber gratings. A grating is a series of reflections over a length of
fiber. Several products can be made by tailoring the characteristic of the fiber
grating, including dense WDM wavelength separation, dispersion compensation and
wavelength locking. Luminent's fiber grating technology allows Luminent to
support new system designs based on the flexibility of fiber grating components.
Optical connectors and adapters. Optical connectors are used to couple
light either directly from a component or from another fiber. Adapters are the
components that facilitate the connection of any two connectors. The overall
performance and reliability of various fiber optic network systems depends upon
these components. These parts feature low power loss and low reflection over a
wide range of temperatures, wavelengths and mechanical stresses. Luminent has
developed a wide range of both normal and hybrid adapters to meet most industry
requirements.
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TECHNOLOGY
Luminent's technical capabilities span several key areas. Luminent believes
its technical depth can enable rapid development and deployment of new
singlemode fiber optic components and subsystems. The development and
manufacturing of superior singlemode fiber optic components require advanced
knowledge in the following technology areas:
Device fabrication. Active components are necessary elements for every
optical communication link as electrical signals must be converted to optical
signals in an optical network. Luminent operates two device fabrication
facilities for the production of active components. Device fabrication is an
extremely complex procedure that requires the use of multiple advanced
processes. The key technology for optimized laser performance is the growth of
material where an electrical signal is converted into an optical signal, which
it performs with metal organic chemical vapor deposition. Metal organic chemical
vapor deposition is the most advanced growth technology available and is capable
of achieving atomic level thickness control and exact composition control
allowing for the highest level of device performance. Luminent's control of
these difficult processes enables Luminent to manufacture lasers that operate
effectively at extremely high temperatures and lasers for WDM systems.
Thin film filter fabrication. Thin film filter based add/drop components
are used in WDM systems and allow for the removal and insertion of a particular
wavelength while permitting other wavelengths to continue through the module.
Thin film filters are comprised of multiple layers of differing materials
deposited in a large vacuum chamber onto the surface of a glass like material.
Band pass filters for dense WDM and coarse WDM applications require over one
hundred layers of deposition with extremely tight tolerances. Manufacturing
these filters to the required degree of precision is extremely difficult for
tightly-spaced channels.
Luminent's advanced thin film capabilities include 200 GHz dense WDM
filters, coarse WDM band pass filters and advanced antireflective coatings for a
variety of applications. Luminent's thin film filter products have important
features, including low insertion loss, flat top band pass, high suppression of
reflection and low polarization sensitivity. Luminent's ability to manufacture
filters with high levels of performance is a direct result of substantial
experience in process development and equipment enhancement.
Optics. Micro-optics design is a critical element in order to achieve a
high degree of coupling between components and a singlemode fiber. Luminent's
experience in optical design has allowed Luminent to provide cost-effective
source lasers with high output power. In addition, Luminent's passive component
characteristics directly benefit from the experience Luminent has in optics
design. Luminent utilizes optics design software, production experience and
close relationships with optics suppliers to achieve new product development.
Luminent's capability to manufacture individual fundamental components allows
Luminent to maintain technological competitiveness in the design of integrated
components, such as distributed feed back lasers with isolators, receivers with
filters, coarse WDM transceiver modules and dense WDM add/drop switching
modules.
In addition to micro-optics, Luminent has developed advanced fiber based
technology. The most common of the products developed from this technology are
couplers used to combine and split signals in an optical network. A fused
biconical coupler is made when the cores of two fibers are fused together. The
light coming in on one fiber is then split between the two fibers on the output
side. A WDM coupler either couples or splits the light of one wavelength on one
fiber with light of a separate wavelength on the other fiber. Luminent's precise
control of the manufacturing process allows Luminent to provide a wide range of
WDM and fixed ratio couplers. Luminent's coupler manufacturing techniques allow
it to meet varying customer specifications while achieving both high volume
manufacturing and highly reliable components.
Luminent has also developed advanced optical technologies based on the
wave-guide approach. The design and manufacturing of wave-guides in materials
such as silicon, lithium niobate and indium phosphide all require high degrees
of wave-guide modeling, layer growth/deposition and process control.
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Luminent's technology in the area has enabled Luminent to produce electro-optic
modulators and lasers with high coupling efficiencies into singlemode fiber.
Luminent is currently developing arrayed wave-guide gratings, and other
components necessary for dense WDM and integrated WDM technologies.
Packaging. For over a decade, Luminent has continued to develop packaging
techniques needed for high volume, cost-effective, singlemode fiber optic
component manufacturing. Luminent's active components employ proprietary
packaging technology as well as automated laser-welding technology in order to
achieve extremely accurate sub-micron alignment. Sub-micron alignment is
required for coupling light out of a laser into singlemode fiber that has a
diameter of 9 microns. Luminent's passive components also employ proprietary
packaging technology to achieve the same degree of precision alignments.
Luminent's packaging techniques provide coupling stability over the wide
temperature range that is necessary to meet even the most demanding
applications.
The combination of Luminent's packaging technologies and its experience in
lasers, filters and electronics has enabled Luminent to design several highly
integrated modules. Examples of these products include small form factor
transceivers, single fiber modules and coarse WDM subsystems.
Electronic design. As data rates increase, circuit design becomes more
critical to the performance of its products. Luminent has a team of digital
design engineers dedicated to electronic design and development for integrated
components such as transmitters, receivers and transceivers. Luminent also has a
team of design engineers dedicated to analog product lines that include return
path transmitters and receivers, cellular/personal communications services band
transceivers and subsystems for a variety of outdoor applications.
INTELLECTUAL PROPERTY
Luminent relies on a combination of patent, copyright, trademark and trade
secret laws, as well as confidentiality agreements and licensing arrangements,
to establish and protect its proprietary rights. As of June 30, 2001, Luminent
owned five issued patents in Taiwan and one issued patent in the U.S. relating
to its technologies. These patents include:
- "Optical Isolator with low polarization mode dispersion" applying to
Luminent's family of isolators, which is valid in Taiwan until August
2008;
- "Reflective Parallel Fiber Optic Circulator" applying to Luminent's
circulator design and which is valid in Taiwan until March 2017;
- "Optical Circulator" applying to Luminent's circulator design and is
valid in the USA until August 2017 and Taiwan until March 2017;
- "Optical Fiber Polisher" applying to the polishing equipment Luminent
uses internally for manufacturing and is valid in Taiwan until October
2010; and
- "Used on Solid State CCD Camera Optical Photometric Filter" apply to
Luminent's deposition science and is used on coatings on crystals and
applies in Taiwan until April 2009.
Luminent has six additional patents pending: two in Taiwan and four in the
U.S. Luminent also utilizes unpatented proprietary know-how and trade secrets
and employ various methods to protect them. Luminent has no licenses which it
believes are material to its business.
From time to time, third parties, including Luminent's competitors, may
assert patent, copyright and other intellectual property rights to technologies
that are important to Luminent. Luminent expects that it will increasingly be
subject to infringement claims as the number of products and competitors in its
market grows and the functioning of products overlaps. In this regard, in early
1999, Luminent received a written notice from Rockwell Corporation in which
Rockwell claimed to have patent rights in certain technology related to MRV's
and Luminent's metal organic chemical vapor deposition processes. Rockwell
requested them to review their processes in light of one of Rockwell's issued
patents, which has been done and determined that the cited patent has expired.
Luminent believes that none of its product sales relates to
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the Rockwell claim. In October 1999, Luminent received a written notice from
Ortel Corporation, which has since been acquired by Lucent Technologies, Inc.,
in which Ortel claimed to have patent rights in certain technology related to
Luminent's triplexer and duplexer products. Ortel requested that Luminent review
its products in connection with one of Ortel's issued patents. Luminent is
evaluating the information provided to it thus far by Ortel and is also
evaluating the validity of Ortel's patent noted in Ortel's letter. In January
2001, Luminent was advised that Lucent had assigned certain of its rights and
claims to Agere Systems, Inc., including the claim made on the Ortel patent. To
date, Luminent has not been contacted by Agere regarding this patent claim. MRV
is presently seeking to determine whether it or Luminent may have violated and
the extent of their usage of, and related revenues from, technology covered by
this patent. Based on our evaluation to date, Luminent has concluded that the
Ortel claim (evidently now the property of Agere) relates to an aspect of its
triplexers. Net sales of Luminent's triplexers accounted for approximately 5% of
total net sales during the year ended December 31, 2000. In May 2001, MRV and
Luminent received written notice from IBM, which claims that several of
Luminent's optical components make use of inventions covered by certain patents
claimed by IBM. Luminent is presently seeking to determine whether it may have
violated and the extent of its usage of, and related revenues from, technology
covered by the IBM patents. Based on its evaluation to date, it has concluded
that the IBM claim relates to certain of Luminent's transceivers. Net sales of
the transceivers in question accounted for approximately 25% of Luminent's total
net sales during the year ended December 31, 2000.
The patents of Ortel and IBM and other patents of which MRV and Luminent
are not presently aware that may relate to Luminent's products may be determined
to be valid, or some of their products may ultimately be determined to infringe
these patents, or those of other companies. Agere, IBM or other companies may
pursue litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to products
that could arise in the future, that may require the company to pay substantial
damages under applicable law, to cease the manufacture, use and sale of
infringing products or to expend significant resources to develop non-infringing
technology. In addition, litigation frequently involves substantial expenditures
and can require significant management attention, even if we ultimately prevail.
Accordingly, any infringement claim or litigation against us could significantly
harm Luminent's business, operating results and financial condition.
RESEARCH AND DEVELOPMENT
Luminent believes that in order to maintain its technological
competitiveness, Luminent must enhance its existing products and continue to
develop new products. Luminent's research and development expenses were
approximately $5.0 million, $8.7 million and $18.2 million for the years ended
December 31, 1998, 1999 and 2000, respectively. Luminent's research and
development expenses were approximately $6.6 million and $10.0 million during
the six months ended June 30, 2000 and 2001, respectively. At June 30, 2001,
Luminent had 181 employees engaged in research and development, including 40
engineers with advanced degrees and 12 engineers who are PhDs.
CUSTOMERS
Luminent's customers include major communications equipment manufacturers
in the U.S. and international markets, which incorporate Luminent's products
into their equipment that they in turn sell to network service providers.
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The following table provides information concerning Luminent's customer
concentration, which accounted for 10% or more of Luminent's net sales in 2000,
and their respective sales percentages for 1998 and 1999 and the six months
ended June 30, 2000 and 2001:
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ------------
CUSTOMER 1998 1999 2000 2000 2001
-------- ----- ----- ----- ---- ----
Marconi Communications............................ 18% 40% 18% 17% 13%
Cisco Systems..................................... 5% 6% 11% 14% 11%
Luminent has no long-term contracts with its customers and sales are
typically made pursuant to individual purchase orders, often with extremely
short lead times. A number of Luminent's current customers were acquired through
the acquisitions of Fiber Optic Communications, Optronics and Quantum, and
Luminent has only a limited history with them as customers.
SALES, MARKETING AND TECHNICAL SUPPORT
Luminent markets its products worldwide through a direct sales force as
well as through distributors' and manufacturers' representatives. Luminent's
sales force maintains close relationships with decision-makers at most of its
key customers. The direct sales force also manages the relationship of
Luminent's distributors' and manufacturers' representatives. Luminent's sales
people have strong technical backgrounds, typically with at least a B.S. or the
equivalent in engineering. Luminent's sales offices are located in Chatsworth,
San Francisco and San Jose, California; Austin, Texas; Sandown, New Hampshire;
Raleigh, North Carolina, and Nagold, Germany.
Luminent's main distributor in North America is Unique Technologies, a
subsidiary of the Veba Corporation. Unique Technologies provides extensive
coverage in the United States and Canada for some of its customers. Other
distributor relationships have been established in Germany, Japan, the United
Kingdom, Taiwan, People's Republic of China, Korea, Benelux, Israel, South
Africa, Australia, Spain, France and Denmark.
Luminent's trained staff provides technical support to its customers,
distributors and representatives. All customer support engineers are trained and
typically have a degree in physics or electrical engineering. Luminent believes
that customer service and support is as valuable and as important as its
technology.
COMPETITION
The fiber optic component industry is highly competitive and subject to
rapid technological change. Luminent believes that the principal competitive
factors in the active fiber optic component market are support for multiple
optical interfaces, output power, wavelength selection, electrical interface
standards, mechanical packaging, price, lead times and reliability. Luminent
believes that the principal competitive factors in the passive component market
are optical performance of components, quality and reliability, manufacturing
capacity, timely delivery, customer relationships, pricing, comprehensiveness of
product offerings and customization to customer specifications. Luminent
believes it competes favorably in each of these factors for both active and
passive components. Luminent also believes that its products are favorably
priced compared to equivalent products currently available from its competitors.
Based on Luminent's assessment of the price performance ratio of competitive
products, it believes that its products currently compare favorably with similar
products, although Luminent cannot assure you that they will continue to do so.
Luminent's current competitors include Agilent Technologies, Corning
Incorporated, Finisar Corporation, Fujitsu, Infineon AG, International Business
Machines Corporation, JDS Uniphase Corp., Lucent Technologies, Inc., Sumitomo,
Tyco International, Ltd. and other companies that offer or have announced
similar products. Many of Luminent's competitors have substantially greater
financial, marketing, technical, human and other resources than us, and greater
brand recognition and market share which may give them certain competitive
advantages, including the ability to negotiate lower prices on raw materials
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and components than those available to us. Luminent cannot assure you that it
will be able to compete successfully with existing or future competitors or that
competitive pressures will not seriously harm Luminent's business, operating
results and financial condition.
Fiber optic technology competes with other technologies such as satellite
transmission and wireless technologies which are less expensive and easier to
deploy. If these technologies are preferred over fiber optics, the demand for
Luminent's products may decline, which would result in a material adverse effect
on its business.
MANUFACTURING
Luminent designs and manufactures its products at its facilities in the
United States, Taiwan, and People's Republic of China. Active components are
manufactured in Hsinchu, Taiwan and Chatsworth, California. These manufacturing
operations consist of wafer fabrication facilities for semiconductor laser
diodes and LEDs; a high precision optical and mechanical assembly; electrical
design; and assembly and final testing. Luminent currently designs and
manufactures passive components in Hsinchu, Taiwan consisting of thin film
filter manufacturing, wave-guide processing, precision optical and mechanical
assembly and final testing. Luminent also manufactures passive components in
Shanghai, People's Republic of China consisting of precision optical and
mechanical assembly and final testing. Many of the key processes used in the
manufacture and test of Luminent's products are proprietary. Consequently, many
of the key components of Luminent's products are designed and produced
internally. Although Luminent generally uses standard parts and raw materials,
certain parts and components are only available from a limited number of
suppliers. Luminent's policy is to maintain a reserve of necessary parts and raw
materials to help minimize any disruption as a result of temporary
unavailability of these parts. Luminent outsources certain board level products
to contract manufacturers and it maintains a modular and flexible manufacturing
approach to facilitate rapid changes of product mix.
Luminent assembles substantially all its active and passive products in a
clean room environment. Relevant assembly processes include die attach, wire
bond, substrate attachment and fiber coupling. Luminent also conducts tests
throughout its manufacturing process using commercially available and in-house
built testing systems that incorporate proprietary procedures. To maintain
reliability and quality, Luminent implements a stringent set of quality
assurance programs throughout the design, assembly, integration and test
processes. Luminent's policy is to perform final product tests on all of its
products prior to shipment. Luminent typically purchases its components and
materials through purchase orders, and it has no guaranteed supply arrangements
with any of its suppliers. Luminent currently purchases several key components
and materials used in the manufacture of its products from single or limited
source suppliers, including Corning Incorporated, Mitsubishi Electric, Nippon
Sheet Glass, Phillips Semiconductor and Sumitomo. Current softness in demand and
pricing in the communications market have necessitated a review of Luminent's
inventory, facilities and headcount. As a result, Luminent recorded in the
second quarter of 2001 a one-time charge for additional write-down for inventory
and inventory purchase commitments, among other things.
Luminent is subject to a variety of federal, state and local government
regulations related to the storage, use, discharge and disposal of toxic,
volatile, or otherwise hazardous chemicals used in its manufacturing processes.
Further, Luminent is subject to other safety, labeling and training regulations
as required by local, state and federal law. Although Luminent believes that it
is in material compliance and has complied with all applicable legal
requirements, any failure by Luminent to comply with present and future
regulations could subject Luminent to future liabilities or the suspension of
production. In addition, these regulations could restrict Luminent's ability to
expand its facilities or could require it to acquire costly equipment or to
incur other significant expenses to comply with environmental regulations.
Luminent cannot assure you that these legal requirements will not impose on it
the need for additional capital expenditures or other requirements.
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EMPLOYEES
At June 30, 2001, Luminent had a total of 1,550 full-time employees. Of
these, employees with science or engineering degrees engaged in research and
development activities numbered 90 with Bachelor of Science degrees (or four
year equivalent), 40 with Masters degrees and 12 with Ph.D. degrees. Luminent's
employees are not represented by any collective bargaining agreement and it has
never suffered any work stoppage. Due to the downturn in the communications
market, Luminent is in the process of reducing employee headcount to
approximately 1,200 employees. Luminent believes that its relations with its
employees are good.
FACILITIES
Luminent maintains its main manufacturing, development and office
facilities in the United States, Taiwan and People's Republic of China. The
table below lists the locations, square footage and expiration dates of its
leased facilities for its major operations at December 31, 2000.
SQUARE FOOTAGE LEASE
LOCATION LEASED/OWNED EXPIRATION DATES
-------- -------------- -----------------
Chatsworth, California, USA............................... 22,200 December 31, 2005
Chatsworth, California, USA............................... 50,000 July 13, 2004(1)
Chatsworth, California, USA............................... 5,000 December 31, 2002
Ventura, California, USA.................................. 46,200 August 2008
Hsinchu, Taiwan........................................... 165,910 March 14, 2016
Hsinchu, Taiwan........................................... 12,712 Owned
Hsinchu, Taiwan........................................... 18,895 June 15, 2001
Hsinchu, Taiwan........................................... 9,437 February 15, 2001
Hsinchu, Taiwan........................................... 7,876 August 31, 2001
Miao-Li County, Taiwan.................................... 24,398 Owned
Hsinchu, Taiwan........................................... 3,907 December 31, 2001
Hsinchu, Taiwan........................................... 31,043 December 31, 2001
Hsinchu, Taiwan........................................... 5,834 December 31, 2001
Hsinchu, Taiwan........................................... 6,372 December 31, 2001
Chu-Pei, Taiwan........................................... 15,989 Owned
Shanghai, People's Republic of China...................... 48,495 October 20, 2047
Shanghai, People's Republic of China...................... 139,008 January 2049
-------------------------
(1) Luminent has an option to renew this lease for three more years.
LEGAL PROCEEDINGS
From time to time, Luminent may become involved in litigation relating to
claims arising from its ordinary course of business. Luminent is currently not a
party to any material legal proceedings. For a description of certain
intellectual property claims Luminent has received alleging infringement of
third-party patents, see "Business of Luminent -- Intellectual Property" earlier
in this prospectus supplement.
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DESCRIPTION OF LUMINENT CAPITAL STOCK
Luminent is authorized to issue 300,000,000 shares of common stock, $.001
par value per share, and 30,000,000 shares of undesignated preferred stock,
$.001 par value per share.
COMMON STOCK
As of date of this prospectus supplement, there were 156,000,000 shares of
Luminent common stock outstanding.
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 ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up of, 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, if any,
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 non-assessable.
Luminent's common stock is listed on the Nasdaq National Market under the
symbol "LMNE."
PREFERRED STOCK
Under Luminent's Certificate of Incorporation, the board of directors has
the authority to issue 30,000,000 shares of preferred stock in one or more
series and to fix the powers, designations, preferences and relative,
participating, optional, or other rights of the preferred stock. No preferred
stock has been issued.
DESCRIPTION OF MRV CAPITAL STOCK
The authorized capital stock of MRV consists of 160,000,000 shares of
common stock and 1,000,000 shares of Preferred Stock
COMMON STOCK
As of September 30, 2001, there were 77,494,009 shares of MRV common stock
outstanding.
The holders of MRV common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Holders of MRV common stock also
are entitled to receive ratably dividends as may be declared by the board of
directors out of funds legally available therefore, subject to preferences that
may be applicable to any outstanding Preferred Stock. In the event of
liquidation, dissolution or winding up of MRV, holders of MRV common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any outstanding Preferred Stock. Holders of
MRV common stock have no preemptive, subscription, redemption, conversion or
cumulative voting rights. All the outstanding shares of MRV common stock are,
and the shares of MRV common stock offered by this prospectus supplement will
be, when issued in exchange for Luminent common stock, validly authorized and
issued, fully paid and nonassessable.
PREFERRED STOCK
Under MRV's Certificate of Incorporation, the board of directors has the
authority to issue 1,000,000 shares of preferred stock in one or more series and
to fix the powers, designations, preferences and relative, participating,
optional, or other rights of preferred stock. No preferred stock has been
issued, including:
- dividend rights;
- conversion rights;
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- voting rights;
- redemption terms;
- liquidation preferences; and
- the number of shares constituting any series.
without any further vote or action by MRV's stockholders. The issuance of
preferred stock in certain circumstances may have the effect of delaying,
deferring, or preventing a change of control, may discourage bids for MRV common
stock at a premium over the market price of the common stock, and may adversely
affect the market price of, and the voting and other rights of the holders of,
our common stock. MRV has no shares of preferred stock outstanding and has no
plans to issue any of these shares.
TRANSFER AGENT, REGISTRAR AND EXCHANGE AGENT
The Transfer Agent, and Registrar of MRV's common stock is American Stock
Transfer & Trust Co., New York, New York and it will act as the Exchange Agent
to exchange certificates that represented shares of Luminent common stock prior
to the Merger for the shares of MRV common stock to which they are entitled in
the Merger. For information on how to surrender your Luminent's certificates for
shares of MRV common stock and cash for any fractional shares, see "The
Merger -- Surrender of Stock Certificates; Fractional Interests" earlier in this
prospectus supplement.
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COMPARATIVE STOCKHOLDER RIGHTS
LUMINENT COMMON STOCK MRV COMMON STOCK
--------------------- ----------------
TRANSFERABILITY TRANSFERABILITY
Luminent common stock (other than shares MRV common stock is freely transferable and
held by MRV) was freely transferable and the the shares are listed on The Nasdaq National
shares were listed on The Nasdaq National Market under the symbol "MRVC."
Market under the symbol "LMNE."
DIVIDEND POLICY DIVIDEND POLICY
Luminent had never declared or paid any cash Since its inception, MRV never declared or
dividends on its capital stock. It's paid cash dividends on its common stock.
announced dividend policy was to retain It's announced dividend policy is that it
future earnings, if any, to finance the currently intends to retain all of our
expansion of its business, and it did not earnings, if any, for use in the operation
expect to pay any cash dividends in the and expansion of its businesses and does not
foreseeable future. intend to pay any cash dividends to
stockholders in the foreseeable future.
VOTING RIGHTS VOTING RIGHTS
Holders of Luminent common stock had the Holders of MRV common stock have the right
right on matters specified by Delaware law on matters specified by Delaware law
affecting the corporate structure of affecting the corporate structure of MRV,
Luminent, including the election of the including the election of the board of
board of directors. Holders of Luminent directors. Holders of MRV common stock are
common stock were entitled to one vote per entitled to one vote per share. Directors
share. Directors were elected annually. are elected annually. The number of MRV
However, because MRV, through its wholly shares issued in the Merger constitutes
owned subsidiary MRV Merger Sub, owned over approximately 6.7% of MRV's outstanding
92% of Luminent's outstanding stock, it was shares.
able to elect the entire board of directors
of Luminent and had sufficient voting power
to approve or defeat all corporate actions
for which stockholder votes were required.
REMOVAL OF MANAGEMENT REMOVAL OF MANAGEMENT
Members of Luminent's board of directors Members of MRV's board of directors can be
could be removed by the holders of a removed by the holders of a majority of
majority of Luminent's common stock. MRV, MRV's common stock. To the knowledge of
through its wholly owned subsidiary MRV MRV's management, no one entity or person
Merger Sub, owned over 92% of Luminent's holds more than approximately 8.2% of MRV's
outstanding stock. outstanding stock.
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MANAGEMENT OF MRV FOLLOWING THE MERGER
The executive officers and directors of MRV at ,
2001 are as follows:
NAME AGE POSITION
---- --- --------
Noam Lotan(1).................. 49 President, Chief Executive Officer and Director
Shlomo Margalit(1)............. 60 Chairman of the Board of Directors, Chief Technical Officer and Secretary
Guy Avidan..................... 39 President and Chief Executive Officer of Optical Access, Inc.
Shay Gonen..................... 36 Interim Chief Financial Officer
Igal Shidlovsky(2)(3).......... 64 Director
Guenter Jaensch(2)(3).......... 62 Director
Professor Daniel Tsui(3)....... 62 Director
Professor Baruch Fischer....... 50 Director
-------------------------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
NOAM LOTAN has been the President, Chief Executive Officer and a Director
of MRV since May 1990 and became Chief Financial Officer of MRV in October 1993,
in which position he served until June 1995. From March 1987 to January 1990,
Mr. Lotan served as Managing Director of Fibronics (UK) Ltd., the United Kingdom
subsidiary of Fibronics International Inc. ("Fibronics"), a manufacturer of
fiber optic communication networks. MRV purchased the Fibronics business in
September 1996. From January 1985 to March 1987, Mr. Lotan served as a Director
of European Operations for Fibronics. Prior to that time, Mr. Lotan held a
variety of sales and marketing positions with Fibronics and Hewlett-Packard. Mr.
Lotan holds a Bachelor of Science degree in Electrical Engineering from the
Technion, the Israel Institute of Technology, and a Masters degree in Business
Administration from INSEAD (the European Institute of Business Administration,
Fontainebleau, France).
DR. SHLOMO MARGALIT, a founder of MRV, has been Chairman of the board of
directors and Chief Technical Officer since MRV's inception in July 1988. From
May 1985 to July 1988, Dr. Margalit served as a founder and Vice President of
Research and Development for LaserCom, Inc. ("LaserCom"), a manufacturer of
semiconductor lasers. From 1982 to 1985, Dr. Margalit served as a Senior
Research Associate at the California Institute of Technology ("Caltech"), and
from 1976 to 1982, a Visiting Associate at Caltech. From 1972 to 1982, Dr.
Margalit served as a faculty member and Associate Professor at the Technion.
During his tenure at the Technion, Dr. Margalit was awarded the "Israel Defense"
prize for his work in developing infrared detectors for heat guided missiles and
the David Ben Aharon Award for Novel Applied Research. Dr. Margalit holds a
Bachelor of Science degree, a Masters degree and a Ph.D. in Electrical
Engineering from the Technion.
GUY AVIDAN has served as the Chief Executive Officer and President of
Optical Access, Inc. MRV's optical wireless products subsidiary since September
2000. From 1995 to September 2000, Mr. Avidan served in various executive
capacities for other subsidiaries of MRV, including as President of NBase-
Xyplex International from January 1999 until joining Optical Access and as
Managing Director of NBase-Communications, from 1995 until January 1999. Mr.
Avidan holds a B.A. degree in business management, economics and accounting from
Haifa University and also is licensed as a Certified Public Accountant.
SHAY GONEN became Interim Chief Financial Officer in September 2001
following the death of Edmund Glazer. Since September 1996, Mr. Gonen has served
in various executive capacities for certain of MRV's subsidiaries, including as
the Vice President of Finance, Chief Financial Officer and Secretary of, Optical
Access, Inc. from September 2000; as General Manager of European Activity for
NBase-Xyplex from January 1999 to September 2000; and as Chief Operating Officer
of NBase Communications from September 1996 to December 1998. Mr. Gonen served
as Vice President of Operations and Finance for Silver Arrow, L.P. from April
1994 to September 1996. Mr. Gonen holds a B.S. degree in industrial engineering
from the Technion, and an M.B.A. degree from Bar-Ilan University in Tel Aviv.
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DR. IGAL SHIDLOVSKY became a Director of MRV in May 1997. Dr. Shidlovsky
serves as Managing Director of Global Technologies, an investment and consulting
organization, which he founded in 1994. He has extensive management and
consulting experience with international companies and start up technology
companies. Dr. Shidlovsky is a Director of the Omega Point Foundation. From 1982
to 1991, Dr. Shidlovsky was a Director of Sentex Sensing Technologies. Dr.
Shidlovsky held several executive positions including Vice President Corporate
Development at Siemens Pacesetter, a division of Siemens AG Medical Group,
Director of Strategic Planning and Technology Utilization, and Director of the
Microelectronics Department at Siemens Corporate Research. From 1969 to 1982 he
was with RCA Laboratories, a leading electronic R&D organization. Dr. Shidlovsky
holds a Bachelor of Science degree in Chemistry from the Technion and Master and
Ph.D. degrees from the Hebrew University in Israel.
DR. GUENTER JAENSCH became a Director of MRV in December 1997. Dr. Jaensch
serves as Managing Director of The McKenzie Companies, Inc. and McKenzie
Ventures LTD. and as President of Jaensch Enterprises, each firm is engaged in
management consulting, mergers and acquisitions and investments. For over 20
years, Dr. Jaensch held several executive positions with Siemens or its
subsidiaries. Among his executive positions in the United States were as
President of Siemens Communications Systems, Inc.; Chairman of Siemens Corporate
Research and Support, Inc.; Chairman and Chief Executive Officer of Pacesetter;
and head of the cardiac management division of Siemens AG Medical Group. Dr.
Jaensch also served as controller of Siemens Data Processing Group and Director
of Siemens Internal Accounting and Budgeting operations. Dr. Jaensch holds a
Masters degree in Business Administration and Ph.D. degree in Finance from the
University of Frankfurt. He also served as an Associate Professor at the
University of Frankfurt prior to joining Siemens.
PROFESSOR DANIEL TSUI became a Director of MRV in December 1999. Professor
Tsui is the Arthur Le Grand Doty Professor of Electrical Engineering at
Princeton University and was awarded the 1998 Nobel prize in Physics for the
discovery and explanation of the fractional quantum hall effect. Professor Tsui
was a recipient of the American Physical Society 1984 Buckley Prize, the 1998
Benjamin Franklin Medal and was elected to the National Academy of Sciences. He
is a fellow of the American Physical Society and the American Association for
the Advancement of Science. He is currently engaged in research activity
relating to properties of thin films and microstructures of semiconductors and
solid-state physics. He received his Ph.D. in physics from the University of
Chicago in 1967 and for 13 years was with Bell Laboratories before joining
Princeton University, where he spent the last 16 years.
PROFESSOR BARUCH FISCHER became a Director of MRV in December 1999.
Professor Fischer currently serves as Dean of the Electrical Engineering Faculty
at the Technion. Professor Fischer's current Research Activities include solid
state devices, lasers and optical amplifiers; WDM technology; fiber gratings;
all optical networks; non-linear effect in fiber, wave mixing; and optical
computing, optical data storage and optical image processing. He has authored or
co-authored approximately 180 papers and holds several patents in the field of
optics and opto-electronics. He received his Ph.D. from Bar-Ilan University,
Israel in 1980. He subsequently became a Post-Doctorate Fellow at CalTech and
joined the faculty of the Technion in 1983.
Each director is elected for a period of one year at MRV's annual meeting
of stockholders and serves until the next annual meeting and until his successor
is duly elected and qualified. Officers are elected by, and serve at the
discretion of, the board of directors, subject to relevant employment
agreements. None of the Directors of MRV are related by blood, marriage or
adoption to any of MRV's Directors or executive officers.
EXECUTIVE COMPENSATION
The members of the board of directors who are not employees of MRV receive
cash compensation of $800 per month and $500 for each board of directors'
meeting attended, while serving as Directors.
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The following table sets forth a summary of all compensation paid by MRV to
its Chief Executive Officer and for each of its other executive officers whose
total annual salary and bonus exceeded $100,000 (the "Named Executive Officers")
during the fiscal year ended December 31, 2000:
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION SECURITIES
------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS OPTIONS(#) COMPENSATION
---------------------------- ---- -------- ------- ------------ ------------
Noam Lotan.............................. 2000 $100,000 $ -- -- --
President and Chief Executive Officer 1999 $100,000 $ -- -- --
1998 $100,000 $ -- 60,000(1) --
Shlomo Margalit......................... 2000 $110,000 $ -- -- --
Chairman of the Board of Directors, 1999 $110,000 $ -- -- --
Chief Technical Officer and Secretary 1998 $110,000 $ -- -- --
Edmund Glazer(3)........................ 2000 $140,000 $ -- 40,000 --
Vice President of Finance and 1999 $140,000 $ -- 60,000 --
Administration and Chief Financial
Officer 1998 $107,000 $ -- 178,000(2) --
William R. Spivey(4).................... 2000 $138,000 $90,000 316,315 $48,682(5)
President and Chief Executive Officer
of 1999 N/A N/A N/A N/A
Luminent, Inc. 1998 N/A N/A N/A N/A
Guy Avidan.............................. 2000 $125,000 $39,000 -- --
President and Chief Executive Office
of 1999 $102,000 $39,000 -- --
Optical Access, Inc. 1998 $102,000 $39,000 60,000 --
-------------------------
(1) Consists of repriced options granted under MRV's stock option plans that
were issued in replacement of earlier options granted to the Named Executive
Officer under MRV's stock option plans. The Options vest at their original
vesting schedules.
(2) Includes 78,000 repriced options granted under MRV's stock option plans that
were issued in replacement of earlier options granted to the Named Executive
Officer under the Stock Option Plans. The Options vest at their original
vesting schedules.
(3) Mr. Glazer was killed in the air crash of American Airlines Flight 11 into
North Tower of the World Trade Center on September 11, 2001.
(4) Dr. Spivey joined Luminent in July 2000 and resigned in September 2001.
(5) Consists of a reimbursement of legal fees Dr. Spivey incurred in 2000 in
connection with negotiation of his employment contract.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides certain information regarding stock option
grants made to the Named Executive Officers in the year ended December 31, 2000.
PERCENT POTENTIAL REALIZABLE VALUE
OF TOTAL AT ASSUMED ANNUAL RATE OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM
UNDERLYING EMPLOYEES EXERCISE EXPIRATION ---------------------------------------
NAME OPTIONS GRANTED IN 2000 PRICE($/SH) DATE 0%(1) 5%(2) 10%(2)
---- --------------- ---------- ----------- ---------- ----------- ----------- -----------
Noam Lotan................. -- -- $ -- N/A N/A N/A N/A
Shlomo Margalit............ -- -- $ -- N/A N/A N/A N/A
Edmund Glazer.............. 40,000 0.7 $20.50 4/16/2006 -- $ 278,878 $ 632,680
William R. Spivey(3)....... 316,315 5.3 $32.56 7/10/2005 $10,300,000 $16,006,758 $22,898,476
Guy Avidan................. -- -- $ -- N/A N/A N/A N/A
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-------------------------
(1) Based upon the difference between the closing price of a share of MRV Common
Stock on the date of grant and the exercise price per share of the options.
(2) The dollar amounts under these columns are the result of calculations
assuming the price of MRV's common stock on the date of the grant of the
option increases at the hypothetical 5% and 10% rates set by the SEC for the
term of the option. Neither the amounts reflected nor the rates applied are
intended to forecast possible future appreciation, if any, of MRV's stock
price.
(3) Excludes separate options granted on July 11, 2000 by Luminent, MRV's
subsidiary, to Dr. Spivey exercisable at $6.25 per share. These options are
described under the Employment Agreements section below. If the market value
of the underlying shares of Luminent common stock on the grant date is
assumed to equal Luminent's IPO price of $12 per share (determined on
November 9, 2000), the intrinsic value of Dr. Spivey's options (the market
price of the underlying common stock less the exercise price) on the grant
date was $27,600,000. The potential realizable value of these options at
assumed annual rate of stock price appreciation of 5% and 10% for the option
term calculated like the amounts in the table accompanying footnote (2) are
$63,824,331 and $119,399,566, respectively.
FISCAL YEAR END OPTION VALUES
The following table provides certain information concerning MRV stock
options exercised by the Named Executive Officers during the year ended, and
held by them at, December 31, 2000.
