10-K/A 1 v77818ke10-ka.txt FORM 10-K AMENDMENT #1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment No. 1) (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ____________ Commission file number 0-25678 MRV COMMUNICATIONS, INC. (Name of registrant as specified in its charter) Delaware 06-1340090 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification number) 20415 Nordhoff Street Chatsworth, California 91311 (Address of principal executive offices) (Zip Code) Issuer's telephone number: (818) 773-0900 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.0017 par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days: $433,597,540 based on the closing sale price at March 29, 2001 as reported by The Nasdaq National Market. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 74,634,001 at March 31, 2001. DOCUMENTS INCORPORATED BY REFERENCE: None EXPLANATORY NOTE This Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K of MRV Communications, Inc. filed on April 17, 2001 amends Item 7 and Item 8 for the purpose of among other things amending certain disclosures in response to comments received from the Securities and Exchange Commission. The amendment to Item 7 revises the disclosure regarding Luminent's distribution and revises the table under the second paragraph within the "General" section. In addition, the "Results of Operations" sections for the years ended December 31, 2000 and 1999 and for the years ended December 31, 1999 and 1998 have been restated in their entirety to discuss the results of operations for operating entities and development stage enterprises separately. A new "Market Risks" section has been added, replacing the "Effects of Inflation" and "Quantitative and Qualitative Disclosure about Market Risks" sections previously reported. The amendments to Item 8 were as follows. The Consolidated Balance Sheet has been revised due to reclassifications to conform the presentation. Disclosures included in Note 2 Summary of Significant Accounting Policies, Note 3 Business Acquisitions, Note 4 Investments In Subsidiaries, Note 9 Interest Rate Swap, Note 11 Commitments and Contingencies, Note 12 Stockholders' Equity, Note 13 Segment Reporting and Geographical Information and Note 14 LAN Business have been amended. Note 18 Events Subsequent to February 19, 2001 has been added to disclose certain subsequent events. Schedule II has been amended to reflect reclassifications presented in the financial statements. Other than these amendments, Items 7 and 8 remain in the same form as initially filed. 2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following and elsewhere in this Report. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report. GENERAL We create, acquire, finance and operate companies, and through them, design, develop, manufacture and market products, which enable high-speed broadband communications. We concentrate on companies and products devoted to optical components and network infrastructure systems. We have leveraged our early experience in fiber optic technology into a number of well-focused operating units specializing in advanced fiber optic components, switching, routing, transaction management and wireless optical transmission systems which we have created, financed or acquired. During 2000, we completed several strategic acquisitions. These acquisitions were made to expand our product offering, enhance our technological expertise and expand our manufacturing capabilities. The table below summarizes the more notable acquisitions.
Date of Total Form of Consideration and Acquired Company Acquisition Consideration Other Notes to Acquisition ---------------- ----------- ------------- -------------------------- Fiber Optic Communications, Inc. April 24, 2000 $309.7 million $48.6 million in cash and 5.4 million shares of common stock and options issued; approximately 97% of capital stock assumed; goodwill and other intangibles recorded of $261.5 million; deferred stock compensation recorded of $14.1 million Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $33.7 million; deferred stock compensation recorded of $25.0 million Quantum Optech Inc. July 12, 2000 $36.1 million 1.2 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $27.8 million; deferred stock compensation recorded of $2.7 million AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and other intangibles recorded of $108.4 million; deferred stock compensation recorded of $50.0 million Optronics International Corp. July 21, 2000 $123.9 million 4.2 million shares of common stock and options issued; approximately 99% of capital stock assumed; goodwill and other intangibles recorded of $99.4 million; deferred stock compensation recorded of $13.4 million
3 Each of these acquisitions was accounted for using the purchase method and therefore, the results of operations of the acquired businesses have been included in our consolidated financial statements from the respective dates of acquisition. Goodwill and other intangibles from these acquisitions totaled $463.9 million. For the year ended December 31, 2000, we recorded amortization of goodwill and other intangibles from these acquisitions of $60.6 million. We expect to record amortization charges of goodwill and other intangibles for these acquisitions of approximately $26.6 million per quarter until December 31, 2001. At January 1, 2002, we intend to implement SFAS No. 142, "Goodwill and other Intangible Assets" (see Recently Issued Accounting Standards below). In connection with these acquisitions, a portion of the purchase prices paid represented deferred stock compensation relating to options to purchase our common stock. The fair values of these options were $105.2 million and have been recorded as deferred stock compensation. Deferred stock compensation amortization expense for the year ended December 31, 2000, relating to these stock options was approximately $42.7 million. We expect to incur approximately $33.4 million of total deferred stock compensation, which will be fully amortized by 2004. Deferred stock compensation is being amortized using the graded method using an estimated employment period of four years. Fiber Optic Communications, Quantum Optech and Optronics International were acquired and contributed to Luminent as part of our plan to complete an initial public offering of our fiber optics components business and eventually spin-off this business to our stockholders. Fiber Optic Communications develops and manufactures passive fiber optic components for wavelength division multiplexing. Quantum Optech specializes in developing and manufacturing optical thin film coating and filters for dense wavelength division multiplexing. Optronics focuses on developing and manufacturing high temperature semiconductor lasers, transceivers and detectors for optical networks. These acquisitions also provided additional manufacturing capabilities for future growth. In July 2000, we and our subsidiary, Luminent, entered into employment agreements with Luminent's President and Chief Executive Officer and its Vice President of Finance and Chief Financial Officer. The agreements provide for annual salaries, performance bonuses and combinations of stock options to purchase shares of our common stock and Luminent's common stock. The stock options were granted to Luminent's executives at exercise prices below market value, resulting in deferred stock compensation. Deferred stock compensation from these stock option grants reported for the year ended December 31, 2000 was $54.2 million, and we will incur additional deferred stock compensation of approximately $2.6 million through 2004. AstroTerra and Jolt were acquired and contributed to our subsidiary, Optical Access, which focuses on optical wireless products that deliver high-speed communications traffic to the so-called last mile portion of the communications network and eventually spin-off this business to our stockholders. AstroTerra develops and manufactures free-space optical wireless communication systems to connect data and telecommunications networks. Jolt develops and manufactures multi-port wireless optics communications equipment. These acquisitions provided strategic components and technology for Optical Access' wireless optical solution. On October 6, 2000, our wholly-owned subsidiary Optical Access filed a registration statement with the Securities and Exchange Commission for the initial public offering of its common stock. This offering has not been completed and, based on current market conditions, we do not expect it to be completed in the foreseeable future, if ever. Accordingly, on November 16, 2001, Optical Access submitted an application to the SEC to withdraw its registration statement. Due to the postponement of the transaction, we expensed all costs ($1.1 million) of the offering in the second quarter of 2001. Optical Access designs, manufactures and markets an optical wireless solution that delivers high-speed communications traffic to the portion of the