8-K/A 1 e8-ka.txt FORM 8-K AMENDMENT 1 FORM 8-K/A WASHINGTON, D.C. 20549 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 24, 2000 MRV COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 0-23452 06-1340090 (Commission File Number) (I.R.S. Employer Identification No.) 20415 Nordhoff Street Chatsworth, California 91311 (Address of Principal executive offices) (Zip Code) 818 773-0900 (Registrant's telephone number, including area code) 8943 Fullbright Ave. Chatsworth, CA 91311 (Former name or former address, if changed since last report) 2 This Form 8-K/A Supplements and completes registrant's Form 8-K filed May 9, 2000: Item 7 Financial Statements and Exhibits (a) Financial Statements of Business Acquired The following financial statements of Fiber Optics Communications, Inc. are included herewith: Audited Consolidated Financial Statements As Of December 31, 1997, 1998 And 1999: Report of Independent Auditors Consolidated Balance Sheets at December 31, 1997, 1998 and 1999 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1997, 1998 and 1999 Consolidated Statements of Changes in Stockholders Equity for the year ended December 31, 1997, 1998 and 1999 Consolidated Statements of Cash Flows for the year ended December 31, 1997, 1998 and 1999 Notes to Consolidated Financial Statements Unaudited Consolidated Financial Statements as of March 31, 1999 and 2000: Consolidated Balance Sheets at March 31, 1999 and 2000 Consolidated Statements of Operations And Comprehensive Income for the Periods Ended March 31, 1999 and 2000 Consolidated Statements Of Cash Flows For the Periods Ended March 31, 1999 and 2000 Notes to Consolidated Financial Statements 2 3 (b) Pro Forma Financial Information The following pro forma financial information is included herewith: Unaudited Pro Forma Condensed Consolidated Financial Information Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2000 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1999 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Three Months Ended March 31, 2000 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information (c) Exhibits 2.1(e) Addendum No. 2 to Escrow Agreement dated as of June 26, 2000 by and among Fiber Optic Communications, Inc. ("FOCI"), Registrant and the selling shareholders of FOCI. 2.1(f) Addendum No. 2 to Stock Purchase Agreement dated as of June 26, 2000 by and among FOCI, Registrant and the selling shareholders of FOCI. 2.1(g) Memorandum of Understanding dated as of June 26, 2000 between Registrant and the remaining shareholders of FOCI. 3 4 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. July 7, 2000 MRV COMMUNICATIONS, INC. BY: /s/ EDMUND GLAZER ----------------------------------- Edmund Glazer Vice President of Finance and Administration and Chief Financial Officer 4 5 [ARTHUR ANDERSEN LETTERHEAD] T N Soong & Co 12th Fl., 156 Min Sheng E. Road Sec. 3 Taipei, Taiwan, ROC Tel : 886-2-2545-9988 Fax: 886-2-2545-9966 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997, 1998 AND 1999 F-1 6 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. /s/ T N SOONG & CO T N Soong & Co A Member Firm of Andersen Worldwide, SC Taipei, Taiwan, the Republic of China June 12, 2000 F-2 7 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997, 1998 and 1999 (In Thousand U.S. Dollars Except Share Amounts)
December 31 --------------------------------------------- A S S E T S Notes 1997 1998 1999 ----------- --------- ------------- ------------- ------------- 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-3 8 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Years Ended December 31, 1997, 1998 and 1999 (In Thousand U.S. Dollars Except Per Share Amounts)
YEARS ENDED DECEMBER 31 Notes 1997 1998 1999 --------- ------------ ------------ ------- GROSS SALES $ 7,544 $ 20,498 $ 20,053 SALES RETURNS AND ALLOWANCES ( 38) ( 117) ( 295) ------------ ------------ ------------ NET SALES 2K, 14 7,506 20,381 19,758 COST OF SALES 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) ( $ 1,434) $ 2,267 $ 76 ============ ============ ============ EARNINGS (LOSS) PER SHARE - Based on 2S Weighted average outstanding common stock 31,245 thousand shares in 1997 and 50,177 thousand shares in 1998 and 68,447 thousand shares in 1999 $ 0.05 $ 0.03 ( $ 0.01) ======= ======= ======= Retroactively adjusted outstanding common stock 43,117 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-4 9 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1997, 1998 and 1999 (In Thousand U.S. Dollars)
CAPITAL SURPLUS CAPITAL STOCK ------------------------------------------- ISSUED Gain on ---------------------------- Disposal of Shares Pain-in Long-term Properties (Thousand) Amount Capital Investment (2G) Total -------------- ---------- ----------- ---------- -------------- ---------- BALANCE , JANUARY 1, 1997 19,980 $ 7,519 $ - $ - $ - $ - Issuance of capital stock for cash 15,020 5,456 5,456 - - 5,456 Net income for 1997 - - - - - - Translation adjustment - - - - - - ------------- ---------- ---------- ---------- ---------- ---------- BALANCE , DECEMBER 31, 1997 35,000 12,975 5,456 - - 5,456 Issuance of capital stock for cash 16,470 4,905 9,809 - - 9,809 Appropriations of 1997 earnings: Legal reserve - - - - - - Capital surplus transferred into capital 5,250 1,907 ( 1,907) - - ( 1,907) Net income for 1998 - - - - - - Translation adjustment - - - - - - ------------- ---------- ---------- ---------- ---------- ---------- BALANCE , DECEMBER 31, 1998 56,720 19,787 13,358 - - 13,358 Appropriations of 1998 earnings: Legal reserve - - - - - - Stock dividends - 10% 5,672 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 - - - - - - Gain on disposal of properties - - - - 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 =========== ========== ========== ========== ========== ==========