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2000 DECEMBER 31, 2000(2)
ACQUIRED UPON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UN-EXERCISABLE EXERCISABLE UN-EXERCISABLE
---- ------------- ----------- ----------- -------------- ----------- --------------
Noam Lotan........... 48,000 $2,634,000 -- 12,000 $ -- $129,000
Shlomo Margalit...... -- $ -- -- -- $ -- $ --
Edmund Glazer........ 96,400 $4,295,160 36,400 101,600 $391,300 $662,200
William R.
Spivey(3).......... -- $ -- 316,315 -- $ -- $ --
Guy Avidan........... -- $ -- 24,000 36,000 $258,000 $387,000
-------------------------
(1) Based on difference between the closing price of MRV common stock on the
date of exercise and the exercise price.
(2) Based on difference between the closing price of MRV common stock on
December 29, 2000 and the exercise price.
(3) Excludes separate options granted on July 11, 2000 by Luminent, MRV's
subsidiary, to Dr. Spivey exercisable at $6.25 per share. These options are
described under the Employment Agreements section below. Of these options,
1,200,000 were exercisable on December 31, 2000 and 3,600,000 were not
exercisable. None of Dr. Spivey's options was in the money at December 29,
2000.
EMPLOYMENT AGREEMENTS
In March 1992, MRV entered into three-year employment agreements with Mr.
Lotan and Dr. Margalit. Upon expiration, these agreements automatically renew
for one-year terms unless either party terminates them by giving the other three
months' notice of non-renewal prior to the expiration of the current term.
Pursuant to the agreements, Mr. Lotan serves as President, Chief Executive
Officer and a Director of MRV and Dr. Margalit serves as Chairman of the Board
of Directors, Chief Technical Officer and Secretary. Mr. Lotan and Dr. Margalit
receive base annual salaries of $100,000 and $110,000, respectively, and each is
entitled to receive a bonus determined and payable at the discretion of the
board of directors upon the recommendation of the Compensation Committee of the
Board. Recommendations with respect to bonus levels are based on achievement of
specified goals, such as new product
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introductions, profitability levels, revenue goals, market expansion and other
criteria as established by the Compensation Committee.
In July 2000, MRV and its subsidiary, Luminent, entered into a four-year
employment agreement with Dr. William R. Spivey, Luminent's former President and
Chief Executive Officer. Under the agreement, Luminent agreed to pay to Dr.
Spivey an annual salary of $300,000 with a bonus targeted at $75,000 for 2000
and at $150,000 for the following years as determined at the discretion of our
board of directors. MRV granted Dr. Spivey an option to purchase 316,315 shares
of MRV common stock exercisable at $32.56 per share for five years. Luminent
granted to Dr. Spivey an option to purchase 4,800,000 shares of Luminent common
stock at an exercise price of $6.25 per share. Dr. Spivey's option to purchase
MRV common stock was fully exercisable as of the date of grant, and his option
to purchase Luminent common stock vested in annual installments of 25%,
beginning on July 11, 2000, provided, however, that in the event his employment
was terminated other than for cause he was entitled to receive from the date of
termination over a one year period an amount equal to two times the sum of his
annual salary plus bonus and all of his unvested Luminent options will
automatically vest and become exercisable. Dr. Spivey's resignation on September
12, 2001 was considered by the parties to be a termination other than for cause
under his employment agreement entitling him to the severance benefits of his
employment agreement therefor. As a consequence of Dr. Spivey's resignation, his
MRV and Luminent options are now exercisable through September 11, 2003.
Each officer also receives employee benefits, such as vacation, sick pay
and insurance, in accordance with MRV's policies, which are applicable to all
employees. MRV has obtained, and is the beneficiary of, key man life insurance
policies in the amount of $1,000,000 on the lives of each of Drs. Margalit and
Mr. Lotan. All benefits under these policies will be payable to MRV upon the
death of an insured.
COMPENSATION OF OUTSIDE DIRECTORS
Outside directors, i.e., directors who are not employees of MRV, receive
cash compensation of $800 per month and $500 for each board of directors'
meeting attended, while serving as Directors. MRV did not grant any stock
options to outside directors during 2000.
BOARD COMMITTEES
MRV's board of directors has established the Compensation Committee, the
Audit Committee and the Executive Committee. The Compensation Committee reviews
and recommends to the board of directors the compensation and benefits of all
MRV's officers and establishes and reviews general policies relating to
compensation and benefits of our employees. The Compensation Committee consists
of Igal Shidlovsky and Guenter Jaensch. The Audit Committee reviews MRV internal
accounting procedures and consults with and reviews the services provided by its
independent accountants. The Audit Committee consists of Igal Shidlovsky,
Guenter Jaensch and Daniel Tsui. The Executive Committee is empowered to take
any action that the board of directors is authorized to act upon, with the
exception of the issuance of stock, the sale of all or substantially all of
MRV's assets and other significant corporate transactions. The Executive
Committee consists of Noam Lotan and Shlomo Margalit.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee has ever been an officer
or employee of MRV. None of MRV's executive officers has served or currently
serves on a board of directors or on a compensation committee of any other
entity that had officers who served on MRV's board of directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1998, MRV and Zaffire, Inc. (formerly New Access Communications,
Inc.) entered into a Securities Purchase Agreement, under which MRV purchased
for $950,000 shares of the capital stock of Zaffire equal to approximately 19%
of the capital stock of Zaffire then outstanding and warrants to
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purchase additional capital stock of Zaffire, which, if fully exercised for an
aggregate of $2,050,000, MRV would own an aggregate of approximately 60% of
Zaffire's capital stock (when the shares purchased upon exercise of the warrants
were added to MRV's existing stake in Zaffire). The warrants were exercisable in
two installments (provided the first installment was exercised) by July 1, 1999
and January 4, 1999, respectively. These warrants were fully exercised in 1999.
In May 2000, MRV, along with 36 other accredited investors, and Zaffire entered
into a Series C Preferred Stock Purchase Agreement under which MRV purchased for
$5,000,000 shares of Series C Preferred Stock of Zaffire. At December 31, 2000,
MRV had an approximate 22% ownership interest in Zaffire.
Zaffire is engaged in the development of new products based on wave
division multiplexing technology. Dr. Near Margalit is the Chairman of the Board
and Chief Executive Officer of Zaffire and a principal stockholder of it. Dr.
Near Margalit is the son of Dr. Shlomo Margalit, a principal stockholder of MRV
and MRV's Chairman of the Board of Directors and Chief Technical Officer.
Divisions and subsidiaries of MRV are customers of Luminent and purchase
substantial quantities of Luminent's fiber optic components. These customers
accounted for Luminent sales of $2.1 million during 1998, $2.5 million during
1999 and $4.9 million during the year ended December 31, 2000. At December 31,
2000, using cash generated from operations Luminent had repaid approximately
$6.5 million to MRV for interest-free advances Luminent made to MRV to cover
payroll and other operating expenses. Like other customers, sales by Luminent to
MRV-related customers are based on purchase orders and none of MRV or its
companies has any long long-term arrangements with Luminent regarding purchases.
MRV believes that its and its companies purchases from Luminent have been on
terms no less or more favorable that those Luminent provided to its other
customers.
Prior to Luminent's separation from MRV, Luminent entered into various
agreements related to interim and ongoing relationships with MRV. These
agreements provided for transitional services and support in the areas of data
processing and telecommunications services (such as voice telecommunications and
data transmission and information technology support services) for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement and other administrative functions. Services were
generally cost plus 5%, but could have increased to cost plus 10% if the
services extended beyond a one-year period. Subsequent to the separation date,
certain of these services were discontinued, including accounting, financial
management, payroll, legal, procurement and other administrative functions. The
transition period varies depending on the agreement but was generally one year.
Although the fees provided for in the agreements were intended to represent
the fair market value of these services, MRV and Luminent cannot assure that
these fees necessarily reflected the costs of providing these services from
unrelated third parties or of Luminent providing these services internally.
However, Luminent and MRV believed that purchasing these services from MRV, and
providing these services to Luminent, provided an efficient means of obtaining
them during the transition period. With the Merger, these agreements have been
terminated.
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PRINCIPAL STOCKHOLDERS
PRINCIPAL STOCKHOLDERS OF MRV
The following table sets forth certain information regarding the beneficial
ownership of the MRV common stock as of September 30, 2001, of
- each person known by MRV to own beneficially 5% or more of MRV's common
stock,
- each current director of MRV owning MRV common stock,
- each of MRV's Named Executive Officers, and
- all current directors and executive officers as a group.
The table does not give effect to the issuance of MRV Common Stock in the
Merger.
COMMON STOCK
-----------------------
NAME AND ADDRESS(1) NUMBER OF PERCENTAGE
OF BENEFICIAL OWNER(2) OR IDENTITY OF GROUP SHARES OWNERSHIP
------------------------------------------- --------- ----------
Pilgrim Baxter & Associates Ltd.(3)......................... 6,387,600 8.2%
Shlomo Margalit............................................. 3,342,060 4.3%
Noam Lotan.................................................. 1,497,874(4) 1.9%
Edmund Glazer............................................... 130,800(5) 0.2%
William R. Spivey........................................... 316,315(6) 0.4%
Guy Avidon.................................................. 36,000(6) *
Igal Shidlovsky............................................. 62,000(6) *
Guenter Jaensch............................................. 32,000(6) *
Professor Daniel Tsui....................................... 6,000(6) *
Professor Baruch Fischer.................................... 6,000(6) *
All current executive officers and directors as a group (8
persons)(11).............................................. 4,981,934(7) 6.4%
-------------------------
* Less than 1%
(1) Except as noted below, the address of each of the person listed is c/o MRV
Communications, Inc., 20415 Nordhoff Street, Chatsworth, California,
Chatsworth, CA 91311.
(2) Pursuant to the rules of the Securities and Exchange Commission, shares of
MRV common stock that an individual or group has a right to acquire within
60 days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of a
particular individual or group, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person shown in
the table.
(3) Based on Amendment No. 1 to Schedule 13D filed with the SEC on February 14,
2001. According to this document, the address of the firm listed is 825
Duportail Road, Wayne, PA 19087. Percentage ownership is based on number of
shares beneficially owned, as reflected in the filing, divided by the number
of shares outstanding on September 30, 2001.
(4) Includes 12,000 shares issuable pursuant to stock options exercisable within
60 days of September 30, 2001.
(5) Includes 36,400 shares issuable pursuant to stock options exercisable within
60 days of September 30, 2001. Mr. Glazer was killed in the terrorists
attack on the World Trade Center on September 11, 2001 and the table
reflects options owned by his estate.
(6) Consists of shares issuable upon exercise of stock options within 60 days of
September 30, 2001. Dr. Spivey resigned in September 2001.
(7) Includes 186,000 shares issuable upon exercise of stock options within 60
days of September 30, 2001.
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PRINCIPAL STOCKHOLDERS OF LUMINENT
The table below sets forth certain information known to us with respect to
the beneficial ownership of our common stock at September 30, 2001 by:
- each stockholder owning 5% or more of Luminent's common stock;
- each of Luminent's directors who beneficially owns Luminent common stock;
- each of Luminent's current executive officers who beneficially owns
Luminent common stock; and
- all of Luminent's directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of September 30, 2001 are deemed
outstanding, while these shares are not deemed outstanding for purposes of
computing percentage ownership of any other person. To MRV's knowledge, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
COMMON STOCK
-------------------------
NAME AND ADDRESS OF NUMBER OF PERCENTAGE
BENEFICIAL OWNER OR IDENTITY OF GROUP SHARES OWNERSHIP
------------------------------------- ----------- ----------
MRV Communications, Inc.(1)................................. 144,000,000 93.2%
Eric Blachno(2)............................................. 400,000(3) *
All directors and executive officers as a group............. 400,000(3) *
-------------------------
* Less than one percent.
(1) MRV's address is 20415 Nordhoff Street, Chatsworth, California 91311.
(2) Mr. Blachno's address is Luminent, Inc., 20550 Nordhoff Street, Chatsworth,
California 91311
(3) Consists of shares of Luminent common stock issuable upon exercise of stock
options, which are currently exercisable or exercisable within 60 days of
September 30, 2001.
LEGAL MATTERS
The validity of the issuance of MRV common stock offered hereby is being
passed upon for MRV by Kirpatrick & Lockhart, LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of MRV Communications, Inc. included
in this prospectus supplement and incorporated be reference elsewhere in the
registration statement, to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
The consolidated financial statements of Luminent, Inc. included in this
prospectus supplement and elsewhere in the registration statement, to the extent
and for the periods indicated in their report, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of AstroTerra Corporation included in this
prospectus supplement, to the extent and for the periods indicated in their
report, have been audited by Arthur Andersen LLP,
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independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of Fiber Optic Communications, Inc. and Optronics
International Corp. included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
report, have been audited by T N Soong & Co., a Member Firm of Andersen
Worldwide, SC, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of Quantum Optech Incorporation and
Subsidiary as of December 31, 1998 and 1999 and for the period from May 27, 1999
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG Certified Public Accountants, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
CONSOLIDATED FINANCIAL STATEMENTS OF MRV COMMUNICATIONS,
INC.
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets at December 31, 1999 and 2000... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000.......................... F-5
Consolidated Statements of Stockholders' Equity and
Comprehensive Loss for the years ended December 31, 1998,
1999 and 2000............................................. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF MRV
COMMUNICATIONS, INC.
Condensed Consolidated Balance Sheets at December 31, 2000
and June 30, 2001 (unaudited)............................. F-29
Unaudited Condensed Consolidated Statements of Operations
for the six months ended June 30, 2000 and 2001........... F-30
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 2001........... F-31
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-32
CONSOLIDATED FINANCIAL STATEMENTS OF LUMINENT, INC.
Report of Independent Public Accountants.................... F-38
Consolidated Balance Sheets at December 31, 1999 and 2000... F-39
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000.......................... F-40
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000.............. F-41
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-42
Notes to Consolidated Financial Statements.................. F-43
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF
LUMINENT, INC.
Condensed Consolidated Balance Sheets at December 31, 2000
and June 30, 2001 (unaudited)............................. F-59
Unaudited Condensed Consolidated Statements of Operations
for the six months ended June 30, 2000 and 2001........... F-60
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 2001........... F-61
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-62
FINANCIAL STATEMENTS OF ASTROTERRA CORPORATION
Report of Independent Public Accountants.................... F-69
Balance Sheets at December 31, 1998 and 1999 and June 30,
2000 (unaudited).......................................... F-70
Statements of Operations for the years ended December 31,
1997, 1998 and 1999 and the six months ended June 30, 1999
and 2000 (unaudited)...................................... F-71
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 (audited) and the six
months ended June 30, 1999 and 2000 (unaudited)........... F-72
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999 and the six months ended June 30, 1999
and 2000 (unaudited)...................................... F-73
Notes to Financial Statements............................... F-74
CONSOLIDATED FINANCIAL STATEMENTS OF FIBER OPTIC
COMMUNICATIONS, INC.
Independent Auditors' Report................................ F-82
Consolidated Balance Sheets at December 31, 1997, 1998 and
1999...................................................... F-83
Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 1997, 1998 and
1999...................................................... F-84
F-1
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Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-85
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-86
Notes to Consolidated Financial Statements.................. F-87
FINANCIAL STATEMENTS OF OPTRONICS INTERNATIONAL CORP.
Independent Auditors' Report................................ F-103
Balance Sheets at December 31, 1997, 1998 and 1999.......... F-104
Statements of Operations and Comprehensive Income for the
years ended December 31, 1997, 1998 and 1999.............. F-105
Statements of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999.......................... F-106
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999....................................... F-107
Notes to Financial Statements............................... F-108
Balance Sheets at December 31, 1999 and June 30, 2000
(unaudited)............................................... F-119
Statements of Operations and Comprehensive Income for the
six months ended June 30, 1999 and 2000 (unaudited)....... F-120
Statements of Cash Flows for the six months ended June 30,
1999 and 2000 (unaudited)................................. F-121
Notes to Financial Statements (Unaudited)................... F-122
CONSOLIDATED FINANCIAL STATEMENTS OF QUANTUM OPTECH
INCORPORATION AND SUBSIDIARY
Independent Auditors' Report................................ F-131
Consolidated Balance Sheets at December 31, 1998 and 1999... F-132
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the period from May 27, 1997 (inception)
to December 31, 1997 and years ended December 31, 1998 and
1999...................................................... F-133
Consolidated Statements of Stockholders' Equity for the
period for May 27, 1997 (inception) to December 31, 1997
and years ended December 31, 1998 and 1999................ F-134
Consolidated Statements of Cash Flows for the period from
May 27, 1997 (inception) to December 31, 1997 and years
ended December 31, 1998 and 1999.......................... F-135
Notes to Consolidated Financial Statements.................. F-136
Consolidated Balance Sheet at June 30, 2000 (unaudited)..... F-146
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the six months ended June 30, 1999 and
2000 (unaudited).......................................... F-147
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 2000 (unaudited).................. F-148
Notes to Consolidated Financial Statements (unaudited)...... F-149
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF MRV COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-153
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
June 30, 2001............................................. F-154
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended June 30, 2001......... F-155
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2000........... F-156
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-157
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF LUMINENT, INC.
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................... F-150
Unaudited Pro Forma Condensed Consolidated Statements of for
the year ended December 31, 2000.......................... F-151
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information..................................... F-152
F-2
109
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MRV Communications, Inc.:
We have audited the accompanying consolidated balance sheets of MRV
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1999 and 2000, and the related consolidated statements of operations,
stockholders' equity and comprehensive loss and cash flows for each of the three
years in the period ended December 31, 2000. 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 in accordance with auditing standards generally
accepted in the United States. 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 MRV
Communications, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Los Angeles, California
February 19, 2001
(except for matters discussed in Note 18
as to which the date is October 4, 2001)
F-3
110
MRV COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1999 2000
-------- ----------
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 34,330 $ 210,080
Short-term investments............................................................. 10,141 73,947
Accounts receivable, net of allowance of $8,451 in 1999 and $10,330 in 2000........ 60,637 61,863
Inventories........................................................................ 35,392 77,005
Refundable income taxes............................................................ 3,216 --
Deferred income taxes.............................................................. 6,907 31,227
Other current assets............................................................... 6,336 22,750
-------- ----------
Total current assets......................................................... 156,959 476,872
Property and equipment, at cost:
Land............................................................................... -- 3,559
Building........................................................................... 3,814 19,563
Machinery and equipment............................................................ 12,598 57,369
Furniture and fixtures............................................................. 4,233 12,824
Computer hardware and software..................................................... 12,913 10,823
Leasehold improvements............................................................. 3,053 7,221
Construction in progress........................................................... -- 3,815
-------- ----------
36,611 115,174
Less -- Accumulated depreciation and amortization.................................. (17,011) (42,905)
-------- ----------
19,600 72,269
Other assets:
Investments........................................................................ 101,936 31,734
Deferred income taxes.............................................................. 5,324 6,209
Goodwill and other intangibles, net................................................ 27,214 504,027
Other.............................................................................. 3,500 5,660
-------- ----------
137,974 547,630
-------- ----------
$314,533 $1,096,771
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations....................................... $ 198 $ 163
Current portion of long-term debt.................................................. -- 2,774
Short-term obligations............................................................. -- 9,104
Accounts payable................................................................... 33,455 56,088
Accrued liabilities................................................................ 15,403 34,044
Income taxes payable............................................................... -- 6,477
Deferred revenue................................................................... 1,478 1,470
-------- ----------
Total current liabilities.................................................... 50,534 110,120
Long-term liabilities:
Convertible subordinated notes..................................................... 90,000 89,646
Capital lease obligations, net of current portion.................................. 1,481 621
Long-term debt, net of current portion............................................. -- 60,257
Other long-term liabilities........................................................ 2,928 3,980
-------- ----------
Total long-term liabilities.................................................. 94,409 154,504
Commitments and contingencies
Minority interest.................................................................... 2,775 50,592
Stockholders' equity:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or outstanding...................... -- --
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 56,282 shares in 1999 and 73,327 in 2000
Outstanding -- 56,234 shares in 1999 and 73,279 in 2000.......................... 96 126
Additional paid-in capital......................................................... 191,468 1,060,650
Accumulated deficit................................................................ (18,377) (171,330)
Deferred stock compensation, net................................................... -- (100,862)
Treasury stock, 48 shares at cost in 1999 and 2000................................. (133) (133)
Accumulated other comprehensive loss............................................... (6,239) (6,896)
-------- ----------
Total stockholders' equity................................................... 166,815 781,555
-------- ----------
$314,533 $1,096,771
======== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
111
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
Revenues, net............................................. $264,075 $288,524 $ 319,394
Costs and expenses:
Cost of goods sold(1)................................... 165,385 197,442 203,371
Research and development(1)............................. 25,817 35,319 74,078
Selling, general and administrative(1).................. 53,852 67,859 124,700
Amortization of goodwill and other intangibles.......... 2,901 3,898 66,814
Purchased technology in progress........................ 20,633 -- --
Restructuring costs..................................... 15,671 -- --
-------- -------- ---------
284,259 304,518 468,963
-------- -------- ---------
Operating loss....................................... (20,184) (15,994) (149,569)
Other income (expense):
Interest expense........................................ (2,480) (4,500) (10,129)
Minority interest....................................... (1,345) 610 796
Interest income and other............................... 6,819 4,822 551
-------- -------- ---------
2,994 932 (8,782)
-------- -------- ---------
Loss before provision (benefit) for income taxes and
extraordinary item................................. (17,190) (15,062) (158,351)
Provision (benefit) for income taxes...................... 5,707 (2,153) (5,398)
-------- -------- ---------
Loss before extraordinary item....................... (22,897) (12,909) (152,953)
Extraordinary item:
Gain on repurchase of convertible notes, net of tax of
$1,639............................................... 2,791 -- --
-------- -------- ---------
Net loss............................................. $(20,106) $(12,909) $(152,953)
======== ======== =========
Loss per share information:
Basic and diluted loss per share.......................... $ (0.38) $ (0.24) $ (2.33)
Basic and diluted weighted average shares outstanding..... 53,064 53,920 65,669
======== ======== =========
-------------------------
(1) Includes amounts relating to deferred stock compensation of $8.3 million,
$13.2 million and $38.4 million presented in "cost of goods sold", "research
and development" and "selling, general and administrative", respectively,
for the year ended December 31, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
112
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL RETAINED OTHER
--------------- PAID-IN DEFERRED STOCK EARNINGS TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCK LOSS TOTAL
------ ------ ---------- -------------- --------- -------- ------------- ---------
BALANCE, DECEMBER 31, 1997..... 52,720 $ 90 $ 175,872 $ -- $ 14,635 $ -- $ (628) $ 189,969
Exercise of stock warrants
and options................ 606 1 1,509 -- -- -- -- 1,510
Issuance of warrants in
connection with the
acquisition of Xyplex...... -- -- 3,272 -- -- -- -- 3,272
Purchase of treasury stock... (48) -- -- -- -- (133) -- (133)
Comprehensive loss:
Translation adjustments.... -- -- -- -- -- -- (83) (83)
Net loss................... -- -- -- -- (20,106) -- -- (20,106)
---------
Comprehensive loss........... -- -- -- -- -- -- -- (20,189)
------ ---- ---------- --------- --------- ----- ------- ---------
BALANCE, DECEMBER 31, 1998..... 53,278 91 180,653 -- (5,471) (133) (711) 174,429
Exercise of stock warrants
and options................ 2,156 4 2,816 -- -- -- -- 2,820
Exercise of stock warrants by
Intel Corporation.......... 800 1 7,999 -- -- -- -- 8,000
Other........................ -- -- -- -- 3 -- -- 3
Comprehensive loss:
Translation adjustments.... -- -- -- -- -- -- (5,528) (5,528)
Net loss................... -- -- -- -- (12,909) -- -- (12,909)
---------
Comprehensive loss........... -- -- -- -- -- -- -- (18,437)
------ ---- ---------- --------- --------- ----- ------- ---------
BALANCE, DECEMBER 31, 1999..... 56,234 96 191,468 -- (18,377) (133) (6,239) 166,815
Exercise of stock options.... 2,896 5 7,757 -- -- -- -- 7,762
Tax benefit from exercise of
stock options.............. -- -- 11,417 -- -- -- -- 11,417
Issuance of common stock in
connection with
acquisitions............... 14,123 25 639,172 -- -- -- -- 639,197
Issuance of common stock in
connection with conversion
of convertible subordinated
notes...................... 26 -- 354 -- -- -- -- 354
Effect of subsidiary equity
transactions............... -- -- 49,679 -- -- -- -- 49,679
Deferred stock
compensation............... -- -- 160,803 (160,803) -- -- -- --
Amortization of deferred
stock compensation......... -- -- -- 59,941 -- -- -- 59,941
Comprehensive loss:
Net loss................... -- -- -- -- (152,953) -- -- (152,953)
Translation adjustments.... -- -- -- -- -- -- (657) (657)
---------
Comprehensive loss........... -- -- -- -- -- -- -- (153,610)
------ ---- ---------- --------- --------- ----- ------- ---------
BALANCE, DECEMBER 31, 2000..... 73,279 $126 $1,060,650 $(100,862) $(171,330) $(133) $(6,896) $ 781,555
====== ==== ========== ========= ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
113
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE THREE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1999 2000
----------- ---------- -----------
Cash Flows From Operating Activities:
Net loss.................................................. $ (20,106) $(12,909) $(152,953)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 7,902 12,501 77,871
Amortization of deferred stock compensation expense... -- -- 59,941
Allowance for doubtful accounts....................... 2,591 1,416 4,683
Deferred income taxes................................. 1,408 (1,302) (25,205)
Realized gain on investment........................... (2,535) -- (50)
Purchased technology in progress...................... 20,633 -- --
Extraordinary gain on repurchase of convertible
subordinated notes................................. (2,791) -- --
Loss on disposition of property and equipment......... -- -- 16
Tax benefit from stock option exercises............... -- -- 11,417
Other................................................. 324 -- --
Minority interests' share of income (loss)............ 1,345 (610) (796)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable..................................... 12,263 (7,457) 4,949
Inventories............................................. 3,453 12,075 (28,869)
Refundable income taxes................................. -- -- 3,216
Other assets............................................ 2,008 (519) (12,020)
Accounts payable........................................ (19,505) 3,698 28,939
Accrued liabilities..................................... (7,438) 1,715 4,040
Income taxes payable.................................... (7,006) (3,661) (5,154)
Deferred revenue........................................ 508 (2,920) 175
--------- -------- ---------
Net cash provided by (used in) operating
activities....................................... (6,946) 2,027 (29,800)
Cash Flows From Investing Activities:
Purchases of property and equipment....................... (6,337) (8,053) (23,977)
Proceeds from sale of property and equipment.............. -- -- 1,520
Purchases of investments.................................. (206,846) (19,242) (21,566)
Proceeds from sale of investments......................... 173,714 38,293 97,704
Cash used in acquisitions, net of cash received........... (44,695) (4,773) (44,517)
--------- -------- ---------
Net cash provided by (used in) investing
activities....................................... (84,164) 6,225 9,164
Cash Flows From Financing Activities:
Net proceeds from subsidiary equity transaction........... -- -- 132,290
Net proceeds from issuance of common stock................ 1,510 10,820 7,762
Proceeds from issuance of convertible debentures, net..... 96,423 -- --
Borrowings on short-term obligations...................... -- -- 35,887
Payments on short-term obligations........................ -- -- (35,949)
Principal payments on capital lease obligations........... (62) 94 (163)
Borrowings on long-term debt.............................. -- -- 62,696
Payments on long-term debt................................ -- -- (4,002)
Repurchase of convertible notes........................... (5,300) -- --
Purchase of treasury stock................................ (133) -- --
--------- -------- ---------
Net cash provided by financing activities.......... 92,438 10,914 198,521
Effect of exchange rate changes on cash and cash
equivalents............................................... (64) (5,528) (2,135)
Net increase in cash and cash equivalents................... 1,264 13,638 175,750
Cash and cash equivalents, beginning of year................ 19,428 20,692 34,330
--------- -------- ---------
Cash and cash equivalents, end of year...................... $ 20,692 $ 34,330 $ 210,080
========= ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
114
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. BUSINESS AND BASIS OF PRESENTATION
MRV Communications, Inc. (a Delaware corporation, MRV or the Company)
creates, acquires, finances and operates companies, and through them, designs,
develops, manufactures and markets products, which enable high-speed broadband
communications. MRV concentrates on companies and products devoted to optical
components and Internet infrastructure systems. Such products include fiber
optic components, switching, routing, transaction management and wireless
optical transmission systems. MRV's strategy involves creating value for its
stockholders and the other owners of its subsidiaries by helping the companies
grow and access the public and private capital markets.
As of December 31, 2000, MRV's more significant subsidiaries, development
stage enterprises and other affiliated companies were as follows:
Luminent, Inc, -- Luminent is a 92 percent-owned subsidiary of MRV
designing, manufacturing and selling fiber optic components that enable
communications equipment manufacturers to provide optical networking solutions
for the rapidly growing metropolitan and access segments of the communications
network. Its products are designed to meet the increasing bandwidth requirements
between long-haul telecommunication networks and end users. Luminent specializes
in singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.
Optical Access, Inc. -- Optical Access is a wholly-owned subsidiary of MRV
designing, manufacturing and marketing optical wireless products that enable the
delivery of high-speed communications traffic to the portion of the
communications network commonly known as the last mile, which extends from the
end user to the service provider's central office. Management believes its
solution provides higher transmission capacity, or bandwidth, at a lower cost
compared to other commercially available last mile solutions.
CEScomm, Inc. -- CEScomm, formerly Creative Electronic Systems SA, is a
wholly-owned subsidiary of MRV developing and providing equipment to
manufacturers of cellular network infrastructure equipment and mobile operators
and service providers for the third generation of wireless solutions for the
next generation of mobile communications systems. These new systems provide
enhanced services to those available today i.e. voice, text and data. CEScomm
specializes in products that provide the real-time conversion of radio signals
generated by Internet ready mobile devices into asynchronous transfer mode
traffic streams.
iTouch Communications, Inc. -- iTouch is wholly-owned subsidiary of MRV
providing next-generation Internet infrastructure solutions that enable service
providers and carriers to deliver and monitor, on a real-time basis, high-speed
Internet services. iTouch's products combine transaction management with
Internet protocol (IP) routing and wide area networks (WAN), high-speed data
acquisition and management systems.
NBase-Xyplex, Inc. -- NBas-Xyplex is a wholly-owned subsidiary of MRV
providing products and services to enhance network infrastructures for city
carriers, service providers, cable operators and campus and enterprise networks.
Its products and technologies have been utilized in metropolitan area based
fiber-based networks, enabling smart access to WAN, as well as in local area
networks (LAN), switching, building enterprise/corporate data networks.
Charlotte's Networks, Inc. -- Charlotte is a 90 percent-owned subsidiary of
MRV developing a core router for large service providers and carriers. Its
product is capable of carrying both IP packets and time-division multiplexing
voice traffic and enables the current WAN to increase processing power and rate
of transmission. In addition, the router provides multi-services required by
telecommunication companies for efficient and flexible transmission of voice
over data networks.
F-8
115
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Zuma Networks, Inc. -- Zuma is a wholly-owned subsidiary of MRV developing
a next generation gigabit Ethernet switch router platform.
Optical Crossing, Inc. -- Optical Crossing is a 60 percent-owned subsidiary
of MRV designing, developing and manufacturing advanced fiber optic
communication components and systems for the telecommunications industry.
Zaffire, Inc. -- Zaffire is a 22 percent-owned, on a fully diluted basis,
affiliate of MRV focused on developing a next-generation, optical services
networking system for service providers.
RedC Optical Networks, Inc. -- RedC is a 35 percent-owned, on a fully
diluted basis, affiliate of MRV that has developed a complete line of optical
modules used for operating, monitoring and protecting optical networks
including: optical amplifiers, add/drop modules, protection and restoration
modules and dense wave division multiplexing monitoring.
Hyperchannel Ltd. -- Hyperchannel, which does business under its trademark
Hyporium, is a 42 percent-owned, on a fully diluted basis, affiliate of MRV and
an independent Internet market maker for the information technology industry
(IT), enabling IT vendors, distributors and resellers to trade online.
In November 2000, Luminent, a publicly owned subsidiary, completed an
initial public offering of its common stock, selling 12.0 million shares at $12
per share and raising net proceeds of approximately $132.3 million. As of
December 31, 2000, MRV owned 92% of the outstanding capital stock of Luminent.
MRV has announced plans to distribute all of its shares of Luminent common stock
to its stockholders on the later of three months after receipt of a favorable
private letter ruling from the Internal Revenue Service or six months after the
offering, although it is not obligated to do so.
As of December 31, 2000, MRV owned all of the outstanding capital stock of
Optical Access. On October 6, 2000, Optical Access filed a registration
statement with the Securities and Exchange Commission (SEC) for the initial
public offering of its common stock, which has not yet become effective.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
MRV and its wholly-owned and majority owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated.
FOREIGN CURRENCY TRANSLATION
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are converted into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation,"
and are included in determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues,
expenses and cash flows are translated at weighted average exchange rates for
the period to approximate translation at the exchange rates prevailing at the
dates those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss.
F-9
116
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
REVENUE RECOGNITION
MRV generally recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable and
collectibility is probable. Revenue related to software and software maintenance
contracts (both of which are immaterial, individually and in aggregate) is
recognized in accordance with the American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 97-2, "Software Revenue
Recognition." Maintenance revenues for customer support are deferred and
recognized ratably over the term of the maintenance period, generally one to
three years.
MRV generally warrants its products against defects in materials and
workmanship for one year. The estimated cost of warranty obligations is
recognized at the time of revenue recognition.
CASH AND CASH EQUIVALENTS
MRV considers all highly liquid investments with an original maturity of 90
days or less to be cash equivalents. MRV maintains cash balances and investments
in highly qualified financial institutions. At various times such amounts are in
excess of insured limits. As of December 31, 2000, $132.9 million of cash, cash
equivalents and short-term investments were held by MRV's publicly traded
subsidiary, Luminent.
INVESTMENTS
MRV accounts for its investments under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
As of December 31, 1999 and 2000, short and long-term investments consisted
principally of U.S. Treasury notes. As defined by SFAS No. 115, MRV has
classified its investments in these debt securities as "held-to-maturity"
investments and all investments are recorded at their amortized cost basis,
which approximated their fair value at December 31, 1999 and 2000.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
material, labor and overhead. Cost is determined by the first-in, first out
method.
Inventories consisted of the following as of December 31, 1999 and 2000 (in
thousands):
1999 2000
------- -------
Raw materials............................................... $ 8,475 $36,278
Work-in-process............................................. 8,083 17,721
Finished goods.............................................. 18,834 23,006
------- -------
$35,392 $77,005
======= =======
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets.
Useful lives range from three to thirty-three years. Maintenance and repairs are
charged to expense as incurred and the costs of additions and betterments that
increase the useful lives of the assets are capitalized.
F-10
117
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
GOODWILL AND OTHER INTANGIBLES
Intangible assets represent intellectual property acquired, purchased
intangible assets and the excess acquisition cost over the fair value of
tangible and identified intangible net assets of the businesses acquired
(goodwill). Purchased intangible assets include patents, assembled work forces,
customer contracts and goodwill. Intangible assets are being amortized using the
straight-line method over estimated useful lives ranging from 1 to 12 years.
The components of intangible assets as of December 31, 1999 and 2000 are as
follows (in thousands):
1999 2000
------- --------
Patents..................................................... $ -- $ 64,600
Assembled work forces....................................... -- 1,790
Customer contracts.......................................... -- 720
Goodwill.................................................... 33,909 510,426
------- --------
33,909 577,536
Less -- Accumulated amortization............................ (6,695) (73,509)
------- --------
$27,214 $504,027
======= ========
IMPAIRMENT OF INTANGIBLES AND OTHER LONG-LIVED ASSETS
MRV evaluates its long-lived assets, such as patents, assembled work
forces, customer contracts, goodwill and property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may be impaired. MRV considers a history of operating losses to be its
primary indicator of potential impairment. An asset is deemed to be impaired if
a forecast of undiscounted future operating cash flows directly related to the
asset, including disposal value, if any, is less than its carrying amount. If an
asset is determined to be impaired, the loss is measured as the amount by which
the carrying value of the asset exceeds fair value. Considerable management
judgment is necessary to estimate fair value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
MRV's financial instruments, including cash and cash equivalents,
investments, accounts receivable, accounts payable, accrued liabilities and
short-term debt obligations are carried at cost, which approximates their fair
market value due to the short-term nature of those instruments. The fair value
of long-term debt obligations is estimated based on current interest rates
available to MRV for debt instruments with similar terms, degrees of risk and
remaining maturities. The carrying values of these obligations approximate their
fair values.
SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," development costs related
to software products are expensed as incurred until the technological
feasibility of the product has been established. Technological feasibility in
MRV's circumstances occurs when a working model is completed. After
technological feasibility is established, additional costs would be capitalized.
MRV believes its process for developing software is essentially completed
concurrent with the establishment of technological feasibility, and,
accordingly, no software development costs have been capitalized to date.
F-11
118
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
INCOME TAXES
Deferred income tax assets and liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period.
EARNINGS PER SHARE
The following schedule summarizes the information used to compute earnings
per share (in thousands, except per share data) for each of the three years in
the period ended December 31, 2000:
1998 1999 2000
-------- -------- ---------
Loss before extraordinary item............................ $(22,897) $(12,909) $(152,953)
Extraordinary item -- gain on repurchase of convertible
subordinated notes, net of tax.......................... 2,791 -- --
-------- -------- ---------
Net loss........................................ $(20,106) $(12,909) $(152,953)
======== ======== =========
Weighted average number of shares used to compute basic
and diluted loss per share.............................. 53,064 53,920 65,669
======== ======== =========
Basic and diluted loss per share before extraordinary
item.................................................... (0.43) (0.24) (2.33)
Extraordinary gain per basic and diluted share............ 0.05 -- --
-------- -------- ---------
Basic and diluted loss per share.......................... (0.38) (0.24) (2.33)
======== ======== =========
STOCK-BASED COMPENSATION
MRV accounts for its employee stock plan under the intrinsic value method
prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, and has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."
MRV accounts for option and warrant grants to non-employees using the
guidance prescribed by SFAS No. 123, Financial Accounting Standards Board (FASB)
Interpretation No. (FIN) 44, "Accounting for Certain Transactions Involving
Stock Compensation (an interpretation of APB Opinion No. 25)," and Emerging
Issue Task Force (EITF) No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or In Conjunction with Selling,
Goods, or Services," whereby the fair value of such option and warrant grants
are measured using the fair value at the earlier of the date at which the
non-employee's performance is completed or a performance commitment is reached.
Deferred stock compensation charges are being amortized using the graded
vesting method. Using this method, approximately 57%, 26%, 13% and 4%,
respectively, of each option's compensation expense is amortized in each of the
four years following the date of grant.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Investments and Hedging Activities," and SFAS No. 137, which delayed
the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138,
which provides additional guidance for the application of SFAS No. 133 for
certain transactions. MRV will adopt the statement in January 2001 and
F-12
119
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
does not expect the adoption of this statement to have a material impact on its
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements," and related interpretations. SAB
101 summarizes certain of the SEC's views in applying accounting principles
generally accepted in the Unites States to revenue recognition in financial
statements. MRV has applied the provisions of SAB 101, which did not have a
material impact on its financial position or results of operations.
In March 2000, the FASB issued FIN 44, which clarifies the application of
APB No. 25 for certain issues, including the definition of an employee, the
treatment of the acceleration of stock options and the accounting treatment for
options assumed in business combinations. FIN 44 became effective on July 1,
2000, but is applicable for certain transactions dating back to December 1998.
The adoption of FIN 44 did not have a significant impact on MRV's financial
position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-13
120
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. BUSINESS ACQUISITIONS
The following table presents information about acquisitions by MRV in each
of the three years in the period ended December 31, 2000. All of these
acquisitions were accounted for under the purchase method of accounting, and the
results of operations of each business have been included in the accompanying
consolidated statements of operations from the date of acquisition.
DATE OF TOTAL FORM OF CONSIDERATION AND
ACQUIRED COMPANY ACQUISITION CONSIDERATION OTHER NOTES TO ACQUISITION
---------------- ---------------- -------------- ------------------------------
YEAR ENDED DECEMBER 31, 2000
Fiber Optic Communications, April 24, 2000 $310.4 million $48.6 million in cash and 5.4
Inc. million shares of common stock
and options issued;
approximately 97% of capital
stock assumed; goodwill
recorded of $261.6 million;
deferred stock compensation
recorded of $14.1 million.
Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill and intangibles
recorded of $33.7 million;
deferred stock compensation
recorded of $25.0 million.
Quantum Optech Inc. July 12, 2000 $36.2 million 1.2 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill recorded of $27.9;
deferred stock compensation
recorded of $2.7 million.
AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common
stock and options issued; 100%
of capital stock assumed;
goodwill and intangibles
recorded of $108.3 million;
deferred stock compensation
recorded of $50.0 million.
Optronics International Corp. July 21, 2000 $124.3 million 4.2 million shares of common
stock and options issued;
approximately 99% of capital
stock assumed; goodwill
recorded of $99.5 million;
deferred stock compensation
recorded of $13.4 million.
F-14
121
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
DATE OF TOTAL FORM OF CONSIDERATION AND
ACQUIRED COMPANY ACQUISITION CONSIDERATION OTHER NOTES TO ACQUISITION
---------------- ---------------- -------------- ------------------------------
Other Various $15.0 million 507,000 shares of common stock
issued; 100% of capital stock
assumed; goodwill recorded of
$14.4 million.
YEAR ENDED DECEMBER 31, 1998
Whittaker Xyplex, Inc.(1) January 30, 1998 $38.3 million $35.0 million in cash and
843,000 options to purchase
common stock issued. 100% of
capital stock assumed; $20.6
million in-process technology
expensed(2); goodwill recorded
of $10.3 million.
-------------------------
(1) Whittaker Xyplex, Inc.'s name was subsequently changed to Nbase-Xyplex and
most recently, to iTouch Communications.
(2) Technology In-process was valued according to the "milestone" or percentage
complete method.
The following unaudited pro forma financial information presents the
combined results of operations of these acquisitions as if the acquisitions had
occurred as of January 1, 1999, giving effect to certain adjustments, including
amortization of goodwill and other intangibles and deferred stock compensation
charges. The unaudited pro forma share data assumes the shares issued in
connection with these acquisitions were outstanding as of January 1, 1999. (in
thousands, except per share amounts, unaudited).
DECEMBER 31,
----------------------
1999 2000
--------- ---------
Pro forma revenue........................................... $ 322,645 $ 335,486
Pro forma net loss.......................................... $(115,775) $(143,044)
Pro forma basic and diluted net loss per share.............. $ (1.75) $ (1.83)
Pro forma basic and diluted weighted average shares
outstanding............................................... 66,247 77,996
========= =========
F-15
122
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
4. INVESTMENTS IN SUBSIDIARIES
The following table presents information regarding investments made by MRV
in subsidiaries accounted for under the equity method of accounting or
consolidated. Subsidiaries in which MRV owns greater than 50% ownership or
exercises control have been consolidated in the accompanying consolidated
financial statements.
SUBSIDIARY OWNERSHIP % FORM OF CONSIDERATION
---------- ----------- ---------------------
EDSLan SRL 80%(1) Purchased an additional 10% ownership in 2000 for
approximately $1.5 million; purchased an additional
10% ownership in 1999 for approximately $1.5 million;
purchased an additional 10% ownership in 1997 for
approximately $500,000; purchased 50% ownership in
1996 for approximately $1.1 million.
Tecnonet SRL 60%(2) Purchased an additional 10% ownership in 1999 for
approximately $600,000; purchased 50% ownership in
1998 for approximately $3.1 million.
RDS 62.5% Purchased an additional 12.5% ownership in 1999 for
approximately $2.4 million; purchased 50% ownership in
1998 for approximately $8.0 million.
Charlotte's Networks 90%(3) Issued 1.0 million shares of common stock valued at
approximately $61.5 million for approximately 10% in
2000.
RedC Optical 35% $5.0 in cash and issued 150,000 shares
of common stock valued at approximately $11.5 million
for approximately 32% in 2000.
Other Various(4) Issued 646,000 shares of common stock valued at
approximately $16.7 million for ownership interest in
various non-consolidated equity investments.
-------------------------
(1) MRV receives 95 percent of EDSLan's profits or losses from the date of each
investment.
(2) MRV receives 90 percent of Tecnonet's profits or losses from the date of
each investment.
(3) MRV's ownership on a fully diluted basis (assuming exercise of all stock
options) is approximately 53 percent.
(4) Represents various investments, all of which are less than 50% ownership and
not consolidated.
Income and losses from non-consolidated equity method subsidiaries are
included in "other income (expense)" in the accompanying consolidated statements
of operations.
5. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
1999 2000
------- -------
Payroll and related......................................... $ 7,055 $16,851
Other....................................................... 8,348 17,193
------- -------
$15,403 $34,044
======= =======
F-16
123
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. INCOME TAXES
The provision (benefit) for income taxes for the three years in the period
ended December 31, 2000 (including provision of $1.6 million related to the
extraordinary gain in 1998) is as follows (in thousands):
1998 1999 2000
------ ------- --------
Current
Federal............................................. $3,306 $(2,139) $ 7,344
State............................................... 1,093 (413) 5,622
Foreign............................................. 3,324 1,701 6,841
------ ------- --------
7,723 (851) 19,807
Deferred
Federal............................................. (176) (1,487) (17,354)
State............................................... (31) 45 (7,137)
Foreign............................................. (170) 140 (714)
------ ------- --------
(377) (1,302) (25,205)
------ ------- --------
$7,346 $(2,153) $ (5,398)
====== ======= ========
The income tax provision (benefit) differs from the amount computed by
applying the federal statutory income tax rate to income before taxes as
follows:
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
Income tax provision (benefit) at statutory federal rate.... (35)% 34% 34%
State and local income taxes, net of federal income tax
effect.................................................... (6) 6 6
Permanent differences....................................... -- (15) (30)
Research and development credit............................. 6 6 --
Income tax on extraordinary gain............................ (10) --
Foreign taxes at rates different than domestic rates........ 2 (17) (3)
Change in valuation reserve................................. -- -- (10)
--- --- ---
(43)% 14% (3)%
=== === ===
F-17
124
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
The components of deferred income taxes as of December 31, 1999 and 2000
are as follows (in thousands):
1999 2000
------- --------
Allowance for doubtful accounts............................. $ 2,548 $ 2,083
Inventory reserve........................................... 3,811 6,133
Warranty reserve............................................ 1,072 647
Deferred stock compensation................................. -- 6,630
Net operating losses........................................ -- 29,014
Accrued liabilities......................................... -- 2,158
Other....................................................... (524) 1,463
------- --------
6,907 48,128
Valuation allowance.................................... -- (16,901)
------- --------
Net short-term deferred income tax assets.............. 6,907 31,227
Purchased technology in progress............................ 5,724 --
Depreciation and amortization............................... (400) 6,209
------- --------
Net long-term deferred income tax assets............... 5,324 6,209
------- --------
$12,231 $ 37,436
======= ========
Realization of the net deferred tax assets is dependent on MRV's ability to
carry losses back to prior periods or on generating sufficient taxable income
during the periods in which temporary differences will reverse. Management
reviews its deferred tax assets and has provided a valuation allowance based on
its assessment of the expected future benefit to be ultimately received from
each asset identified. Although realization is not assured, management believes
it is more likely than not that the net deferred tax assets will be realized.
As of December 31, 2000, MRV had net operating loss carryforwards available
of approximately $106.8 million and $56.4 million for federal and state income
tax purposes, respectively, which can be used to offset future taxable income,
expiring through 2015.
In 1995, MRV, through a subsidiary in Israel, qualified for a program under
which it is eligible for a tax exemption on its income for a period of ten years
from the beginning of the benefits period. This benefit is due to expire in
2006. Due to operating losses at this subsidiary, no tax benefit was received in
2000. MRV received a tax benefit of approximately $300,000 in 1999.
MRV does not provide United States federal income taxes on the
undistributed earnings of its foreign operations. MRV's policy is to leave the
income permanently invested in the country of origin. Such amounts will only be
distributed to the United States to the extent any federal income tax can be
fully offset by foreign tax credits.
7. SHORT-TERM OBLIGATIONS
Short-term obligations consist of secured and unsecured lines of credit,
short-term loans and notes entered into with certain financial institutions. As
of December 31, 2000, these short-term obligations totaled $9.1 million.
Approximately $2.9 million in assets of MRV's subsidiaries have been pledged as
collateral on these borrowings. The weighted average interest rate on these
obligations is 6.1 percent. These obligations are incurred and settled in the
local currencies of the respective subsidiaries. As of December 31, 2000, MRV
had approximately $8.7 million of available short-terms borrowings.
F-18
125
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
8. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2000 (in
thousands):
Secured notes payable to financial institutions bearing
interest ranging from 6.5% to 18.0%, payable in monthly
and quarterly installments of principal and interest
through October 2012...................................... $13,031
Term loan with a financial institution bearing interest at
7.0% as of December 31, 2000, payable in full in 2003..... 50,000
-------
63,031
Less -- Current portion................................... (2,774)
-------
$60,257
=======
The following summarizes the required principal payments on long-term debt
as of December 31, 2000 (in thousands):
YEAR ENDING DECEMBER 31,
2001...................................................... $ 2,774
2002...................................................... 1,905
2003...................................................... 52,061
2004...................................................... 1,666
2005...................................................... 1,608
Thereafter................................................ 3,017
-------
$63,031
=======
Certain assets of MRV, primarily through its foreign subsidiaries, have
been pledged as collateral under these obligations.
9. INTEREST RATE SWAP
In April 2000, MRV purchased an interest rate swap agreement with a
financial institution. The purpose of this agreement is to establish a specific
hedge to prevent interest fluctuations due to floating rate term debt. Under the
agreement, MRV is committed to pay the financial institution interest based on a
principal balance of $50.0 million at a fixed rate of 7.11 percent as of
December 31, 2000) in exchange for the financial institution's commitment to pay
MRV interest on the same principal at the one-month LIBOR rate (6.6 percent as
of December 31, 2000). MRV includes the outcome of this interest rate swap
agreement in interest expense ($217,000 for the year ended December 31, 2000).
10. CONVERTIBLE SUBORDINATED NOTES
In June 1998, MRV completed a private placement of $100.0 million principal
amount five-year, convertible subordinated notes (the Notes). The Notes bear
interest at five percent per year, payable semi-annually, and are convertible
into common stock at the option of the holders. The conversion rate is 73.94
shares of common stock per $1,000 principal amount of the Notes, equivalent to a
conversion price of $13.52 per share, an initial premium above market price. The
conversion rate is subject to adjustment in certain circumstances, including
dividends payable in common stock, issuance of stock rights to all holders of
common stock or stock splits or distributions to common stockholders in
connection with a tender offer. If a change in control, as defined, occurs, the
holders of the Notes have the right to require MRV to repurchase the Notes at
face value along with any interest accrued. MRV has the right, after June 2001,
F-19
126
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
to redeem the Notes at 102 percent of face value, and after June 2002 for 101
percent of face value. The Notes are not entitled to the benefits of any sinking
fund.
In connection with the private placement, MRV incurred costs of $4.0
million. These costs are being amortized using the effective interest method
over five years, the life of the Notes. Amortization expense for the years ended
December 31, 1999 and 2000 was $681,000 and $723,000, respectively.
In November 1998, MRV repurchased $10.0 million of the Notes for $5.3
million. MRV recorded an extraordinary gain of $2.8 million, net of tax, related
to the repurchase of the Notes. Included in this amount is the portion of the
Notes amortization of expense of the costs attributable to the Notes
repurchased.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases all of its facilities and certain equipment under
noncancelable capital and operating lease agreements expiring in various years
through 2049. The aggregate minimum annual lease payments under leases in effect
on December 31, 2000 were as follows (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
2001...................................................... $ 207 $ 3,756
2002...................................................... 200 3,007
2003...................................................... 200 2,256
2004...................................................... 152 777
2005...................................................... 64 467
Thereafter................................................ 68 2,242
----- -------
$ 891 $12,505
=======
Less -- Amount representing interest...................... (107)
-----
784
Less -- Current portion................................... (163)
-----
$ 621
=====
Annual rental expense under noncancelable operating lease agreements for
the years ended December 31, 1998, 1999 and 2000 was $2.8 million, $4.7 million
and $4.9 million, respectively.
Subsequent to December 31, 2000 and subject to certain conditions, MRV has
agreed to issue stock options to purchase MRV common stock and a subsidiary is
common stock to former employees. Additionally, MRV will receive approximately
24% ownership in a new company formed by these former employees in exchange for
the transfer of intellectual property from MRV to the new company. Should the
certain conditions not be met, no stock options to purchase common stock or the
transfer of intellectual property will result. Accordingly, due to the
uncertainty, no amounts have been provided in the accompanying statements of
operations for these items.
ROYALTY COMMITMENT
Through subsidiaries in Israel, MRV is obligated to the Office of the Chief
Scientist of the Government of Israel (Chief Scientist) with respect to the
government's participation in research and development expenses for certain
products. Accordingly, MRV's royalty to the Chief Scientist is calculated
F-20
127
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
at a rate of three percent to five percent of sales of such products developed
with the participation up to the dollar amount of such participation. MRV
received participation of $350,000 and $500,000 for the year ended December 31,
1998 and 1999, respectively. No participation was received for the year ended
December 31, 2000. The remaining future obligation as of December 31, 2000 is
approximately $913,000 which is contingent on generating sufficient sales of
this selected product line.
ACCOUNTS RECEIVABLE
MRV, through foreign subsidiaries, has agreements with several financial
institutions to sell its receivables with recourse; in the event of customer's
default, MRV must repurchase the receivables. At December 31, 2000 the Company
is contingently liable for approximately $23.4 million relating to such
receivables sold with recourse. MRV believes that adequate provision has been
made for losses on receivables with recourse.
LITIGATION
In December, 1996, Datapoint brought an action against Nbase
Communications, Inc., a subsidiary of the Company ("Nbase") and several other
defendants in the United States District Court, for the Eastern District of New
York alleging infringement of two of Datapoint's patents related to LANs, more
particularly to claimed improved LANs which interoperatively combine additional
enhanced capability and/or which provide multiple different operational
capabilities. In the same lawsuit, Datapoint alleges that other defendants
including Dayna Communications, Inc., Sun Microsystems, Inc., Adaptec, Inc.,
International Business Machines Corporation, Lantronix and SVEC America Computer
Corporation have infringed the same two patents. The Company has been advised
that several other companies, including Intel Corporation and Cisco Systems,
Inc., have also had actions brought against them by Datapoint with respect to
the same two patents. The action against Nbase and its codefendants seeks, among
other things, an injunction against the manufacture or sale of products which
embody the inventions set forth in the two patents and single and treble damages
for the alleged infringement. Datapoint's complaint also seeks to have the court
determine that the named defendants shall serve as representatives of a
defendant class of manufacturers, vendors and users of products allegedly
infringing on Datapoint's claimed patents from which defendant class Datapoint
seeks the same relief as from the individual defendants. In February 1999, the
court entered judgement in favor of the defendants and Datapoint filed a notice
of appeal. The Company is cooperating with several of the defendants in pursuit
of common defenses and believes the claim is without merit. If a conclusion
unfavorable to the Company is reached, however, Datapoint's claim could
materially affect the business, operating results and financial condition of the
Company.
The Company has received notices from third party alleging possible
infringement of patents with respect to product features or manufacturing
processes. Management believes such notices are common in the communications
industry because of the large number of patents that have been filed on these
subjects. The Company's policy is to discuss these notices with the senders in
an effort to demonstrate that the Company's products and/or processes do not
violate any patents. The Company is currently involved in such discussions with
Lucent, Ortel, Rockwell and the Lemelson Foundation. The Company does not
believe that any of its products or processes violate any of the patents
asserted by these parties and the Company further believes that it has
meritorious defenses if any legal action is taken by any of these parties.
However, if one or more of these parties was to assert a claim and gain a
conclusion unfavorable to the Company such claims could materially and adversely
affect the business, operating results and financial condition of the Company.
F-21
128
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
From time to time, MRV is a defendant in lawsuits involving matters which
are routine to the nature of its business. Management is of the opinion that the
ultimate resolution of all such matters will not have a material adverse effect
on the accompanying consolidated financial statements.
12. STOCKHOLDERS' EQUITY
AUTHORIZED SHARES
On May 10, 2000, the Board of Directors and stockholders of MRV approved an
increase in the authorized number of shares of its $0.0017 par value common
stock from 80.0 million to 160.0 million shares relating to the two-for-one
stock split distributed on May 26, 2000. MRV is authorized to issue up to 1.0
million shares of its $0.01 par value preferred stock, of which none has been
issued or outstanding as of December 31, 1999 and 2000.
STOCK SPLIT
The Board of Directors authorized the splitting of MRV's common stock on a
two-for-one basis for stockholders of record on May 11, 2000 and the resulting
shares from the split were distributed on May 26, 2000. All references to share
and per-share data for all periods presented have been adjusted to give effect
to this two-for-one stock split.
STOCK OPTIONS
MRV has various stock option and warrant plans that provide for granting
options and warrants to purchase shares of MRV's common stock to employees,
directors and non-employees performing consulting or advisory services for MRV.
The plans provide for the granting of options, which meet the Internal Revenue
Code requirements for qualification as incentive stock options, as well as
nonstatutory options. Under these plans, stocks option and warrant exercise
prices generally equal the fair market value of MRV's common stock at the date
of grant. The options and warrants generally vest over three to five years with
expiration dates ranging from six and ten years from the date of grant depending
on the plan. The plans provide for the issuance of 13.4 million shares of common
stock over the remaining life of the plans.
Stock option information with respect to MRV's stock option and warrant
plans is as follows:
1998 1999 2000
------------------ ------------------ ------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------ --------- ------ --------- ------ ---------
Outstanding, beginning of year.............. 2,416 $4.39 4,082 $2.49 3,980 $4.36
Granted..................................... 2,000 9.24 1,122 9.21 5,959 8.14
Exercised................................... (236) 2.26 (744) 2.31 (1,660) 2.52
Forfeited................................... (98) 5.55 (480) 2.63 (67) 2.56
Cancelled in repricing...................... (2,996) 8.93 -- -- -- --
Granted in repricing........................ 2,996 2.63 -- -- -- --
Outstanding, end of year.................... 4,082 $2.49 3,980 $4.36 8,212 $6.29
F-22
129
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Information about stock options outstanding at December 31, 2000 is
summarized as follows:
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE PRICE AS OF 2000 REMAINING CONTRACT LIFE AS OF 2000
-------------- ------------------ ----------------------- ------------------
$1.82 - $2.63 3,511 6.29 Years 3,337
$2.75 - $2.94 1,081 8.09 Years 221
$3.00 - 33.00 3,620 9.55 Years 322
----- -----
8,212 3,880
===== =====
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123 permits companies to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. Because MRV's stock-based compensation plans have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate,
management believes that the existing option valuation models do not necessarily
provide a reliable single measure of the fair value of a wards from the plan.
Therefore, as permitted, MRV applies the existing accounting rules under APB No.
25 and provides pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for stock-based awards made during the year as if the fair
value method defined in SFAS No. 123 had been applied. Net loss and net loss per
share for each of the three years in the period ended December 31, 2000 would
have increased to the following pro forma amounts (in thousands, except per
share data):
1998 1999 2000
-------- -------- ---------
Additional compensation expense................... $ 1,835 $ 2,888 $ 24,998
Pro forma net loss................................ $(21,941) $(15,797) $(177,951)
Pro forma basic net loss per share................ $ (0.41) $ (0.29) $ (2.71)
Pro forma diluted net loss per share.............. $ (0.41) $ (0.29) $ (2.71)
The following assumptions were applied: (i) no expected dividend yield for
all periods, (ii) expected volatility ranging from 22 percent to 162 percent,
(iii) expected lives of 4 to 6 years for all years, (iv) and risk-free interest
rates ranging from 4.23 percent to 6.73 percent for all years.
COMMON STOCK PURCHASE WARRANTS
In connection with various public and private offerings of common stock and
acquisitions MRV has issued warrants to purchase additional shares of common
stock.
F-23
130
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
A summary of warrant activities for the three years ended December 31, 2000
is as follows (in thousands, except share prices):
NUMBER OF SHARES EXERCISE PRICES
---------------- ---------------
Balance, December 31, 1997............................. 5,212 $0.14 to 16.25
Issued............................................... 842 17.50
Exercised............................................ (132) 2.13 to 2.80
Canceled............................................. (152) 4.21
------ --------------
Balance, December 31, 1998............................. 5,770 0.14 to 17.50
Issued............................................... -- --
Exercised............................................ (874) 2.40 to 10.00
Canceled............................................. (1,556) 0.14 to 13.38
------ --------------
Balance, December 31, 1999............................. 3,340 2.13 to 17.50
Issued............................................... -- --
Exercised............................................ (895) 2.29 to 16.25
Canceled............................................. (5) 2.13
------ --------------
Balance, December 31, 2000............................. 2,440 $2.13 to 17.50
====== ==============
13. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
MRV operates under a business model that creates and manages start-up
companies and independent business units. These companies fall into two
segments: operating entities and development stage enterprises. Segment
information is therefore being provided on this basis which differs from prior
period presentations.
Development stage enterprises that MRV has created or invested in are
developing optical components, subsystems and networks and products for the
infrastructure of the Internet. Operating entities of MRV design, manufacture
and distribute optical components, optical subsystems, optical networking
solutions, and Internet infrastructure products.
The accounting policies of the segments are the same as those described in
the summary of significant accounting polices. MRV evaluates segment performance
based on revenues and operating income (loss) of each segment. As such, there
are no separately identifiable segment assets nor are there any separately
identifiable statements of operations data below operating income.
Business Segment Net Revenues for each of the three years in the period
ended December 31, 2000 (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Operating entities................................. $264,075 $288,524 $319,394
Development stage enterprises...................... -- -- --
-------- -------- --------
Total revenues........................... $264,075 $288,524 $319,394
======== ======== ========
There were no inter-segment sales for the years ended December 31, 2000,
1998 and 1999.
F-24
131
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Business Segment Operating Income (Loss) for each of the three years in the
period ended December 31, 2000 (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
Operating entities................................ $(18,141) $ 4,017 $(100,759)
Development stage enterprises..................... (2,043) (20,011) (48,810)
-------- -------- ---------
Total operating loss.................... $(20,184) $(15,994) $(149,569)
======== ======== =========
For each of the three years in the period ended and as of December 31,
2000, MRV had no single customer that accounted for more than 10 percent of
revenues or accounts receivable. MRV does not track customer revenue by region
for each individual reporting segment. A summary of external revenue by region
follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
United States...................................... $107,376 $122,054 $119,190
European Community................................. 118,881 129,994 160,398
Middle East........................................ 5,634 4,166 2,483
Pacific Rim........................................ 24,892 28,921 31,891
Other.............................................. 7,292 3,389 5,432
-------- -------- --------
Total net sales.......................... $264,075 $288,524 $319,394
======== ======== ========
Operating loss before other income (expense), provision (benefit) for
income taxes and extraordinary item (in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
United States..................................... $(28,280) $ (5,781) $ (69,671)
Foreign........................................... 8,096 (10,213) (79,898)
-------- -------- ---------
Operating loss.......................... $(20,184) $(15,994) $(149,569)
======== ======== =========
14. LAN BUSINESS
In February 2000, MRV discontinued manufacturing and supporting its LAN
product lines. In connection with his decision, MRV recorded one-time charges of
approximately $13.8 million primarily related to the write-down of inventories.
These charges have been included in "cost of goods sold" for the year ended
December 31, 1999 in the accompanying consolidated statement of operations.
15. 401(K) PLANS
MRV has 401(K) savings plans (the Plans) at certain subsidiaries under
which all eligible employees may participate. The Plans provide for MRV to make
matching contributions to all eligible employees. In 1999 and 2000,
approximately $679,000 and $731,000, respectively, was charged as expense
related to these plans.
F-25
132
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
16. SUPPLEMENTAL STATEMENTS OF CASH FLOW INFORMATION (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
-------- -------- ----------
Supplemental disclosure of cash flow information:
Cash paid during period for interest................. $2,569 $1,652 $ 3,635
Cash paid during period for income taxes............. $9,945 $4,887 $ 130
Supplemental schedule of noncash investing and
financing activities:
Fair value of asset acquired, net of cash received... $ -- $ -- $ 48,611
Less: Liabilities assumed............................ -- -- (44,190)
------ ------ --------
Cash received in acquisitions........................ $ -- $ -- $ 4,421
------ ------ --------
Cash used in acquisitions............................ -- -- 48,938
------ ------ --------
Cash used in acquisitions, net of cash received...... $ -- $ -- $ 44,517
====== ====== ========
Common stock issued in connection with investments in
subsidiaries......................................... $ -- $ -- $ 90,126
F-26
133
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
YEAR ENDED DECEMBER 31, 2000
Revenues, net......................... $65,072 $ 73,935 $ 82,720 $ 97,667
Costs and expenses:
Cost of goods sold.................. 42,736 45,793 47,910 66,932
Research and development............ 11,891 14,758 21,803 25,626
Selling, general and
administrative................... 16,028 26,467 52,699 29,506
Amortization of goodwill and other
intangibles...................... -- 12,055 27,348 27,411
------- -------- -------- --------
70,655 99,073 149,760 149,475
Operating loss................... (5,583) (25,138) (67,040) (51,808)
Other income (expense), net........... (488) (1,190) (5,764) (2,136)
------- -------- -------- --------
Loss before provision (benefit)
for income taxes and minority
interest....................... (6,071) (26,328) (72,804) (53,944)
Provision (benefit) for income
taxes............................... (494) 1,377 1,005 (7,286)
Minority interest..................... (287) (45) (570) 1,698
------- -------- -------- --------
Net loss......................... $(5,864) $(27,750) $(74,379) $(44,960)
======= ======== ======== ========
Basic and diluted earnings per
share............................... $ (0.10) $ (0.44) $ (1.06) $ (0.62)
Basic and diluted weighted averages
shares.............................. 56,850 62,754 70,122 72,768
======= ======== ======== ========
YEAR ENDED DECEMBER 31, 1999
Revenues, net......................... $70,116 $ 73,251 $ 71,254 $ 73,903
Costs and expenses:
Cost of goods sold.................. 46,366 47,595 44,653 58,828
Research and development............ 9,592 8,572 8,476 9,806
Selling, general and
administrative................... 14,718 14,750 15,581 22,474
Amortization of goodwill and other
intangibles...................... -- 1,142 951 1,014
------- -------- -------- --------
70,676 72,059 69,661 92,122
Operating income (loss).......... (560) 1,192 1,593 (18,219)
Other income (expense), net........... 278 132 165 (253)
------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
minority interest.............. (282) 1,324 1,758 (18,472)
Provision (benefit) for income
taxes............................... 627 782 1,169 (4,731)
Minority interest..................... -- (17) (22) 649
------- -------- -------- --------
Net income....................... $ (909) $ 525 $ 567 $(13,092)
======= ======== ======== ========
Basic earnings (loss) per share....... $ (0.02) $ 0.01 $ 0.01 $ (0.24)
Diluted earnings (loss) per share..... $ (0.02) $ 0.01 $ 0.01 $ (0.24)
Basic weighted averages shares........ 53,300 53,472 53,868 55,082
Diluted weighted averages shares...... 53,300 57,621 60,154 55,082
======= ======== ======== ========
F-27
134
MRV COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
18. EVENTS SUBSEQUENT TO FEBRUARY 19, 2001
During the second quarter of 2001, the management of Luminent, MRV's
publicly traded subsidiary, approved and implemented a restructuring plan as a
result of the dramatic slowdown in demand for communications equipment. During
the six months ended June 30, 2001, Luminent recorded restructuring and other
one-time charges totaling $41.2 million resulting from the lower demand for
Luminent's products and pricing pressures stemming from the continuing
deterioration in the communications equipment industry, specifically the optical
components sector.
In June, 2001, the FASB approved two pronouncements: SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", which provide guidance on the accounting for business combinations to
be accounted for using the purchase method. Under the new rules, goodwill will
no longer be subject to amortization over its useful life. Rather, goodwill will
be subject to at least an annual impairment assessment. This assessment is a
fundamentally different two-step approach and is based on a comparison between a
reporting unit's fair value and its carrying value. Intangible assets have newly
defined criteria and will be accounted for separately from goodwill and will
continue to be amortized over their useful lives. MRV plans to adopt these
pronouncements on January 1, 2002. MRV is currently reviewing these standards to
determine the impact on its results of operations and its financial position.
The most significant anticipated effect on MRV's financial statements at
adoption would be the discontinuing of the amortization of goodwill and the
possible impairment loss measured as of the date of adoption.
In September 2001, Luminent's President and Chief Executive Officer
resigned. In connection with the resignation, Luminent's President and Chief
Executive Officer received a severance package, as defined in the employment
agreement dated July 2000, providing severance payments of approximately $1.0
million and the immediate vesting of all outstanding MRV and Luminent stock
options held as of the date of resignation. The MRV and Luminent stock options
are exercisable through September 11, 2003. Additionally, an immediate
recognition of deferred compensation expenses of $18.9 million will be recorded
during the third quarter of 2001 as a result of the acceleration of these stock
options.
In September 2001, MRV and Luminent jointly announced that MRV intends to
merge Luminent into MRV through the filing of a short-form merger. All Luminent
shareholders are entitled to receive 0.43 shares of MRV common stock for each
share of Luminent common stock held. Furthermore, outstanding Luminent employee
stock options will convert into options to purchase MRV common stock at the same
ratio. The merger is expected to be completed during the fourth quarter of 2001.
F-28
135
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 210,080 $ 174,887
Short-term investments, $56,181 and $52,907 restricted in
2000 and 2001, respectively............................ 73,947 55,704
Accounts receivable....................................... 61,863 59,731
Inventories............................................... 77,005 72,123
Deferred income taxes..................................... 31,227 34,307
Other current assets...................................... 22,750 26,812
---------- ----------
Total current assets................................. 476,872 423,564
Property and Equipment -- At cost, net of depreciation and
amortization.............................................. 72,269 75,291
Other Assets:
Goodwill and intangibles.................................. 504,027 475,496
Deferred income taxes..................................... 6,209 7,797
Investments............................................... 31,734 28,164
Other non-current assets.................................. 5,660 12,835
---------- ----------
$1,096,771 $1,023,147
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligations and
long-term debt......................................... $ 2,937 $ 2,642
Accounts payable.......................................... 56,088 68,644
Accrued liabilities....................................... 34,044 31,867
Short-term debt........................................... 9,104 12,976
Deferred revenue.......................................... 1,470 1,663
Income taxes payable...................................... 6,477 --
---------- ----------
Total current liabilities............................ 110,120 117,792
Long-Term Liabilities:
Convertible debentures.................................... 89,646 89,646
Capital lease obligations, net of current portion......... 621 566
Long-term debt............................................ 60,257 60,399
Other long-term liabilities............................... 3,980 4,571
Minority Interest........................................... 50,592 39,868
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or
outstanding
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 73,327 shares in 2000 and 77,317 in 2001
Outstanding -- 73,279 shares in 2000 and 77,269 in
2001.................................................. 126 132
Additional paid-in capital................................ 1,060,650 1,097,915
Accumulated deficit....................................... (171,330) (319,761)
Deferred stock compensation, net.......................... (100,862) (60,041)
Treasury stock, 48 shares at cost in 2000 and 2001........ (133) (133)
Accumulated other comprehensive loss...................... (6,896) (7,807)
---------- ----------
Total stockholders' equity........................... $ 781,555 $ 710,305
---------- ----------
$1,096,771 $1,023,147
========== ==========
See accompanying notes
F-29
136
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2000 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues, net............................................... $139,007 $ 189,634
-------- ---------
Costs and Expenses:
Cost of goods sold........................................ 88,529 155,156
Research and development expenses......................... 26,649 50,787
Selling, general and administrative expenses.............. 41,481 82,123
Amortization of goodwill and intangibles from
acquisitions........................................... 13,069 57,167
-------- ---------
Operating loss............................................ (30,721) (155,599)
Other expense, net.......................................... (1,678) (2,893)
Provision (credit) for income taxes......................... 883 (3,622)
Minority interest........................................... 332 (6,439)
-------- ---------
Net Loss.................................................. $(33,614) $(148,431)
======== =========
Net Loss Per Share -- Basic and Diluted..................... $ (0.56) $ (1.97)
======== =========
Shares Used in Per-Share Calculation -- Basic and Diluted... 59,839 75,245
======== =========
See accompanying notes
F-30
137
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2000 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net cash used in operating activities.................. $ (5,039) $ (43,529)
-------- -----------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,588) (26,580)
Investments in unconsolidated partner companies........... (10,785) --
Purchases of minority interest in consolidated
subsidiaries and short-term investments................ (9,096) (59,521)
Proceeds from sale or maturity of investments............. 12,216 71,150
Cash used in acquisitions and equity purchases, net of
cash received.......................................... (45,391) --
-------- -----------
Net cash used in investing activities.................. (55,644) (14,951)
-------- -----------
Cash flows from financing activities:
Proceeds from line of credit.............................. 68,510 --
Net proceeds from issuance of common stock................ 6,001 20,534
Borrowings on long-term debt.............................. -- 373
Payments on short-term debt............................... -- (92)
Borrowings on short-term debt............................. -- 3,587
Principal payments on capital lease obligations........... (493) (204)
-------- -----------
Net cash provided by financing activities.............. 74,018 24,198
-------- -----------
Effect of exchange rate changes on cash and cash
equivalents............................................... (2,458) (911)
-------- -----------
Net (decrease) increase in cash and cash equivalents........ 10,877 (35,193)
Cash and cash equivalents, beginning of period.............. 34,330 210,080
-------- -----------
Cash and cash equivalents, end of period.................... $ 45,207 $ 174,887
======== ===========
See accompanying notes
F-31
138
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of MRV Communications and Subsidiaries as
of June 30, 2001, and the results of their operations and their cash flows for
the six and three months then ended.