communications network commonly known as the last mile, which extends from the end user to the service provider's central office. We reported a net loss of $153.0 million for the year ended December 31, 2000. A significant portion of the net loss was due to the amortization of goodwill and other intangibles and deferred stock compensation related to our recent acquisitions and our employment arrangements with Luminent's President and Chief Financial Officer. We will continue to record amortization of goodwill and other intangibles until December 31, 2001, and deferred stock compensation through 2004 relating to these acquisitions and Luminent's employment arrangements with its executives. Effective January 1, 2002, the adoption of SFAS 142 will stop amortization of goodwill, however, it may require us to record an impairment charge (see Recently Issued Accounting Standards). As a consequence 4 of these charges, we do not expect to report net income in the foreseeable future. See discussion of the impact on the amortization of goodwill and other intangibles due to the adoption of SFAS 142 as of January 1, 2002 (see Recently Issued Accounting Standards). On November 10, 2000, Luminent completed the initial public offering of its common stock, selling 12.0 million shares at $12.00 per share for net proceeds of approximately $132.3 million. Luminent designs, manufactures and sells a comprehensive line of fiber optic components that enable communications equipment manufactures to provide optical networking equipment for the rapidly growing metropolitan and access segments of the communications networks. While we had planned to distribute all of our shares of Luminent common stock to our stockholders, unfavorable business and economic conditions in the fiber optic, data networking and telecommunications industries and the resulting adverse effects on the market prices of our common stock and Luminent's common stock has caused us to determine to abandon the distribution and merge Luminent into MRV Merger Sub, our wholly-owned subsidiary, thereby eliminating public ownership of Luminent. Results of Operations The following table sets forth, for the periods indicated, our statements of operations data expressed as a percentage of revenues. 5
Year ended December 31, ---------------------------------------------------- 1998 1999 2000 ------------ ------------ ------------ Revenues, net 100% 100% 100% Cost of goods sold 63 68 64 Research and development 10 12 23 Selling, general and administrative 20 23 39 Purchased technology in progress 8 - - Restructuring costs 6 - - Amortization of goodwill and other intangibles 1 1 21 --- --- --- Operating income (loss) (8) (6) (47) Other income (expense), net 2 - (3) --- --- --- Income (loss) before provision for income taxes, minority (6) (5) (50) interests and extraordinary items Provision (benefit) for income taxes 2 (1) (2) Minority interests (1) - - Gain on extraordinary items, net of tax 1 - - --- --- --- Net income (loss) (8)% (4)% (48)% === === ===
6 YEARS ENDED DECEMBER 31, 2000 AND 1999 REVENUES, NET We generally recognize product revenue, net of sales discounts and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point" with no rights of return. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. We generally warrant our products against defects in materials and workmanship for one year. The estimated costs of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience. Our major revenue-generating products consist of: optical passive and active components; switches and routers; remote device management; and network physical infrastructure equipment. Revenue generated through the sales of services and systems support has been insignificant in relation to our consolidated revenues. Operating Entities. Revenue for the year ended December 31, 2000 increased $30.9 million or 11% to $319.4 million from $288.5 million for the year ended December 31, 1999. Revenue generated through our recent acquisitions for the year ended December 31, 2000 was $38.6 million. No acquisitions were made during the year of 1999. Revenue from our existing business was $280.8 million and $288.5 million for the years ended December 31, 2000 and 1999, respectively. This change represents a decrease of $7.7 million or 3% for the year ended December 31, 2000 due to a decrease of approximately $37.0 million or 27% due to our decision to discontinue the production and sale of LAN switches and remote device management products. We made this decision in order to focus on the emerging carrier and service providers' market segment where the sales cycle is significantly greater than the enterprise networks 7 market. This decrease was offset by the growth in the fiber optic components business of approximately $22.0 million due to the increase in market demand created by carrier equipment manufacturers. Our various other products substantially accounted for the remaining increase of approximately $7.0 million or 9% for the year ended December 31, 2000. Development Stage Enterprises. No significant revenues were generated by these entities for the years ended 2000 and 1999. GROSS PROFIT Gross profit is equal to our revenues less our cost of goods sold. Our cost of goods sold includes materials, direct labor and overhead. Cost of inventory is determined by the first-in, first-out method. Operating Entities. Gross profit for the year ended December 31, 2000 increased $24.9 million, or 27% to $116.0 million from $91.1 million for the year ended December 31, 1999. Our gross margin (defined as gross profit as a percentage of revenues) increased to 36% for the year ended December 31, 2000 from 32% for the year ended December 31, 1999. Prior to deferred stock compensation amortization expense, MRV's gross margin would have increased to $124.3 million or 39% for the year ended December 31, 2000 compared to $91.1 million or 32% for the year ended December 31, 1999. Our margins increased due to a favorable shift in product mix towards higher margin product lines, such as those for third generation wireless networks and other Internet infrastructure products. Development Stage Enterprises. No significant gross profits were generated by these entities for the years ended 2000 and 1999. RESEARCH AND DEVELOPMENT (R&D) R&D expenses increased $38.8 million or 110% to $74.1 million for the year ended December 31, 2000 from $35.3 million for the year ended December 31, 1999. Operating Entities. R&D expenses of the operating entities were $32.6 million or 10% of revenues for the year ended December 31, 2000 as compared to $15.3 million or 5% of revenues for the year ended December 31, 1999. This represents an increase of $17.3 million or 113% for the year ended December 31, 2000. Prior to deferred stock compensation amortization expense of $21.6 million for the year ended December 31, 2000, R&D expenses would have been $11.0 million or 3% of revenues compared to $15.3 million or 5% of revenues. This represents a decrease of $4.3 million or 28% for the year ended December 31, 2000. Development Stage Enterprises. R&D expenses of the development stage enterprises increased by $21.5 million or 108% to $41.5 million or 13% of revenues for the year ended December 31, 2000 compared to $20.0 million or 7% of revenues for the year ended December 31, 1999. Our increased spending in R&D illustrates our commitment to continued product development and technological expansion. Additionally, R&D from our consolidated development stage enterprises continued to increase as those enterprises strive towards bringing new products to market. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) Operating Entities. SG&A expenses increased $56.8 million, or 84%, to $124.7 million from $67.9 for the year ended December 31, 1999. SG&A expenses were 39% of revenues for the year ended December 31, 2000 compared to 24% of revenue for the year ended December 31, 1999. Prior to the amortization of deferred stock compensation of $30.0 million for the year ended December 31, 2000, SG&A expenses would have been $94.7 million or 30% of revenues. This represents an increase of $26.8 million or 39% for the year ended December 31, 2000 primarily as a result of our recent acquisitions. We also increased personnel and related costs in our operating entities during the year ended December 31, 2000. Development Stage Enterprises. The development stage enterprises did not report SG&A expenses during the years of 2000 and 1999 as their activities primarily involved the research development of products and they had yet to develop administrative and selling functions. 