RETAINED EARNINGS (Note 10) CUMULATIVE ----------------------------------------------- TRANSLATION TOTAL Legal Unappropriated ADJUSTMENT SHAREHOLDERS' Reserve Earnings (Deficit) Total ( Note 2Q) EQUITY ---------- ------------------- ---------- ---------------- ------------ BALANCE , JANUARY 1, 1997 $ - ( $ 1,208) ( $ 1,208) $ - $ 6,311 Issuance of capital stock for cash - - - - 10,912 Net income for 1997 - 1,634 1,634 - 1,634 Translation adjustment - - - ( 3,068) ( 3,068) ---------- ------------ ---------- ------------ ------------ BALANCE , DECEMBER 31, 1997 - 426 426 ( 3,068) 15,789 Issuance of capital stock for cash - - - - 14,714 Appropriations of 1997 earnings: Legal reserve 62 ( 62) - - - Capital surplus transferred into capital - - - - - Net income for 1998 - 1,507 1,507 - 1,507 Translation adjustment - - - 760 760 ---------- ------------ ---------- ------------ ------------ BALANCE , DECEMBER 31, 1998 62 1,871 1,933 ( 2,308) 32,770 Appropriations of 1998 earnings: Legal reserve 205 ( 205) - - - Stock dividends - 10% - ( 1,759) ( 1,759) - - Capital surplus transferred into capital - - - - - Stocks issued as payment of bonus to employees - - - - 570 Net loss for 1999 - ( 661) ( 661) - ( 661) Gain on disposal of properties - ( 1) ( 1) - - Adjustment of capital reserve due to change in equity in long-term investments - - - - 8 Translation adjustments - - - 737 737 ---------- ------------ ---------- ------------ ------------ BALANCE , DECEMBER 31, 1999 $ 267 ( $ 755) ( $ 488) ( $ 1,571) $ 33,424 ========== ============ ========== ============ ============
The accompanying notes are an integral part of the financial statements. F-5 10 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1998 and 1999 (In Thousand U.S. Dollars)
Years Ended December 31 ------------------------------------------------ 1997 1998 1999 ------------ ------------ -------------- 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-6 11 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's has the following subsidiaries:
----------------------------------------------------------------------------------------------------------------------- Date, Place and Other Details Related to Name Ownership Incorporation Nature of Business ----------------------------------------------------------------------------------------------------------------------- FOCI USA, Inc. 100% Incorporated on March 11, Selling of fiber optic related products 1999 in the State of including components, testing California, United systems, instruments, network States of America. installation, CATV engineering, and sensing systems. ----------------------------------------------------------------------------------------------------------------------- FOCI Optronic Components, 94% Incorporated on February Designs, installs, manufactures and Inc. 6, 1999 in the markets fiber optic related Republic of China. products including components, testing systems, instruments, network installation, CATV engineering, and sensing systems ----------------------------------------------------------------------------------------------------------------------- FIOPTEC Inc. 93% Incorporated on April 9, Manufacture and markets fiber optic 1993 in the Republic related products including fiber of China. The optic components. Company's 93% investment was Also, it has indirect investment in acquired on June 29, Shanghai FOCI Fiber Optic 1998. Communications Equipment, Inc. through FIOPTEC Inc. (Cayman Islands). ----------------------------------------------------------------------------------------------------------------------- FIOPTEC Inc. (Cayman 100% owned by Incorporated on August 28, Investment holding company. Islands) FIOPTEC, Inc. 1998 in Cayman Islands. ----------------------------------------------------------------------------------------------------------------------- Shanghai FOCI Fiber Optic 100% owned by Incorporated on August 1, Designs, installs, manufactures and Communications FIOPTEC 1995 in Shanghai, markets fiber optic related Equipment, Inc. (Cayman People's Republic of products including components, Islands) China. FIOPTEC Inc.'s testing systems, instruments, investment was made on network installation, CATV June 29, 1998. engineering, and sensing systems. ----------------------------------------------------------------------------------------------------------------------- Yuan-Tai Enterprises Pte, 100% owned by Incorporated on October Import fiber optic products from the Ltd. FIOPTEC Inc. 23, 1993 in Singapore. Company for export outside FIOPTEC Inc. made its Singapore. investment to the Company on December 5, 1995 and the investment was disposed by FIOPTEC Inc. on October 29, 1998. -----------------------------------------------------------------------------------------------------------------------