2. BUSINESS COMBINATIONS
No material business combinations took place during the six months ended
June 30, 2001. See our latest annual report on Form 10-K and management's
discussion and analysis of financial conditions and results of operations in
this 10-Q. The following unaudited pro forma financial information presents the
combined results of operations with the acquisitions as if the acquisitions had
occurred as of January 1, 2000, giving effect to certain adjustments, including
amortization of goodwill and other intangibles and deferred stock compensation
charges. The unaudited pro forma share data assumes the shares issued in
connection with these acquisitions were outstanding as of January 1, 2000. (in
thousands, except per share amounts; unaudited)
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
---------- -----------
Pro forma revenue........................................... $146,065 $ 189,634
Pro forma net loss.......................................... (33,087) (148,431)
Pro forma basic and diluted net loss per share.............. $ (0.55) $ (1.97)
3. EARNINGS PER SHARE
Basic earnings (loss) per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
(loss) per common share include the incremental shares issuable upon the assumed
exercise of stock options and conversion of the convertible debentures. The
effect of the assumed conversion of $89.6 million convertible debentures has not
been included, as it would be anti-dilutive. For the six months ended June 30,
2001 and 2000, common stock equivalents were also not considered in the diluted
computation, as their effect was anti-dilutive.
4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." For year-end financial statements, SFAS No. 130 requires
that net income (loss) and all other non-owner changes in equity be displayed in
a financial statement with the same prominence as other consolidated
F-32
139
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements. In addition, the standard requires companies to display
the components of comprehensive income as follows (in thousands).
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
---------- -----------
Net loss.................................................... $(33,614) $(148,431)
Foreign currency translation................................ (2,458) (911)
-------- ---------
Comprehensive loss........................................ $(36,072) $(149,342)
======== =========
5. CASH AND CASH EQUIVALENTS
MRV considers all highly liquid investments with an original maturity of 90
days or less to be cash equivalents. MRV maintains cash balances and investments
in highly qualified financial institutions. At various times such amounts are in
excess of insured limits. As of June 30, 2001 and December 31, 2000, cash, cash
equivalents and short-term investments of $93.0 million and $132.9 million,
respectively, were held by MRV's publicly traded subsidiary Luminent.
6. INVENTORIES
Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first in, first out
method. Inventories consist of the following as of June 30, 2001 and December
31, 2000 (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
------------ --------
Raw materials............................................... $ 36,278 $28,033
Work-in process............................................. 17,721 24,249
Finished goods.............................................. 23,006 19,841
-------- -------
$ 77,005 $72,123
======== =======
7. STOCK DISTRIBUTION
On May 26, 2000, the Company completed a two-for-one stock split. The
effect of this stock split has been reflected in the accompanying condensed
consolidated financial statements for all periods presented.
8. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
The Company operates under a business model that creates and manages
start-up companies and independent business units. These companies fall into two
segments: operating entities and development stage enterprises. Segment
information is therefore being provided on this basis.
Development stage enterprises that the Company has created or invested in
develop optical components, subsystems and networks and products for the
infrastructure of the Internet. Operating entities of the Company design,
manufacture and distribute optical components, optical subsystems, optical
networking solutions and Internet infrastructure products, and provide IT system
integration services.
The accounting policies of the segments are the same as those described in
the summary of significant accounting polices in our latest annual report on
Form 10-K. The Company evaluates segment performance based on revenues,
operating income (loss) and total assets of each segment. As such, there are no
separately identifiable segment assets nor are there any separately identifiable
statements of operations data below operating income.
F-33
140
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Business Segment Net Revenues for the six months ended June 30, 2001 and
2000 (in thousands):
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 2001
-------- --------
Operating entities.......................................... $139,007 $189,634
Development stage enterprises............................... -- --
-------- --------
Total revenues............................................ $139,007 $189,634
======== ========
There were no inter-segment sales in the six months ended June 30, 2001 and
2000.
Business Segment Loss for the six months ended June 30, 2001 and 2000 (in
thousands):
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
---------- -----------
Operating loss
Operating entities........................................ $(17,439) $(127,358)
Development stage enterprises............................. (13,282) (28,241)
Other income (expense)
Interest expense related to convertible debentures........ (2,250) (2,250)
Other income, net......................................... 2,009 2,401
Development stage enterprises............................. (1,437) (3,044)
-------- ---------
Loss before provision (credit) for income taxes and minority
interest.................................................. $(32,399) $(158,492)
======== =========
For the six months ended and as of June 30, 2001, the Company had no single
customer that accounted for more than 10 percent of revenue or accounts
receivable. The Company does not track customer revenue by region for each
individual reporting segment. A summary of external revenue by region follows
(in thousands).
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 2001
-------- --------
United States............................................... $ 55,032 $ 69,578
Asia Pacific................................................ 18,171 26,454
European.................................................... 62,543 89,750
Other....................................................... 3,261 3,852
-------- --------
Total net sales........................................... $139,007 $189,634
======== ========
Loss before provision (credit) for income taxes (in thousands):
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 2001
---------- -----------
United States............................................... $(25,756) $ (82,818)
Foreign..................................................... (6,975) (69,235)
-------- ---------
Loss before provision (credit) for income taxes........... $(32,731) $(152,053)
======== =========
9. RESTRUCTURING AND OTHER ONE-TIME CHARGES
In the second quarter of 2001, the management of Luminent, MRV's publicly
traded subsidiary, approved and implemented a restructuring plan and other
one-time charges as a result of the dramatic
F-34
141
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
slowdown in demand for communications equipment. During the six months ended
June 30, 2001, Luminent recorded restructure and other one-time charges totaling
$41.2 million resulting from the lower demand for Luminent's products and
pricing pressures stemming from the continuing downturn in the communications
equipment industry generally and the optical components sector in particular.
Luminent's restructuring activities primarily involve employee severance
costs, abandonment and non-utilization of assets and other similar actions.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future benefit
or costs incurred under contractual obligations that existed before the
restructuring plan and will continue with either no future benefit or become a
penalty incurred for termination of the obligation.
Restructuring costs totaling $14.5 million consisting of severance and
outplacement of terminated employees and exit costs are included in the results
of operations. The restructuring activities as described above, resulted in 150
layoffs during the six months ended June 30, 2001 and will result in additional
layoffs of approximately 450 personnel, bringing Luminent's total workforce to
approximately 1,200 employees. Affected employees will come from all divisions
and areas of Luminent. The majority of affected employees will be in the
manufacturing group.
A summary of the restructuring costs consists of the following (in
thousands):
REMAINING
PROVISION UTILIZED BALANCE
--------- -------- ---------
Exit Costs
Asset impairment.................................... $ 8,904 $8,904 $ --
Closed and abandoned facilities..................... 1,108 -- 1,108
Other commitments................................... 2,402 -- 2,402
Other............................................... 991 -- 991
------- ------ ------
13,405 8,904 4,501
Employee severance costs.............................. 1,072 196 876
------- ------ ------
$14,477 $9,100 $5,377
======= ====== ======
In addition to the costs associated with the restructuring plan, Luminent
also recorded a one-time $26.1 million charge to write-down inventory to
realizable value and an additional $598,000 charge to bad debt. Furthermore,
Luminent is undertaking a formal review of the goodwill generated in its
acquisitions and it may record additional impairment charges when the review is
completed in the fourth quarter of 2001.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Investments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The Company adopted the statement in January 2001 and the adoption
of this statement did not have a material impact on the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commissions (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB No. 101
provides additional guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company has reviewed this bulletin and
believes that its current revenue recognition policy is consistent with the
guidance of SAB No. 101.
F-35
142
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on MRV's financial position or
results of operations.
The FASB recently approved two pronouncements: SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", which
provide guidance on the accounting for business combinations to be accounted for
using the purchase method. Under the new rules, goodwill will no longer be
subject to amortization over its useful life. Rather, goodwill will be subject
to at least an annual impairment assessment. This assessment is a fundamentally
different two-step approach and is based on a comparison between a reporting
unit's fair value and its carrying value. Intangible assets have newly defined
criteria and will be accounted for separately from goodwill and will continue to
be amortized over their useful lives. MRV plans to adopt these pronouncements on
January 1, 2002. MRV is currently reviewing these standards to determine the
impact on its results of operations and its financial position. The most
significant anticipated effect on MRV's financial statements at adoption would
be the discontinuing of the amortization of goodwill and the possible impairment
loss measured as of the date of adoption.
11. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION (IN THOUSANDS):
SIX MONTHS ENDED
JUNE 30,
----------------
2000 2001
------ ------
(UNAUDITED)
Supplemental disclosure of cash flow information:
Cash paid during period for interest...................... $1,718 $4,675
Cash paid during period for taxes......................... $ 417 $6,455
F-36
143
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
The purpose of the following unaudited pro forma condensed consolidated
statements of operations for the six months ended June 30, 2001 and 2000 is to
present the results of operations excluding certain charges such as non-cash
amortization of goodwill and other intangibles, non-cash deferred stock
compensation expenses, cost incurred in connection with the Optical Access IPO,
and expenses associated with development stage enterprises (in thousands, except
per share data).
SIX MONTHS ENDED
--------------------------
JUNE 30, JUNE 30,
2000 2001
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues, net............................................... $139,007 $ 189,634
-------- ---------
Costs and expenses:
Cost of goods sold........................................ 88,529 121,804
Research and development expenses......................... 13,367 17,137
Selling, general and administrative expenses.............. 34,153 45,051
-------- ---------
Operating income.......................................... 2,958 5,642
Other income (expense), net................................. (241) 167
Provision for income taxes.................................. 883 2,124
Minority interests.......................................... 332 1,031
-------- ---------
Net income................................................ $ 1,502 $ 2,654
======== =========
Net income per share -- basic............................... $ 0.03 $ 0.04
======== =========
Net income per share -- diluted............................. $ 0.02 $ 0.03
======== =========
Shares used in per-share calculation -- basic............... 59,839 75,245
Shares used in per-share calculation -- diluted............. 66,767 80,847
-------- ---------
Reconciliation
Net income, pro forma....................................... $ 1,502 $ 2,654
Less:
Amortization of goodwill and other intangibles............ 13,069 57,167
Deferred stock compensation expense....................... 7,328 33,796
One-time charges reported by Luminent..................... -- 41,232
Expenses of development stage enterprises................. 14,719 31,285
Costs incurred in connection with Optical Access' IPO..... -- 1,003
Tax effects of above items................................ -- (5,928)
Minority interest in above items.......................... -- (7,470)
-------- ---------
Net loss, as reported....................................... $(33,614) $(148,431)
======== =========
F-37
144
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Luminent, Inc.:
We have audited the accompanying consolidated balance sheets of Luminent,
Inc. (a Delaware corporation and a wholly owned subsidiary of MRV
Communications, Inc.) and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. 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 in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Luminent, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Los Angeles, California
January 25, 2001 (except
for Note 14 as to
which the date
is October 4, 2001)
F-38
145
LUMINENT, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
-------------------
1999 2000
------- --------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 220 $131,778
Short-term investments.................................... -- 1,082
Accounts receivable, net of allowance of $1,724 in 1999
and $4,455 in 2000...................................... 10,544 21,613
Inventories............................................... 8,755 39,428
Deferred income taxes..................................... 2,190 6,220
Prepaids and other current assets......................... 5 9,106
------- --------
Total current assets.................................... 21,714 209,227
Property and Equipment, net:
Land...................................................... -- 3,559
Buildings................................................. -- 18,006
Machinery and equipment................................... 4,483 34,096
Furniture and fixtures.................................... 12 1,950
Computer hardware and software............................ 890 2,180
Leasehold improvements.................................... 180 2,694
Construction in progress.................................. -- 3,815
------- --------
5,565 66,300
Less -- Accumulated depreciation and amortization......... (4,152) (14,934)
------- --------
1,413 51,366
Goodwill and other intangibles, net......................... -- 341,540
Other assets................................................ -- 3,247
------- --------
Total assets............................................ $23,127 $605,380
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ -- $ 2,607
Short-term borrowings..................................... -- 7,957
Accounts payable.......................................... 4,200 20,021
Accrued expenses.......................................... 1,163 10,337
Income taxes payable...................................... 3,790 6,634
------- --------
Total current liabilities............................... 9,153 47,556
Long-term debt, net of current portion...................... -- 9,550
Other long-term liabilities................................. -- 779
Minority interest........................................... -- 444
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 30,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.001 par value, 300,000,000 shares
authorized; 156,000,000 shares issued and outstanding... -- 156
Additional paid-in capital................................ -- 635,066
Equity of MRV Communications.............................. 13,974 --
Accumulated deficit....................................... -- (29,241)
Deferred stock compensation, net.......................... -- (55,570)
Accumulated other comprehensive loss...................... -- (3,360)
------- --------
Total stockholders' equity.............................. 13,974 547,051
------- --------
Total liabilities and stockholders' equity.............. $23,127 $605,380
======= ========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-39
146
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................................. $ 38,596 $ 65,264 $124,193
Cost of sales(1)........................................... 24,289 43,078 84,384
-------- -------- --------
Gross profit.......................................... 14,307 22,186 39,809
Operating Costs and Expenses:
Selling, general and administrative(1)................... 2,642 5,675 38,768
Research and development(1).............................. 4,974 8,693 18,204
Parent company allocations............................... 808 885 588
Amortization of goodwill and other intangibles........... -- -- 47,421
-------- -------- --------
8,424 15,253 104,981
-------- -------- --------
Operating income (loss)............................... 5,883 6,933 (65,172)
Other income, net.......................................... -- 6 2,246
-------- -------- --------
Income (loss) before provision for income taxes and
minority interest................................... 5,883 6,939 (62,926)
Provision for income taxes................................. 2,343 2,764 2,766
Minority interest.......................................... -- -- (707)
-------- -------- --------
Net Income (loss)..................................... $ 3,540 $ 4,175 $(64,985)
======== ======== ========
Basic and diluted earnings (loss) per share................ $ 0.02 $ 0.03 $ (0.45)
======== ======== ========
Basic and diluted weighted average shares.................. 144,000 144,000 145,677
======== ======== ========
-------------------------
(1) Includes amounts relating to deferred stock compensation of $2.8 million,
$21.7 million and $4.3 million presented in "cost of sales", "selling,
general and administrative" and "research and development", respectively,
for the year ended December 31, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
147
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DEFERRED ACCUMULATED
COMMON STOCK ADDITIONAL STOCK OTHER
---------------- PAID-IN ACCUMULATED EQUITY OF COMPENSATION, COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT MRV NET LOSS TOTAL
------- ------ ---------- ----------- --------- ------------- ------------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997....................... -- $ -- $ -- $ -- $ 5,782 $ -- $ -- $ 5,782
Net income................. -- -- -- -- 3,540 -- -- 3,540
Net distributions to MRV
Communications, Inc...... -- -- -- -- (1,232) -- -- (1,232)
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
1998....................... -- -- -- -- 8,090 -- -- 8,090
Net income................. -- -- -- -- 4,175 -- -- 4,175
Net advances from MRV
Communications, Inc...... -- -- -- -- 1,709 -- -- 1,709
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
1999....................... -- -- -- -- 13,974 -- -- 13,974
Comprehensive loss:
Net loss................. -- -- -- (29,241) (35,744) -- -- (64,985)
Foreign translation
adjustment............. -- -- -- -- -- -- (3,360) (3,360)
--------
Comprehensive loss......... (68,345)
Net advances from MRV
Communications, Inc...... -- -- -- -- 439,657 -- -- 439,657
Deferred stock
compensation............. -- -- -- -- 84,350 (84,350) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 28,780 -- 28,780
Allocation of Equity of
MRV...................... 144,000 144 502,093 -- (502,237) -- -- --
Stock options issued in
exchange for consulting
services................. -- -- 683 -- -- -- -- 683
Common stock issued in
connection with initial
public offering.......... 12,000 12 132,290 -- -- -- -- 132,302
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
2000....................... 156,000 $156 $635,066 $(29,241) $ -- $(55,570) $(3,360) $547,051
======= ==== ======== ======== ========= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
148
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 3,540 $ 4,175 $(64,985)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,000 1,461 52,020
Provision for doubtful accounts......................... 778 500 2,915
Amortization of deferred stock compensation............. -- -- 28,780
Loss on disposition of fixed assets..................... -- -- 16
Gain on sale of short-term investments.................. -- -- (50)
Minority interest....................................... -- -- (707)
Deferred income taxes................................... (168) (1,026) (4,030)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable..................................... (326) (4,605) (3,194)
Inventories............................................. (2,172) (2,253) (16,903)
Prepaid and other current assets........................ -- (5) 753
Accounts payable........................................ (72) 842 13,118
Accrued expenses........................................ 116 381 3,058
Income taxes payable.................................... (915) 1,278 2,656
------- ------- --------
Net cash provided by operating activities............. 1,781 748 13,447
Cash flows from investing activities:
Purchases of property and equipment....................... (549) (2,237) (14,846)
Proceeds from sale of property and equipment.............. -- -- 1,520
Purchases of short-term investments....................... -- -- (3,022)
Proceeds from sale of short-term investments.............. -- -- 2,524
Net cash received in connection with acquisitions......... -- -- 5,472
Other assets.............................................. -- -- (5,822)
------- ------- --------
Net cash used in investing activities................. (549) (2,237) (14,174)
Cash flows from financing activities:
Net proceeds from issuance of common stock................ -- -- 132,302
Borrowings on long-term debt.............................. -- -- 6,092
Payments on long-term debt................................ -- -- (4,002)
Borrowings on short-term debt............................. -- -- 19,079
Payments on short-term debt............................... -- -- (21,349)
Net change in other liabilities........................... -- -- 190
Net cash (distributions to) advances from MRV
Communications.......................................... (1,232) 1,709 1,568
------- ------- --------
Net cash provided by (used in) financing activities... (1,232) 1,709 133,880
Effect of exchange rate on cash and cash equivalents........ -- -- (1,595)
------- ------- --------
Net increase in cash and cash equivalents................... -- 220 131,558
Cash and cash equivalents, beginning of year................ -- -- 220
------- ------- --------
Cash and cash equivalents, end of year...................... $ -- $ 220 $131,778
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
149
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Luminent, Inc. ("Luminent" or the "Company") designs, manufactures, and
sells a comprehensive line of fiber optic components that enable communications
equipment manufactures to provide optical networking solutions for the rapidly
growing metropolitan and access segments of the communications network. Its
products are designed to meet the increasing bandwidth requirements between
long-haul telecommunication networks and end users. Luminent specializes in
singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.
On April 29, 2000, MRV Communications, Inc. (MRV) announced its plan to
create a separate company, Luminent, comprised of MRV's fiber optic transmission
business. Luminent was incorporated in Delaware in March 2000, as a wholly owned
subsidiary of MRV. Since the completion of Luminent's initial public offering in
November 2000, MRV owns approximately 92% of Luminent's outstanding common
stock.
On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the "Separation Agreement") effective on September 8,
2000 (the "separation date"), under which MRV continued to fund working capital
and other needs for the first few months of operations as a separate,
stand-alone entity. Additionally, MRV transferred to Luminent, substantially all
of the assets and liabilities associated with Luminent's business.
As of the separation date, Luminent began operating independently from MRV.
For periods prior to the separation date, the accompanying consolidated
financial statements reflect MRV's historical bases in the assets and
liabilities and the historical results of operations that were transferred to
Luminent. Additionally, the consolidated financial statements include
allocations of certain MRV corporate expenses, including centralized legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other MRV corporate and infrastructure costs.
The expense allocations have been determined on bases that MRV and Luminent
considered to be a reasonable reflection of the utilization of services provided
or the benefit received by Luminent. The allocation methods are based on
relative revenues, head counts or square footage. However, the financial
information included herein may not reflect the consolidated financial position,
operating results, changes in parent company investment and cash flows of
Luminent in the future or what they would have been had Luminent been a
separate, stand-alone entity during the periods presented.
Luminent faces numerous risks related to the fact that it has no history as
an independent company. In addition, Luminent faces risks commonly associated
with a technology company such as operating in a sector that is new and
characterized by rapid technological change, evolving industry standards, the
need to generate capital to fund operations and uncertainty regarding market
acceptance of its products and products under development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EQUITY OF MRV COMMUNICATIONS, INC.
The MRV equity account represents the book value of net assets transferred
to Luminent. No intercompany interest income or expense has been allocated to,
or included in, the accompanying consolidated financial statements (see Note 7
for additional information regarding transactions with MRV). As of the
separation date, the remaining balance of MRV Communications' equity was
transferred to paid-in capital, and Luminent began to generate retained earnings
as a stand-alone company.
F-43
150
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Luminent and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
The reporting currency for the consolidated financial statements of the
Company is the U.S. dollar. The assets and liabilities of companies whose
functional currency is other than the U.S. dollar are included in the
consolidation by translating the assets and liabilities at the exchange rates
applicable at the end of the reporting period, while capital accounts are
translated at historical rates. The statements of operations and cash flows of
such companies are translated at the average exchange rates during the
applicable period. Translation gains or losses are accumulated as a separate
component of shareholders' equity. The Company has not tax effected the
cumulative translation adjustment as there is no intention to remit the
earnings.
REVENUE RECOGNITION
Luminent recognizes product revenue upon shipment of products, at which
time, customer acceptance of the products have been attained and collection is
considered probable. Products are shipped "FOB shipping point" with no rights of
return other than normal warranty rights. Luminent generally warrants its
products against defects in material and workmanship for one year. The estimated
cost of warranty obligations is recognized at the time of revenue recognition.
Sales to MRV and its affiliates are made in the ordinary course of business
under terms and conditions that Luminent believes are substantially equal to
terms and conditions granted to third party customers (See Note 7).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Luminent's short-term
investments have initial maturities of greater than three months. These
securities are classified as "available-for-sale" in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These investments are carried at
fair market value with any unrealized gains and losses recorded as a separate
component of stockholders' equity. Fair value is based upon market prices quoted
on the last day of the year. Unrealized gains or losses on securities were
insignificant as of December 31, 2000.
Luminent maintains cash balances and investments in highly qualified
financial institutions. At various times, such amounts are in excess of insured
limits.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first-in, first-out
method.
F-44
151
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
Buildings........................... 20 years
Machinery and equipment............. 3 years
Furniture and fixtures.............. 5 years
Computer hardware and software...... 3 years
Leasehold improvements.............. Lesser of lease term or useful lives
Maintenance and repairs are charged to expense as incurred and the costs of
additions and betterments that increase the useful lives of the assets are
capitalized.
GOODWILL AND OTHER INTANGIBLES, NET
Goodwill and other intangibles, net represents the excess cost over the
fair value of net assets of the businesses acquired. Goodwill and other
intangibles are being amortized using the straight-line method over estimated
useful lives of 5 years. Amortization of goodwill and other intangibles of $47.4
million has been included in the accompanying consolidated statement of
operations for the year ended December 31, 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
Luminent evaluates its long-lived assets, including certain intangibles,
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest charges) expected to
be generated by the asset. If these assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are carried at cost,
which approximates their fair market value.
INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period. For purposes of these financial
statements, income taxes have been calculated as if Luminent had prepared a tax
return on a stand-alone basis.
STOCK-BASED COMPENSATION
Luminent accounts for its employees stock plan under the intrinsic value
method prescribed by Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation."
Luminent accounts for option and warrant grants to non-employees using the
guidance prescribed by SFAS No. 123, Financial Accounting Standards Board (FASB)
Interpretation No. 44 (FIN 44),
F-45
152
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25," and Emerging Issues Task Force (EITF) No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods, or Services,"
whereby the fair value of such option and warrant grants are determined using
the Black-Scholes option pricing model at the earlier of the date at which the
non-employee's performance is completed or a performance commitment is reached.
Deferred stock compensation is being amortized using the graded vesting
method. Using this method, approximately 57%, 26%, 13% and 4%, respectively, of
each option's compensation expense is amortized in each of the 4 years following
the date of grant.
EARNINGS PER SHARE
Basic and diluted earnings per common share are computed using the weighted
average number of common shares outstanding (adjusted for the effect of the
stock split discussed in Note 10). The weighted average number of shares used
for computation of basic and diluted earnings (loss) per share were 144,000,000
for 1998 and 1999, and 145,677,000 for 2000. The 10.3 million stock options
outstanding and 75,000 warrants outstanding have been excluded from the diluted
computations of earnings per share as their effect would be anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Investments and Hedging Activities," and SFAS No. 137, which delayed
the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138,
which provides additional guidance for the application of SFAS No. 133 for
certain transactions. Luminent will adopt the statement in January 2001 and does
not expect the adoption of this statement to have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commissions (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and related interpretations. SAB No. 101 summarizes certain of the
Securities and Exchange Commission's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Luminent
has adopted the provisions of SAB No. 101, which did not have a material impact
on its financial position or results of operations.
In March 2000, the FASB issued FIN 44. FIN 44 clarifies the application of
APB No. 25 for certain issues, including the definition of an employee, the
treatment of the acceleration of stock options and the accounting treatment for
options assumed in business combinations. FIN 44 became effective on July 1,
2000, but is applicable for certain transactions dating back to December 1998.
The adoption of FIN 44 did not have a significant impact on Luminent's financial
position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-46
153
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS
In December 1999, MRV acquired 51% of the outstanding stock of Luminent
Korea in exchange for approximately $250,000 in cash. This investment was
accounted for using the purchase method. The assets and liabilities of this
acquired entity have been "pushed down" to Luminent.
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of MRV
common stock and options to purchase 680,000 shares of MRV common stock for a
total purchase price of approximately $310.4 million. The issuance price of the
MRV common stock was approximately $53 per share, which was determined based on
the average market price five days before and after the terms were agreed upon.
The options to purchase MRV common stock are exercisable at $3.00 per share,
have an aggregate intrinsic value of $14.1 million, and vest over a four-year
period. The acquisition is being accounted for using the purchase method of
accounting. The assets and liabilities of the acquired entity have been "pushed
down" to Luminent. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $261.6 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years. The deferred
compensation is being amortized using the graded vesting method over 4 years.
On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.2 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have an aggregate intrinsic value of $4.0 million, of which
$1.3 million is vested, and the remaining vest over a four-year period. The
acquisition is being accounted for using the purchase method of accounting. The
assets and liabilities of the acquired entity have been "pushed down" to
Luminent. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $27.9 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years. The deferred
compensation is being amortized using the graded vesting method over 4 years.
On July 21, 2000, MRV completed the acquisition of approximately 99% of the
outstanding capital stock of Optronics International Corp., a Republic of China
corporation. Optronics International is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks. Under the
terms of the purchase agreement, Optronics International shareholders received
approximately 3.4 million shares of MRV common stock and options to purchase
approximately 800,000 shares of MRV common stock for a total purchase price of
approximately $124.3 million. The issuance price of the MRV common stock was
approximately $30 per share, which was determined based on the average market
price five days before and after the terms were agreed upon. The options to
purchase MRV common stock are exercisable at $3.00 per share, have an aggregate
intrinsic value of $20.0 million, of which $6.6 million is vested, and the
remaining vest over a four-year period. The acquisition is being accounted for
using the purchase method of accounting. The assets and liabilities of the
acquired entity have been "pushed down" to Luminent. The excess purchase price
paid over the fair value of the net identifiable assets acquired of $99.5
million has been recorded as goodwill and is being amortized on a straight-line
basis over 5 years. The deferred compensation is being amortized using the
graded vesting method over 4 years.
F-47
154
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The purchase price of Fiber Optic Communications, Quantum Optech and
Optronics International were allocated as follows (in thousands, unaudited):
Purchase price............................................ $420,861
Allocation of purchase price
Net tangible assets.................................. 1,750
Deferred stock compensation.......................... 30,150
Goodwill............................................. 388,961
The outstanding capital stock of Fiber Optic Communications, Quantum Optech
and Optronics International, purchased by MRV, has been contributed to Luminent.
The results of operations of these acquisitions have been included in Luminent's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of Luminent, Fiber Optic Communications, Quantum Optech and Optronics
International as if the acquisitions had occurred as of January 1, 1999, giving
effect to certain adjustments, including amortization of goodwill and other
intangibles and deferred compensation charges.
DECEMBER 31,
--------------------
1999 2000
-------- --------
(UNAUDITED)
Pro forma net sales.................................... $ 93,262 $137,782
Pro forma net loss..................................... $(95,557) $(91,830)
Pro forma basic and diluted net loss per share......... $ (0.66) $ (0.63)
4. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31,
-----------------
1999 2000
------ -------
Raw materials............................................. $4,291 $22,896
Work in process........................................... 3,655 12,402
Finished goods............................................ 809 4,130
------ -------
Total inventories....................................... $8,755 $39,428
====== =======
5. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.
The Company depends on single or limited source suppliers for some of the
key components and materials in its products, which makes Luminent susceptible
to supply shortages or price fluctuations that could adversely affect operating
results. Management believes this will not have a significant impact on
operations.
For the two years ended December 31, 1998 and 1999, the Company had one
customer that accounted for more than 18% and 40% of net sales, respectively. As
of December 31, 1999, one customer accounted for approximately 30% of total
accounts receivable. For the year ended December 31, 2000, the Company had 2
customers that accounted for approximately 29% of net sales. As of December 31,
2000, the Company had one customer that accounted for approximately 13% of
accounts receivable. Certain geographical area information follows.
F-48
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Geographical Area Net Sales (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
North America........................................ $22,808 $52,737 $ 76,995
Asia-Pacific......................................... 7,646 3,812 25,773
Europe............................................... 3,056 4,678 18,575
Other................................................ 5,086 4,037 2,850
------- ------- --------
Total net sales.................................... $38,596 $65,264 $124,193
======= ======= ========
6. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------- -------
Current
Federal.............................................. $1,944 $ 2,968 $ 4,988
State................................................ 567 822 1,358
Foreign.............................................. -- -- 450
------ ------- -------
2,511 3,790 6,796
Deferred
Federal.............................................. (121) (817) (3,156)
State................................................ (47) (209) (874)
Foreign.............................................. -- -- --
------ ------- -------
(168) (1,026) (4,030)
------ ------- -------
Provision for income taxes............................. $2,343 $ 2,764 $ 2,766
====== ======= =======
The income tax provision differs from the amount computed by applying the
federal statutory income tax rate to income before provision for income taxes as
follows:
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
---- ---- ----
Tax computed at federal statutory rate...................... 34% 34% 35%
State income taxes, net of federal effect................... 6 6 (1)
Foreign taxes at rates less than domestic rates............. -- -- 4
Permanent differences....................................... -- -- (32)
Change in valuation allowance............................... -- -- (10)
-- -- ---
Provision for income taxes................................ 40% 40% (4)%
== == ===
F-49
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred income tax assets at December 31, 1999
and 2000 are as follows (in thousands):
DECEMBER 31,
-----------------
1999 2000
------ -------
Accrued expenses.......................................... $ 320 $ 209
Allowance for doubtful accounts........................... 687 1,307
Deferred stock compensation............................... -- 6,630
Inventory reserves........................................ 905 3,543
State income taxes........................................ 278 475
Other..................................................... -- 276
------ -------
2,190 12,440
Valuation allowance....................................... -- (6,220)
------ -------
Net deferred tax asset.................................. $2,190 $ 6,220
====== =======
Realization of the net deferred tax assets is dependent on its ability to
carry losses back to prior periods or on generating sufficient taxable income
during the periods in which temporary differences will reverse. Management
reviews its deferred tax assets and has provided a valuation allowance based on
its assessment of the expected future benefit to be ultimately received from
each asset identified. Although realization is not assured, management believes
it is more likely than not that the net deferred tax assets will be realized.
Income (Loss) before Provision for Income Taxes (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------ --------
United States.......................................... $5,883 $6,940 $ (8,277)
Non-United States...................................... -- (1) (53,942)
------ ------ --------
Income (loss) before provision for income taxes...... $5,883 $6,939 $(62,219)
====== ====== ========
7. TRANSACTIONS WITH MRV COMMUNICATIONS, INC.
Luminent's sales of products to MRV and its affiliates was $2.1 million in
1998, $2.5 million in 1999, and $4.9 million in 2000. Through December 31, 2000,
Luminent had received a total of $6.5 million from MRV to fund payroll and other
operations related matters. Luminent repaid this amount to MRV through operating
cash and offsetting amounts due from MRV on or before December 31, 2000.
For the three years in the period ended December 31, 2000, intercompany
transactions between Luminent and MRV consisted of the following (in thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
Sales to MRV and its affiliates...................... $ 2,104 $ 2,503 $ 4,878
Operating expenses................................... 7,218 9,512 14,213
Fair value of acquisitions........................... -- 250 440,628
Deferred stock compensation.......................... -- -- 40,950
Net cash advances (distributions).................... (1,232) 1,709 1,568
------- ------- --------
Equity of MRV Communications, Inc.................. $ 8,090 $13,974 $502,237
======= ======= ========
F-50
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Luminent's costs and expenses include allocations from MRV for centralized
legal, accounting, employee benefits, real estate, insurance services,
information technology services, treasury and other MRV corporate and
infrastructure costs. These allocations have been determined on bases that MRV
and Luminent considered to be a reasonable reflection of the utilization of
services provided for the benefit received by Luminent. The allocation methods
are based on relative revenues, headcount or square footage. No intercompany
interest income or expense has been allocated to, or included in, the
accompanying consolidated financial statements.
For purposes of governing the ongoing relationships between Luminent and
MRV at and after the separation and to provide for an orderly transition,
Luminent and MRV have entered into various agreements. A brief description of
each of the agreements follows.
Master Separation and Distribution Agreement
MRV and Luminent have entered into a Master Separation Agreement, which
contains key provisions relating to the separation, Luminent's initial funding,
initial public offering and the distribution of Luminent's common stock to MRV's
stockholders. The Master Separation and Distribution Agreement lists the
documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from MRV to Luminent, effective on the
separation date. The Master Separation and Distribution Agreement also contains
conditions that must occur prior to the distribution. The parties also entered
into ongoing covenants that survive the transactions, including covenants to
establish interim service level agreements, exchange information, engage in
certain auditing practices and resolve disputes in particular ways.
General Assignment and Assumption Agreement
The General Assignment and Assumption Agreement identifies the assets that
MRV has transferred to Luminent and the liabilities that Luminent has assumed
from MRV in the separation. The Agreement General Assignment and Assumption also
describes when and how these transfers and assumptions occurred. In general,
these assets and liabilities were those that appeared in the consolidated
balance sheet as of September 30, 2000.