8 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles increased $62.9 million to $66.8 million from $3.9 million for the year ended December 31, 2000 and 1999, respectively. Furthermore, as we continue to engage in strategic acquisitions, additional goodwill and other intangibles may be recorded. OTHER EXPENSES, NET. We incurred $4.5 million in interest expense relating to the Notes for each year ended December 31, 2000 and 1999, respectively. The increase in other expense is primarily attributed to our share of losses from our unconsolidated development stage enterprises of $7.3 million for the year ended December 31, 2000. For the year ended December 31, 1999, these entities were included in our consolidated statements of operations based on our ownership in those enterprises. The remaining components of other expense, principally represent interest income recognized from short-term and long-term investments. PROVISION (BENEFIT) FOR INCOME TAXES The benefit for income taxes for the year ended December 31, 2000 was $5.4 million, compared to $2.2 million for the year ended December 31, 1999. Our income tax expense fluctuates primarily due to the tax jurisdictions where we currently have operating facilities and the varying tax rates in those jurisdictions. YEARS ENDED DECEMBER 31, 1999 AND 1998 REVENUES, NET Operating Entities. Revenues for the year ended December 31, 1999 increased 9%, to $288.5 million from $264.1 million for the year ended December 31, 1998. Revenues from sales of networking products (switches, routers and remote device management) and optical components products were 65% and 25%, respectively, and service and others represent 10% of total revenues during the year ended December 31, 1999 compared to 72%, 15% and 13% respectively, of total revenues during the year ended December 31, 1998. Revenue increased as a result of greater marketing efforts and wider market acceptance of our products, both domestically and internationally. International sales accounted for approximately 58% of revenues for the year ended December 31, 1999, compared to 59% of revenues for the year ended December 31, 1998. Development Stage Enterprises. No significant revenues were generated by these entities for the years ended December 31, 1999 and 1998. GROSS PROFIT Operating Entities. Gross profit for the year ended December 31, 1999 decreased $7.6 million, or 8%, to $91.1 million from $98.7 million for 1998. Our gross margin decreased to 32% for the year ended December 31, 1999 from 37% during the year ended December 31, 1998 as a result of its decision to exit the LAN switching business. During the last two years, we endured intense price competition from our larger competitors. We had planned to compensate for this price competition by introducing new lower cost products during 1998. We began shipping these products in the last quarter of 1998, however, the commoditization of these products and the economies of scale and manufacturing advantages of our larger competitors were too difficult for us to overcome. We recorded a charge of $13.8 million in 1999 to reduce that inventory to net realizable value. Also in February 2000, we decided to exit the LAN switching business. Development Stage Enterprises. No significant gross profits were produced by these entities during the years ended December 31, 1999 and 1998. 9 RESEARCH AND DEVELOPMENT (R&D) R&D expenses increased $9.5 million, or 37%, to $35.3 million for the year ended December 31, 1999 from $25.8 million for the year ended December 31, 1998. R&D expenses as a percentage of revenues increased to 12% of revenues during the year ended December 31, 1999, from 10% of revenues for year ended December 31, 1998. This increase was primarily caused by additional development projects commenced during 1999 and associated personnel costs. We intend to continue to invest in the research and development of new products as we believe that our ability to develop and commercialize new products is our key competitive factor. The segmentation below illustrates our change of strategy during 1999, where substantial amounts of the resources were directed to the R&D activities in the development stage enterprises. Operating Entities. R&D expenses of the operating entities were $15.3 million or 5% of revenues for the year ended December 31, 1999 compared to $23.8 million or 9% of revenue for the year ended December 31, 1998. This represents a decrease of $8.5 million or 36% for the year ended December 31, 1999. As discussed above, this reduction is due to the shifting of resources to development stage enterprises. Development Stage Enterprises. R&D expenses of the development stage enterprises were $20.0 million or 7% of revenues for the year ended December 31, 1999 as compared to $2.0 million or 1% of revenues for the year ended December 31, 1998. This represents an increase of $18.0 million or 900% for the year ended December 31, 1999. As discussed above, this increase is due to the shifting of resources to development stage enterprises. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) Operating Entities. SG&A expenses increased $14.0 million, or 26%, to $67.9 million for the year ended December 31, 1999 from $53.9 million for the year ended December 31, 1998. SG&A expenses were 24% of revenue for the year ended December 31, 1999, compared to 20% of revenue for the year ended December 31, 1998. The increase in SG&A expense, both in absolute dollars and as a percentage of revenue were due primarily to substantial increases in marketing efforts as well as increased personnel and overhead costs in additional and expanded locations. Development Stage Enterprises. The development stage enterprises did not report SG&A expenses during the years of 1999 and 1998. PURCHASED TECHNOLOGY IN PROGRESS AND RESTRUCTURING COSTS Purchased technology in progress for the year ended December 31, 1998 was $20.6 million. The purchased technology in 1998 was related to R&D projects in progress at the time we acquired Xyplex on January 30, 1998, which had not yet reached technological feasibility and for which we had no alternative future use. The majority of this charge related to the EdgeBlaster(TM) technology. The related products were being designed to provide integrated switching at the seam where the enterprise network meets the wide area public network, including the Internet. The research and development was completed as planned before the end of fiscal year 1998 and all expenses to complete the projects were included in research and development during the year with no material variances between projected and actual results. Restructuring costs during the year ended December 31, 1998 were $15.7 million. The restructuring costs in 1998 were associated with our plan adopted in March 1998 calling for the reduction of workforce, closing of certain facilities, elimination of particular product lines, settlement of distribution agreements and other costs. The restructuring plan was completed as originally anticipated, except for the following items. The restructuring costs incurred in the first quarter of 1998 were offset by a restructuring credit of $7.5 million booked during the last quarter of 1998 in connection with our decision to consolidate the Xyplex and NBase organizations. This credit principally resulted from the renegotiation of Xyplex's lease in Littletown, Massachusetts and a reevaluation reducing the anticipated cost of discontinuing some of Xyplex's legacy products. We did not incur these charges or receive a similar credit in 1999. 10 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES Amortization of goodwill and other intangibles increased $1.0 million to $3.9 million from $2.9 million for the year ended December 31, 1999 from 1998, respectively. Furthermore, as we continue to engage in strategic acquisitions, additional goodwill and other intangibles may be recorded. OTHER EXPENSE, NET In November 1998, we repurchased $10.0 million face amount of the Notes at a discount from par resulting in a gain of $2.8 million recorded in the fourth quarter of 1998. The outstanding Notes resulted in interest expense of $2.5 million for the year ended December 31, 1998 and $4.5 million for the year ended December 31, 1999. These expenses were offset by interest income from various investments of approximately $5.0 million and $6.9 million for the years ended December 31, 1999 and 1998, respectively. 