F-7 12 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 an allowance for doubtful accounts receivable based upon review of the expected collectibility of individual accounts receivable. 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 F-8 13 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. 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 Sales are recognized when products are shipped to customers. 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 reasonably 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. 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 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. F-9 14 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. 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. F-10 15 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 ============ ============ ============
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 Completed contract method optic $ 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 Completed contract method optic $5,400 $4,657 $3,312 $705 $2,607 ====== ====== ====== ==== ======
F-11 16 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 -------------------------------------------------------------------- % of % of % of Carrying Owner- Carrying Owner- Carrying Owner- Value Ship Value Ship Value Ship ---------- --------- ---------- --------- ---------- ------ Ganso Corp. $ - - $ 22 - $ 13 - Winluck Group Ltd. - - 18 - 18 - ---------- ---------- ---------- $ - $ 40 $ 31 ========== ========== ==========
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. F-12 17
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. 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
F-13 18 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. 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:
1997 1998 1999 ---------- ---------- ---------- a. Net periodic pension cost 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 ========== ========== ==========
F-14 19 The change in benefit obligation and plan assets and reconciliation of fund status are as follows:
1997 1998 1999 ---------- ---------- ---------- b. Change in benefit obligation: 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 ========== ========== ========== c. Change in plan assets: 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 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%
F-15 20 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 ============ ============ ============
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. F-16 21 14. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties Name and Relationship of Related Parties Relationship with the Company ---------------------------------------- ---------------------------------- 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)
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-17 22 15. 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 Carrying Carrying Value Fair Value Value Fair Value Value Fair 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 Short-term guarantee and endorse other current assets) 154 1,466 3,022 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$4,768. 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. F-18 23 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 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-19 24
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-20 25 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999 AND 2000, AND APRIL 24, 2000 F-21 26 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS ( Unaudited ) March 31, 1999 and 2000 (In Thousand U.S. Dollars Except Share Amounts)
March 31 ------------------------------ A S S E T S Notes 1999 2000 ----------- --------- ------------- ------------- CURRENT ASSETS Cash 2C $ 2,213 $ 1,747 Marketable securities 2D 173 174 Notes and accounts receivable-net 2C, 3 10,122 10,541 Inventories 2E, 4 8,482 12,720 Prepaid expenses and other current assets 12, 14 2,913 4,682 ------------- ------------- Total Current Assets 23,903 29,864 ------------- ------------- LONG-TERM STOCK INVESTMENTS 2F, 5 40 40 -------------- ------------- PROPERTIES- NET 2G, 6, 14, 15 17,523 27,518 ------------- ------------- INTANGIBLE ASSETS 2I Patent 93 96 Land occupancy rights 500 500 Others 936 736 ------------- ------------- Total Intangible Assets 1,529 1,332 ------------- ------------- OTHER ASSETS Deferred charges- net 2J 279 658 Deferred income tax 2N, 12 442 342 Refundable deposits 87 83 ------------- ------------- Total Other Assets 808 1,083 ------------- ------------- TOTAL ASSETS $ 43,803 $ 59,837 ============= ============= CURRENT LIABILITIES Short-term bank loans 7 $ 2,796 $ 6,533 Commercial papers 8 2,713 2,442 Notes payable 447 494 Accounts payable 916 2,678 Income tax payable 2N, 12 163 189 Current portion of long-term debts 9, 14 - 625 Accrued expenses and other current liabilities 12 1,971 4,377 ------------- -------------- Total Current Liabilities 9,006 17,338 ------------- -------------- LONG-TERM DEBTS - NET OF CURRENT PORTION 9, 14 2,305 7,423 ------------- ------------- OTHER LIABILITIES Accrued pension cost 2M 57 67 Others 572 422 ------------- ------------- Total Other Liabilities 629 489 ------------- ------------- Total Liabilities 11,940 25,250 SHAREHOLDERS' EQUITY 10 Capital stock, $0.3 par value; Authorized - 110,000 thousand shares Issued - 56,720 thousand shares in 1999 and 68,984 thousand shares in 2000 19,787 23,891 Capital surplus 13,358 11,592 Retained earnings: Legal reserve - 267 Unappropriated earnings (accumulated deficits) 2,087 (580) Cumulative translation adjustment (3,369) (583) ------------- ------------- Total Shareholders' Equity 31,863 34,587 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,803 $ 59,837 ============= =============