Intellectual Property Agreements
The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement and the Master Trademark Ownership and License
Agreement together are referred to as the Intellectual Property Agreements.
Under the Intellectual Property Agreements, MRV confirmed that Luminent owns or
transferred to Luminent its rights in specified patents, patent applications,
invention disclosures, specified trademarks and other intellectual property
related to Luminent's current business and research and development efforts.
Employee Matters Agreement
The Employee Matters Agreement outlines how MRV and Luminent allocated
assets, liabilities and responsibilities relating to current and former
employees of Luminent and their participation in the benefits plans, including
stock plans, that MRV currently sponsors and maintains. The Employee Matters
Agreement also contains provisions describing some of Luminent's employee
benefit and employee stock plans.
All eligible Luminent employees continue to participate in the MRV benefits
plans on comparable terms and conditions to those for MRV employees until the
distribution date or until Luminent establishes
F-51
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
benefit plans for its employees, or elects not to establish comparable plans if
it is not legally or financially practical. Luminent intends to establish its
own benefit program no later than the time of distribution.
Once Luminent establishes it own benefits plans, it may modify or terminate
each plan in accordance with the terms of that plan and its policies. No
Luminent benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan at the time of the distribution. Each Luminent
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding MRV benefits plan will be taken into account under that Luminent
benefit plan.
Following the date of MRV's distribution of its Luminent common stock to
its stockholders, Luminent will be under no obligation to maintain these plans
in the form in which they were established or at all. The transfer to Luminent
of employees at certain of MRV's international operations, and of certain
employee benefit plans, may not take place until Luminent receives consents or
approvals or has satisfied other applicable requirements.
Tax Sharing Agreement
The Tax Sharing Agreement allocates MRV's and Luminent's responsibilities
for certain tax matters. The agreement requires Luminent to pay MRV for the
incremental tax costs of Luminent's inclusion in consolidated, combined or
unitary tax returns with affiliated corporations. In determining these
incremental costs, the Tax Sharing Agreement takes into account not only the
group's incremental tax payments to the Internal Revenue Service or other taxing
authorities, but also the incremental use of tax losses of affiliates to offset
Luminent's taxable income, and the incremental use of tax credits of affiliates
to offset the tax on Luminent's income. The Tax Sharing Agreement also provides
for compensation or reimbursement as appropriate to reflect redeterminations of
Luminent's tax liability for periods during which Luminent joined in filing
consolidated, combined or unitary tax returns.
The Tax Sharing Agreement also requires Luminent to indemnify MRV for
certain taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by MRV from Luminent before the distribution, (b) customs
duties or harbor maintenance fees on products exported or imported by MRV on
behalf of Luminent, (c) the additional taxes that would result if an acquisition
of a controlling interest in Luminent's stock after the distribution causes the
distribution not to qualify for tax-free treatment to MRV, and (d) any taxes
resulting from transactions undertaken in preparation for the distribution.
Luminent's indemnity obligations include any interest penalties on taxes,
duties or fees for which Luminent must indemnify MRV.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a deficiency in the group's
federal income tax liability for a period during which Luminent was a member of
the group even if the Tax Sharing Agreement allocates that liability to MRV or
another member.
Master Transitional Services Agreement
The Master Transitional Service Agreement governs the provision of
information technology services by MRV and Luminent to each other, on an interim
basis, for one year from the date of separation, unless extended for specific
services or otherwise indicated in the agreement. The services include data
processing and telecommunications services, such as voice telecommunications and
data transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement, and other administrative functions. Specified
charges for such services are generally intended to allow the providing company
to recover the direct and indirect
F-52
159
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
costs of providing the services. The Master Transitional Services Agreement also
will cover the provision of certain additional transitional services identified
from time to time after the separation date that were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Master Separation and Distribution
Agreement, so long as the provision of such services would not significantly
disrupt MRV's operations or significantly increase the scope of its
responsibility under the agreement.
In addition, the Master Transitional Services Agreement will provide for
the replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
Real Estate Matters Agreement
The Real Estate Matters Agreement addresses real estate matters relating to
the MRV leased and owned properties that MRV will transfer to or share with
Luminent. The Real Estate Matters Agreement describes the manner in which MRV
will transfer to or share with Luminent various leased and owned properties. The
Real Estate Matters Agreement provides that Luminent will be required to accept
the transfer of all sites allocated to Luminent, even if a site has been damages
by a casualty before the separation date. The Real Estate Matters Agreement also
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorney's fees will be paid by MRV.
Indemnification and Insurance Matters Agreements
Effective as of the separation date, subject to specified exceptions,
Luminent and MRV will each release the other from any liabilities arising from
events occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The Indemnification and Insurance Matters
Agreement also contains provisions governing indemnification. In general,
Luminent and MRV will each indemnify the other from all liabilities arising from
their respective businesses or contracts, as well as liabilities arising from a
breach of the Master Separation and Distribution Agreement or any ancillary
agreement. In addition, MRV and Luminent will each indemnify the other against
liability for specified environmental conditions. Luminent will reimburse MRV
for the cost of any insurance coverage from the separation date to the
distribution date.
8. SHORT-TERM BORROWINGS
The Company's short-term borrowings consist of secured and unsecured
short-term loans and notes entered into with certain financial institutions. As
of December 31, 2000, these short-term borrowings totaled approximately $8.0
million and approximately $2.9 million of two Taiwanese subsidiaries' assets
have been pledged as collateral on these borrowings. The weighted average
interest rate on these notes is 6.2% and the notes are incurred and paid in the
New Taiwan Dollar. The unused line of credit is $446,000 at December 31, 2000.
F-53
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2000 (in
thousands):
Notes payable to financial institutions bearing interest
ranging from 6.5% to 8.9%, payable in monthly or
quarterly installments of principal and interest through
October 2012, secured by $15.0 in pledged assets of two
Taiwanese subsidiaries................................... $12,157
Less -- Current Portion.................................. (2,607)
-------
$ 9,550
=======
The following summarizes the required principal payments on long-term debt
as of December 31, 2000 (in thousands):
Year ending December 31,
2001..................................................... $ 2,607
2002..................................................... 1,586
2003..................................................... 1,690
2004..................................................... 1,649
2005..................................................... 1,608
Thereafter............................................... 3,017
-------
$12,157
=======
10. STOCKHOLDERS' EQUITY
Luminent's Board of Directors authorized 30,000,000 shares of its $.001 par
value of preferred stock, of which none was issued or outstanding as of December
31, 1999 and 2000. Luminent's Board of Directors also authorized 300,000,000 of
its $.001 par value common stock with 144,000,000 and 156,000,000 shares issued
and outstanding as of December 31, 1999 and 2000, respectively. Effective July
25, 2000, the Board of Directors declared a 144,000-for-one stock split. All
references to share and per-share data for all periods presented have been
restated to give effect to this stock split.
On November 9, 2000, Luminent issued 12,000,000 shares of its common stock
for $12 per share, or $144.0 million, to complete its initial public offering.
Net proceeds of $132.3 million were received after deducting the underwriters'
discount and other costs of the offering.
STOCK OPTIONS
In July 2000, the Board of Directs adopted, and the stockholder approved
the 2000 Stock Option Plan (the Plan). The Plan provides for grants of qualified
incentive stock options, non-qualified stock options, restricted stock awards
and other stock-based awards to officers, employees, directors, consultants and
advisors of the Company. Stock-based awards are generally granted at not less
than fair market value at the grant date, and typically vest over a four-year
period and expire ten years after the grant date. 10,400,000 shares of common
stock have been reserved for issuance under the Plan. As of December 31, 2000
4,685,100 options have been granted under the Plan, and 5,715,000 are available
for future grant under the Plan.
In July 2000, Luminent and MRV entered into four-year employment contracts
with the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of
Luminent. The agreements provide for annual salaries, performance bonuses and a
combination of stock options to purchase common stock of MRV and Luminent. The
CEO received approximately 316,000 options to purchase shares of MRV
F-54
161
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
common stock at $32.56 per share (a substantial discount) expiring in five
years. The CFO received approximately 22,000 options to purchase shares of MRV
common stock at $33.44 per share (a substantial discount) expiring in five
years. These options are immediately exercisable, however they provide for the
repurchase in the event of voluntary termination. These grants have been
accounted for under APB No. 25 and the intrinsic value (fair market value less
exercise price) results in additional deferred stock compensation of
approximately $11.1 million that is being amortized over the four year vesting
period. Furthermore, Luminent granted 4.8 million and 800,000 of its stock
options to the CEO and CFO, respectively. The options are exercisable at $6.25
per share and vest over 4 years. These grants have been accounted for in
accordance with APB No. 25 and the intrinsic value (original mid point of filing
range, $14, less $6.25) resulted in aggregate deferred stock compensation of
approximately $43.4 million. The deferred stock compensation is being amortized
using the graded vesting method over four years.
Stock option information with respect to options granted under the Plan and
MRV options granted to Luminent employees is as follows (in thousands, except
share prices):
Options granted by Luminent (in thousands, except share prices):
YEAR ENDED
DECEMBER 31, 2000
-------------------
WTD. AVG.
SHARES EX. PRICE
------ ---------
Outstanding, beginning of year........................... -- --
Granted.................................................. 10,285 $8.77
Exercised................................................ -- --
Forfeited................................................ -- --
------ -----
Outstanding, end of year................................. 10,285 $8.77
====== =====
Information about Luminent stock options outstanding at December 31, 2000
is summarized as follows (in thousands, except share prices):
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT DECEMBER 31, REMAINING AT DECEMBER 31,
PRICE 2000 CONTRACT LIFE 2000
------------- ------------------ ---------------- ------------------
$ 6.00 - 6.25 5,767 9.53 years 1,400
$12.00 4,518 9.85 years 40
------ -----
10,285 1,440
====== =====
Options granted by MRV (in thousands, except share prices):
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------ --------- ------ --------- ------ ---------
Outstanding, beginning of year..... 140 $4.27 242 $2.62 434 $4.37
Granted............................ 102 3.85 256 5.59 2,060 8.81
Exercised.......................... -- -- (64) 2.68 (85) 3.44
Forfeited.......................... -- -- -- -- -- --
Canceled in repricing.............. (193) 4.47 -- -- -- --
Granted in repricing............... 193 2.63 -- -- -- --
---- ----- --- ----- ----- -----
Outstanding, end of year........... 242 $2.62 434 $4.37 2,409 $8.20
==== ===== === ===== ===== =====
F-55
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information about MRV stock options outstanding at December 31, 2000 is
summarized as follows (in thousands, except share prices):
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT DECEMBER 31, REMAINING AT DECEMBER 31,
PRICE 2000 CONTRACT LIFE 2000
--------------- ------------------ ---------------- ------------------
$ 2.63 - $ 2.97 180 7.20 years 21
$ 6.69 - $ 6.82 169 8.50 years 11
$14.63 - $33.44 354 9.54 years 338
$42.13 - $64.88 83 9.29 years --
$ 3.00 1,623 9.44 years --
----- ---
2,409 370
===== ===
In July 2000, Luminent granted 75,000 warrants to purchase common stock to
a non-employee in connection with the hiring of its CEO. The warrants had a fair
value on the date of grant of approximately $635,000, are immediately
exercisable and expire in July 2010. In November 2000, Luminent granted 10,000
options to purchase common stock to a non-employee in connection consulting
services received. The options had a fair value on the date of grant of
approximately $48,000, are immediately exercisable and expire in November 2010.
The expense related to the issuance of these warrants and options is included
the accompanying consolidated statements of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123 permits companies to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of the fair value of stock-based
awards. Therefore, as permitted, the Company applies the existing accounting
rules under APB No. 25 and provides pro forma net income and pro forma earnings
per share disclosures for stock based awards made during the year as if the
fair-value-based method defined in SFAS No. 123 had been applied. Net loss and
net loss per share would have been reduced to the following pro forma amounts
(in thousands, except per share amounts):
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------ --------
Additional compensation expense........................ $ 86 $ 195 $ 25,544
Pro forma net income (loss)............................ $3,454 $3,980 $(90,529)
Pro forma basic and diluted net earnings (loss) per
share................................................ $ 0.02 $ 0.03 $ (0.62)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Option valuation models also require the input of
highly subjective assumptions such as expected option life and expected stock
price volatility. The following assumptions were applied for all periods
presented: (i) expected dividend yield of 0%, (ii) expected volatility rate
ranging from 64% to 230%, (iii) expected lives ranging from 5 to 10 years, and
(iv) the risk-free interest rate ranging from 4.29 to 6.23%.
Because the Company's employee stock-based compensation plan has
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
the plan.
F-56
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases facilities and certain equipment under lease
arrangements expiring in various years through July 2005. The aggregate minimum
annual lease payments under leases in effect on December 31, 2000 were as
follows (in thousands):
OPERATING
LEASES
---------
2001....................................................... $1,556
2002....................................................... 972
2003....................................................... 929
2004....................................................... 603
2005....................................................... 295
Thereafter................................................. 1,012
------
$5,367
======
Rental expense under lease agreements for the years ended December 31,
1998, 1999 and 2000 was $54,000, $349,000 and $882,000 million, respectively.
Through foreign subsidiaries, Luminent has open letters of credit totaling
approximately $4.0 million. The letters of credit expire through August 2001.
LITIGATION
Luminent has received notices from third party alleging possible
infringements of patents with respect to product features or manufacturing
processes. Management believes such notices are common in the communications
industry because of the large number of patents that have been filed on these
subjects. The Company's policy is to discuss these notices with the senders in
an effort to demonstrate that the Company's products and/or processes do not
violate any patents. The Company is currently involved in such discussions with
Ortel and Rockwell. The Company is evaluating these claims and presently does
not believe that any of its products or processes violates any of the patents
asserted by these parties, and the claims are without merit. Additionally the
Company intends to vigorously defend its positions if any legal action is taken.
Management believes the ultimate outcome of such claims will not have a material
impact on the results of operations or financial position.
12. RELATED PARTY TRANSACTION
During the year the Company reimbursed $48,000 to the Chief Executive
Officer for legal fees incurred in connection with the negotiation of his
employment agreement.
F-57
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LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental information regarding the Statements of Cash Flows is as
follows (in thousands):
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
----- ----- --------
Supplemental disclosure of cash flow information
Cash paid during the year for interest.................... $-- $-- $ 975
Cash paid during the year for income taxes................ $-- $-- $ 88
Supplemental schedule of noncash investing activities
Fair value of assets acquired, net of cash received....... $-- $-- $39,263
Less: Liabilities assumed................................. -- -- 33,791
-- -- -------
Cash acquired in acquisitions.......................... $-- $-- $ 5,472
== == =======
14. EVENTS SUBSEQUENT TO JANUARY 25, 2001
During the second quarter of 2001, the management of Luminent approved and
implemented a restructuring plan as a result of the dramatic slowdown in demand
for communications equipment. During the six months ended June 30, 2001,
Luminent recorded restructuring and other one-time charges totaling $41.2
million resulting from the lower demand for Luminent's products and pricing
pressures stemming from the continuing deterioration in the communications
equipment industry, specifically the optical components sector.
In June, 2001, the FASB approved two pronouncements: SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", which provide guidance on the accounting for business combinations to
be accounted for using the purchase method. Under the new rules, goodwill will
no longer be subject to amortization over its useful life. Rather, goodwill will
be subject to at least an annual impairment assessment. This assessment is a
fundamentally different two-step approach and is based on a comparison between a
reporting unit's fair value and its carrying value. Intangible assets have newly
defined criteria and will be accounted for separately from goodwill and will
continue to be amortized over their useful lives. Luminent plans to adopt these
pronouncements on January 1, 2002. Luminent is currently reviewing these
standards to determine the impact on its results of operations and its financial
position. The most significant anticipated effect on Luminent's financial
statements at adoption would be the discontinuing of the amortization of
goodwill and the possible impairment loss measured as of the date of adoption.
In September 2001, Luminent's President and Chief Executive Officer
resigned. In connection with the resignation, Luminent's President and Chief
Executive Officer received a severance package, as defined in the employment
agreement dated July 2000, providing severance payments of approximately $1.0
million and the immediate vesting of all outstanding MRV and Luminent stock
options held as of the date of resignation. The MRV and Luminent stock options
are exercisable through September 11, 2003. Additionally, an immediate
recognition of deferred compensation expenses of $18.9 million will be recorded
during the third quarter of 2001 as a result of the acceleration of these stock
options.
In September 2001, MRV and Luminent jointly announced that MRV intends to
merge Luminent into MRV through the filing of a short-form merger. All Luminent
shareholders are entitled to receive 0.43 shares of MRV common stock for each
share of Luminent common stock held. Furthermore, outstanding Luminent employee
stock options will convert into options to purchase MRV common stock at the same
ratio. The merger is expected to be completed during the fourth quarter of 2001.
F-58
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LUMINENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $131,778 $ 93,037
Short-term investments.................................... 1,082 81
Accounts receivable, net of allowance of $4,455 at
December 31, 2000, and $6,003 at June 30, 2001......... 21,613 24,628
Inventories............................................... 39,428 29,886
Deferred income taxes..................................... 6,220 9,863
Prepaid and other current assets.......................... 9,106 21,398
-------- ---------
Total current assets................................... 209,227 178,893
Property and equipment, net................................. 51,366 52,129
Goodwill and other intangibles, net......................... 341,540 302,564
Other assets................................................ 3,247 8,039
-------- ---------
Total assets........................................... $605,380 $ 541,625
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,607 $ 2,152
Short-term borrowings..................................... 7,957 12,822
Accounts payable.......................................... 20,021 21,143
Accrued expenses.......................................... 10,337 12,720
Income taxes payable...................................... 6,634 7,049
-------- ---------
Total current liabilities.............................. 47,556 55,886
Long-term debt, net of current portion...................... 9,550 8,596
Other long-term liabilities................................. 779 702
-------- ---------
Total liabilities...................................... 57,885 65,184
Minority interest........................................... 444 329
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 30,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.001 par value, 300,000,000 shares
authorized; 156,000,000 shares issued and
outstanding............................................ 156 156
Additional paid-in capital................................ 635,066 635,066
Accumulated deficit....................................... (29,241) (117,492)
Deferred stock compensation, net.......................... (55,570) (36,659)
Accumulated other comprehensive loss...................... (3,360) (4,959)
-------- ---------
Total stockholders' equity............................. 547,051 476,112
-------- ---------
Total liabilities and shareholders' equity............. $605,380 $ 541,625
======== =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-59
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LUMINENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 2001
-------- --------
Net Sales................................................... $ 43,006 $ 89,344
Cost of sales(1)(2)......................................... 27,801 90,146
-------- --------
Gross Profit........................................... 15,205 (802)
Operating costs and expenses:
Selling, general and administrative(1)(2)................. 8,084 39,528
Research and development(1)(2)............................ 6,624 10,030
Amortization of goodwill and other intangibles............ 9,580 38,976
-------- --------
24,288 88,534
-------- --------
Operating loss......................................... (9,083) (89,336)
Other income, net(2)........................................ 192 2,822
-------- --------
Loss before provision for income taxes and minority
interest.............................................. (8,891) (86,514)
Provision for income taxes.................................. 1,469 1,854
Minority interest........................................... 318 (115)
-------- --------
Net loss............................................... $(10,678) $(88,253)
======== ========
Net loss per share, basic and diluted....................... $ (0.07) $ (0.57)
======== ========
Shares used in per-share calculation, basic and diluted..... 144,000 156,000
======== ========
-------------------------
(1) Includes amounts relating to deferred stock compensation of $744,000 and
$1.2 million presented in "cost of sales", $1.1 million and $15.7 million
presented in "selling, general and administrative", and $1.2 million and 2.0
million and "research and development" for the six months ended June 30,
2000 and 2001, respectively.
(2) Includes one-time charges of $29.3 million, $11.4 million, $501,000 and
$16,000 presented in "cost of sales", "selling, general and administrative",
"research and development" and "other income, net", respectively, for the
six months ended June 30, 2001 to write-down inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other non-recurring items. These charges resulted from the lower demand for
our products and pricing pressures stemming from the continuing downturn in
the communications equipment industry generally and the optical components
sector in particular.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-60
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LUMINENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 2001
-------- --------
Cash Flows from Operating Activities:
Net (loss) income......................................... $(10,678) $(88,253)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization........................ 9,953 43,046
Amortization of deferred stock compensation.......... 2,973 18,911
Impairment loss on property and equipment............ -- 8,904
Minority interest.................................... 332 (115)
Deferred income taxes................................ (350) (3,643)
Changes in operating assets and liabilities
Accounts receivable.................................... 1,281 (3,015)
Inventories............................................ 426 9,542
Prepaid and other current assets....................... (1,879) (12,292)
Accounts payable....................................... 4,225 1,122
Accrued expenses....................................... (1,093) 2,383
Income taxes payable................................... (1,452) 415
-------- --------
Net cash provided by (used in) operating
activities...................................... 3,738 (22,995)
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (1,243) (13,735)
Sale of short-term investments............................ -- 1,001
Other assets.............................................. 1,463 (4,792)
-------- --------
Net cash provided by (used in) investing
activities...................................... 220 (17,526)
Cash flows from financing activities:
Payments on long-term debt................................ (116) (1,409)
Borrowings on long-term debt.............................. -- --
Payments on short-term debt............................... -- (9,077)
Borrowings on short-term debt............................. 3,383 13,942
Net change in other liabilities........................... (77) (77)
Net cash distributions to MRV Communications, Inc. ....... (1,723) --
-------- --------
Net cash provided by financing activities......... 1,467 3,379
Effect of exchange rate on cash and cash equivalents........ (663) (1,599)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 4,762 (38,741)
Cash and cash equivalents, beginning of period.............. 220 131,778
-------- --------
Cash and cash equivalents, end of period.................... $ 4,982 $ 93,037
======== ========
Supplemental Cash Flow Information:
Cash paid for
Income taxes........................................... -- 5,023
Interest............................................... -- 647
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-61
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LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS
Luminent, Inc. ("Luminent" or the "Company") designs, manufactures, and
sells a comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking solutions for the rapidly
growing metropolitan and access segments of the communications network. The
Company's products are designed to meet the increasing bandwidth requirements
between long-haul telecommunication networks and end users. Luminent specializes
in singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.
Luminent was incorporated in Delaware in March 2000 as a wholly owned
subsidiary of MRV Communications, Inc. ("MRV"). Since the completion of
Luminent's initial public offering in November 2000, MRV has owned approximately
92% of Luminent's outstanding common stock.
On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the "Separation Agreement") which became effective as of
September 8, 2000 (the "Separation Date"). MRV transferred to Luminent,
substantially all of the assets and liabilities associated with Luminent's
business.
As of the Separation Date, Luminent began operating independently from MRV.
For periods prior to the Separation Date, the accompanying consolidated
condensed financial statements reflect MRV's historical bases in the assets and
liabilities and the historical results of operations that were transferred to
Luminent. Additionally, the consolidated condensed financial statements include
allocations of certain MRV corporate expenses, including centralized legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other MRV corporate and infrastructure costs.
The expense allocations have been determined on bases that MRV and Luminent
considered to be a reasonable reflection of the utilization of services provided
or the benefit received by Luminent. The allocation methods are based on
relative revenues, head counts or square footage. However, the financial
information included herein may not reflect the consolidated financial position,
operating results, changes in parent company investment and cash flows of
Luminent in the future or what they would have been had Luminent been a
separate, stand-alone entity during the periods presented.
Luminent faces numerous risks related to the fact that it has no history as
an independent company. In addition, Luminent faces risks common to many
technology companies including but not limited to operating in a sector that is
new and characterized by rapid technological change, evolving industry
standards, the need to generate capital to fund operations and uncertainty
regarding market acceptance of its products and products under development.
BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared by the Company, in accordance with accounting principles generally
accepted in the United States for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
F-62
169
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary to present a fair presentation have
been included. The operating results for the six months ended June 30, 2001 are
not necessarily indicative of the results that may be expected for the fiscal
year ended December 31, 2001.
EARNINGS PER SHARE
Basic and diluted earnings (loss) per common share are computed using the
weighted average number of common shares outstanding. All share and per share
amounts have been retroactively restated to give effect to the Company's
144,000-for-one stock split that occurred on July 25, 2000. The weighted average
number of shares used for computation of basic and diluted earnings (loss) per
share were 156,000,000 for June 30, 2001, and 144,000,000 for June 30, 2000. The
13.4 million stock options outstanding and 75,000 warrants outstanding have been
excluded from the diluted computations of loss per share as of June 30, 2001 as
their effect would be anti-dilutive. There were no options or warrants
outstanding as of June 30, 2000.
2. BUSINESS ACQUISITIONS
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of MRV
common stock and options to purchase 680,000 shares of MRV common stock for a
total purchase price of approximately $310.4 million. The issuance price of the
MRV common stock was approximately $53 per share, which was determined based on
the average market price five days before and after the terms were agreed upon.
The options to purchase MRV common stock are exercisable at $3.00 per share,
have an aggregate intrinsic value of $14.1 million at the acquisition date, and
vest over a four-year period. The acquisition is being accounted for using the
purchase method of accounting. The assets and liabilities of the acquired entity
have been "pushed down" to Luminent. The excess purchase price paid over the
fair value of the net identifiable assets acquired of $261.6 million has been
recorded as goodwill and is being amortized on a straight-line basis over 5
years. The deferred compensation is being amortized using the graded vesting
method over 4 years.
On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.2 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have an aggregate intrinsic value of $4.0 million at the
acquisition date, of which $1.3 million is vested, and the remaining vest over a
four-year period. The acquisition is being accounted for using the purchase
method of accounting. The assets and liabilities of the acquired entity have
been "pushed down" to Luminent. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $27.9 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.
On July 21, 2000, MRV completed the acquisition of approximately 99% of the
outstanding capital stock of Optronics International Corp., a Republic of China
corporation. Optronics International is a
F-63
170
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
manufacturer of high temperature semiconductor lasers, transceivers and
detectors for optical networks. Under the terms of the purchase agreement,
Optronics International shareholders received approximately 3.4 million shares
of MRV common stock and options to purchase approximately 800,000 shares of MRV
common stock for a total purchase price of approximately $124.3 million. The
issuance price of the MRV common stock was approximately $30 per share, which
was determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have an aggregate intrinsic value of $20.0 million at the
acquisition date, of which $6.6 million is vested, and the remaining vest over a
four-year period. The acquisition is being accounted for using the purchase
method of accounting. The assets and liabilities of the acquired entity have
been "pushed down" to Luminent. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $99.5 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.
The purchase price of Fiber Optic Communications, Quantum Optech and
Optronics International in the aggregate were allocated as follows (in
thousands, unaudited):
Purchase price.............................................. $420,861
Allocation of purchase price
Net tangible assets....................................... 1,750
Deferred stock compensation............................... 30,150
Goodwill and other intangibles............................ 388,961
The outstanding capital stock of Fiber Optic Communications, Quantum Optech
and Optronics International, purchased by MRV, has been contributed to Luminent.
The results of operations of these acquisitions have been included in Luminent's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of Luminent, Fiber Optic Communications, Quantum Optech and Optronics
International as if the acquisitions had occurred as of January 1, 2000, giving
effect to certain adjustments, including amortization of goodwill and other
intangibles and deferred compensation charges.
SIX MONTHS ENDING
JUNE 30,
--------------------
2000 2001
-------- --------
(UNAUDITED)
Pro forma net sales......................................... $ 55,575 $ 89,344
Pro forma net loss.......................................... $(48,743) $(86,820)
Pro forma basic and diluted net loss per share.............. $ (0.34) $ (0.56)
3. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, JUNE 30,
2000 2001
------------ -----------
(UNAUDITED)
Raw materials............................................... $22,896 $18,130
Work in process............................................. 12,402 8,832
Finished goods.............................................. 4,130 2,924
------- -------
Total inventories......................................... $39,428 $29,886
======= =======
F-64
171
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.
The Company depends on single or limited source suppliers for some of the
key components and materials in its products, which makes Luminent susceptible
to supply shortages or price fluctuations that could adversely affect operating
results. Management believes this will not have a significant impact on
operations.
For the three months ended June 30, 2001, the Company had one customer that
accounted for approximately 13% of net sales. For the six months ended June 30,
2001, the Company had two customers that accounted for approximately 24% of net
sales. As of June 30, 2001, one customer accounted for approximately 25% of
total accounts receivable. Certain geographical area information follows (in
thousands).
Geographical Area Net Sales (in thousands):
SIX MONTHS ENDING
JUNE 30,
------------------
2000 2001
------- -------
(UNAUDITED)
North America............................................... $28,754 $54,223
Asia-Pacific................................................ 7,630 21,092
Europe and others........................................... 6,622 14,029
------- -------
Total net sales........................................... $43,006 $89,344
======= =======
5. RESTRUCTURING AND OTHER ONE-TIME CHARGES
In the second quarter of 2001, the Company's management approved and
implemented a restructuring plan and other actions in order to adjust operations
and administration due to the dramatic slowdown in demand for communications
equipment. During the six months ended June 30, 2001, the Company recorded
restructure and other one-time charges totaling $41.2 million resulting from the
lower demand for our products and pricing pressures stemming from the continuing
downturn in the communications equipment industry generally and the optical
components sector in particular.
The Company's restructuring activities primarily involve employee severance
costs, abandonment and non-utilization of assets and other similar actions.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future benefit
or costs incurred under contractual obligations that existed before the
restructuring plan and will continue with either no future benefit or become a
penalty incurred for termination of the obligation.
Restructuring costs totaling $14.5 million consisting of severance and
outplacement of terminated employees and exit costs are included in the results
of operations. The restructuring activities as described above, results in
approximately 100 layoffs during the six months ended June 30, 2001 and will
result in additional layoffs of approximately 500 personnel, bringing the
Company's total workforce to approximately 1,200 employees. Affected employees
will come from all divisions and areas of the Company. The majority of affected
employees will be in the manufacturing group.
F-65
172
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A summary of the restructuring costs consist of the following:
REMAINING
PROVISION UTILIZED BALANCE
----------- ---------- ----------
Exit costs
Asset impairment............................ $ 8,904,000 $8,904,000 $ --
Closed and abandoned facilities............. 1,108,000 -- 1,108,000
Other commitments........................... 2,402,000 -- 2,402,000
Other....................................... 991,000 -- 991,000
----------- ---------- ----------
13,405,000 8,904,000 4,501,000
Employee severance costs...................... 1,072,000 196,000 876,000
----------- ---------- ----------
$14,477,000 $9,100,000 $5,377,000
=========== ========== ==========
In addition to the costs associated with the restructuring plan, the
Company also recorded a one-time $26.1 million charge to write-down inventory to
realizable value and an additional $598,000 charge to bad debt. Furthermore, the
Company is undertaking a formal review of the goodwill generated in its
acquisitions and it may record additional impairment charges when the review is
completed in the fourth quarter of 2001.
6. SEPARATION FROM MRV COMMUNICATIONS, INC.
For purposes of governing the ongoing relationships between Luminent and
MRV at and after the separation and to provide for an orderly transition,
Luminent and MRV have entered into various agreements. A brief description of
each of the agreements follows.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
MRV and Luminent have entered into a Master Separation Agreement, which
contains key provisions relating to the separation, Luminent's initial funding,
initial public offering and the distribution of Luminent's common stock to MRV's
stockholders. The Master Separation and Distribution Agreement lists the
documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from MRV to Luminent, effective on the
separation date. The Master Separation and Distribution Agreement also contains
conditions that must occur prior to the distribution. The parties also entered
into ongoing covenants that survive the transactions, including covenants to
establish interim service level agreements, exchange information, engage in
certain auditing practices and resolve disputes in particular ways.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The General Assignment and Assumption Agreement identifies the assets and
certain capital stock that MRV has transferred to Luminent and the liabilities
that Luminent has assumed from MRV in the separation. The General Assignment and
Assumption Agreement also describes when and how these transfers and assumptions
occurred. In general, these assets and liabilities were those that appeared in
the consolidated balance sheet as of September 30, 2000.
INTELLECTUAL PROPERTY AGREEMENTS
The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement and the Master Trademark Ownership and License
Agreement collectively are referred to as the Intellectual Property Agreements.
Under the Intellectual Property Agreements, MRV confirmed
F-66
173
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
that Luminent owns or MRV transferred to Luminent certain rights in specified
patents, patent applications, invention disclosures, specified trademarks and
other intellectual property related to Luminent's current business, research and
development efforts.
EMPLOYEE MATTERS AGREEMENT
The Employee Matters Agreement outlines how MRV and Luminent allocated
assets, liabilities and responsibilities relating to current and former
employees of Luminent and their participation in the benefits plans, including
stock plans, that MRV currently sponsors and maintains. The Employee Matters
Agreement also contains provisions describing some of Luminent's employee
benefit and employee stock plans.
All eligible Luminent employees continue to participate in the MRV benefits
plans on comparable terms and conditions to those for MRV employees until the
distribution date or until Luminent establishes benefit plans for its employees,
or elects not to establish comparable plans if it is not legally or financially
practical. Luminent intends to establish its own benefit program no later than
the time of distribution.
Once Luminent establishes it own benefits plans, it may modify or terminate
each plan in accordance with the terms of that plan and its policies. No
Luminent benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan at the time of the distribution. Each Luminent
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding MRV benefits plan, will be taken into account under that Luminent
benefit plan.
Following the date of MRV's distribution of its Luminent common stock to
its stockholders, Luminent will be under no obligation to maintain these plans
in the form in which they were established or at all. The transfer to Luminent
of employees at certain of MRV's international operations, and of certain
employee benefit plans, may not take place until Luminent receives consents or
approvals or has satisfied other applicable requirements.
TAX SHARING AND INDEMNIFICATION AGREEMENT
The Tax Sharing and Indemnification Agreement allocates MRV's and
Luminent's responsibilities and rights for certain tax matters. The agreement
requires Luminent to pay MRV for the incremental tax costs of Luminent's
inclusion in consolidated, combined or unitary tax returns with affiliated
corporations. In determining these incremental costs, the Tax Sharing and
Indemnification Agreement takes into account not only the group's incremental
tax payments to the Internal Revenue Service or other taxing authorities, but
also the incremental use of tax losses of affiliates to offset Luminent's
taxable income, and the incremental use of tax credits of affiliates to offset
the tax on Luminent's income. The Tax Sharing and Indemnification Agreement also
provides for compensation or reimbursement as appropriate to reflect
redeterminations of Luminent's tax liability for periods during which Luminent
joined in filing consolidated, combined or unitary tax returns.
The Tax Sharing and Indemnification Agreement also requires Luminent to
indemnify MRV for certain taxes and similar obligations, including (a) sales
taxes on the sale of products purchased by MRV from Luminent before the
distribution, (b) customs duties or harbor maintenance fees on products exported
or imported by MRV on behalf of Luminent, (c) the additional taxes that would
result if an acquisition of a controlling interest in Luminent's stock after the
distribution causes the distribution not to qualify for tax-free treatment to
MRV, and (d) any taxes resulting from transactions undertaken in preparation for
the distribution.
F-67
174
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Luminent's indemnity obligations include any interest penalties on taxes,
duties or fees for which Luminent must indemnify MRV.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a deficiency in the group's
federal income tax liability for a period during which Luminent was a member of
the group even if the Tax Sharing and Indemnification Agreement allocates that
liability to MRV or another member.
MASTER TRANSITIONAL SERVICES AGREEMENT
The Master Transitional Service Agreement governs the individual
transitional services as requested by Luminent and provided by MRV, on an
interim basis, for one year from the date of separation, unless extended for
specific services or otherwise indicated in the agreement. The services include
data processing and telecommunications services, such as voice
telecommunications and data transmission, and information technology support
services, for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement, and other
administrative functions. Specified charges for such services are generally
intended to allow the providing company to recover the direct and indirect costs
of providing the services. The Master Transitional Services Agreement also will
cover the provision of certain additional transitional services identified from
time to time after the Separation Date that were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Master Separation and Distribution
Agreement, so long as the provision of such services would not significantly
disrupt MRV's operations or significantly increase the scope of its
responsibility under the agreement.