11 LIQUIDITY AND CAPITAL RESOURCES On November 10, 2000, Luminent completed the initial public offering of its common stock, selling 12.0 million shares at $12.00 per share and raising net proceeds of approximately $132.3 million. Cash, cash equivalents and restricted cash were $266.3 million at December 31, 2000, compared to $34.3 million at December 31, 1999. As of December 31, 2000, we had working capital of $366.8 million, compared with $106.4 million as of December 31, 1999. The ratio of current assets to current liabilities at December 31, 2000 was 4.3 to 1, compared to 3.1 to 1 at December 31, 1999. This is primarily due to the consolidation of MRV's recent acquisitions, cash utilized for acquisitions and the cash Luminent received from its initial public offering. Cash used in operating activities was $29.8 million for the year ended December 31, 2000, compared to cash provided by operating activities of $2.0 million for the year ended December 31, 1999. Cash used in operating activities was primarily impacted by our net loss, partially offset by the amortization of goodwill and other intangibles and amortization of deferred stock compensation. The increase in cash used in operating activities was also a result of an overall increase in our current assets. Cash provided by investing activities was $9.2 million for year ended December 31, 2000, compared to cash provided by investing activities of $6.2 million for the year ended December 31, 1999. We spent approximately $24.0 million on the purchase of property and equipment for business expansion and increased manufacturing capacity. We purchased approximately $21.6 million in investments primarily in partner companies. We also received cash of $97.7 million from the sale of investments, which was offset by net cash used in our recent acquisitions and equity purchases of $44.5 million. Cash provided by financing activities was primarily generated through net proceeds from Luminent's initial public offering and long term borrowings. Cash provided by long term borrowings was $62.7 million for the year ended December 31, 2000 offset by payments of approximately $4.0 million. Net proceeds from Luminent's initial public offering were $132.3 million. Net proceeds from the issuance of our common stock were $7.8 million and $10.8 million for the years ended December 31, 2000 and 1999, respectively. 12 In June 1998, we issued $100.0 million principal amount of 5% convertible subordinated debentures due in 2003 in a private placement raising net proceeds of $96.4 million. The debentures are convertible into our common stock at a conversion price of $13.52 per share (equivalent to a conversion rate of approximately 73.94 shares per $1,000 principal amount of notes), representing an initial conversion premium of 24%, for a total of approximately 7.4 million shares of our common stock. The debentures bear interest at 5% per annum, which is payable semi-annually on June 15 and December 15 of each year. The debentures have a five-year term and have been callable by us since June 15, 2001. The premiums payable to call the debentures are 102% of the outstanding principal amount during the 12 months ending June 14, 2002 and 101% during the 12 months ending June 14, 2003, plus accrued interest through the date of redemption. We believe that our cash flows from operations will be sufficient to satisfy our working capital, capital expenditure and research and development requirements for at least the next 12 months. However, we may require or choose to obtain additional debt or equity financing in order to finance acquisitions or other investments in our business. We will continue to devote resources for expansion and other business requirements. Our future capital requirements will depend on many factors, including acquisitions, our rate of revenue growth, the timing and extent of spending to support development of new products and expansion of sales and marketing, the timing of new product introductions and enhancements to existing products and market acceptance of our products. MARKET RISKS Market risk represents the risk of loss that may impact our Consolidated Financial Statements through adverse changes in financial market prices and rates and inflation. Our market risk exposure results primarily from fluctuations in interest rates and foreign exchange rates. We manage our exposure to these market risks through our regular operating and financing activities and have not historically hedged these risks through the use of derivative financial instruments. The term "hedge" is used to mean a strategy designed to manage risks of volatility in prices or interest and foreign exchange rate movements on certain assets, liabilities or anticipated transactions and creates a relationship in which gains or losses on derivative instruments are expected to counter-balance the losses or gains on the assets, liabilities or anticipated transactions exposed to such market risks. Interest Rates. We are exposed to interest rate fluctuations on our investments, short-term borrowings and long-term obligations. Our cash and short-term investments are subject to limited interest rate risk, and are primarily maintained in money market funds and bank deposits. Our variable-rate short-term borrowings are also subject to limited interest rate risk due to their short-term maturities. Our long-term obligations were entered into with fixed and variable interest rates. In connection with our $50.0 million variable-rate term loan due in 2003, we entered into a specific hedge, an interest rate swap, to modify the interest characteristics of this instrument. The interest rate swap was used to reduce our cost of financing and the fluctuations in the aggregate interest expense. The notional amount, interest payment and maturity dates of the swap match the principal, interest payment and maturity dates of the related debt. Accordingly, any market risk or opportunity associated with this swap is offset by the opposite market impact on the related debt. To date, we have not entered into any other derivative instruments, however, as we continue to monitor our risk profile, we may enter into additional hedging instruments in the future. Foreign Exchange Rates. We operate on an international basis with a portion of our revenues and expenses being incurred in currencies other than the U.S. dollar. Fluctuations in the value of these foreign currencies in which we conduct our business relative to the U.S. dollar will cause U.S. dollar translation of such currencies to vary from one period to another. We cannot predict the effect of exchange rate fluctuations upon future operating results. However, because we have expenses and revenues in each of the principal functional currencies, the exposure to our financial results to currency fluctuations is reduced. We have not historically attempted to reduce our currency risks through hedging instruments; however, we may do so in the future. 13 Inflation. We believe that the relatively moderate rate of inflation in the United States over the past few years has not had a significant impact on our sales or operating results or on the prices of raw materials. However, in view of our recent expansion of operations in Taiwan, Israel and other countries, which have experienced substantial inflation, there can be no assurance that inflation will not have a material adverse effect on our operating results in the future. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998 and June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Investments and Hedging Activities," and SFAS No. 137, which delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138, which provides additional guidance for the application of SFAS No. 133 for certain transactions. MRV will adopt the statement in January 2001 and does not expect the adoption of this statement to have a material impact on its financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," and related interpretations. SAB 101 summarized certain of the Securities and Exchange Commission's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. MRV has applied the provisions of SAB 101 in the consolidated financial statements. The adoption of SAB 101 did not have a material impact on its financial condition or results of operations. In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain issues, including the definition of an employee, the treatment of the acceleration of stock options and the accounting treatment for options assumed in business combinations. FIN 44 became effective on July 1, 2000, but is applicable for certain transactions dating back to December 1998. The adoption of FIN 44 did not have a significant impact on its financial position or results of operations. 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed as part of this Report:
PAGE ---- Report of Independent Public Accountants................................................. F-1 Consolidated Balance Sheets as of December 31, 1999 and 2000............................. F-2 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2000............................................................... F-3 Consolidated Statements of Stockholders' Equity and Comprehensive Loss for each of the three years in the period ended December 31, 2000.............................. F-4 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000............................................................... F-5 Notes to Consolidated Financial Statements............................................... F-6
15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) The financial statements filed as a part of this Report consist of the financial statements listed under Item 8. (2) The financial statements schedules filed as part of this report consist of the following: Schedule II --Valuation and Qualifying Accounts Report of Independent Public Accountants on Financial Statement Schedule (3) The following exhibits are filed as part of this Report:
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 Agreement and Plan of Merger by and between MRV Technologies, Inc. (a California corporation) and MRV Technologies, Inc. (a Delaware corporation), as amended (incorporated by reference to Exhibit 2a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 2.2 Certificate of Merger by and between MRV Technologies, Inc. (a California corporation) and MRV Technologies, Inc. (a Delaware corporation) (incorporated by reference to Exhibit 2b filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 3.1 Certificate of Incorporation, as amended (incorporated by referenced to Exhibit 3a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 3.2 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on March 20, 1996 (incorporated by reference to Exhibit 3.2 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 3.3 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on July 29, 1996 (incorporated by reference to Exhibit 3.3 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 3.4 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on November 19, 1998 (incorporated by reference to Exhibit 3.4 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 3.5 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 11, 2000. 3.6 Bylaws (incorporated by reference to Exhibit 3b filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 4.1 Specimen certificate of Common Stock (incorporated by reference to Exhibit 4.5 filed as part of Registrant's Registration Statement on Form S-3 (File No. 333-64017). 4.2 Specimen of Restricted Global Security (incorporated by reference to Exhibit 4.3 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.1 Lease for premises at 8917 Fullbright Avenue, Chatsworth, CA dated August 5, 1991 (incorporated by reference to Exhibit 10a filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.2 Lease for premises at 8943 Fullbright Avenue, Chatsworth, CA dated March 3, 1993 (incorporated by reference to Exhibit 10a(1) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.3 Key Employee Agreement between the Company and Noam Lotan dated March 23, 1993 (incorporated by reference to Exhibit 10b(1) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.4 Letter amending Key Employee Agreement between the Company and Noam Lotan (incorporated by reference to Exhibit 10b(1)1 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.5 Letter amending Key Employee Agreement between the Company and Noam Lotan (incorporated by reference to Exhibit 10b(1)2 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.6 Key Employee Agreement between the Company and Zeev Rav-Noy dated March 23, 1992 (incorporated by reference to Exhibit 10b(2) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.7 Letter amending Key Employee Agreement between the Company and Zeev Rav-Noy (incorporated by reference to Exhibit 10b(2) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.8 Letter amending Key Employee Agreement between the Company and Zeev Rav-Noy (incorporated reference to Exhibit 10b(2) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.9 Key Employee Agreement between the Company and Shlomo Margalit (incorporated by reference to Exhibit 10b(3) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.10 Letter amending Key Employee Agreement between the Company and Shlomo Margalit (incorporated by reference to Exhibit 10b(3)1 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.11 Form of Letter amending Key Employee Agreement between the Company and Shlomo Margalit (incorporated reference to Exhibit 10b(3)2 filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003)). 10.12 Employment Letter between the Company and Khalid (Ken) Ahmad dated August 8, 1990 (incorporated by reference to Exhibit 10b(4) filed as part of Registrant's Registration Statement on Form S-1 (File No. 33-48003). 10.13 MRV Communications Inc. Incentive Plan for Grant of Warrants to Employees Subsidiaries (incorporated by reference to Exhibit No. 10.21 of Registrant's Annual Report on Form 10-K (0-23452) for the year ended December 31, 1996 filed April 15, 1997).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.14 Standard Industrial/Commercial Single-Tenant Lease dated October 8, 1996 between the Company and Nordhoff Development relating to the premises located at 20415 Nordhoff Street, Chatsworth, California (incorporated by reference to Exhibit No. 10.23 of Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 filed April 15, 1997). 10.15 Stock Purchase Agreement dated January 19, 1998 by and between Whittaker and Registrant (incorporated by reference to Exhibit No. 2.1(a) of Registrant's Report on Form 8-K filed February 13, 1998 with respect to the Xyplex Acquisition). 10.16 Warrant Agreement dated January 30, 1998 by and between Whittaker and Registrant (incorporated by reference to Exhibit No. 2.1(b) of Registrant's Report on Form 8-K filed February 13, 1998 with respect to the Xyplex Acquisition). 10.17 Warrant Certificate No. Whittaker #1 to purchase 421,402 shares of Common Stock of Registrant issued to Whittaker on January 30, 1998 (incorporated by reference to Exhibit No. 2.1(c) of Registrant's Report on Form 8-K filed February 13, 1998 with respect to the Xyplex Acquisition). 10.18 American Industrial Real Estate Association, Standard Industrial/ Commercial Single-Tenant Lease - Net dated November 17, 1997 by and between Ruth G. Fisher Living Trust U/D/T dated June 28, 1990 and Registrant relating to the premises located at 8928 Fullbright Avenue, Chatsworth, California (incorporated by reference to Exhibit No. 10.35 of Registrant's Report on Form 10-K for the year ended December 31, 1997 filed April 15, 1998). 10.19 New Lease dated February 22, 1993 by and between 495 Littleton Associates and Xyplex, Inc. relating to the premises located at 295 Foster Street, Littleton, Mass, Amendments Nos. 1 through 4 thereto (incorporated by reference to Exhibit No. 10.36 of Registrant's Report on Form 10-K for the year ended December 31, 1997 filed April 15, 1998). 10.20 Fifth Amendment to Lease relating to the premises located at 295 Foster Street, Littleton, Mass. with attached Lease Guaranty of Registrant (incorporated by reference to Exhibit 10.31 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.21 Underwriting Agreement dated September 18, 1997 by and among Registrant, the Selling Stockholders named on Schedule I thereto and the Underwriters named on Schedule II thereto (incorporated by reference to Exhibit No. 10.37 of Registrant's Report on Form 10-K for the year ended December 31, 1997 filed April 15, 1998). 10.22 Indenture, dated as of June 26, 1998, between the Company and American Stock Transfer & Trust Company, as Trustee, relating to the Company's 5% Convertible Subordinated Notes Due 2003 (the "Notes") (incorporated by reference to Exhibit 4.2 of the Company's Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998 10.23 Purchase Agreement, dated June 23, 1998, between the Company and Prudential Securities Incorporated and Bear, Stearns & Co. Inc. relating to the Notes (incorporated by reference to Exhibit 4.1 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.24 Indenture, dated as of June 26, 1998, between the Company and American Stock Transfer & Trust Company, as Trustee, relating to the Notes (incorporated by reference to Exhibit 4.2 of the Company's Form 10-Q for the quarter ended June 30, 1998, filed August 14, 1998). 10.25 Registration Rights Agreement dated June 26, 1998 between the Company and Prudential Securities Incorporated and Bear, Stearns & Co. Inc. relating to the shares of Common Stock issuable upon conversion of the Notes (incorporated by reference to Exhibit 4.4 of the Company's Form 10-Q for the quarter ended June 30, 1998 filed August 14, 1998). 10.26 Underlease dated September 16, 1998 between Lowe Azure Limited, NBase Europe Gmbh and the Company relating to property at Unit 16, Campbell Court, Campbell Road, Bramley Basingstoke Hampshire, England (incorporated by reference to Exhibit 10.37 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.27 Standard Industrial/Commercial Single-Tenant Lease - Net dated December 1, 1998 by and between Radar Investments, Inc. and Registrant relating to the premises located at 8943 Fullbright Avenue, Chatsworth, California (incorporated by reference to Exhibit 10.38 of the Company's Form 10-K for the year ended December 31, 1998 filed March 31, 1999). 10.28 Stock Purchase Agreement Dated February 21, 2000 relating to the sale and purchase of up to one hundred percent (100%) of the ordinary shares in the capital of Fiber Optic Communications, Inc. ("FOCI") and the sale and purchase of two million four hundred thousand of ordinary shares in the capital of MRV Communications, Inc. (incorporated by reference to Exhibit 2.1(a) of the Company's Form 8-K filed with the SEC on May 9, 2000). 