The accompanying notes are an integral part of the financial statements. F-22 27 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME ( Unaudited ) For the Periods Ended March 31, 1999 and 2000 (In Thousand U.S. Dollars Except Per Share Amounts)
Periods Ended March 31 ------------------------------- Notes 1999 2000 --------- ------------- ------------- NET SALES 2K $ 3,668 $ 5,967 ------------- ------------- COST OF SALES 2,378 3,760 ------------- ------------- GROSS PROFIT 1,290 2,207 ------------- ------------- OPERATING EXPENSES Research and development 2L 259 425 General and administrative 790 563 Marketing 367 701 ------------- ------------- Total Operating Expenses 1,416 1,689 ------------- ------------- INCOME (LOSS) FROM OPERATIONS (126) 518 ------------- ------------- NON-OPERATING INCOME (EXPENSES) Foreign exchange gain (losses) - net 2P 55 (370) Interest - net (74) (192) Loss on disposal of properties - net (3) - Gain on sale of marketable securities 126 - Other - net 32 188 ------------- ------------- Total Non-Operating Income (Expenses) 136 (374) ------------- ------------- INCOME BEFORE INCOME TAX AND MINORITY INTERESTS 10 144 INCOME TAX BENEFIT (EXPENSE) 2N, 12 - - ------------- -------------- NET INCOME BEFORE MINORITY LOSS 10 144 MINORITY LOSS 14 31 ------------- ------------- NET INCOME $ 24 $ 175 ============= ============= OTHER COMPREHENSIVE INCOME Translation adjustment (1,061) 988 ------------- ------------- COMPREHENSIVE INCOME (LOSS) $ (1,037) $ 1,163 ============= ============= (Forward) EARNINGS (LOSS) PER SHARE- Based on 2S Weighted average outstanding common stock 56,720 thousand shares in 1999 and 68,984 thousand shares in 2000 $ 0.0004 $ 0.003 ============= =============
The accompanying notes are an integral part of the financial statements. F-23 28 FOCI FIBER OPTIC COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ( Unaudited ) For the Periods Ended March 31, 1999 and 2000 (In Thousand U.S. Dollars)
Periods Ended March 31 ---------------------------- 1999 2000 ------------ ------------ OPERATING ACTIVITIES Net income $ 24 $ 175 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 264 716 Loss on disposal of properties 3 - Accrued pension costs (9) (3) Minority interest in net loss of consolidated subsidiaries 14 31 Deferred income tax (74) (11) Gain on sale of marketable securities (126) - Changes in operating assets and liabilities Notes and accounts receivable (761) (193) Inventories 22 (1,179) Prepaid expenses and other current assets 304 (238) Notes and accounts payable (1,184) 160 Accrued expenses and other current liabilities 370 2,183 ------------ ------------ Net Cash Provided by (Used in) Operating Activities (1,153) 1,641 ------------ ------------ INVESTING ACTIVITIES: Acquisitions of Long-term stock investments - (1) Properties (1,960) (2,582) Proceeds from disposals of marketable securities 1,480 - Decrease in refundable deposits 13 2 Increase in other assets (312) (461) ------------ ------------ Net Cash Used in Investing Activities (779) (3,042) ------------ ------------ FINANCING ACTIVITIES: Proceeds from (payments of) Short-term bank loans 110 (2,167) Commercial paper 2,713 783 Long-term debts (228) 190 Increase in minority interest 245 18 ------------ ------------ Net Cash Provided by (Used in)Financing Activities 2,840 (1,176) ------------ ------------ EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE (931) 980 ------------ ------------ NET DECREASE IN CASH (23) (1,597) CASH AT BEGINNING OF PERIOD 2,236 3,344 ------------ ------------ CASH AT END OF PERIOD $ 2,213 $ 1,747 ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 88 $ 272 ============ ============ Cash paid for income tax $ 2 $ 4 ============ ============
The accompanying notes are an integral part of the financial statements. F-24 29 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's has the following subsidiaries:
------------------------------------------------------------------------------------------------------------------------- Date, Place and Other Details Related to Nature of Name Ownership Incorporation Business ------------------------------------------------------------------------------------------------------------------------ FOCI USA, Inc. 100% Incorporated on March 11, Selling of fiber optic related 1999 in the State of products including components, California, United States testing systems, instruments, of America. network installation, CATV engineering, and sensing systems. ------------------------------------------------------------------------------------------------------------------------ FOCI Optronic 94% Incorporated on February Designs, installs, manufactures and Components, Inc. 6, 1999 in the Republic of markets fiber optic related products