In addition, the Master Transitional Services Agreement will provide for
the replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
REAL ESTATE MATTERS AGREEMENT
The Real Estate Matters Agreement addresses real estate matters relating to
certain MRV leased and owned properties that MRV will transfer to or share with
Luminent. The Real Estate Matters Agreement describes the manner in which MRV
will transfer to or share with Luminent various leased and owned properties. The
Real Estate Matters Agreement provides that Luminent will be required to accept
the transfer of all sites allocated to Luminent, even if a site has been damaged
by a casualty before the separation date. The Real Estate Matters Agreement also
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorney's fees will be paid by MRV.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
Effective as of the separation date, subject to specified exceptions,
Luminent and MRV released the other from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The Indemnification and Insurance Matters
Agreement also contains provisions governing indemnification. In general,
Luminent and MRV will each indemnify the other from all liabilities arising from
their respective businesses or contracts, as well as liabilities arising from a
breach of the Master Separation and Distribution Agreement or any ancillary
agreement. In addition, MRV and Luminent will each indemnify the other against
liability for specified environmental conditions. Luminent will reimburse MRV
for the cost of any insurance coverage from the separation date to the
distribution date.
F-68
175
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AstroTerra Corporation:
We have audited the accompanying balance sheets of AstroTerra Corporation
(a California corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. 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 in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of AstroTerra Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
San Diego, California
August 24, 2000
F-69
176
ASTROTERRA CORPORATION
BALANCE SHEETS
DECEMBER 31,
------------------------- JUNE 30,
1998 1999 2000
---------- ----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 699,567 $ 1,192,250 $ 113,141
Accounts receivable................................ 429,266 559,114 805,394
Inventories........................................ 227,588 582,027 1,416,410
Prepaid expenses and other......................... 10,137 64,391 28,641
Refundable and deferred income taxes............... 37,048 85,567 107,067
---------- ----------- -----------
Total current assets............................ 1,403,606 2,483,349 2,470,653
Property and equipment, net.......................... 57,000 300,994 453,875
Other assets......................................... 1,000 56,478 51,879
---------- ----------- -----------
Total assets.................................... $1,461,606 $ 2,840,821 $ 2,976,407
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 21,012 $ 221,847 $ 234,266
Accrued expenses................................... 286,000 323,287 300,909
Income taxes payable............................... 71,981 -- --
Deferred revenues.................................. 17,239 87,376 298,898
Line of credit..................................... -- -- 136,000
Non-revolving credit facility...................... -- -- 182,000
---------- ----------- -----------
Total current liabilities....................... 396,232 632,510 1,152,073
---------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, 20,000,000 shares authorized;
10,000,000, 10,526,316 and 10,526,316 issued and
outstanding, respectively....................... 647,994 1,689,636 1,689,636
Additional paid-in capital......................... 318,948 3,387,986 10,851,535
Notes receivable from stockholders................. (30,000) (4,020) --
Deferred compensation.............................. -- (1,602,517) (6,678,402)
Retained earnings (accumulated deficit)............ 128,432 (1,262,774) (4,038,435)
---------- ----------- -----------
Total stockholders' equity...................... 1,065,374 2,208,311 1,824,334
---------- ----------- -----------
Total liabilities and stockholders' equity...... $1,461,606 $ 2,840,821 $ 2,976,407
========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-70
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ASTROTERRA CORPORATION
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------- --------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues:
Products................. $ 410,481 $ 842,901 $ 1,684,825 $ 630,047 $ 1,733,257
Contracts................ 2,441,665 3,284,976 2,966,051 1,331,444 818,737
---------- ---------- ----------- ---------- -----------
2,852,146 4,127,877 4,650,876 1,961,491 2,551,994
---------- ---------- ----------- ---------- -----------
Cost of Revenues:
Products................. 375,749 562,913 1,100,516 423,342 1,317,680
Contracts................ 1,905,020 2,758,922 3,053,468 1,281,209 1,075,924
---------- ---------- ----------- ---------- -----------
2,280,769 3,321,835 4,153,984 1,704,551 2,393,604
---------- ---------- ----------- ---------- -----------
Gross margin.......... 571,377 806,042 496,892 256,940 158,390
---------- ---------- ----------- ---------- -----------
Operating Expenses:
Selling, general and
administrative........ 222,633 808,450 1,698,027 540,871 1,971,382
Research and
development........... 246,884 108,429 164,566 17,876 968,524
---------- ---------- ----------- ---------- -----------
469,517 916,879 1,862,593 558,747 2,939,906
---------- ---------- ----------- ---------- -----------
Income (loss) from
operations.......... 101,860 (110,837) (1,365,701) (301,807) (2,781,516)
Interest Income............ 534 430 5,835 8,246 12,766
Interest Expense........... (1,462) (3,247) (259) (152) (6,911)
---------- ---------- ----------- ---------- -----------
Income (loss) before
provision for income
taxes............... 100,932 (113,654) (1,360,125) (293,713) (2,775,661)
Provision for Income
Taxes.................... 36,000 98,056 31,081 89,590 --
---------- ---------- ----------- ---------- -----------
Net Income (loss).......... $ 64,932 $ (211,710) $(1,391,206) $ (383,303) $(2,775,661)
========== ========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
F-71
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ASTROTERRA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
NOTES RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS TOTAL
----------------------- PAID-IN FROM DEFERRED (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
---------- ---------- ----------- ------------ ------------ ------------ -------------
Balance, December 31, 1996... 7,500,000 $ 76,000 $ -- $ -- $ -- $ 275,210 $ 351,210
Net income................. -- -- -- -- -- 64,932 64,932
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1997... 7,500,000 76,000 -- -- -- 340,142 416,142
Repurchases of common stock
from employees........... (500,000) (5,000) -- -- -- -- (5,000)
Sales of common stock to
employees................ 2,300,000 76,994 -- (30,000) -- -- 46,994
Sale of common stock to
investor................. 700,000 500,000 -- -- -- -- 500,000
Compensation expense for
stock issued to
employees................ -- -- 318,948 -- -- -- 318,948
Net loss................... -- -- -- -- -- (211,710) (211,710)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1998... 10,000,000 647,994 318,948 (30,000) -- 128,432 1,065,374
Repurchase of common stock
from employees........... (982,046) (76,205) -- 30,000 -- -- (46,205)
Sales of common stock to
employees................ 982,046 117,847 -- (4,020) -- -- 113,827
Sale of common stock to
investor................. 526,316 1,000,000 -- -- -- -- 1,000,000
Deferred compensation for
stock issued to
employees................ -- -- 3,069,038 -- (3,069,038) -- --
Amortization of deferred
compensation............. -- -- -- -- 1,466,521 -- 1,466,521
Net loss................... -- -- -- -- -- (1,391,206) (1,391,206)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1999... 10,526,316 1,689,636 3,387,986 (4,020) (1,602,517) (1,262,774) 2,208,311
The following information
is unaudited:
Repurchase of common stock
from employees........... -- -- -- 4,020 -- -- 4,020
Deferred compensation for
stock issued to
employees................ -- -- 7,463,549 -- (7,463,549) --
Amortization of deferred
compensation............. -- -- -- -- 2,387,664 -- 2,387,664
Net loss................... -- -- -- -- -- (2,775,661) (2,775,661)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, June 30, 2000
(unaudited)................ 10,526,316 $1,689,636 $10,851,535 $ -- $(6,678,402) $(4,038,435) $ 1,824,334
========== ========== =========== ======== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-72
179
ASTROTERRA CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- ---------------------------
1997 1998 1999 1999 2000
--------- --------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss).............................. $ 64,932 $(211,710) $(1,391,206) $(383,303) $(2,775,661)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 47,825 45,929 83,284 42,619 129,506
Deferred income taxes........................ -- (3,925) (21,521) (22,245) --
Non-cash employee stock compensation......... -- 318,948 1,466,521 463,725 2,387,664
Changes in assets and liabilities:
Accounts receivable.......................... 302,165 (301,519) (129,848) (400,872) (246,280)
Inventories.................................. (373,023) 145,435 (354,439) (255,393) (834,383)
Prepaid expenses and other................... (519) (9,576) (54,254) 9,716 35,750
Refundable income taxes...................... -- -- (26,998) -- (21,500)
Other assets................................. -- (1,000) (55,478) (17,115) (9,545)
Accounts payable............................. 23,346 (48,478) 200,835 112,395 12,419
Accrued expenses............................. 72,661 48,643 37,287 (124,477) (22,378)
Income taxes payable......................... (16,601) 69,981 (71,981) 43,834 --
Deferred revenues............................ -- 17,239 70,137 (10,548) 211,521
--------- --------- ----------- --------- -----------
Net cash provided by (used in) operating
activities............................ 120,786 69,967 (247,661) (541,664) (1,132,887)
--------- --------- ----------- --------- -----------
Net cash used in investing activities:
Purchases of property and equipment............ (79,269) (39,219) (327,278) (60,615) (268,242)
--------- --------- ----------- --------- -----------
Cash flows from financing activities:
Net (repayments) borrowings on line of
credit....................................... 127,292 (127,292) -- -- 136,000
Borrowings on non-revolving credit facility.... -- -- -- -- 182,000
Proceeds from issuances of common stock........ -- 546,994 1,113,827 -- --
Payments for repurchases of common stock....... -- (5,000) (46,205) (46,205) 4,020
--------- --------- ----------- --------- -----------
Net cash provided by (used in) financing
activities............................ 127,292 414,702 1,067,622 (46,205) 322,020
--------- --------- ----------- --------- -----------
Net increase (decrease) in cash and cash
equivalents.................................... 168,809 445,450 492,683 (648,484) (1,079,109)
Cash and cash equivalents, beginning of year..... 85,308 254,117 699,567 699,567 1,192,250
--------- --------- ----------- --------- -----------
Cash and cash equivalents, end of year........... $ 254,117 $ 699,567 $ 1,192,250 $ 51,083 $ 113,141
========= ========= =========== ========= ===========
Non-cash activities:
Common stock issued for notes receivable from
stockholders................................. $ -- $ 30,000 $ 4,020 $ -- $ --
========= ========= =========== ========= ===========
Repurchase of common stock from employee in
exchange for notes receivable................ $ -- $ -- $ 30,000 $ 30,000 $ --
========= ========= =========== ========= ===========
Deferred compensation for stock issued to
employees.................................... $ -- $ -- $ 3,069,038 $ -- $ 7,463,549
========= ========= =========== ========= ===========
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest..................................... $ 1,462 $ 3,247 $ 259 $ 152 $ 6,911
========= ========= =========== ========= ===========
Income taxes................................. $ 35,298 $ 32,000 $ 83,525 $ 60,742 $ 16,000
========= ========= =========== ========= ===========
The accompanying notes are an integral part of these financial statements.
F-73
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ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
1. LINE OF BUSINESS AND SALE OF COMPANY
AstroTerra Corporation (the "Company") develops and manufactures free-space
optical laser communication systems to connect data and telecommunications
networks. The Company's optical communication systems are practical high-speed
wireless alternatives to fiber optic cable and microwave systems. The Company
also performs contract research and development for the U.S. government and
commercial customers.
During July 2000, the Company entered into a stock purchase agreement with
MRV Communications, Inc. ("MRV"), whereby MRV acquired the entire share capital
of the Company in an exchange for shares of MRV common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements for the interim periods
included herein are unaudited. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. The results for the interim periods presented are not
necessarily indicative of results to be expected for a full year.
REVENUE RECOGNITION
Product revenues are recognized upon shipment and transfer of title and
risk of loss to the customer.
Research and development contract revenues are recognized using the
percentage-of-completion method on a cost-to-cost basis. Contract costs include
all direct material and labor costs, and those indirect costs related to
contract performance. If a loss is projected on a contract, the entire estimated
loss is charged to operations during the period that the loss becomes
determinable.
Payments received from customers in advance of shipment of products or
performance of contract services are deferred and recognized upon completion of
the related obligations.
F-74
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ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less and consist primarily of money
market accounts.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method and includes materials, direct labor
and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using an
accelerated method over the estimated useful lives of the assets, ranging from 3
to 5 years. Maintenance and repairs are charged to expense as incurred, and the
costs of additions and betterments that increase the useful lives of the related
assets are capitalized. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is reflected in operations.
LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition is less than the carrying
amount of the asset, an impairment loss is recognized. In the opinion of
management, there have been no events or changes in circumstances that indicate
impairment of the Company's long-lived assets.
INCOME TAXES
Deferred income tax assets or liabilities are recognized based on the
temporary differences between financial statement and income tax bases of assets
and liabilities using enacted statutory tax rates in effect for the years in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short term nature.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." The Company has elected, as permitted under SFAS No.
123, to continue to account for stock-based employee compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25 and to
F-75
182
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
disclose pro forma net income (loss) as if stock-based employee compensation
were computed using the fair value method under SFAS No. 123. Transactions with
other than employees, in which goods or services are the consideration received
for the issuance of equity instruments, are accounted for on a fair value basis
under SFAS No. 123. For the years ended December 31, 1997, 1998 and 1999 and for
the six months ended June 30, 1999, the differences between pro forma net income
(loss) in accordance with SFAS No. 123 and net income (loss) as reported in the
accompanying statements of operations was not material. There were no additional
shares issued to employees during the six months ended June 30, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS No. 133 was amended by SFAS No. 137, which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations as the Company has not
been engaged in the use of derivative instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101, as amended, must be adopted no later than the fourth
quarter of the fiscal year beginning after December 15, 1999. The Company does
not anticipate the adoption of SAB No. 101 to have a material impact on the
Company's financial position or results of operations.
3. COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS
Accounts receivable consists of the following:
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
Billed receivables................................ $366,730 $415,905 $652,193
Costs incurred in excess of billings on
uncompleted contracts........................... 62,536 143,209 153,201
-------- -------- --------
$429,266 $559,114 $805,394
======== ======== ========
Inventories consist of the following:
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
Raw materials..................................... $ 27,774 $204,173 $ 438,275
Work in process................................... 102,965 236,938 657,612
Finished goods.................................... 96,849 140,916 320,523
-------- -------- ----------
$227,588 $582,027 $1,416,410
======== ======== ==========
F-76
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ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Property and equipment consists of the following:
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
Machinery and equipment......................... $ 230,415 $ 384,964 $ 621,934
Computers and software.......................... 21,780 121,169 121,169
Furniture and fixtures.......................... 4,387 18,646 49,918
--------- --------- ---------
256,582 524,779 793,021
Less: accumulated depreciation.................. (199,582) (223,785) (339,146)
--------- --------- ---------
$ 57,000 $ 300,994 $ 453,875
========= ========= =========
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
totaled $47,825, $45,929 and $83,284 respectively. Depreciation expense for the
six months ended June 30, 1999 and 2000 totaled $42,619 and $115,361
respectively.
Accrued expenses consist of the following:
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
Compensation and related taxes..................... $286,000 $253,012 $257,318
Warranty reserve................................... -- 33,500 33,500
Other.............................................. -- 36,775 10,091
-------- -------- --------
$286,000 $323,287 $300,909
======== ======== ========
4. INCOME TAXES
Provision for income taxes consists of the following:
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- -------- --------
Current:
Federal........................................... $25,227 $ 79,341 $ 39,628
State............................................. 10,773 22,640 12,974
------- -------- --------
36,000 101,981 52,602
------- -------- --------
Deferred:
Federal........................................... -- (3,336) (18,293)
State............................................. -- (589) (3,228)
------- -------- --------
-- (3,925) (21,521)
------- -------- --------
Provision for income taxes.......................... $36,000 $ 98,056 $ 31,081
======= ======== ========
Realization of deferred income taxes is dependent on generating sufficient
taxable income during the periods in which temporary differences will reverse.
Although realization is not assured, management believes it is more likely than
not that the deferred income taxes will be realized. The amount of deferred
income taxes considered realizable, however, could be adjusted in the near term
if estimates of future taxable income during the reversal periods are revised.
F-77
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ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Deferred income taxes consist of the following:
DECEMBER 31,
------------------
1998 1999
------- -------
Accrued expenses............................................ $34,326 $58,569
Other....................................................... 2,722 --
------- -------
Deferred income taxes....................................... $37,048 $58,569
======= =======
Provision for income taxes reconciles to the expected provision (benefit)
for income taxes based on the federal statutory tax rate as follows:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
------- -------- ---------
Expected federal income taxes...................... $36,987 $(41,313) $(462,443)
State income taxes, net of federal benefit......... 6,527 (7,291) (81,608)
Employee stock compensation........................ -- 127,579 586,608
Other.............................................. (7,514) 19,081 (11,476)
------- -------- ---------
Provision for income taxes....................... $36,000 $ 98,056 $ 31,081
======= ======== =========
5. CREDIT FACILITIES
In May 1998, the Company obtained a $300,000 revolving line of credit with
a bank, bearing interest at the bank's prime rate plus 1.5% (10.0% at December
31, 1999), collateralized by substantially all assets of the Company and
personally guaranteed by three majority stockholders of the Company. No amounts
were outstanding under the line of credit at December 31, 1999 and 1998. The
line of credit was terminated by the Company during February 2000.
In February 2000, the Company entered into a $1,300,000 credit agreement
with a bank, consisting of a $1,000,000 revolving line of credit and a $300,000
non-revolving credit facility for equipment purchases. The credit agreement
bears interest at variable rates based on either the banks' reference rate plus
0.5% or LIBOR plus 2.75%, as elected by borrower, is secured by substantially
all assets of the Company, and is subject to certain financial and non-financial
covenants. As of June 30, 2000, the Company had $136,000 outstanding under the
revolving line of credit and $182,000 outstanding under the non-revolving credit
facility for equipment purchases. The credit agreement is collateralized by the
assets of the Company. The credit agreement contains certain covenants, which
among other things requires the Company to maintain a minimum effective tangible
net worth, certain financial ratios and no consecutive losses. As of June 30,
2000, the Company was in default with certain financial covenants; therefore,
the components of the credit agreement are classified as short-term. The credit
agreement was terminated by the Company during August 2000 and all amounts
outstanding were repaid.
6. STOCKHOLDERS' EQUITY
CAPITAL STRUCTURE
The Company is authorized to issue up to 20,000,000 shares of common stock,
no par value. Common shares are voting shares with equal dividend participation,
when and if declared, and equal rights in the event of liquidation.
F-78
185
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
EMPLOYEE STOCK PURCHASE PLANS
In August 1997, the Company implemented a book value employee stock
purchase plan (the "Plan") and determined that 2,000,000 shares would be made
available for purchases. The Plan allowed each full time employee with at least
one year of service to purchase up to 2,000 shares of common stock at book value
per share, as determined by the board of directors. Additionally, the board of
directors determined that an additional 500,000 shares of common stock would be
made available for purchases by key employees on a discretionary basis.
Under the Plan, the Company retains the option to repurchase shares sold to
employees upon their termination. If an employee leaves the Company within a
year after purchasing shares, the Company's repurchase price per share is the
original issuance price. If an employee leaves the Company more than one year
after purchasing shares, the Company's repurchase price per share is the greater
of the original issuance price or current book value.
Discretionary shares sold to key employees carry terms determined by the
board of directors, and generally allow for employee vesting (elimination of the
Company repurchase option) over a period of four years. Further, upon a
substantial change in control of the Company or employee termination without
cause, the Company repurchase option terminates.
Stock issued to employees under the above plans are accounted for using the
variable method of accounting in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," Emerging Issues Task
Force Release ("EITF") No. 87-23, "Book Value Stock Purchase Plans" and EITF No.
88-6 "Book Value Stock Plans in an Initial Public Offering." Accordingly,
outstanding shares under the book value purchase plan are marked to book value
per share during each reporting period. Outstanding shares issued to employees
on a discretionary basis with vesting provisions (elimination of the Company's
repurchase option) are marked to fair value during each reporting period. At the
point when restrictions related to employee shares lapse, any unamortized
deferred compensation expenses are recognized in operations.
Compensation expense for shares issued to employees during fiscal 1998,
1999 and the six months ended June 30, 1999 and 2000 totaled $318,948,
$1,466,521, $463,725 and $2,387,664 respectively, and is included in the
accompanying statements of operations. As of December 31, 1999 and June 30,
2000, deferred compensation included as a component of stockholders' equity
totals $1,602,517 and $6,678,402, respectively, and is expected to be amortized
in full during fiscal year 2000 as a result of the acquisition of the Company by
MRV (see Note 1).
F-79
186
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Stock based compensation expense has been included in the accompanying
statement of operations as follows:
DECEMBER 31, JUNE 30,
---------------------- --------------------------
1998 1999 1999 2000
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Allocation of compensation expense:
Cost of revenues:
Products................................. $ 3,844 $ 233,707 $ 73,900 $ 380,502
Contracts................................ 40,144 574,645 188,865 518,904
Operating expenses:
Selling, general and administrative...... 273,382 627,199 198,325 1,021,154
Research and development................. 1,578 30,970 2,635 467,104
-------- ---------- -------- ----------
Total stock-based compensation
expense............................. $318,948 $1,466,521 $463,725 $2,387,664
======== ========== ======== ==========
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases its facilities and certain equipment under operating
leases expiring at various dates through April 2002. The Company has the right
to terminate the lease with at least 120 days prior written notice and has an
option to renew the lease for an additional two years at a rate increase of ten
percent. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$56,300, $81,089 and $127,746, respectively. Rent expense for the six months
ended June 30, 1999 and 2000 was $58,314 and $137,398, respectively.
Future minimum lease payments under operating leases are as follows:
YEAR ENDING
DECEMBER 31:
------------
2000...................................................... $256,120
2001...................................................... 246,352
2002...................................................... 36,063
--------
$538,535
========
LEGAL MATTERS
In the ordinary course of business, the Company is subject to claims and,
from time to time, is named in various legal proceedings. In the opinion of
management, the amount of ultimate liability, if any, with respect to any of
these matters will not have a material adverse affect on the financial position
or results of operations of the Company.
8. RETIREMENT SAVINGS PLAN
The Company maintains a 401(k) retirement savings plan that covers
substantially all of its employees. Eligible employees may contribute to the
plan subject to certain Internal Revenue Service limitations. Company
contributions to the plan are discretionary. During fiscal 1997, 1998 and 1999,
the Company contributed $61,723, $82,823 and $77,907, respectively. For the six
months ended June 30, 1999 and 2000, the Company contributed $22,020 and $67,323
respectively.
F-80
187
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
9. CONCENTRATIONS OF RISK
During fiscal 1997, 1998 and 1999, the Company had 7, 7 and 6 contracts,
respectively, with government agencies that accounted for 98%, 99% and 69% of
contract revenues, respectively. Additionally, the Company had a contract with a
commercial customer that accounted for 31% of contract revenues in fiscal 1999.
During both of the six month periods ended June 30, 1999 and 2000, the Company
had 5 contracts with government agencies that accounted for 73% and 100% of
contract revenues, respectively. Additionally, the Company had a commercial
customer that accounted for 27% of contract revenues for the six months ended
June 30, 1999.
During fiscal 1997, 1998 and 1999, 1, 3 and 1 customers represented 37%,
34% and 10% of product revenues, respectively. During the six months ended June
30, 1999 and 2000, 3 and 1 customers represented 39% and 58% of product
revenues, respectively.
Government agency contracts accounted for 43% and 63% of accounts
receivable at December 31, 1998 and 1999, respectively, and 31% of accounts
receivable at June 30, 2000. One commercial customer accounted for 15% of
accounts receivable at December 31, 1998, and another commercial customer
accounted for 48% of accounts receivable at June 30, 2000.
10. SEGMENT REPORTING
The Company operates in one industry segment, which includes developing,
manufacturing and selling free-space optical laser communications systems to
connect data and telecommunication networks. The Company derives revenues in
this segment from both product shipments and research and development contracts.
The accompanying statements of operations separately reflect the revenues and
cost of revenues for products and research and development contracts.
F-81
188
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
FOCI Fiber Optic Communications, Inc.
We have audited the accompanying consolidated balance sheets of FOCI Fiber
Optic Communications, Inc. as of December 31, 1997, 1998 and 1999, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for the years ended December 31, 1997, 1998
and 1999. 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 in accordance with auditing standards generally
accepted in the United States of America. 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 FOCI Fiber
Optic Communications, Inc. at December 31, 1997, 1998 and 1999 and the results
of its operations and its cash flows for the years ended December 31, 1997, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States of America.
T N Soong & Co
A Member Firm of Andersen Worldwide, SC
Taipei, Taiwan, the Republic of China
June 12, 2000
F-82
189
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
DECEMBER 31,
-----------------------------
NOTES 1997 1998 1999
--------- ------- ------- -------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets
Cash...................................................... 2C $ 532 $ 2,236 $ 3,344
Marketable securities..................................... 2D, 15 911 1,527 174
Notes and accounts receivable -- net...................... 2C, 3, 14 8,119 9,361 10,348
Inventories............................................... 2E, 4 2,787 8,504 11,541
Prepaid expenses and other current assets................. 15 1,252 3,217 4,444
------- ------- -------
Total Current Assets.................................... 13,601 24,845 29,851
------- ------- -------
Long-Term Stock Investments................................. 2F, 5 -- 40 31
------- ------- -------
Properties -- Net........................................... 2G, 6, 15 9,231 15,723 25,559
------- ------- -------
Intangible Assets........................................... 2I
Patent.................................................... 149 107 66
Land occupancy rights..................................... -- 270 502
------- ------- -------
Total Intangible Assets................................. 149 377 568
------- ------- -------
Other Assets
Deferred charges -- net................................... 2J -- 197 265
Deferred income tax....................................... 2N, 13 490 368 331
Refundable deposits....................................... 28 100 85
Others.................................................... 10 1,029 789
------- ------- -------
Total Other Assets...................................... 528 1,694 1,470
------- ------- -------
Total Assets............................................ $23,509 $42,679 $57,479
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term bank loans..................................... 7 $ 2,099 $ 2,686 $ 8,700
Commercial papers......................................... 8 -- -- 1,659
Notes payable............................................. 867 1,607 1,225
Accounts payable.......................................... 304 940 1,787
Income tax payable........................................ 2N, 13 25 185 188
Current portion of long-term debts........................ 9, 15 317 641 429
Accrued expenses and other current liabilities............ 13 1,337 1,579 2,195
------- ------- -------
Total Current Liabilities............................... 4,949 7,638 16,183
------- ------- -------
Long-Term Debts -- Net of Current Portion................... 9, 15 2,473 1,892 7,429
------- ------- -------
Other Liabilities
Accrued pension cost...................................... 2M, 12 44 66 70
Others.................................................... 254 313 373
------- ------- -------
Total Other Liabilities................................. 298 379 443
------- ------- -------
Total Liabilities....................................... 7,720 9,909 24,055
------- ------- -------
Shareholders' Equity........................................ 10
Capital stock, $0.3 par value; Authorized -- 35,000
thousand shares in 1997, 110,000 thousand shares in 1998
and 1999; Issued -- 35,000 thousand shares in 1997,
56,720 thousand shares in 1998 and 68,984 thousand
shares in 1999.......................................... 12,975 19,787 23,891
Capital surplus........................................... 5,456 13,358 11,592
Retained earnings:
Legal reserve............................................. -- 62 267
Unappropriated earnings................................... 426 1,871 (755)
Cumulative translation adjustment......................... (3,068) (2,308) (1,571)
------- ------- -------
Total Shareholders' Equity.............................. 15,789 32,770 33,424
------- ------- -------
Total Liabilities and Shareholders' Equity.............. $23,509 $42,679 $57,479
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-83
190
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
YEARS ENDED DECEMBER 31,
--------------------------------------
NOTES 1997 1998 1999
------ ---------- ---------- ----------
(IN THOUSAND U.S. DOLLARS EXCEPT PER
SHARE AMOUNTS)
Sales
Products, net...................................... $ 7,506 $16,939 $19,158
Engineering contracts.............................. -- 3,442 600
------- ------- -------
Net Sales............................................ 7,506 20,381 19,758
Cost of Sales
Cost of goods sold................................. 2,688 12,274 12,739
Cost of engineering contracts...................... -- 1,115 668
------- ------- -------
2,688 13,389 13,407
------- ------- -------
Gross Profit......................................... 4,818 6,992 6,351
------- ------- -------
Operating Expenses
Research and development........................... 2L 895 871 1,256
General and administrative......................... 1,506 3,358 3,321
Marketing.......................................... 1,067 2,132 1,692
------- ------- -------
Total Operating Expenses........................ 3,468 6,361 6,269
------- ------- -------
Income from Operations............................... 1,350 631 82
------- ------- -------
Non-Operating Income (Expenses)
Foreign exchange gain (losses) -- net.............. 2P 1,003 (403) (599)
Interest -- net.................................... (9) (63) (322)
Loss on disposal of properties -- net.............. (71) (19) (65)
Long-term investment permanent loss................ 2F -- (57) (9)
Unrealized holdings gains (loss) of market
securities...................................... 2D (437) 211 170
Loss on sale of marketable securities.............. (421) (106) --
Other -- net....................................... 30 (132) 114
------- ------- -------
Total Non-Operating Income (Expenses)........... 95 (569) (711)
------- ------- -------
Income (Loss) Before Income Tax and Minority
Interests.......................................... 1,445 62 (629)
Income Tax Benefit (Expense)......................... 2N, 13 174 129 (68)
------- ------- -------
Net Income Before Minority Loss...................... 1,619 191 (697)
Minority Loss........................................ 15 1,316 36
------- ------- -------
Net Income (Loss).................................... $ 1,634 $ 1,507 $ (661)
======= ======= =======
Other Comprehensive Income
Translation adjustment............................... $(3,068) $ 760 $ 737
------- ------- -------
Comprehensive Income (Loss).......................... 2S $(1,434) $ 2,267 $ 76
======= ======= =======
Earnings (Loss) Per Share --
Retroactively adjusted outstanding common stock
44,665 thousand shares in 1997 and 60,213
thousand shares in 1998 and 68,447 thousand
shares in 1999.................................. $ 0.04 $ 0.03 $ (0.01)
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-84
191
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
CAPITAL SURPLUS RETAINED EARNINGS
CAPITAL STOCK ISSUED ------------------------------- (NOTE 10)
------------------------------------------- GAIN ON ------------------------
LONG- DISPOSAL OF UNAPPROPRIATED
SHARES PAID-IN TERM PROPERTIES LEGAL EARNINGS
(THOUSAND) AMOUNT CAPITAL INVESTMENT (2G) TOTAL RESERVE (DEFICIT) TOTAL
---------- ------- ------- ---------- ----------- ------- ------- -------------- -------
(IN THOUSAND U.S. DOLLARS)
BALANCE, JANUARY 1,
1997................. 19,980 $ 7,519 $ -- $-- $-- $ -- $ -- $(1,208) $(1,208)
Issuance of capital
stock for cash....... 15,020 5,456 5,456 -- -- 5,456 -- -- --
Net income for 1997.... -- -- -- -- -- -- -- 1,634 1,634
Translation
adjustment........... -- -- -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ---- ------- -------
BALANCE, DECEMBER 31,
1997................. 35,000 12,975 5,456 -- -- 5,456 -- 426 426
Issuance of capital
stock for cash....... 16,470 4,905 9,809 -- -- 9,809 -- -- --
Appropriations of 1997
earnings:
Legal reserve.......... -- -- -- -- -- -- 62 (62) --
Capital surplus
transferred into
capital.............. 5,250 1,907 (1,907) -- -- (1,907) -- -- --
Net income for 1998.... -- -- -- -- -- -- -- 1,507 1,507
Translation
adjustment........... -- -- -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ---- ------- -------
BALANCE, DECEMBER 31,
1998................. 56,720 19,787 13,358 -- -- 13,358 62 1,871 1,933
Appropriations of 1998
earnings:
Legal reserve.......... -- -- -- -- -- -- 205 (205) --
Stock
dividends -- 10%..... 5,672 1,759 -- -- -- -- -- (1,759) (1,759)
Capital surplus
transferred into
capital.............. 5,672 2,060 (2,060) -- -- (2,060) -- -- --
Stocks issued as
payment of bonus to
employees............ 920 285 285 -- -- 285 -- -- --
Net loss for 1999...... -- -- -- -- -- -- -- (661) (661)
Gain on disposal of
properties........... -- -- -- -- 1 1 -- (1) (1)
Adjustment of capital
reserve due to change
in equity in
long-term
investments.......... -- -- -- 8 -- 8 -- -- --
Translation
adjustments.......... -- -- -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ---- ------- -------
BALANCE, DECEMBER 31,
1999................. 68,984 $23,891 $11,583 $8 $1 $11,592 $267 $ (755) $ (488)
====== ======= ======= == == ======= ==== ======= =======
CUMULATIVE
TRANSLATION TOTAL
ADJUSTMENT SHAREHOLDERS'
(NOTE 2Q) EQUITY
----------- -------------
(IN THOUSAND U.S. DOLLARS)
BALANCE, JANUARY 1,
1997................. $ -- $ 6,311
Issuance of capital
stock for cash....... -- 10,912
Net income for 1997.... -- 1,634
Translation
adjustment........... (3,068) (3,068)
------- -------
BALANCE, DECEMBER 31,
1997................. (3,068) 15,789
Issuance of capital
stock for cash....... -- 14,714
Appropriations of 1997
earnings:
Legal reserve.......... -- --
Capital surplus
transferred into
capital.............. -- --
Net income for 1998.... -- 1,507
Translation
adjustment........... 760 760
------- -------
BALANCE, DECEMBER 31,
1998................. (2,308) 32,770
Appropriations of 1998
earnings:
Legal reserve.......... -- --
Stock
dividends -- 10%..... -- --
Capital surplus
transferred into
capital.............. -- --
Stocks issued as
payment of bonus to
employees............ -- 570
Net loss for 1999...... -- (661)
Gain on disposal of
properties........... -- --
Adjustment of capital
reserve due to change
in equity in
long-term
investments.......... -- 8
Translation
adjustments.......... 737 737
------- -------
BALANCE, DECEMBER 31,
1999................. $(1,571) $33,424
======= =======
The accompanying notes are an integral part of the financial statements.
F-85
192
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- ------- --------
(IN THOUSAND U.S. DOLLARS)
Operating Activities
Net income (loss)......................................... $ 1,634 $ 1,507 $ (661)
Adjustments to reconcile net income (loss) to net cash
provided used in operating activities:
Depreciation and amortization........................... 697 972 1,475
Loss on disposal of properties.......................... 71 19 65
Long-term investment permanent loss..................... -- 57 9
Accrued pension costs................................... (4) 22 4
Unrealized holding losses (gains) on marketable
securities............................................. 437 (211) (170)
Minority interest in net income of consolidated
subsidiaries........................................... (15) (1,316) (36)
Deferred income tax..................................... (485) 122 37
Loss on sale of marketable securities................... 421 106 --
Changes in operating assets and liabilities
Notes and accounts receivable......................... (5,483) (1,242) (987)
Inventories........................................... (1,354) (5,717) (3,037)
Prepaid expenses and other current assets............. (237) (2,157) (1,227)
Notes and accounts payable............................ (189) 1,376 465
Accrued expenses and other current liabilities........ 907 402 619
------- ------- --------
Net Cash Used in Operating Activities............... (3,600) (6,060) (3,444)
------- ------- --------
Investing Activities
Acquisitions of:
Marketable securities................................... (1,769) (511) 1,523
Long-term stock investments............................. -- (40) --
Properties.............................................. (6,316) (7,175) (11,388)
Proceeds from disposals of:
Properties.............................................. 17 190 56
Long-term stock investment.............................. -- 135 --
Increase in deferred charges.............................. -- (459) (541)
Decrease (increase) in refundable deposits................ 176 (72) 15
Decrease (increase) in other assets....................... -- (1,019) 240
------- ------- --------
Net Cash Used in Investing Activities............... (7,892) (8,951) (10,095)
------- ------- --------
Financing Activities
Proceeds from (payments of):
Short-term bank loans................................... 1,605 587 6,014
Commercial paper........................................ -- -- 1,659
Long-term debts......................................... 971 (257) 5,325
Issuance of capital stock............................... 10,912 14,714 570
Increase in minority interest........................... -- 1,375 96
------- ------- --------
Net Cash Provided by Financing Activities........... 13,488 16,419 13,664
------- ------- --------
Effects of Changes in Foreign Exchange Rate................. (1,754) 296 983
------- ------- --------
Net Increase in Cash........................................ 242 1,704 1,108
Cash at Beginning of Year................................... 290 532 2,236
------- ------- --------
Cash at End of Year......................................... $ 532 $ 2,236 $ 3,344
======= ======= ========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest.................................... $ 118 $ 284 $ 385
======= ======= ========
Cash paid for income tax.................................. $ 12 $ 34 $ 29
======= ======= ========
The accompanying notes are an integral part of the financial statements.