10.29 Stock Option Agreement dated July 11, 2000 between William R. Spivey and the Registrant (incorporated by reference to Exhibit 10.4 filed with the Luminent, Inc. Registrant Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.30 Stock Option Agreement dated July 12, 2000 between Eric Blachno and the Registrant (incorporated by reference to Exhibit 10.7 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on October 5, 2000). 10.31 Escrow Agreement dated as of 21st day of February, 2000, by and among the Registrant, the Selling Shareholders of FOCI and the law firm of Baker & McKenzie, Taipei Office (incorporated by reference to Exhibit 2.1(b) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000). 10.32 Addendum to Stock Purchase Agreement dated as of April 14, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(c) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000). 10.33 Addendum to Escrow Agreement dated as of April 14, 2000 by and among FOCI, Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(d) of the Form 8-K of the Registrant filed with the SEC on May 9, 2000).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.34 Addendum No. 2 to Escrow Agreement dated as of June 26, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(d) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000). 10.35 Addendum No. 2 to Stock Purchase Agreement dated as of June 26, 2000 by and among FOCI, the Registrant and the selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(e) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000). 10.36 Memorandum of Understanding dated as of June 26, 2000 between the Registrant and the remaining shareholders of FOCI (incorporated by reference to Exhibit 2.1(f) of the Form 8-K/A of the Registrant filed with the SEC on July 7, 2000). 10.37 Stock Purchase Agreement by and between the Registrant and the shareholders of Optronics International Corp. ("OIC") dated April 23, 2000 (incorporated by reference to Exhibit 10.19 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.38 Escrow Agreement, dated as of the 23rd day of April 2000, by and among the Registrant, the selling shareholders of OIC and the law firm of Baker & McKenzie, Taipei Office (incorporated by reference to Exhibit 10.20 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.39 Stock Purchase Agreement by and between the Registrant and the shareholders of Quantum Optech Inc. ("QOI") dated April 26, 2000 (incorporated by reference to Exhibit 10.21 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.40 Escrow and Stock Pledge Agreement dated as of April 26, 2000 by and between the Registrant and certain shareholders of QOI (incorporated by reference to Exhibit 10.22 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.41 Addendum to Stock Purchase Agreement made as of June 16th, 2000 by and among the Registrant, QOI and shareholders of QOI (incorporated by reference to Exhibit 10.23 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.42 Addendum to Escrow and Stock Pledge Agreement dated as of June 16, 2000 by and between the Registrant and certain shareholders of QOI (incorporated by reference to Exhibit 10.24 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.43 2000 MRV Communications, Inc. Stock Option plan for Employees of Optronics International Corp. (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47898)). 10.44 Form of Stock Option Agreement for the 2000 MRV Communications, Inc. Stock Option Plan for Employees of Optronics International Corp. (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47898)).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.45 2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47900)). 10.46 Form of Stock Option Agreement for the 2000 MRV Communications, Inc. Stock Option Plan for Employees of AstroTerra Corporation (incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement on Form S-8 filed with the SEC on October 13, 2000 (file no. 333-47900)). 10.47 1997 Incentive and Nonstatutory Stock Option Plan, as amended (incorporated by reference to Exhibit A to the Registrant's Definitive Proxy Statement filed with the SEC on November 2, 1999) 10.48 Form of Stock Option Agreement under the 1997 Incentive and Nonstatutory Stock Option Plan (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 filed with the SEC on September 24, 1999 (file no. 333-87735)). 10.49 Underwriting Agreement dated as of November 9, 2000 by and between the Registrant, the Registrant and Credit Suisse First Boston Corporation, acting on behalf of themselves and as the Representatives of the several Underwriters (incorporated by reference to Exhibit 10.25 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.50 Master Separation and Distribution Agreement dated as of July 25, 2000 between the Registrant and Luminent, Inc. (incorporated by reference to Exhibit 2.1 filed with the Luminent, Inc. Registration Statement (file no. 333-42238) on Form S-1 on July 26, 2000). 10.51 Amendment to Master Separation and Distribution Agreement dated as of September 8, 2000, between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.27 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.52 General Assignment and Assumption Agreement dated as of September 8, 2000 between the Registrant and Luminent, Inc. (incorporated by reference to Exhibit 10.28 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.53 Master Technology Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.29 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.54 Employee Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.30 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.55 Real Estate Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. incorporated by reference to Exhibit 10.31 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001).
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EXHIBIT NO. DESCRIPTION ----------- ----------- 10.56 Master Transitional Services Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.32 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.57 Master Trademark Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.33 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.58 Master Patent Ownership and License Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. incorporated by reference to Exhibit 10.34 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.59 Indemnification and Insurance Matters Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.35 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.60 Master Confidential Disclosure Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.36 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 10.61 Tax Sharing Agreement dated as of September 8, 2000 between the Registrant, and Luminent, Inc. (incorporated by reference to Exhibit 10.37 of the Form 10-K for the year ended December 31, 2000 of Luminent, Inc. filed with the SEC on April 2, 2001). 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP to incorporation of Report on Financial Statements into Company's Registration Statements 25 Power of Attorney (contained on Signature Page to Form 10-K for the year ended December 31, 2000 filed with the SEC on April 17, 2001).
(b) Reports on Form 8-K. Two reports on Form 8-K were filed during the last quarter of the period covered by this Report, as follows: (i) A report on Form 8-K/A dated September 29, 2000 was filed on October 5, 2000 supplementing and completing the Form 8-K dated July 26, 2000 filed on July 27, 2000, as amended by Form 8-K/A dated September 22, 2000 filed on September 22 reporting the acquisition of AstroTerra. In that Form 8-K/A, the following financial statements and pro forma financial information were filed under Item 7: (a) Financial Statements of AstroTerra: Report of Independent Public Accountants 22 Balance Sheets at December 31, 1998 and 1999 (audited) and June 30, 2000 (unaudited) Statements of Operations for the years ended December 31, 1997, 1998 and 1999 (audited) and the six months ended June 30, 1999 and 2000 (unaudited) Statements of Stockholders' Equity for the years ended December 31, 1997, 1998 and 1999 (audited) and the six months ended June 30, 1999 and 2000 (unaudited) Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 (audited) and the six months ended June 30, 1999 and 2000 (unaudited) Notes to Financial Statements (b) Pro Forma Financial Information Unaudited Pro Forma Condensed Consolidated Financial Information Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2000 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six Month Period Ended June 30, 2000 Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1999 Notes to Unaudited Pro Forma Condensed Consolidated Financial Information (ii). A report on Form 8-K dated October 16, 2000 was filed on October 16, 2000 reporting matters under Item 5 23 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Chatsworth, State of California, on December 27, 2001. MRV COMMUNICATIONS, INC. By: /s/ NOAM LOTAN -------------------------------------- Noam Lotan, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons in the capacities and on the dates indicated.