China. including components, testing systems, instruments, network installation, CATV engineering, and sensing systems ------------------------------------------------------------------------------------------------------------------------ FIOPTEC Inc. 93% Incorporated on April 9, Manufacture and markets fiber optic 1993 in the Republic of related products including fiber China. The Company's 93% optic components. investment was acquired on June 29, 1998. Also, it has indirect investment in Shanghai FOCI Fiber Optic Communications Equipment, Inc. through FIOPTEC Inc. (Cayman Islands). ------------------------------------------------------------------------------------------------------------------------ FIOPTEC Inc. (Cayman 100% owned by Incorporated on August 28, Investment holding company. Islands) FIOPTEC, Inc. 1998 in Cayman Islands. ------------------------------------------------------------------------------------------------------------------------ Shanghai FOCI Fiber 100% owned by FIOPTEC Incorporated on August 1, Designs, installs, manufactures and Optic Communications (Cayman Islands) 1995 in Shanghai, People's markets fiber optic related products Equipment, Inc. Republic of China. FIOPTEC including components, testing Inc.'s investment was made systems, instruments, network on June 29, 1998. installation, CATV engineering, and sensing systems. ------------------------------------------------------------------------------------------------------------------------
F-25 30 2. ACCOUNTING POLICIES A. Basis of presentation The consolidated financial statements included the following: 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 an allowance for doubtful accounts receivable based upon review of the expected collectibility of individual accounts receivable. 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. F-26 31 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. 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 Sales are recognized when products are shipped to customers. 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 reasonably 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. 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 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. F-27 32 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. 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-28 33 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 March 31, 1999 and 2000, 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
March 31 ----------------------------- 1999 2000 ------------ ------------ Notes receivable $ 200 $ 417 Accounts receivable - third parties 11,280 11,077 ------------ ------------ 11,480 11,494 Allowance for doubtful accounts ( 1,358) ( 953) ------------ ------------ $ 10,122 $ 10,541 ============ ============
4. INVENTORIES A. The details of inventories are summarized as follows:
March 31 ----------------------------- 1999 2000 ------------ ------------ Finished goods $ 903 $ 1,055 Work in process 1,707 2,255 Raw materials 2,525 4,974 Contract in progress - net 3,422 4,538 ------------ ------------ 8,557 12,822 Allowance for losses (75) (102) ------------ ------------ $ 8,482 $ 12,720 ============ ============
F-29 34 B. The details of contract in progress are summarized as follows:
Contract Estimated Paid - in Billing on Contract in Accounting method price contract cost cost contract progress -------------------- ------------- ------------- ------------- -------------- ------------- March 31, 2000 -------------- Applied system of Completed contract fiber optic method $ 5,400 $ 5,523 $ 5,257 $ 952 $ 4,305 Others Completed contract method 492 407 234 - 233 ---------- ----------- ----------- ----------- ----------- $ 5,892 $ 5,930 $ 5,491 $ 952 $ 4,538 ========== =========== =========== =========== =========== March 31, 1999 -------------- Applied system of Completed contract fiber optic method $ 5,400 $ 4,523 $ 4,107 $ 685 $ 3,422 ========== =========== =========== =========== ===========
5. INVESTMENTS IN SHARES OF STOCK The details of the investments are as follows:
March 31 --------------------------------------------- 1999 2000 -------------------- -------------------- % of % of Carrying Owner- Carrying Owner- Value Ship Value Ship --------- -------- --------- -------- Ganso Corp. $ 22 - $ 22 - Winluck Group Ltd. 18 - 18 - -------- -------- $ 40 $ 40 ======== ========
6. PROPERTIES - NET
March 31 ----------------------------- 1999 2000 ------------ ------------ Cost Land $ - $ 3,292 Buildings 5,383 18,357 Machinery and equipment 6,117 7,408 Test equipment 337 581 Transportation equipment 89 211 Furniture and fixtures 1,110 1,598 Leasehold improvements 181 - Construction in progress and prepayments 6,625 325 ------------ ------------ 19,842 31,772 ------------ ------------ Accumulated Depreciation Buildings 332 894 Machinery and equipment 1,457 2,446 Test equipment 92 160 Transportation equipment 17 46 Furniture and fixtures 407 708 Leasehold improvements 14 - ------------ ------------ 2,319 4,254 ------------ ------------ $ 17,523 $ 27,518 ============ ============
F-30 35 7. SHORT-TERM LOANS