F-86
193
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
FOCI Fiber Optic Communications, Inc. (the "Company") was incorporated
under the Company Law of the Republic of China on June 14, 1995 and started its
operation in September 1995. The Company designs, installs, manufactures and
markets fiber optic related products such as components, testing systems,
instruments, network installation, CATV engineering and sensing systems.
The Company has the following subsidiaries:
DATE, PLACE AND OTHER DETAILS
NAME OWNERSHIP RELATED TO INCORPORATION NATURE OF BUSINESS
---- --------- ----------------------------- ------------------
FOCI USA, Inc.......... 100% Incorporated on March 11, Selling of fiber optic
1999 in the State of related products
California, United States of including components,
America. testing systems,
instruments, network
installation, CATV
engineering, and
sensing systems.
FOCI Optronic
Components, Inc...... 94% Incorporated on February 6, Designs, installs,
1999 in the Republic of manufactures and
China. markets fiber optic
related products
including components,
testing systems,
instruments, network
installation, CATV
engineering, and
sensing systems.
FIOPTEC Inc............ 93% Incorporated on April 9, 1993 Manufacture and markets
in the Republic of China. The fiber optic related
Company's 93% investment was products including
acquired on June 29, 1998. fiber optic components.
Also, it has indirect
investment in Shanghai
FOCI Fiber Optic
Communications
Equipment, Inc. through
FIOPTEC Inc. (Cayman
Islands).
FIOPTEC Inc. (Cayman
Islands)............. 100% owned by Incorporated on August 28, Investment holding
FIOPTEC, Inc. 1998 in Cayman Islands. company.
F-87
194
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
DATE, PLACE AND OTHER DETAILS
NAME OWNERSHIP RELATED TO INCORPORATION NATURE OF BUSINESS
---- --------- ----------------------------- ------------------
Shanghai FOCI Fiber
Optic Communications
Equipment, Inc....... 100% owned by Incorporated on August 1, Designs, installs,
FIOPTEC (Cayman 1995 in Shanghai, People's manufactures and
Islands) Republic of China. FIOPTEC markets fiber optic
Inc.'s investment was made on related products
June 29, 1998. including components,
testing systems,
instruments, network
installation, CATV
engineering, and
sensing systems.
Yuan-Tai Enterprises
Pte, Ltd............. 100% owned by Incorporated on October 23, Import fiber optic
FIOPTEC Inc. 1993 in Singapore. FIOPTEC products from the
Inc. made its investment to Company for export
the Company on December 5, outside Singapore.
1995 and the investment was
disposed by FIOPTEC Inc. on
October 29, 1998.
2. ACCOUNTING POLICIES
A. Basis of Presentation
The consolidated financial statements included the following: (a)
1997 -- the Company, FIOPTEC Inc., Shanghai FOCI Fiber Optic Communications
Equipment, Inc., and Yuan-Tai Enterprises Pte., Ltd.; (b) 1998 -- the Company,
FIOPTEC Inc., FIOPTEC Inc. (Cayman Islands), and Shanghai FOCI Fiber Optic
Communications Equipment, Inc.; and (c) 1999 -- the Company, FIOPTEC Inc.,
FIOPTEC Inc. (Cayman Islands), and Shanghai FOCI Fiber Optic Communications
Equipment, Inc., FOCI Optronic Components, Inc., and FOCI USA, Inc.
All transactions and balances with consolidated companies have been
eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
C. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. Cash is
deposited with high credit quality financial institutions. As far as the
accounts receivable, the Company performs ongoing credit evaluations of its
customers' financial condition and the Company maintains its allowance for
doubtful accounts receivable based on a review of the collectibility of
individual receivable taking into account the age of the receivables.
F-88
195
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
D. Marketable Securities
Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings.
The costs of investment sold are determined by the weighted average method.
E. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
F. Investments in Shares of Stock
These investments are equity securities without readily available market
value. Accordingly, they were carried at costs. The unrealized loss resulting
from the decline in market value of such investment is reported as deduction
from stockholders' equity in the current year's income. When it becomes
evidently clear that there has been a permanent impairment in value and the
chance of recovery is minimal, loss is recognized in the current year's income.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment and interest expense incurred during the
construction period are capitalized, while maintenance and repairs are expensed
currently.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. Salvage values of fixed assets still in use after
the end of their original estimated useful lives are depreciated over the
remaining new estimated useful lives. The useful lives of the fixed assets are
2 - 10 years, except for buildings which are 20 - 25 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income. Any such gain, less applicable income tax, is transferred to
capital surplus at the end of the year.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the consolidated financial statements of the Company.
I. Intangible Assets
Intangible assets are stated at cost and amortized on straight-line basis
over the following years: patent -- 5 years; land occupancy rights -- 50 years.
F-89
196
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
J. Deferred Charges
Deferred charges consisting of computer software purchased, and payments
under technology transfer agreements are stated at cost and amortized on
straight basis over 2 - 5 years.
K. Revenue Recognition
The Company derives its revenue from the sale of fiber optic related
components and contracted projects on engineering services.
Revenue from product sales is recognized when all of following conditions
are met: the product has been shipped, the Company has the right to invoice the
customer at a fixed price, the collection of the receivable is probable and
there are no significant obligations remaining.
Revenue and cost on engineering contracts are accounted for under completed
contract method or the percentage of completion method. The use of the
percentage of completion method depends on the ability to make reasonable
dependable estimates. That is, the Company can estimate the extent of progress
toward completion, contract revenues, and contract costs. The completed contract
method may be used as the Company's basic accounting policy in circumstances in
which financial position and results of operations would not vary materially
from those resulting from use of the percentage of completion method.
Anticipated losses on engineering contracts are provided for when
determined. When the balances of contract in progress excess the one of billing
on contract, the billing on contract is shown in the current asset as a
deduction, on the contrary, the contract in progress is shown in the current
liability as a deduction.
Provisions for sales return and allowances are recorded based on historical
experience at the time revenue is recognized based on the Company's historical
experience. Generally, the Company provides one-year warranty period for its
product sold and engineering contracts provided. Estimated expenses for warranty
obligations are based on its historical field return rates and are accrued as
revenue is recognized and included in cost of goods sold.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company currently complies with SAB 101 and therefore SAB 101 will not have
any effect on our financial position or results of operations.
L. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
M. Pension Costs
The Company, FOCI Optronic Components, Inc. and FIOPTEC Inc. have
non-contributory and funded defined benefit retirement plans covering all their
regular employees. The contribution to an independent fund is deposited with the
Central Trust of China, as the custodian. Net pension cost, with
F-90
197
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
includes service cost, interest cost, expected return on plan assets and
amortization of net asset or obligation at transition, is recognized based on an
actuarial valuation.
N. Income Tax
The Company, FOCI Optronic Component, Inc. and FIOPTEC Inc. are subject to
tax in the Republic of China (ROC), FIOPTEC Inc. (Cayman Island) is not subject
to income or other taxes in Cayman Island, while FOCI USA, Inc. is subject to
tax in the United States of America and Shanghai FOCI Fiber Optic Communications
Equipment, Inc. is subject to tax in the People Republic of China (PRC).
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
related to a asset or liability in the financial statements, then it should be
classified as current or noncurrent based on the expected reversal dates of
temporary differences.
O. Bonuses to Employees, Directors and Supervisors
According to ROC regulations and the Articles of Incorporation of FOCI, a
portion of distributable earnings should be set aside as bonuses to employees,
directors and supervisors. Bonuses to directors and supervisors are always paid
in cash. However, bonuses to employees may be granted in cash or stock or both.
All of these appropriations, including stock bonuses which are valued at par
value of $0.30, are charged against retained earnings under ROC GAAP, after such
appropriations are formally approved by the shareholders in the following year.
Under U.S. GAAP, such bonuses are charged to income currently in the year
earned. Stock issued as part of these bonuses is recorded at fair market value,
determined by an independent third parties. Since the amount and form of such
bonuses are not finally determinable until the shareholders' meeting in the
subsequent year, the total amount of the aforementioned bonuses is initially
accrued based on management's estimate regarding the amount to be paid based on
the Company's Articles of Incorporation. Any difference between the initially
accrued amount and the fair market value of the bonuses settled by the issuance
of shares is recognized in the year of approval by shareholders.
P. Foreign-currency Transactions
The functional currency of the Company, FOCI Optronic Components, Inc. and
FIOPTEC Inc. is New Taiwan dollars, that of Shanghai FOCI Fiber Optic
Communications Equipment, Inc. is Remibi, and that of FOCI USA, Inc. and FIOPTEC
Inc. (Cayman Islands) is US dollars. The foreign-currency transactions of the
Company and its subsidiary, except that of FOCI USA, Inc. and FIOPTEC Inc.
(Cayman Islands), are recorded using their respective functional currencies at
the rates of exchange in effect when the transactions occur. Gains or losses,
resulting from the application of different foreign exchange rates when cash in
foreign currency is converted into New Taiwan dollars and Remibi, or when
foreign-currency receivables and payables are settled, are credited or charged
to income in the year of conversion or settlement. At the balance sheet dates,
the balances of foreign-currency assets and liabilities are restated into the
respective functional currencies based on prevailing exchange rates and any
resulting gains or losses are credited or charged to income.
F-91
198
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
Q. Translation of Foreign-currency Financial Statements
The financial statements of the foreign subsidiary are translated into U.S.
dollars at the following exchange rates: assets and liabilities -- current rate;
income and expenses -- weighted average rate during the year. The resulting
translation adjustment is recorded as separate component of shareholders'
equity.
R. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income". Comprehensive income, as defined, includes all changes in equity during
a period from non-owner sources. As of December 31, 1999, comprehensive income
of the Company included only the translation adjustments on subsidiaries.
S. Earnings (Loss) Per Share
Earnings per share is calculated by dividing net income by the average
number of shares outstanding in each period, adjusted retroactively for stock
dividends issued subsequently.
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
DECEMBER 31,
----------------------------
1997 1998 1999
------ ------- -------
Receivable from related parties (Note 14).............. $ 919 $ 3,140 $ 3,619
Notes receivable....................................... 211 316 320
Accounts receivable -- third parties................... 7,154 7,303 7,332
------ ------- -------
8,284 10,759 11,271
Allowance for doubtful accounts........................ (165) (1,398) (923)
------ ------- -------
$8,119 $ 9,361 $10,348
====== ======= =======
4. INVENTORIES
A. The details of inventories are summarized as follows:
DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
Finished goods.......................................... $1,177 $ 41 $ 1,780
Work in process......................................... -- 1,798 1,427
Raw materials........................................... 1,658 4,134 4,236
Contract in progress -- net............................. -- 2,607 4,198
------ ------ -------
2,835 8,580 11,641
Allowance for losses.................................... (48) (76) (100)
------ ------ -------
$2,787 $8,504 $11,541
====== ====== =======
F-92
199
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. The details of contract in progress are summarized as follows:
ESTIMATED CONTRACT
CONTRACT CONTRACT PAID-IN BILLING ON IN
ACCOUNTING METHOD PRICE COST COST CONTRACT PROGRESS
----------------- --------- -------- ------- ---------- --------
1999
Applied system of fiber
optic.................. Completed contract method $5,400 $5,348 $4,813 $722 $4,091
Others................... Completed contract method 492 394 107 -- 107
------ ------ ------ ---- ------
$5,892 $5,742 $4,920 $722 $4,198
====== ====== ====== ==== ======
1998
Applied system of fiber
optic.................. Completed contract method $5,400 $4,657 $3,312 $705 $2,607
====== ====== ====== ==== ======
The completion percentage of the construction -- Applied system of fiber
optic was 90% as of December 31, 1999 and will be completed in 2000.
5. INVESTMENTS IN SHARES OF STOCK
The details of the investments are as follows:
DECEMBER 31,
-----------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ---------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE OWNERSHIP VALUE OWNERSHIP VALUE OWNERSHIP
-------- --------- -------- --------- -------- ---------
Ganso Corp. .................. $-- -- $22 -- $13 --
Winluck Group Ltd. ........... -- -- 18 -- 18 --
-- --- ---
$-- $40 $31
== === ===
F-93
200
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
6. PROPERTIES -- NET
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
Cost
Land................................................ $ -- $ -- $ 3,186
Buildings........................................... 5,386 5,458 15,255
Machinery and equipment............................. 3,733 5,093 6,852
Test equipment...................................... 343 340 551
Transportation equipment............................ 18 183 195
Furniture and fixtures.............................. 830 1,041 1,448
Leasehold improvements.............................. -- 76 --
Construction in progress and prepayments............ 41 5,628 1,704
------- ------- -------
10,351 17,819 29,191
------- ------- -------
Accumulated depreciation
Buildings........................................... 69 280 699
Machinery and equipment............................. 763 1,326 2,151
Test equipment...................................... 50 82 135
Transportation equipment............................ 3 17 39
Furniture and fixtures.............................. 235 386 608
Leasehold improvements.............................. -- 5 --
------- ------- -------
1,120 2,096 3,632
------- ------- -------
$ 9,231 $15,723 $25,559
======= ======= =======
Interest expense were amounting to $95 and $151 were capitalized in 1997
and 1999, respectively.
7. SHORT-TERM LOANS
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
Secured loans from Tai-sin Bank, Far Eastern Bank, Dah
An Commercial Bank and Land Bank of Taiwan............ $ 248 $2,686 $5,426
Unsecured loans from The International Commercial Bank
of China.............................................. 1,851 -- 2,479
Working capital loans from The International Commercial
Bank of China......................................... -- -- 795
------ ------ ------
$2,099 $2,686 $8,700
====== ====== ======
3.00% 6.67% 1.12%
(8.15)% (7.75)% (7.77)%
====== ====== ======
As of December 31, 1999, unused credit for short-term bank borrowings is
about $407.
8. COMMERCIAL PAPERS
Commercial paper will mature between January to May 2000. It bore annual
interest rates ranging from 4.85% to 5.10% and is secured by a guaranty issued
by Tai-sin Bank, Far Eastern Bank and Dah An Commercial Bank.
F-94
201
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
As of December 31, 1999, unused credit for issuance of commercial paper is
about $2,451.
9. LONG-TERM DEBTS
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
Land Bank of Taiwan:
Loan for plant expansion. Payable in 60 monthly
installments starting from December 1998 to November
2003. Interest at floating rate and actual annual
interest rate was 7.5% in 1997 and 1998................ $1,904 $1,893 $ --
Loan for plant expansion. Payable in 72 monthly
installments starting from December 2000 to November
2006. Interest at an annual rate of 7.5%............... -- -- 6,161
Loan for the purchase machinery and equipment. Payable in
48 monthly installments starting from July 1997 to June
2001. Interest at floating rate and actual annual
interest rate was 7.5%................................. 886 640 393
The International Commercial Bank of China -- loan for
the purchase land. Payable in 16 quarterly installments
starting from October 2000 to September 2004. Interest
at floating rate and actual applicable rate for 1999
was 7.5% per annum..................................... -- -- 1,304
------ ------ ------
2,790 2,533 7,858
Current portion.......................................... (317) (641) (429)
------ ------ ------
$2,473 $1,892 $7,429
====== ====== ======
As of December 31, 1999, long-term bank loans mature as follows:
DECEMBER 31,
1999
------------
During the year 2000.................................... $ 429
During the year 2001.................................... 1,484
During the year 2002.................................... 1,352
During the year 2003.................................... 1,353
During the year 2004.................................... 1,272
During the year 2005.................................... 1,027
During the year 2006.................................... 941
10. SHAREHOLDERS' EQUITY
According to the ROC Company Law, capital surplus can only be used to
offset a deficit or transferred to capital.
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income (less deficit, if any):
(a) 10% thereof as legal reserve;
(b) Not over 15% special bonus to employees;
(c) Not over 5% compensation to directors and supervisors; and
(d) The remaining amount shall be appropriated as common stockholders'
bonus.
F-95
202
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
The appropriations and the disposition of the remaining net income shall be
resolved by the shareholders in the following year and given effect to in the
financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
11. LONG-TERM OPERATING LEASES
The Company has an operating lease agreement covering certain parcels of
land with an area of 4,494 square meters. The agreement will is valid until
December 2015 and required payment of fixed annual rental of $58.
12. PENSION PLAN
The Company has a defined benefit pension plan for all regular employees,
which provides benefits based on length of service and average monthly salary
for the last six months prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited in the committee's name in the Central Trust of China which acts
as trustee.
Certain pension information are summarized as follows:
The components of net periodic benefit costs are as follows:
a. Net periodic pension cost
1997 1998 1999
---- ---- ----
Service cost................................................ $34 $83 $74
Interest cost............................................... 4 9 12
Projected return on plan assets............................. (1) (3) (8)
Amortization of unrecognized loss........................... -- 5 --
--- --- ---
Net periodic benefit cost................................... $37 $94 $78
=== === ===
The change in benefit obligation and plan assets and reconciliation of fund
status are as follows:
b. Change in benefit obligation:
1997 1998 1999
---- ---- ----
Projected benefit obligation at beginning of year........... $ 56 $144 $188
For the years:
Service cost.............................................. 34 83 74
Interest cost............................................. 4 9 12
Actuarial loss (gain)..................................... 49 (57) 24
Foreign currency exchanges.................................. 1 9 8
---- ---- ----
Projected benefit obligation at end of year................. $144 $188 $306
==== ==== ====
F-96
203
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
c. Change in plan assets:
1997 1998 1999
---- ---- ----
Fair value of plan assets at beginning of year.............. $15 $ 45 $124
Employer contributions...................................... 29 76 82
Interest income............................................. 1 3 8
--- ---- ----
Fair value of plan assets at end of year.................... $45 $124 $214
=== ==== ====
d. Reconciliation of fund status
1997 1998 1999
----- ---- ----
Funded status............................................... $ 99 $64 $ 92
Unrecognized actuarial loss................................. (58) (1) (25)
----- --- ----
Net amount of "Prepaid pension costs" shown in the balance
sheets.................................................... $ 41 $63 $ 67
===== === ====
e. Actuarial assumptions
Discount rate used in determining present values............ 6.75% 6.5% 6.0%
Rate of long-term rate of return on plan assets............. 7.0% 6.5% 6.0%
Rate of compensation increase............................... 6.5% 6.5% 6.0%
13. INCOME TAX
A. Income tax benefit and income tax payable:
DECEMBER 31,
----------------------
1997 1998 1999
----- ----- ----
Income tax expense -- current............................... $ 42 $ 189 $44
Income tax expense (benefit) -- deferred.................... (216) (319) 24
Translation adjustment...................................... -- 1 --
----- ----- ---
Income tax expense (benefit)................................ $(174) $(129) $68
===== ===== ===
F-97
204
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. As of December 31, 1997, 1998 and 1999, deferred income tax assets and
liabilities are as follows:
DECEMBER 31,
---------------------
1997 1998 1999
----- ---- ----
Current:
Taxable temporary differences............................. $(132) $241 $354
Investment tax credits.................................... 66 155 69
----- ---- ----
Total.................................................. (66) 396 423
Valuation allowance....................................... -- (4) --
----- ---- ----
(66) 392 423
----- ---- ----
Noncurrent:
Taxable temporary differences............................. 7 4 (4)
Investment tax credits.................................... 483 364 335
Operating loss carryforwards.............................. -- 35 --
----- ---- ----
Total.................................................. 490 403 331
Valuation allowance....................................... -- (35) --
----- ---- ----
490 368 331
----- ---- ----
$ 424 $760 $754
===== ==== ====
C. The Company's income tax returns through taxable year ended December 31,
1997 have been examined by the tax authorities. The Company did not receive any
tax assessment from the tax authorities as a result from the foregoing tax
examinations.
D. Pursuant to the "Statute for the Establishment and Administration of
Science-Based Industrial Park," the Company was granted several periods of tax
holidays with respect to income derived from approved investments and are
eligible until December, 2002.
E. As of December 31, 1999, the Company's unused investment tax credits
amounted to $405. Such tax credits can be utilized until December 2003.
14. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
RELATIONSHIP WITH THE COMPANY
NAME AND RELATIONSHIP OF RELATED PARTIES -----------------------------
Pacriminvesting & Developing Co., Ltd. .............. A shareholder.
Winluck Group Ltd. .................................. The supervisor is the board chairman
of the Company
Yuan-Tai Enterprises Pte., Ltd. ..................... A consolidated entity until October
29, 1998 (see Note 1)
F-98
205
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. Significant Related Party Transactions
(1) Sales
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Winluck Group Ltd. ............................ $1,033 14 $1,755 9 $ 878 4
Yuan-Tai Enterprises Pte., Ltd. ............... -- -- 2,058 10 387 2
Pacriminvesting & Developing Co., Ltd. ........ 6 -- -- -- -- --
------ -- ------ -- ------ --
$1,039 14 $3,813 19 $1,265 6
====== == ====== == ====== ==
The above sales are dealt with in the ordinary course of business similar
to that with other companies, and the collection period is at sight in the
average 60 days.
(2) Engineering revenues
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Winluck Group Ltd. ............................ $-- -- $3,050 89 $-- --
=== == ====== == === ==
(3) Accounts Receivable
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Winluck Group Ltd. ............................ $919 11 $3,140 29 $3,137 28
Yuan-Tai Enterprises Pte, Ltd. ................ -- -- -- -- 482 4
---- -- ------ -- ------ --
919 11 3,140 29 3,619 32
==== == ====== == ====== ==
Allowance for doubtful accounts................ (75) (543) --
---- ------ ------
$844 $2,597 $3,619
==== ====== ======
F-99
206
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
15. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and listed as follows:
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- -------
ASSETS
Cash.................................... $ 532 $ 532 $2,236 $2,236 $ 3,344 $ 3,344
Marketable securities................... 911 911 1,527 1,527 174 174
Notes and accounts receivable -- net.... 8,119 8,119 9,361 9,361 10,348 10,348
Long-term investment.................... -- -- 40 40 31 31
Refundable deposits..................... 28 28 100 100 85 85
LIABILITIES
Short-term bank loans................... 2,099 2,099 2,686 2,686 8,700 8,700
Commercial papers payable............... -- -- -- -- 1,659 1,659
Notes payable........................... 867 867 1,607 1,607 1,225 1,225
Accounts payable........................ 304 304 940 940 1,787 1,787
Long-term bank borrowing (including
current portion)...................... 2,790 2,790 2,533 2,533 7,858 7,868
16. ASSETS PLEDGED AS COLLATERAL
DECEMBER 31,
---------------------------
ASSETS 1997 1998 1999 SUBJECT OF COLLATERAL
------ ------ ------ ------- ---------------------
Land................................. $ -- $ -- $ 3,186 Long-term loans
Marketable securities................ 361 -- -- Financed stock
Time deposit (shown in other current 154 1,466 3,022 Short-term guarantee and
assets)............................ endorse for the bank loan of
subsidiary
Machinery and equipment.............. 1,307 1,088 905 Long-term loans
Buildings............................ 5,354 5,317 12,741 Long-term loans
------ ------ -------
$7,176 $7,871 $19,854
====== ====== =======
17. COMMITMENTS AND CONTINGENT LIABILITIES
A. On July 27, 1995, the Company has acquired from Industrial Technology
Research Institute specific product technology know-how related to light source
driver, FBT Fiber Couplers, WIC and WBC, WDM attenuators and FBT attenuators. In
consideration for the foregoing, the Company shall pay royalty, until 2001,
equivalent to 1% of the sales value of the products covered by the agreement.
ITRI, however, have agreed to waive the royalty payments in 1997 and 1998, and,
in 1999, the Company paid royalties of US$5.
B. FIOPTEC Inc. and FOCI Optronic Components Inc. signed several contracts
with third parties for the construction of its new plant amounting to $1,639. As
of December 31, 1999, the two subsidiaries has outstanding obligations of $608
related to these contracts.
18. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with "management" approach. The management
F-100
207
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS 131 also requires disclosures about products
and services, geographic areas and major customers.
A. Industry:
The Company is engaged in a single industry, which is manufacturing,
selling, designing and installation of fiber optic related products.
B. Foreign markets
YEARS ENDED DECEMBER 31,
----------------------------
AREA 1997 1998 1999
---- ------ ------- -------
Asia................................................... $6,671 $ 8,731 $ 7,834
United States.......................................... 1,869 2,003 5,196
Europe................................................. 1,303 2,695 4,165
Other.................................................. 114 217 303
------ ------- -------
$9,957 $13,646 $17,498
====== ======= =======
C. Major customers
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
CUSTOMERS AMOUNT % AMOUNT % AMOUNT %
--------- ------ --- ------ --- ------ ---
A...................................... $ -- -- $3,050 15 $2,285 12
==== === ====== === ====== ===
F-101
208
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
D. Geographic information
ADJUSTMENTS
AND
ELIMINATING
OVERSEAS TAIWAN ENTRIES CONSOLIDATED
-------- ------- ----------- ------------
1997
Sales to customers other than the parent
and its subsidiaries.................. $ -- $ 7,506 $ -- $ 7,506
Intercompany revenue.................... -- 4,914 (4,914) --
------ ------- ------- -------
Total sales........................... $ -- $12,420 $(4,914) $ 7,506
====== ======= ======= =======
Gross profit............................ $ -- $ 9,732 $(4,914) $ 4,818
====== ======= ======= =======
Operating expenses...................... (3,468)
Non-operating income (expenses)......... 95
-------
Income before income tax................ 1,445
Income tax benefit...................... 174
Minority loss........................... 15
-------
Net income.............................. $ 1,634
=======
Identifiable assets..................... $5,743 $23,317 $(5,551) $23,509
====== ======= ======= =======
1998
Sales to customers other than the parent
and its subsidiaries.................. $ -- $20,381 $ -- $20,381
Intercompany revenue.................... -- 108 (108) --
------ ------- ------- -------
Total sales........................... $ -- $20,489 $ (108) $20,381
====== ======= ======= =======
Gross profit............................ $ -- $ 7,100 $ (108) $ 6,992
====== ======= ======= =======
Operating expenses...................... (6,361)
Non-operating income (expenses)......... (569)
-------
Income before income tax................ 62
Income tax benefit...................... 129
Minority loss........................... 1,316
-------
Net income.............................. $ 1,507
=======
Identifiable assets..................... $ -- $42,730 $ (91) $42,639
====== ======= ======= =======
1999
Sales to customers other than the parent
and its subsidiaries.................. $3,480 $16,278 $ -- $19,758
Intercompany revenue.................... -- 1,082 (1,082) --
------ ------- ------- -------
Total sales........................... $3,480 $17,360 $(1,082) $19,758
====== ======= ======= =======
Gross profit............................ $ 793 $ 6,640 $(1,082) $ 6,351
====== ======= ======= =======
Operating expenses...................... (6,269)
Non-operating income (expenses)......... (711)
-------
Loss before income tax.................. (629)
Income tax expense...................... (68)
Minority loss........................... 36
-------
Net loss................................ $ (661)
-------
Identifiable assets..................... $1,188 $56,510 $ (250) $57,448
====== ======= ======= =======
F-102
209
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Optronics International Corp.
We have audited the accompanying balance sheets of Optronics International
Corp. as of December 31, 1997, 1998 and 1999, and the related statements of
operations and comprehensive income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1997, 1998 and 1999. 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 in accordance with auditing standards generally
accepted in the United States of America. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Optronics International
Corp. at December 31, 1997, 1998 and 1999 and the results of its operations and
its cash flows for the years ended December 31, 1997, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States of
America.
T N Soong & Co
A Member Firm of Andersen Worldwide, SC
Taipei, Taiwan, the Republic of China
June 23, 2000
F-103
210
OPTRONICS INTERNATIONAL CORP.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
DECEMBER 31,
-----------------------------
NOTES 1997 1998 1999
------------- ------- ------- -------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets
Cash........................................ 2B $ 4,734 $ 6,510 $ 1,841
Restricted cash............................. 2D 742 64 967
Marketable securities....................... 2B, 2E 1,607 -- 2,307
Notes and accounts receivable -- net........ 2B, 3, 10 486 2,076 476
Inventories................................. 2F, 4 248 694 1,046
Prepaid expenses and other current assets... 53 39 102
------- ------- -------
Total Current Assets..................... 7,870 9,383 6,739
------- ------- -------
Properties -- Net............................. 2G, 2H, 5, 10 2,741 4,920 5,197
Other Assets
Prepaid long-term investment................ -- 1 --
Deferred pension cost....................... 2L, 8 33 13 --
Deferred charges -- net of accumulated
amortization cost of $2 in 1999.......... 2I -- -- 32
Refundable deposits......................... 38 62 41
------- ------- -------
Total Other Assets....................... 71 76 73
------- ------- -------
Total Assets............................. $10,682 $14,379 $12,009
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes and accounts payable.................. 10 $ 97 $ 701 $ 537
Income tax payable.......................... 2N, 9 -- 14 62
Current portion of long-term debts.......... 6, 12 -- -- 253
Accrued expenses and other current
liabilities.............................. 520 1,809 841
------- ------- -------
Total Current Liabilities................ 617 2,524 1,693
Long-Term Debts -- Net of Current Portion..... 6, 12 -- 495 253
Accrued Pension Cost.......................... 2L, 8 34 39 86
------- ------- -------
Total Liabilities........................ 651 3,058 2,032
------- ------- -------
Shareholders' Equity.......................... 7
Capital stock, $0.3 par value;
Authorized -- 25,000 thousand shares in
1997 and 45,000 thousand shares in 1998
and 1999; Issued -- 20,000 thousand
shares in 1997 and 35,000 thousand shares
in 1998 and 1999......................... 7,266 11,833 11,833
Advanced capital............................ 4,324 --
Retained earnings:
Legal reserve............................ -- -- 50
Unappropriated earnings (Deficit)........ (499) 365 (1,261)
Cumulative translation adjustment............. 2P (1,060) (877) (645)
------- ------- -------
Total Shareholders' Equity............... 10,031 11,321 9,977
------- ------- -------
Total Liabilities and Shareholders'
Equity................................. $10,682 $14,379 $12,009
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-104
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OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
YEARS ENDED DECEMBER 31,
----------------------------
NOTES 1997 1998 1999
------ ------- ------ -------
(IN THOUSAND U.S. DOLLARS
EXCEPT PER SHARE AMOUNTS)
Sales................................................. $ 1,280 $7,940 $ 4,998
Sales Returns and Allowances.......................... (2) (318) (191)
------- ------ -------
Net Sales............................................. 2J, 10 1,278 7,622 4,807
Cost of Sales......................................... 2J, 10 1,164 4,336 4,684
------- ------ -------
Gross Profit.......................................... 114 3,286 123
------- ------ -------
Operating Expenses
Research and development............................ 2K 888 2,086 1,453
General and administrative.......................... 187 646 453
Marketing........................................... 169 638 318
------- ------ -------
Total Operating Expenses......................... 1,244 3,370 2,224
------- ------ -------
Loss From Operations.................................. (1,130) (84) (2,101)
------- ------ -------
Non-Operating Income
Interest revenue.................................... 67 236 206
Subsidy............................................. 2M 492 704 339
Gain on sale of marketable securities............... 2E 177 132 48
Unrealized holding gains on marketable securities... 13 -- --
Foreign exchange gain............................... 2O 10 -- --
Gain on disposal of properties...................... 10 -- -- 4
Other............................................... -- 1 39
------- ------ -------
Total Non-Operating Income....................... 759 1,073 636
------- ------ -------
Non-Operating Expense
Foreign exchange loss............................... 2O -- 15 49
Loss on disposal of properties...................... -- 27 --
------- ------ -------
Total Non-Operating Expense...................... -- 42 49
------- ------ -------
Income (Loss) Before Income Tax....................... (371) 901 (1,514)
Income Tax Expense.................................... 2N, 9 -- (37) (62)
------- ------ -------
Net Income (Loss)..................................... $ (371) $ 864 $(1,576)
======= ====== =======
Other Comprehensive Income
Translation adjustments............................. 2Q (1,060) 183 232
------- ------ -------
Comprehensive Income (Loss)........................... $(1,431) $1,047 $(1,344)
======= ====== =======
Earnings (Loss) Per Share -- 2R
Based on weighted average outstanding common stock
18,085 thousand shares in 1997, 33,125 thousand
shares in 1998 and 35,000 thousand shares 1999... $ (0.02) $ 0.03 $ (0.05)
======= ====== =======
The accompanying notes are an integral part of the financial statements.
F-105
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OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
RETAINED EARNINGS (NOTE 7)
---------------------------------- CUMULATIVE
CAPITAL STOCK ISSUED UNAPPROPRIATED TRANSLATION TOTAL
-------------------- ADVANCED LEGAL EARNINGS ADJUSTMENT SHAREHOLDERS'
SHARES AMOUNT CAPITAL RESERVE (DEFICIT) TOTAL (NOTE 20) EQUITY
---------- ------- -------- ------- -------------- ------- ----------- -------------
(THOUSAND) (IN THOUSAND U.S. DOLLARS)
BALANCE, JANUARY 1,
1997.................... 14,000 $5,093 $ -- $-- $ (128) $ (128) $ -- $ 4,965
Issuance of capital stock
for cash................ 6,000 2,173 -- -- -- -- -- 2,173
Advanced capital.......... -- -- 4,324 -- -- -- -- 4,324
Net loss for 1997......... -- -- -- -- (371) (371) -- (371)
Translation adjustments... -- -- -- -- -- -- (1,060) (1,060)
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1997.................... 20,000 7,266 4,324 -- (499) (499) (1,060) 10,031
Issuance of capital stock
for cash................ 15,000 4,567 (4,324) -- -- -- -- 243
Net income for 1998....... -- -- -- -- 864 864 -- 864
Translation adjustments... -- -- -- -- -- -- 183 183
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1998.................... 35,000 11,833 -- -- 365 365 (877) 11,321
Appropriations of 1998
earnings:
Legal reserve............. -- -- -- 50 (50) -- -- --
Net loss for 1999......... -- -- -- -- (1,576) (1,576) -- (1,576)
Translation adjustments... -- -- -- -- -- -- 232 232
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31,
1999.................... 35,000 $11,833 $ -- $50 $(1,261) $(1,211) $ (645) $ 9,977
====== ======= ======= === ======= ======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-106
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OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSAND U.S. DOLLARS)
Operating Activities
Net income (loss)......................................... $ (371) $ 864 $(1,576)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 190 480 647
Loss (gain) on disposal of properties.................. -- 27 (4)
Accrued pension cost................................... 1 25 60
Unrealized holding gains on marketable securities...... (13) -- --
Gain on sale of marketable securities.................. (177) (132) (48)
Transfer of properties to expense...................... 10 -- --
Changes in operating assets and liabilities
Notes and accounts receivable........................ (486) (1,590) 1,600
Inventories.......................................... (248) (446) (352)
Prepaid expenses and other current assets............ (39) 14 (63)
Notes and accounts payable........................... 97 604 (164)
Income tax payable................................... -- 14 48
Accrued expenses and other current liabilities....... 179 1,289 (968)
------- ------- -------
Net Cash Provided by (Used in) Operating
Activities...................................... (857) 1,149 (820)
------- ------- -------
Investing Activities
Acquisitions of properties................................ (2,550) (2,575) (834)
Decrease (increase) in restricted cash.................... (742) 678 (903)
Proceeds from disposals of properties..................... 2 -- 39
Decrease (increase) in marketable securities.............. 2,680 1,739 (2,259)
Decrease (increase) in prepaid long-term investments...... -- (1) 1
Increase in deferred charges.............................. -- -- (33)
Decrease (increase) in refundable deposits................ (9) (24) 21
------- ------- -------
Net Cash Used in Investing Activities............. (619) (183) (3,968)
------- ------- -------
Financing Activities
Proceeds from issuance of capital stock................... 6,497 243 --
Long-term debts........................................... -- 495 --
------- ------- -------
Net Cash Provided by Financing Activities......... 6,497 738 --
------- ------- -------
Effects of Changes in Foreign Exchange Rate................. (658) 72 119
------- ------- -------
Net Increase (Decrease) in Cash............................. 4,363 1,776 (4,669)
Cash at Beginning of Year................................... 371 4,734 6,510
------- ------- -------
Cash at End of Year......................................... $ 4,734 $ 6,510 $ 1,841
======= ======= =======
Supplemental Disclosures of Cash Flow Information
Cash paid for income tax.................................. $ -- $ 24 $ 15
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-107
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
Optronics International Corp. (the "Company") was incorporated under the
Company Law of the Republic of China on November 21, 1996 and started its
operations in February 1997. The Company is primarily engaged in research,
development, production, manufacture and sale of visible laser diode and module,
communication laser diode and module and high power laser diode and module.