Names Title Date ----- ----- ---- /s/ NOAM LOTAN President, Chief Executive Officer (Principal -------------------------------- Executive Officer), and a Director December 27, 2001 Noam Lotan /s/ SHLOMO MARGALIT Chairman of the Board, Chief Technical -------------------------------- Officer, Secretary, and a Director December 27, 2001 Shlomo Margalit /s/ SHAY GONEN Interim Chief Financial Officer -------------------------------- (Principal Financial and Accounting Officer) December 27, 2001 Shay Gonen /s/ IGAL SHIDLOVSKY* -------------------------------- Director December 27, 2001 Igal Shidlovsky /s/ GUENTER JAENSCH* -------------------------------- Director December 27, 2001 Guenter Jaensch /s/ DANIEL TSUI* -------------------------------- Director December 27, 2001 Daniel Tsui /s/ BARUCH FISCHER* -------------------------------- Director December 27, 2001 Baruch Fischer *By /s/ NOAM LOTAR -------------------------------- Attorney-In-Fact Noam Lotar
24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MRV Communications, Inc.: We have audited the accompanying consolidated balance sheets of MRV Communications, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholders' equity and comprehensive loss and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MRV Communications, Inc. and subsidiaries as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP -------------------------------------- Arthur Andersen LLP Los Angeles, California February 19, 2001 (except for matters discussed in Note 18 as to which the date is October 4, 2001) F-1 MRV COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ---------------------- 1999 2000 -------- ---------- ASSETS Current assets: Cash and cash equivalents.......................................................... $ 34,330 $ 210,080 Restricted cash.................................................................... -- 56,181 Short-term investments............................................................. 10,141 17,766 Accounts receivable, net of allowance of $8,451 in 1999 and $9,480 in 2000......... 60,637 62,713 Inventories........................................................................ 35,392 77,005 Refundable income taxes............................................................ 3,216 -- Deferred income taxes.............................................................. 6,907 31,227 Other current assets............................................................... 6,336 22,750 -------- ---------- Total current assets......................................................... 156,959 477,722 Property and equipment, at cost: Land............................................................................... -- 3,559 Building........................................................................... 3,814 19,563 Machinery and equipment............................................................ 12,598 57,369 Furniture and fixtures............................................................. 4,233 12,824 Computer hardware and software..................................................... 12,913 10,823 Leasehold improvements............................................................. 3,053 7,221 Construction in progress........................................................... -- 3,815 -------- ---------- 36,611 115,174 Less -- Accumulated depreciation and amortization.................................. (17,011) (42,905) -------- ---------- 19,600 72,269 Other assets: Investments........................................................................ 101,936 31,734 Deferred income taxes.............................................................. 5,324 6,209 Goodwill and other intangibles, net................................................ 27,214 504,027 Other.............................................................................. 3,500 5,660 -------- ---------- 137,974 547,630 -------- ---------- $314,533 $1,097,621 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations....................................... $ 198 $ 163 Current portion of long-term debt.................................................. -- 2,774 Short-term obligations............................................................. -- 9,104 Accounts payable................................................................... 33,455 56,088 Accrued liabilities................................................................ 15,403 34,894 Income taxes payable............................................................... -- 6,477 Deferred revenue................................................................... 1,478 1,470 -------- ---------- Total current liabilities.................................................... 50,534 110,970 Long-term liabilities: Convertible subordinated notes..................................................... 90,000 89,646 Capital lease obligations, net of current portion.................................. 1,481 621 Long-term debt, net of current portion............................................. -- 60,257 Other long-term liabilities........................................................ 2,928 3,980 -------- ---------- Total long-term liabilities.................................................. 94,409 154,504 Commitments and contingencies Minority interest.................................................................... 2,775 50,592 Stockholders' equity: Preferred stock, $0.01 par value: Authorized -- 1,000 shares; no shares issued or outstanding...................... -- -- Common stock, $0.0017 par value: Authorized -- 160,000 shares Issued -- 56,282 shares in 1999 and 73,327 in 2000 Outstanding -- 56,234 shares in 1999 and 73,279 in 2000.......................... 96 126 Additional paid-in capital......................................................... 191,468 1,060,650 Accumulated deficit................................................................ (18,377) (171,330) Deferred stock compensation, net................................................... -- (100,862) Treasury stock, 48 shares at cost in 1999 and 2000................................. (133) (133) Accumulated other comprehensive loss............................................... (6,239) (6,896) -------- ---------- Total stockholders' equity................................................... 166,815 781,555 -------- ---------- $314,533 $1,097,621 ======== ==========
The accompanying notes are an integral part of these consolidated balance sheets. F-2 MRV COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1998 1999 2000 -------- -------- --------- Revenues, net............................................. $264,075 $288,524 $ 319,394 Costs and expenses: Cost of goods sold(1)................................... 165,385 197,442 203,371 Research and development(1)............................. 25,817 35,319 74,078 Selling, general and administrative(1).................. 53,852 67,859 124,700 Amortization of goodwill and other intangibles.......... 2,901 3,898 66,814 Purchased technology in progress........................ 20,633 -- -- Restructuring costs..................................... 15,671 -- -- -------- -------- --------- 284,259 304,518 468,963 -------- -------- --------- Operating loss....................................... (20,184) (15,994) (149,569) Other income (expense): Interest expense........................................ (2,480) (4,500) (10,129) Minority interest....................................... (1,345) 610 796 Interest income and other............................... 6,819 4,822 551 -------- -------- --------- 2,994 932 (8,782) -------- -------- --------- Loss before provision (benefit) for income taxes and extraordinary item................................. (17,190) (15,062) (158,351) Provision (benefit) for income taxes...................... 5,707 (2,153) (5,398) -------- -------- --------- Loss before extraordinary item....................... (22,897) (12,909) (152,953) Extraordinary item: Gain on repurchase of convertible notes, net of tax of $1,639............................................... 2,791 -- -- -------- -------- --------- Net loss............................................. $(20,106) $(12,909) $(152,953) ======== ======== ========= Loss per share information: Basic and diluted loss per share.......................... $ (0.38) $ (0.24) $ (2.33) Basic and diluted weighted average shares outstanding..... 53,064 53,920 65,669 ======== ======== =========