March 31 ----------------------------- 1999 2000 ------------ ------------ Secured loans from Tai-sin Bank, Far Eastern Bank, Dah An Commercial Bank , The International Commercial Bank of China and Land Bank of Taiwan $ 1,590 $ 2,674 Working capital loans from Far Eastern Bank, Land Bank, China Construction Bank and Shanghai Pudong Development Bank 1,206 3,859 ------------ ------------ $ 2,796 $ 6,533 ============ ============ 1.80% 1.8% ~8.0% ~8.0% ============ ============
8. COMMERCIAL PAPERS Commercial paper will mature between May to July 2000. It bore annual interest rates ranging from 4.70% to 5.10% and is secured by a guaranty issued by Tai-sin Bank, Far Eastern Bank and Dah An Commercial Bank. 9. LONG-TERM DEBTS
March 31 ----------------------------- 1999 2000 ------------ ------------ Land Bank of Taiwan: Loan for plant expansion. Payable in 60 monthly installments starting from December 1998 to November 2003. Interest at an annual rate of 7.5% but was prepaid in November 1999. $ 1,745 $ - Loan for plant expansion. Payable in 72 monthly installments starting from December 2000 to November 2006. Interest at an annual rate of 7.5%. - 6,363 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 7.14%. 560 339 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 2000 was 7.5% per annum. - 1,346 ------------ ------------ 2,305 8,048 Current portion - (625) ------------ ------------ $ 2,305 $ 7,423 ============ ============
F-31 36 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 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. 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. INCOME TAX A. Income tax benefit and income tax payable:
March 31 ----------------------------- 1999 2000 ------------ ------------ Income tax expense - current $ 5 $ 35 Income tax benefit - deferred (5) (35) ------------ ------------ Income tax benefit (expense) $ - $ - ============ ============
F-32 37 B. As of March 31, 1999 and 2000, deferred income tax assets and liabilities are as follows:
March 31 ----------------------------- 1999 2000 ------------ ------------ Current: Taxable temporary differences $ 241 $ 354 Investment tax credits 155 69 ------------ ------------ Total 396 423 Valuation allowance (4) - ------------ ------------ 392 423 ------------ ------------ Noncurrent: Taxable temporary differences 43 7 Investment tax credits 364 335 Operating loss carryforwards 35 - ------------ ------------- Total 442 342 Valuation allowance - - ------------ ------------ 442 342 ------------ ------------ $ 834 $ 765 ============ ============
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. 13. FINANCIAL INSTRUMENTS The Company's financial instruments are carried at cost, which approximates their fair value and are listed as follows:
March 31,1999 March 31,2000 ------------------------- ------------------------ Carrying Fair Value Carrying Fair Value Value Value ------------- ----------- ------------ ----------- Assets Cash $ 2,213 $ 2,213 $ 1,747 $ 1,747 Marketable securities 173 173 174 174 Notes and accounts receivable-net 10,122 10,122 10,541 10,541 Long-term investment 40 40 32 32 Refundable deposits 87 87 83 83 Liabilities Short-term bank loans 2,796 2,796 6,533 6,533 Commercial papers 2,713 2,713 2,442 2,442 Notes payable 447 447 494 494 Accounts payable 916 916 2,678 2,678 Long-term debts (including current portion) 2,305 2,305 8,048 8,048
F-33 38 14. ASSETS PLEDGED AS COLLATERAL
March 31 ------------------------- Assets 1999 2000 Subject of collateral ------------------------------ -------------- -------------- ----------------------------------------- Land $ - $ 3,292 Long-term loans Time deposit (shown in Short-term guarantee and endorse for other current assets) - 3,156 the bank loan of subsidiary Machinery and equipment 1,008 882 Long-term loans Buildings 5,140 15,173 Long-term loans ---------- ---------- $ 6,148 $ 22,503 ========== ==========
15. 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. As of April 24, 2000, the Company paid royalties of US$4,768. B. FIOPTEC Inc. and FOCI Optronic Components Inc. signed several contracts with third parties for the construction of its new plant amounting to $2,248. As of March 31, 2000, the two subsidiaries has outstanding obligations of $192 related to these contracts. 16. 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. 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
Periods Ended March 31 -------------------------------- Area 1999 2000 ----------------- ------------- ------------- Asia $ 1,299 $ 1,114 United States 865 1,859 Europe 665 1,283 Other 6 32 ------------- ------------- $ 2,835 $ 4,288 ============= =============
C. Major customers
Periods Ended March 31 --------------------------------------------- 1999 2000 -------------------- -------------------- Customers Amount % Amount % --------- ------------ ---- ------------ ---- A $ - - $ 854 14 B - - 725 12 ------------ ---- ------------ ---- $ - - 1,579 26 ============ ==== ============ ====
F-34 39 D. Geographic information