2. ACCOUNTING POLICIES
A. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
B. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, marketable securities and accounts
receivable. Cash and marketable securities are deposited or placed with high
credit quality financial institutions. The Company is exposed to credit risk in
the event of default by these institutions to the extent of the amount recorded
on the balance sheet. As far as the accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and the Company
maintains an allowance for doubtful accounts receivable based upon review of the
expected collectibility of individual accounts receivable.
C. Fair Value of Financial Instruments
The Company's financial instruments, including cash, restricted cash,
marketable securities, notes and accounts receivable, refundable deposits, and
notes and accounts payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Fair value of long-term debts is estimated based on current interest rates
available to the Company with similar terms, degrees of risks and remaining
maturities. The carrying values of long-term debts approximate their respective
fair value.
D. Restricted Cash
Restricted cash is composed of time deposits that the Company maintains as
collateral for obtaining letters of credits.
E. Marketable Securities
Marketable securities are open-end bond funds that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings.
The costs of investment sold are determined by the weighted average method.
F-108
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
F. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment are capitalized, while maintenance and
repairs are expensed currently.
Depreciation is provided on the straight-line method over the estimated
useful lives that range as follows: machinery and equipment -- 3 to 8 years;
computer equipment -- 3 years; office equipment -- 5 years; leasehold
improvements -- 5 years; transportation equipment -- 5 years; other
equipment -- 5 to 20 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the financial statements of the Company.
I. Deferred Charges
Deferred charges are stated at cost and amortized on straight-line basis
over the following years: tools -- 3 years.
J. Revenue Recognition
Revenue is mainly from product sales to customers and is recognized at the
time of shipment, indicating that revenue has been realized and earned. The four
criteria for revenue being realized and earned are the existence of evidence of
sale, actual shipment, fixed or determinable selling price, and reasonable
assurance of collectibility.
Allowances for sales return and discounts are provided at the time of the
recognition of the related revenues based on experience and these provisions are
deducted from sales.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company currently complies with SAB 101 and therefore SAB 101 will not have
any effect on our financial position or results of operations.
K. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
F-109
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
L. Pension Costs
The Company has non-contributory and funded defined benefit retirement
plans covering all its regular employees. The contribution to an independent
fund is deposited with the Central Trust of China, as the custodian. Net pension
cost, with includes service cost, interest cost, expected return on plan assets
and amortization of net asset or obligation at transition, is recognized based
on an actuarial valuation.
M. Subsidy Income
The company recognized subsidy income on a straight-line basis over the
term of the agreements entered into with two Bureaus of ROC Government,
Industrial Development Bureau (IDB) and Administration of Hsin-chu Science-based
Industrial Park (SBIP), for new product developments.
N. Income Tax
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
identified to an asset or a liability in the financial statements, then it
should be classified as current or noncurrent based on the expected reversal
date of temporary difference.
O. Foreign-currency Transactions
The functional currency of the Company is New Taiwan dollars. The
foreign-currency transactions of the Company are recorded using their respective
functional currencies at the rates of exchange in effect when the transactions
occur. Gains or losses, resulting from the application of different foreign
exchange rates when cash in foreign currency is converted into New Taiwan
dollars, or when foreign-currency receivables and payables are settled, are
credited or charged to income in the year of conversion or settlement. At the
balance sheet dates, the balances of foreign-currency assets and liabilities are
restated into the respective functional currencies based on prevailing exchange
rates and any resulting gains or losses are credited or charged to income.
P. Translation of Foreign-currency Financial Statements
The financial statements are translated into U.S. dollars at the following
exchange rates: assets and liabilities -- current rate; income and
expenses -- weighted average rate during the year. The resulting translation
adjustment is recorded as separate component of shareholders' equity.
Q. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income"; SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-
F-110
217
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
owner sources. To date, the Company has only translation adjustments that are
required to be reported in comprehensive income.
R. Earnings (Loss) Per Share
SFAS No. 128 "Earnings Per Share", establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using the
average shares of common share outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either as if converted
method for convertible preferred share or the treasury stock method for options
and warrants. Since the Company's capital structure is simple, therefore, its
basic earnings per share is the same as diluted earnings per share.
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
DECEMBER 31,
------------------------
1997 1998 1999
----- ------ -----
Receivable from related parties (Note 10)................. $ -- $ 13 $ 46
Notes receivable.......................................... 207 1,676 46
Accounts receivable -- third parties...................... 397 915 861
----- ------ -----
604 2,604 953
Allowance for doubtful accounts........................... (118) (528) (477)
----- ------ -----
$ 486 $2,076 $ 476
===== ====== =====
4. INVENTORIES
DECEMBER 31,
----------------------
1997 1998 1999
---- ---- ------
Finished goods.............................................. $ 34 $246 $ 233
Work in process............................................. 152 297 320
Raw materials............................................... 62 151 493
---- ---- ------
$248 $694 $1,046
==== ==== ======
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
5. PROPERTIES -- NET
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
Cost
Machinery and equipment................................ $2,042 $4,090 $5,018
Computer equipment..................................... 41 47 60
Office equipment....................................... 27 33 36
Leasehold improvements................................. 100 71 81
Transportation equipment............................... 41 56 58
Other equipment........................................ 24 1,167 1,230
Prepayments............................................ 632 106 33
------ ------ ------
2,907 5,570 6,516
------ ------ ------
Accumulated depreciation
Machinery and equipment................................ 137 558 1,076
Computer equipment..................................... 7 19 32
Office equipment....................................... 2 8 13
Leasehold improvements................................. 15 16 29
Transportation equipment............................... 4 12 21
Other equipment........................................ 1 37 148
------ ------ ------
166 650 1,319
------ ------ ------
$2,741 $4,920 $5,197
====== ====== ======
6. LONG-TERM DEBTS
DECEMBER 31,
---------------------
1997 1998 1999
---- ---- -----
Industrial Bureau -- Innovation Products Matching Fund to be
repaid in installment with final payment due in October
2001 (Note 12)............................................ $-- $495 $ 506
Current portion............................................. -- -- (253)
---- ---- -----
$-- $495 $ 253
==== ==== =====
As of December 31, 1999, long-term debts mature as follows:
DECEMBER 31,
1999
------------
During the year 2000........................................ $253
During the year 2001........................................ 253
7. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income after deducting any previously
accumulated deficit and 10% legal reserve:
(a) 5% - 10% special bonus to employees;
(b) 1% - 3% compensation to directors and supervisors; and
F-112
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
(c) Special retained earnings reserve and unappropriated earnings can
be set aside when necessary, and the remaining amount shall be appropriated
as common shareholders' bonus.
The appropriations and the disposition of the remaining net income
shall be resolved by the shareholders in the following year and given
effect to in the financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
8. PENSION PLAN
The Company has a defined benefit pension plan for all regular employees,
which provides benefits based on length of service and average monthly salary
for the last six months prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited in the committee's name in the Central Trust of China which acts
as trustee.
Certain pension information are summarized as follows:
The components of net periodic benefit costs are as follows:
a. Net periodic pension cost
1997 1998 1999
---- ---- ----
Service cost................................................ $51 $47 $ 87
Interest cost............................................... -- 4 10
Projected return on plan assets............................. -- (1) (3)
Amortization of transition obligation....................... -- 4 4
Amortization of unrecognized loss........................... -- -- 1
---- ---- ----
Net periodic benefit cost................................... $51 $54 $ 99
==== ==== ====
The change in benefit obligation and plan assets and reconciliation of fund
status are as follows:
b. Change in benefit obligation:
1997 1998 1999
---- ---- ----
Projected benefit obligation at beginning of year........... $-- $ 68 $148
For the years:
Service cost.............................................. 51 47 87
Interest cost............................................. -- 4 10
Actuarial loss (gain)..................................... 26 26 (6)
Amortization.............................................. -- -- 1
Foreign currency exchanges.................................. (9) 3 6
---- ---- ----
Projected benefit obligation at end of year................. $68 $148 $246
==== ==== ====
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220
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
c. Change in plan assets:
1997 1998 1999
---- ---- ----
Fair value of plan assets at beginning of year.............. $-- $12 $ 43
Contributions............................................... 12 30 41
Interest income............................................. -- 1 3
---- ---- ----
Fair value of plan assets at end of year.................... $12 $43 $ 87
==== ==== ====
d. Reconciliation of fund status
1997 1998 1999
---- ---- ----
Funded status............................................... $ 57 $105 $156
Unrecognized transition obligation.......................... (56) (53) (50)
Unrecognized actuarial loss................................. -- (26) (20)
Additional liability........................................ 33 13 --
---- ---- ----
Net amount of accrued pension cost shown in the balance
sheets.................................................... $ 34 $ 39 $ 86
==== ==== ====
e. Actuarial assumptions
1997 1998 1999
----- ----- -----
Discount rate used in determining present values........... 6.75% 6.50% 6.00%
Rate of long-term rate of return on plan assets............ 6.50% 6.25% 6.00%
Rate of compensation increase.............................. 6.00% 6.00% 6.00%
9. INCOME TAX
A. Income tax benefit and income tax payable:
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
Income tax expense -- current............................... $-- $126 $ --
Income tax benefit -- deferred.............................. -- (82) --
Estimated permanent differences............................. -- (7) --
Additional 10% income tax on undistributed earnings......... -- -- 60
Adjustment of prior year's income tax....................... -- -- 2
---- ---- ----
Income tax expense.......................................... $-- $ 37 $ 62
==== ==== ====
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. As of December 31, 1997, 1998 and 1999, deferred income tax assets and
liabilities are as follows:
DECEMBER 31,
-------------------------
1997 1998 1999
----- ----- -------
Current:
Taxable temporary differences.......................... $ 33 $ 112 $ 119
Investment tax credits................................. 21 156 5
Operating loss carryforward............................ 109 -- 338
----- ----- -------
Total............................................... 163 268 462
Valuation allowance.................................... (163) (268) (462)
----- ----- -------
Noncurrent:
Taxable temporary differences.......................... 33 23 31
Investment tax credits................................. 329 -- 1,279
Operating loss carryforwards........................... -- 670 51
----- ----- -------
Total............................................... 362 693 1,361
Valuation allowance.................................... (362) (693) (1,361)
----- ----- -------
$ -- $ -- $ --
===== ===== =======
C. The Company's income tax returns through taxable year ended December 31,
1996 have been examined by the tax authorities.
D. As of December 31 1999, the Company's unused investment tax credits and
the tax effect of loss carryforward amounted to approximately $1,284 and $389,
respectively, and are available for future use through 2003 and 2004,
respectively.
10. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
NAME AND RELATIONSHIP OF RELATED PARTIES RELATIONSHIP WITH THE COMPANY
---------------------------------------- -----------------------------
Wah Lee Industrial Corp. (WAH LEE)................. Its chairman is the supervisor of the
Company
Delta Electronics Int. Ltd. (DELTA LTD.)........... Same chairman
Delta Electronics Inc. (DELTA INC.)................ Same chairman
Cyntec Co., Ltd. (CYNTEC).......................... Same chairman
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222
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. Significant Related Party Transactions
For the period:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Sales
DELTA INC. .......................... $ -- -- $ 22 -- $148 3
WAH LEE.............................. -- -- 274 4 95 2
---- --- ---- --- ---- ---
$ -- -- $296 4 $243 5
==== === ==== === ==== ===
Purchases
CYNTEC............................... $ -- -- $ 1 -- $ -- --
DELTA LTD. .......................... -- -- 121 4 265 12
---- --- ---- --- ---- ---
$ -- -- $122 4 $265 12
==== === ==== === ==== ===
At end of period:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
Receivable
DELTA INC. .......................... $ -- -- $ 2 -- $ 25 5
WAH LEE.............................. -- -- 11 1 21 4
---- --- ---- --- ---- ---
$ -- -- $ 13 1 $ 46 9
==== === ==== === ==== ===
Accounts payable -- DELTA LTD. ........ $ -- -- $ 65 9 $ 52 10
==== === ==== === ==== ===
a. Sales to related parties are based on normal selling prices. The
collection period is 30 - 75 days after shipment for related parties and
15 - 60 days for other companies.
b. The payment terms for purchases from related parties are the same
as those from other suppliers.
c. As of December 1999, the Company sold certain machinery and
equipment to DELTA INC. for $38 and generated a gain of $4.
F-116
223
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
11. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and are listed as follows:
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------ ------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- ------
ASSETS
Cash............................... $4,734 $4,734 $6,510 $6,510 $1,841 $1,841
Restricted cash.................... 742 742 64 64 967 967
Marketable securities.............. 1,607 1,607 -- -- 2,307 2,307
Notes and accounts
receivable -- net................ 486 486 2,076 2,076 476 476
Prepaid long-term investment....... -- -- 1 1 -- --
Refundable deposits................ 38 38 62 62 41 41
LIABILITIES
Notes and accounts payable......... 97 97 701 701 537 537
Long-term debts (including current
portion)......................... -- -- 495 495 506 506
12. COMMITMENTS AND CONTINGENT LIABILITIES
In 1997 and 1999, the Company entered into loan agreements with Industrial
Development Bureau, Ministry of Economic Affairs and Administration of Hsin-chu
Science-based Industrial Park, respectively, for developing new products. Under
the agreements, the Company starts to repay the loan by installment after the
prototypes are completed for one year. In addition, when the new products begin
to sell, the Company shall pay 2% of net sales as feedback fund each quarter for
three years, but the total feedback fund should not be more than 30% of the
loan.
The major subsidy income contracts are summarized as follows:
BUREAU CONTRACT TERM SUBSIDY INCOME
------ --------------------- --------------
Industry Development Bureau, Ministry
of Economic Affairs (IDB)............ 1997.7.1 - 1998.12.31 $508
Administration of Hsin-chu
Science-based Industrial Park
(SBIP)............................... 1997.7.1 - 1998.12.31 711
Administration of Hsin-chu
Science-based Industrial Park
(SBIP)............................... 1999.10.1 - 2000.9.30 319
Generally, if the company can follow the contract policy, the bureaus will
not terminate the contract no matter new products can be produced or not.
13. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers.
F-117
224
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
A. Industry:
The Company is engaged in a single industry, which is research,
development, production, manufacture and sale of visible laser diode and module,
communication laser diode and module and high power laser diode and module.
B. Foreign markets:
Export sales were under 10% of total revenues for 1997 and 1998. Sales to
Asia and other area in 1999 were $1,865 and $683, respectively.
C. Major customers
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
CUSTOMERS AMOUNT % AMOUNT % AMOUNT %
--------- ------ --- ------ --- ------ ---
A.................................... $484 27 $ -- -- $ -- --
B.................................... 276 16 -- -- -- --
C.................................... -- -- 1,212 15 -- --
D. Geographic information.
The Company's operations are entirely in the Republic of China.
F-118
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OPTRONICS INTERNATIONAL CORP.
BALANCE SHEETS
DECEMBER 31, 1999 (AUDITED) AND JUNE 30, 2000 (UNAUDITED)
DECEMBER 31, JUNE 30,
NOTES 1999 2000
------------- ------------- ---------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
ASSETS
Current Assets
Cash................................................ 2B $ 1,841 $ 2,058
Restricted cash..................................... 2D 967 1,163
Marketable securities............................... 2B, 2E 2,307 --
Notes and accounts receivable -- net................ 2B, 3, 9 476 1,330
Inventories......................................... 2F, 4 1,046 1,740
Prepaid expenses and other current assets........... 102 126
------- -------
Total Current Assets............................. 6,739 6,417
------- -------
Properties -- Net..................................... 2G, 2H, 5, 9 5,197 5,618
------- -------
Other Assets
Prepaid long-term investment........................ -- --
Deferred pension cost............................... 2L -- --
Deferred charges -- net of accumulated amortization
cost of $2 as of December 31, 1999 and $13 as of
June 30, 2000.................................... 2I 32 108
Refundable deposits................................. 41 51
------- -------
Total Other Assets............................... 73 159
------- -------
Total Assets..................................... $12,009 $12,194
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes and accounts payable.......................... 9 $ 537 $ 1,306
Income tax payable.................................. 2M, 8 62 --
Current portion of long-term debts.................. 6, 11 253 259
Accrued expenses and other current liabilities...... 841 753
------- -------
Total Current Liabilities........................ 1,693 2,318
Long-Term Debts -- Net of Current Portion............. 6, 11 253 129
Accrued Pension Cost.................................. 2L 86 141
------- -------
Total Liabilities................................ 2,032 2,588
------- -------
Shareholders' Equity.................................. 7
Capital stock -- $0.3 par value;
Authorized -- 45,000 thousand shares
Issued -- 35,000 thousand shares................. 11,833 11,833
Retained earnings:
Legal reserve....................................... 50 50
Unappropriated earnings (deficit)................... (1,261) (1,843)
Cumulative translation adjustment................... 2O, 2P (645) (434)
------- -------
Total Shareholders' Equity....................... 9,977 9,606
------- -------
Total Liabilities and Shareholders' Equity....... $12,009 $12,194
======= =======
The accompanying notes are an integral part of the financial statements.
F-119
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OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
SIX MONTHS ENDED
JUNE 30,
-------------------
NOTES 1999 2000
----- -------- -------
(UNAUDITED)
(IN THOUSAND U.S.
DOLLARS EXCEPT
PER SHARE AMOUNTS)
Net Sales................................................... 2J, 9 $ 2,968 $3,207
Cost of Sales............................................... 9 2,117 2,917
------- ------
Gross Profit................................................ 851 290
------- ------
Operating Expenses
Research and development.................................. 2K 901 599
General and administrative................................ 217 354
Marketing................................................. 261 143
------- ------
Total Operating Expenses............................... 1,379 1,096
------- ------
Loss from Operations........................................ (528) (806)
------- ------
Non-Operating Income (Expense)
Interest revenue.......................................... 130 38
Subsidy................................................... 235 174
Gain on sale of marketable securities..................... 2E -- 22
Unrealized holding gains on marketable securities......... -- --
Foreign exchange gain loss................................ 2N 10 (10)
Gain on disposal of properties............................ 9 4 --
------- ------
Total Non-Operating Income............................. 379 224
------- ------
Loss Before Income Tax...................................... (149) (582)
Income Tax Expense.......................................... 2M, 8 2 --
------- ------
Net Loss.................................................... $ (151) $ (582)
======= ======
Other Comprehensive Income
Translation adjustments................................... 2O (97) 211
------- ------
Comprehensive Loss.......................................... $ (248) $ (371)
======= ======
Loss Per Share --
Based on weighted average outstanding common stock 35,000
thousand shares........................................ 2Q $(0.004) $(0.02)
======= ======
The accompanying notes are an integral part of the financial statements.
F-120
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OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
1999 2000
------- -------
(UNAUDITED)
(IN THOUSAND U.S.
DOLLARS)
Operating Activities
Net loss.................................................. $ (151) $ (582)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 314 405
Gain on disposal of properties......................... (4) --
Accrued pension cost................................... 44 55
Gain on sale of marketable securities.................. -- (22)
Changes in operating assets and liabilities
Notes and accounts receivable.......................... 1,564 (854)
Inventories.......................................... (463) (694)
Prepaid expenses and other current assets............ (281) (24)
Notes and accounts payable........................... 99 769
Income tax payable................................... (14) (62)
Accrued expenses and other current liabilities....... (1,021) (88)
------- -------
Net Cash Provided by (Used in) Operating
Activities....................................... 87 (1,097)
------- -------
Investing Activities
Acquisitions of properties................................ (450) (709)
Increase in restricted cash............................... (887) (196)
Proceeds from disposal of properties...................... 38 --
Decrease (increase) in marketable securities.............. (400) 2,329
Increase in deferred charges.............................. (2) (86)
Decrease (increase) in refundable deposits................ 23 (10)
------- -------
Net Cash Provided by (Used in) Investing
Activities....................................... (1,678) 1,328
------- -------
Financing Activity
Payment of long-term debts................................ -- (124)
------- -------
Effects of Changes in Foreign Exchange Rate................. (60) 110
------- -------
Net Increase (Decrease) in Cash............................. (1,651) 217
Cash At Beginning of Period................................. 6,510 1,841
------- -------
Cash at End of Period....................................... $ 4,859 $ 2,058
======= =======
Supplemental Disclosures of Cash Flow Information
Cash paid for income tax.................................. $ 15 $ 62
======= =======
The accompanying notes are an integral part of the financial statements.
F-121
228
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
Optronics International Corp. (the "Company") was incorporated under the
Company Law of the Republic of China on November 21, 1996 and started its
operations in February 1997. The Company is primarily engaged in research,
development, production, manufacture and sale of visible laser diode and module,
communication laser diode and module and high power laser diode and module.
2. ACCOUNTING POLICIES
A. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
B. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, marketable securities and accounts
receivable. Cash and marketable securities are deposited or placed with high
credit quality financial institutions to the extent of the amount recorded on
the balance sheet. As far as the accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and the Company
maintains an allowance for doubtful accounts receivable based upon review of the
expected collectibility of individual accounts receivable.
C. Fair Value of Financial Instruments
The Company's financial instruments, including cash, restricted cash,
marketable securities, notes and accounts receivable, refundable deposits, and
notes and accounts payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Fair value of long-term debts is estimated based on current interest rates
available to the Company with similar terms, degrees of risks and remaining
maturities. The carrying values of long-term debts approximate their respective
fair value.
D. Restricted Cash
Restricted cash is composed of time deposits that the Company maintains as
collateral for obtaining letters of credits.
E. Marketable Securities
Marketable securities are open-end bond funds that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings.
The costs of investment sold are determined by the weighted average method.
F-122
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
F. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment are capitalized, while maintenance and
repairs are expensed currently.
Depreciation is provided on the straight-line method over the estimated
useful lives that range as follows: machinery and equipment -- 3 to 8 years;
computer equipment -- 3 years; office equipment -- 5 years; leasehold
improvements -- 5 years; transportation equipment -- 5 years; other
equipment -- 5 to 20 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the financial statements of the Company.
I. Deferred Charges
Deferred charges are stated at cost and amortized on straight-line basis
over the following years: tools -- 3 years.
J. Revenue Recognition
Revenue is mainly from product sales to customers and is recognized at the
time of shipment, indicating that revenue has been realized and earned. The four
criteria for revenue being realized and earned are the existence of sale, actual
shipment, fixed or determinable selling price, and reasonable assurance of
collectibility. Allowances for sales returns and discounts are provided at the
time of the recognition of the related revenues based on experience and these
provisions are deducted from sales.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company currently complies with SAB 101 and therefore SAB 101 will not have
any effect on our financial position or result of operations.
K. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
F-123
230
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
L. Pension Costs
The Company has non-contributory and funded defined benefit retirement
plans covering all its regular employees. The contribution to an independent
fund is deposited with the Central Trust of China, as the custodian. Net pension
cost, with includes service cost, interest cost, expected return on plan assets
and amortization of net asset or obligation at transition, is recognized based
on an actuarial valuation.
The Company has a defined benefit pension plan for all regular employees,
which provides benefits base on length of service and average monthly salary for
the last six month prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited as the committee's name in the Central Trust of China which acts
as trustee.
M. Income Tax
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
identified to an asset or a liability in the financial statements, then it
should be classified as current or noncurrent based on the expected reversal
date of temporary difference.
N. Foreign-currency Transactions
The functional currency of the Company is New Taiwan dollars. The
foreign-currency transactions of the Company are recorded using their respective
functional currencies at the rates of exchange in effect when the transactions
occur. Gains or losses, resulting from the application of different foreign
exchange rates when cash in foreign currency is converted into New Taiwan
dollars, or when foreign-currency receivables and payables are settled, are
credited or charged to income in the year of conversion or settlement. At the
balance sheet dates, the balances of foreign-currency assets and liabilities are
restated into the respective functional currencies based on prevailing exchange
rates and any resulting gains or losses are credited or charged to income.
O. Translation of Foreign-Currency Financial Statements
The financial statements are translated into U.S. dollars at the following
exchange rates: assets and liabilities -- current rate; income and
expenses -- weighted average rate during the year. The resulting translation
adjustment is recorded as separate component of shareholders' equity.
Q. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income"; SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-
F-124
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
owner sources. To date, the Company has only translation adjustment that are
required to be reported in comprehensive income.
R. Earnings (Loss) Per Share
SFAS No. 128 "Earnings Per Share", establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using the
average shares of common share outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either as if converted
method for convertible preferred share or the treasury stock method for options
and warrants. Since the Company's capital structure is simple, therefore, its
basic earnings per share is the same as diluted earnings per share.
S. Unaudited Interim Financial Statements
The interim financial information contained herein is unaudited but, in the
opinion of management, reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. All adjustments are of a normal, recurring nature.
Results of operations for interim periods presented herein are not necessarily
indicative of results of operations for the entire year.
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
Receivable from related parties (Note 9)............... $ 46 $ 331
Notes receivable....................................... 46 12
Accounts receivable -- third parties................... 861 1,474
----- ------
953 1,817
Allowance for doubtful accounts........................ (477) (487)
----- ------
$ 476 $1,330
===== ======
4. INVENTORIES
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
Finished goods......................................... $ 233 $ 323
Work in process........................................ 320 626
Raw materials.......................................... 493 791
------ ------
$1,046 $1,740
====== ======
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OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
5. PROPERTIES -- NET
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
Cost
Machinery and equipment.............................. $5,018 $5,381
Computer equipment................................... 60 85
Office equipment..................................... 36 69
Leasehold improvements............................... 81 176
Transportation equipment............................. 58 59
Other equipment...................................... 1,230 1,291
Prepayments.......................................... 33 292
------ ------
6,516 7,353
------ ------
Accumulated depreciation
Machinery and equipment.............................. $1,076 $1,407
Computer equipment................................... 32 42
Office equipment..................................... 13 18
Leasehold improvements............................... 29 32
Transportation equipment............................. 21 27
Other equipment...................................... 148 209
------ ------
1,319 1,735
------ ------
$5,197 $5,618
====== ======
6. LONG-TERM DEBTS
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
Industrial Bureau -- Innovation Products Matching Fund
to be repaid in installment with final payment due in
October 2001 (Note 12)............................... $ 506 $ 388
Current portion........................................ (253) (259)
----- -----
$ 253 $ 129
===== =====
As of June 30, 2000, long-term debts mature as follows:
JUNE 30,
2000
--------
During the year 2000........................................ $259
During the year 2001........................................ 129
7. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income after deducting any previously
accumulated deficit and 10% legal reserve:
(a) 5% - 10% special bonus to employees;
(b) 1% - 3% compensation to directors and supervisors; and
F-126
233
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
(c) Special retained earnings reserve and unappropriated earnings can
be set aside when necessary, and the remaining amount shall be appropriated
as common shareholders' bonus.
The appropriations and the disposition of the remaining net income
shall be resolved by the shareholders in the following year and given
effect to in the financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
8. INCOME TAX
A. Income tax benefit: The Company expects no income tax benefits and
income tax payable for the six months ended June 30, 2000. Income tax expense of
$2 for the six months ended June 30, 1999 represents the prior year's income tax
adjustment.
B. As of December 31, 1999 and June 30, 2000, deferred income tax assets
and liabilities are as follows:
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
Current:
Taxable temporary differences....................... $ 119 $ 105
Investment tax credits.............................. 5 --
Operating loss carryforwards........................ 338 284
------- -------
Total............................................ 462 389
Valuation allowance................................... (462) (389)
------- -------
-- --
------- -------
Noncurrent:
Taxable temporary differences....................... 31 5
Investment tax credits.............................. 1,279 1,214
Operating loss carryforwards........................ 51 59
------- -------
Total............................................ 1,361 1,278
Valuation allowance................................... (1,361) (1,278)
------- -------
$ -- $ --
======= =======
C. The Company's income tax returns through taxable year ended December 31,
1996 have been examined by the tax authorities.
D. As of June 30, 2000, the Company's unused investment tax credits and the
tax effect of loss carryforwards amounted to approximately $1,214 and $343,
respectively, and are available for future use through 2003 and 2004,
respectively.
F-127
234
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
9. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
NAME AND RELATIONSHIP OF RELATED PARTIES RELATIONSHIP WITH THE COMPANY
---------------------------------------- -----------------------------
Wah Lee Industrial Corp. (WAH LEE)........ Its chairman is the supervisor of the
Company
Delta Electronics Int. Ltd. (DELTA
LTD.)................................... Same chairman
Delta Electronics Inc. (DELTA INC.)....... Same chairman
B. Significant Related Party Transactions
For the period:
FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------
1999 2000
---------------- ----------------
AMOUNT % AMOUNT %
------- ----- ------- -----
Sales
DELTA INC. ............................................... $ 86 3 $314 5
WAH LEE................................................... 86 3 176 10
---- ---- ---- ----
$172 6 $490 15
==== ==== ==== ====
Purchases................................................... $160 8 $ 8 --
DELTA LTD. ............................................... 2 -- -- --
---- ---- ---- ----
DELTA INC. ............................................... $162 8 $ 8 --
==== ==== ==== ====
At end of period:
DECEMBER 31, JUNE 30,
1999 2000
-------------- --------------
AMOUNT % AMOUNT %
------ ---- ------ ----
Receivable
DELTA INC. ............................................... $ 25 5 $272 20
WAH LEE................................................... 21 4 59 5
---- ---- ---- ----
$ 46 9 $331 25
==== ==== ==== ====
Accounts payable -- DELTA LTD. ............................. $ 52 10 $ 1 --
==== ==== ==== ====
a. Sales to related parties are based on normal selling prices. The
collection period is 30 - 75 days after shipment for related parties and
15 - 60 days for other companies.
b. The payment terms for purchases from related parties are the same
as those from other suppliers.
c. As of June 30, 1999, the Company sold certain machinery and
equipment to DELTA INC. for $38 and generated a gain of $4.
F-128
235
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
10. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and are listed as follows:
DECEMBER 31, 1999 JUNE 30, 2000
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- ------
ASSETS
Cash................................................... $1,841 $1,841 $2,058 $2,058
Restricted cash........................................ 967 967 1,163 1,163
Marketable securities.................................. 2,307 2,307 -- --
Notes and accounts receivable -- net................... 476 476 1,330 1,330
Prepaid long-term investment........................... -- -- -- --
Refundable deposits.................................... 41 41 51 51
LIABILITIES
Notes and accounts payable............................. 537 537 1,306 1,306
Long-term debts (including current portion)............ 506 506 388 388
11. COMMITMENTS AND CONTINGENT LIABILITIES
A. In 1997 and 1999, the Company entered into loan agreements with
Industrial Development Bureau, Ministry of Economic Affairs and Administration
of Hsin-chu Science-based Industrial Park, respectively, for developing new
products. Under the agreements, the loans are paid in installments starting one
year after the prototypes are completed. In addition, the Company shall make
quarterly payment for a period of three years equivalent to 2% of net sales as
feedback fund starting when sales are generated from the new products begin.
However, the total feedback fund should not be more than 30% of the loan.
B. As of June 30, 2000, unused letters of credit aggregate about US$129
thousand and JPY 32,683 thousand.
12. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires companies to disclose
certain information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment, laser diode
products.
A. Foreign markets:
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
AREA 1999 2000
---- ------- -------
Asia....................................................... $1,234 $ 907
America.................................................... 94 762
Europe..................................................... 16 234
Other...................................................... -- 7
------ ------
$1,344 $1,910
====== ======
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236
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
B. Major customers
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 2000
--------------- ---------------
CUSTOMERS AMOUNT % AMOUNT %
--------- ------- ---- ------- ----
A...................................................... $410 14 $ -- --
B...................................................... 400 13 -- --
C...................................................... -- -- 380 12
D...................................................... -- -- 314 10
C. Geographic information.
The Company's operations are entirely in the Republic of China.
F-130
237
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quantum Optech Incorporation
We have audited the accompanying consolidated balance sheets of Quantum
Optech Incorporation and subsidiary as of December 31, 1998 and 1999 and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for the period from May 27, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999. 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 auditing standards generally
accepted in the United States of America. 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 Quantum
Optech Incorporation and subsidiary as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for the period from May 27,
1997 (inception) to December 31, 1997 and for the years ended December 31, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States of America.
KPMG Certified Public Accountants
Hsin Chu, Taiwan
May 25, 2000
F-131
238
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
1998 1999
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,978,930 $ 1,521,481
Marketable securities..................................... -- 581,423
Accounts receivable, net of allowance for doubtful
accounts of $6,713 and $6,878 as of December 31, 1998
and 1999, respectively................................. 705,854 1,070,429
Inventories............................................... 1,094,718 1,506,436
Prepaid expenses.......................................... 26,190 16,616
Other current assets...................................... 37,860 121,683
---------- -----------
Total current assets................................... 3,843,552 4,818,068
Property, plant and equipment, net........................ 2,766,572 4,316,607
---------- -----------
Total assets........................................... $6,610,124 $ 9,134,675
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 178,581 $ 428,634
Current portion of long-term debt......................... 155,231 353,546
Due to related parties.................................... 129,143 13,898
Accounts payable.......................................... 417,037 1,075,277
Advance from customers.................................... 263 795,877
Accrued expenses and other current liabilities............ 185,196 321,170
---------- -----------
Total current liabilities.............................. 1,065,451 2,988,402
Long-term debt............................................ 956,225 1,094,609
Accrued pension........................................... 39,863 95,070
---------- -----------
Total liabilities...................................... 2,061,539 4,178,081
---------- -----------
Stockholders' equity:
Common stock, par value of 10 New Taiwan dollars,
authorized shares of 15,000,000 and 30,000,000; issued
and outstanding shares of 15,000,000 and 19,000,000, as
of December 31, 1998 and 1999, respectively............ 4,815,382 6,076,019
Additional paid-in capital................................ 565,789 943,980
Accumulated deficit....................................... (677,173) (1,983,792)
Accumulated other comprehensive loss...................... (155,413) (79,613)
---------- -----------
Total stockholders' equity............................. 4,548,585 4,956,594
Commitments
Total liabilities and stockholders' equity............. $6,610,124 $ 9,134,675
========== ===========
See accompanying notes to consolidated financial statements.
F-132
239
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
PERIOD FROM MAY 27, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999
1997 1998 1999
--------- ---------- -----------
Net sales............................................. $ -- $2,116,317 $ 3,433,449
Cost of goods sold.................................... -- 2,016,479 3,555,303
--------- ---------- -----------
Gross profit (loss)................................... -- 99,838 (121,854)
Selling, general and administrative expense........... 43,075 508,384 853,904
Research and development expense...................... -- 73,519 281,076
--------- ---------- -----------
Operating loss........................................ (43,075) (482,065) (1,256,834)
Interest expense...................................... (5,416) (165,125) (100,451)
Interest income....................................... 1,333 7,086 15,095
Foreign exchange gain (loss), net..................... -- 8,876 (8,259)
Other gain (loss), net................................ (993) 2,206 43,830
--------- ---------- -----------
Net loss.............................................. $ (48,151) $ (629,022) $(1,306,619)
========= ========== ===========
Other comprehensive income (loss):
Foreign currency translation adjustment............. $(136,108) $ (19,305) $ 86,292
Unrealized holding loss on marketable securities.... -- -- (10,492)
--------- ---------- -----------
Comprehensive loss.................................. $(184,259) $ (648,327) $(1,230,819)
========= ========== ===========
See accompanying notes to consolidated financial statements.
F-133
240
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FOR MAY 27, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
---------------------------
FOREIGN UNREALIZED
COMMON SHARES ADDITIONAL CURRENCY HOLDING LOSS TOTAL
----------------------- PAID-IN ACCUMULATED TRANSLATION ON MARKETABLE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SECURITIES EQUITY
---------- ---------- ---------- ----------- ----------- ------------- -------------