Adjustments and Eliminating Overseas Taiwan Entries Consolidated ------------ ------------ ----------- -------------- March 31, 1999 -------------- Sales to customers other than the parent and its subsidiaries $ 655 $ 3,013 $ - $ 3,668 Intercompany revenue - 1,164 (1,164) - ------------ ------------ ------------ ------------ Total sales $ 655 $ 4,177 $ (1,164) $ 3,668 ============ ============ ============ ============ Gross profit $ 48 $ 1,270 $ (28) $ 1,290 ============ ============ ============ Operating expenses (1,416) Non-operating income 136 ------------ Income before income tax 10 Income tax - Minority loss 14 ------------ Net income $ 24 ============ Identifiable assets $ 7,179 $ 48,954 $ (12,330) $ 43,803 ============ ============ ============ ============ March 31, 2000 -------------- Sales to customers other than the parent and its subsidiaries $ 2,079 $ 3,888 $ - $ 5,967 Intercompany revenue - 2,763 (2,763) - ------------ ------------ ------------ ------------ Total sales $ 2,079 $ 6,651 $ (2,763) $ 5,967 ============ ============ ============ ============ Gross profit $ 39 $ 2,421 $ (253) $ 2,207 ============ ============ ============ Operating expenses (1,689) Non-operating expenses (374) ------------ Income before income tax 144 Income tax - Minority loss 31 ------------ Net income $ 175 ============ Identifiable assets $ 9,909 $ 61,937 $ (12,017) $ 59,829 ============ ============ ============ ============
F-35 40 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION On April 24, 2000, MRV Communications, Inc. (MRV) completed the acquisition of approximately 97% or the outstanding capital stock of Fiber Optic Communications, Inc. (FOCI), a Republic of China corporation, in exchange for approximately 4.8 million shares of MRV's common stock and approximately $48.6 million in cash. MRV's management has prepared the following unaudited pro forma condensed consolidated financial information to give effect to this acquisition. The Unaudited Pro Forma condensed consolidated Statement of Operations for the years ended December 31, 1999 and for the three-months ended March 3,1 2000 give effect to the FOCI acquisition as if it had taken place at the beginning of each period. The Unaudited Pro Forma condensed consolidated Balance Sheet as of March 31, 2000 gives effect to the FOCI acquisition as if it had taken place on such date. The pro forma adjustments, which are based upon available information and certain assumptions that the Company believes are reasonable in the circumstances, are applied to the historical financial statements of MRV and FOCI. The FOCI acquisition will be accounted for using the purchase method of accounting. MRV allocation of purchase price is based upon management's current estimates of the fair value of assets acquired and liabilities assumed in accordance with Accounting Principles Board No. 16. The purchase price allocations reflected in the accompanying unaudited pro forma condensed consolidated financial statements may be different from the final allocation of the purchase price and such differences may be material. The Company expects to complete a valuation and other procedures during the fourth quarter of 2000. The accompanying unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements and the notes thereto for both MRV and FOCI. The unaudited pro forma condensed combined financial information is provided for informational purposes only and does not purport to represent what MRV's financial position or results of operations would actually have been had the FOCI acquisition occurred on such dates or to project MRV's results of operation or financial position for any future period. F-36 41 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2000 (in thousands)
Pro Forma MRV FOCI Adjustments Total -------- ---------- ------------- ----------- Current Assets: Cash and cash equivalents 19,467 1,747 - 21,214 Short-term investments 10,344 174 - 10,518 Accounts receivable 54,374 10,541 - 64,915 Inventories 37,569 12,720 - 50,289 Refundable income taxes 3,789 - - 3,789 Deferred income taxes 6,800 - - 6,800 Other current assets 6,211 4,682 - 10,893 --------- ----------- ----------- ----------- Total current assets 138,554 29,864 - 168,418 --------- ----------- ----------- ----------- Property and Equipment, net 17,226 27,518 3,000 (1) 47,744 Other Assets: Goodwill 26,201 - 258,703 (1) 284,904 Other intangibles - 1,332 - 1,332 U.S. Treasury notes 96,253 - (48,578) (1) 47,675 Investments in partner companies 24,258 - - 24,258 Deferred income taxes 5,479 342 - 5,821 Long-term stock investments - 40 - 40 Loan financing costs and other 3,143 741 - 3,884 --------- ----------- ----------- ----------- Total assets 311,114 59,837 213,125 584,076 --------- ----------- ----------- ----------- Current Liabilities Current maturities of capital lease obligation 122 - - 122 Current maturities of long-term debt - 625 - 625 Short-term bank loans - 6,533 - 6,533 Commercial paper - 2,442 - 2,442 Accounts payable 23,789 2,678 - 26,467 Accrued liabilities 15,690 4,377 - 20,067 Note payable - 494 - 494 Income taxes payable - 189 - 189 Deferred revenue 1,041 - - 1,041 --------- ----------- ----------- ----------- Total current liabilities 40,642 17,338 - 57,980 --------- ----------- ----------- ----------- Long-Term Liabilities Convertible debentures 90,000 - - 90,000 Capital lease obligations, net of current portion 1,268 - - 1,268 Long-term debt, net of current portion - 7,423 - 7,423 Deferred income taxes 281 - - 281 Accrued pension - 67 - 67 Other long-term liabilities 1,942 422 - 2,364 --------- ----------- ----------- ----------- Total long-term liabilities 93,491 7,912 - 101,403 --------- ----------- ----------- ----------- Minority Interests 2,394 - - 2,394 Stockholders' Equity Preferred stock - - - Common stock 126 23,891 (23,891) (1) 126 Additional paid-in capital 204,841 11,592 (11,592) (1) - - 261,782 (1) 466,623 Legal Reserve - 267 (267) (1) - Treasury stock (133) - (133) Retained earnings (deficit) (24,241) (580) 580 (1) (24,241) Accumulated other comprehensive income (loss) (6,006) (583) 583 (1) (6,006) Deferred compensation - - (14,070) (1) (14,070) --------- ----------- ----------- ----------- Total stockholders' equity 174,587 34,587 213,125 422,299 --------- ----------- ----------- ----------- --------- ----------- ----------- ----------- Total liabilities and stockholders' equity 311,114 59,837 213,125 584,076 --------- ----------- ----------- -----------
See notes to unaudited pro forma condensed consolidated financial information. F-37 42 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999
(Amounts in thousands, except per share data) Pro forma MRV FOCI Adjustments Total ------- ------ ----------- --------- -------- ------- --------- --------- Revenues, net 288,524 19,758 - 308,282 -------- ------- --------- --------- Costs and Expenses Cost of goods sold 197,442 13,407 - 210,849 Research and development 35,319 1,256 - 36,575 Research and development of consolidated development stage enterprises - - - - Selling, general and administrative expenses 71,756 5,013 - 76,769 Amortization of goodwill and other intangibles - - 51,741 (2) 51,741 Deferred compensation charges - - 3,518 (4) 3,518 -------- ------- --------- --------- Operating (loss) (15,993) 82 (55,259) (71,170) -------- ------- --------- --------- Interest expenses related to convertible notes 4,500 - - 4,500 Interest income, net 4,822 (711) 2,672 (3) 6,783 Provision (credit) for income taxes (2,153) 68 - (2,085) Minority interest (610) (36) - (646) -------- ------- --------- --------- Net (loss) (12,908) (661) (52,587) (66,156) -------- ------- --------- --------- Basic and diluted net loss per share (0.48) (2.08) -------- --------- Weighted average shares outstanding used in basic and diluted per shares calculation 26,960 4,800 31,760 -------- --------- ---------
See notes to unaudited pro forma condensed consolidated financial information F-38 43 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
(Amounts in thousands, except per share data) Pro Forma MRV FOCI Adjustments Total ------ ------ ----------- --------- ------- ------ ------- ------- Revenues, net 65,072 5,967 - 71,039 ------- ------ ------- ------- Costs and Expenses Cost of goods sold 42,736 3,760 - 46,496 Research and development 6,060 425 - 6,485 Research and development of consolidated development stage enterprises 5,831 - - 5,831 Selling, general and administrative expenses 16,027 1,264 - 17,291 Amortization of goodwill and other intangibles - - 12,935 (5) 12,935 Deferred compensation charges - - 879 (7) 879 ------- ------ ------- ------- Operating (loss) (5,582) 518 (13,814) (18,878) ------- ------ ------- ------- Interest expenses related to convertible notes 1,125 - 1,125 Other income, net 637 (374) 668 (6) 931 Provision (credit) for income taxes (494) - - (494) Minority interest 287 (31) - 256 ------- ------ ------- ------- Net (loss) (5,863) 175 (13,146) (18,834) ------- ------ ------- ------- Basic and diluted net loss per share (0.21) (0.57) ------- ------- Weighted average shares outstanding used in basic and diluted per shares calculation 28,425 4,800 33,225 ======= ====== ======= =======
See notes to unaudited pro forma condensed consolidated financial information F-39 44 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The pro forma financial information gives effect to the following pro forma adjustments: (1) The purchase price of FOCI and the estimated allocation of the purchase price is summarized as follows (in thousands): Cash 48,578 Common stock 246,712 Stock options 14,070 Other costs 1,000 --------- 310,360 --------- Allocation of purchase price - Net assets of FOCI 34,587 Property, Plant and equipment 3,000 Deferred Compensation 14,070 Goodwill and other intangibles 258,703 --------- 310,360 --------- (2) The pro forma adjustment is for the amortization of $258.7 million of goodwill over 5 years or approximately $52.0 million for the year ended December 31, 1999. (3) The pro forma adjustment is to reduce interest income by approximately $2.7 million for the year ended December 31, 1999 to reflect the use of investments of $48.6 million to fund the purchase price, assumes 5.5 percent return on investment. (4) The pro forma adjustment is for the amortization of $14.1 million of deferred compensation over an expected life of 4 years or approximately $3.5 million for the year ended December 13, 1999. (5) The pro forma adjustment is for the amortization of $258.7 million of goodwill over 5 years or approximately $12.9 million for the period ended March 31, 2000. (6) The pro forma adjustment is to reduce interest income by approximately $668,000 for the period ended March 31, 1999 to reflect the use of investments of $48.6 million to fund the purchase price, assumes 5.5 percent return on investment. (7) The pro forma adjustment is for the amortization of $14.1 million of deferred compensation over an expected life of 4 years or approximately $879,000 for the period ended March 31, 2000. F-40