------------------------- (1) Includes amounts relating to deferred stock compensation of $8.3 million, $21.6 million and $30.0 million presented in "cost of goods sold", "research and development" and "selling, general and administrative", respectively, for the year ended December 31, 2000. The accompanying notes are an integral part of these consolidated financial statements. F-3 MRV COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL RETAINED OTHER --------------- PAID-IN DEFERRED STOCK EARNINGS TREASURY COMPREHENSIVE SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCK LOSS TOTAL ------ ------ ---------- -------------- --------- -------- ------------- --------- BALANCE, DECEMBER 31, 1997..... 52,720 $ 90 $ 175,872 $ -- $ 14,635 $ -- $ (628) $ 189,969 Exercise of stock warrants and options................ 606 1 1,509 -- -- -- -- 1,510 Issuance of warrants in connection with the acquisition of Xyplex...... -- -- 3,272 -- -- -- -- 3,272 Purchase of treasury stock... (48) -- -- -- -- (133) -- (133) Comprehensive loss: Translation adjustments.... -- -- -- -- -- -- (83) (83) Net loss................... -- -- -- -- (20,106) -- -- (20,106) --------- Comprehensive loss........... -- -- -- -- -- -- -- (20,189) ------ ---- ---------- --------- --------- ----- ------- --------- BALANCE, DECEMBER 31, 1998..... 53,278 91 180,653 -- (5,471) (133) (711) 174,429 Exercise of stock warrants and options................ 2,156 4 2,816 -- -- -- -- 2,820 Exercise of stock warrants by Intel Corporation.......... 800 1 7,999 -- -- -- -- 8,000 Other........................ -- -- -- -- 3 -- -- 3 Comprehensive loss: Translation adjustments.... -- -- -- -- -- -- (5,528) (5,528) Net loss................... -- -- -- -- (12,909) -- -- (12,909) --------- Comprehensive loss........... -- -- -- -- -- -- -- (18,437) ------ ---- ---------- --------- --------- ----- ------- --------- BALANCE, DECEMBER 31, 1999..... 56,234 96 191,468 -- (18,377) (133) (6,239) 166,815 Exercise of stock options.... 2,896 5 7,757 -- -- -- -- 7,762 Tax benefit from exercise of stock options.............. -- -- 11,417 -- -- -- -- 11,417 Issuance of common stock in connection with acquisitions............... 14,123 25 639,172 -- -- -- -- 639,197 Issuance of common stock in connection with conversion of convertible subordinated notes...................... 26 -- 354 -- -- -- -- 354 Effect of subsidiary equity transactions............... -- -- 49,679 -- -- -- -- 49,679 Deferred stock compensation............... -- -- 160,803 (160,803) -- -- -- -- Amortization of deferred stock compensation......... -- -- -- 59,941 -- -- -- 59,941 Comprehensive loss: Net loss................... -- -- -- -- (152,953) -- -- (152,953) Translation adjustments.... -- -- -- -- -- -- (657) (657) --------- Comprehensive loss........... -- -- -- -- -- -- -- (153,610) ------ ---- ---------- --------- --------- ----- ------- --------- BALANCE, DECEMBER 31, 2000..... 73,279 $126 $1,060,650 $(100,862) $(171,330) $(133) $(6,896) $ 781,555 ====== ==== ========== ========= ========= ===== ======= =========
The accompanying notes are an integral part of these consolidated financial statements. F-4 MRV COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE THREE YEARS ENDED DECEMBER 31, ---------------------------------------- 1998 1999 2000 ----------- ---------- ----------- Cash Flows From Operating Activities: Net loss.................................................. $ (20,106) $(12,909) $(152,953) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization......................... 7,902 12,501 77,871 Amortization of deferred stock compensation expense... -- -- 59,941 Allowance for doubtful accounts....................... 2,591 1,416 3,833 Deferred income taxes................................. 1,408 (1,302) (25,205) Realized gain on investment........................... (2,535) -- (50) Purchased technology in progress...................... 20,633 -- -- Extraordinary gain on repurchase of convertible subordinated notes................................. (2,791) -- -- Loss on disposition of property and equipment......... -- -- 16 Tax benefit from stock option exercises............... -- -- 11,417 Other................................................. 324 -- -- Minority interests' share of income (loss)............ 1,345 (610) (796) Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable..................................... 12,263 (7,457) 4,949 Inventories............................................. 3,453 12,075 (28,869) Refundable income taxes................................. -- -- 3,216 Other assets............................................ 2,008 (519) (12,020) Accounts payable........................................ (19,505) 3,698 28,939 Accrued liabilities..................................... (7,438) 1,715 4,890 Income taxes payable.................................... (7,006) (3,661) (5,154) Deferred revenue........................................ 508 (2,920) 175 --------- -------- --------- Net cash provided by (used in) operating activities....................................... (6,946) 2,027 (29,800) Cash Flows From Investing Activities: Purchases of property and equipment....................... (6,337) (8,053) (23,977) Proceeds from sale of property and equipment.............. -- -- 1,520 Purchases of investments.................................. (206,846) (19,242) (21,566) Proceeds from maturity of investments..................... 173,714 38,293 97,704 Cash used in acquisitions, net of cash received........... (44,695) (4,773) (44,517) --------- -------- --------- Net cash provided by (used in) investing activities....................................... (84,164) 6,225 9,164 Cash Flows From Financing Activities: Net proceeds from subsidiary equity transaction........... -- -- 132,290 Net proceeds from issuance of common stock................ 1,510 10,820 7,762 Proceeds from issuance of convertible debentures, net..... 96,423 -- -- Borrowings on short-term obligations...................... -- -- 35,887 Payments on short-term obligations........................ -- -- (35,949) Principal payments on capital lease obligations........... (62) 94 (163) Borrowings on long-term debt.............................. -- -- 62,696 Payments on long-term debt................................ -- -- (4,002) Repurchase of convertible notes........................... (5,300) -- -- Purchase of treasury stock................................ (133) -- -- --------- -------- --------- Net cash provided by financing activities.......... 92,438 10,914 198,521 Effect of exchange rate changes on cash and cash equivalents............................................... (64) (5,528) (2,135) Net increase in cash and cash equivalents................... 1,264 13,638 175,750 Cash and cash equivalents, beginning of year................ 19,428 20,692 34,330 --------- -------- --------- Cash and cash equivalents, end of year...................... $ 20,692 $ 34,330 $ 210,080 ========= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. F-5 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 1. BUSINESS AND BASIS OF PRESENTATION MRV Communications, Inc. (a Delaware corporation, MRV or the Company) creates, acquires, finances and operates companies, and through them, designs, develops, manufactures and markets products, which enable high-speed broadband communications. MRV concentrates on companies and products devoted to optical components and Internet infrastructure systems. Such products include fiber optic components, switching, routing, transaction management and wireless optical transmission systems. MRV's strategy involves creating value for its stockholders and the other owners of its subsidiaries by helping the companies grow and access the public and private capital markets. As of December 31, 2000, MRV's more significant subsidiaries, development stage enterprises and other affiliated companies were as follows: Luminent, Inc, -- Luminent is a 92 percent-owned subsidiary of MRV designing, manufacturing and selling fiber optic components that enable communications equipment manufacturers to provide optical networking solutions for the rapidly growing metropolitan and access segments of the communications network. Its products are designed to meet the increasing bandwidth requirements between long-haul telecommunication networks and end users. Luminent specializes in singlemode fiber optic components and subsystems for high-capacity data transmission for long-reach applications in the metropolitan and access markets. Optical Access, Inc. -- Optical Access is a wholly-owned subsidiary of MRV designing, manufacturing and marketing optical wireless products that enable the delivery of high-speed communications traffic to the portion of the communications network commonly known as the last mile, which extends from the end user to the service provider's central office. Management believes its solution provides higher transmission capacity, or bandwidth, at a lower cost compared to other commercially available last mile solutions. CEScomm, Inc. -- CEScomm, formerly Creative Electronic Systems SA, is a wholly-owned subsidiary of MRV developing and providing equipment to manufacturers of cellular network infrastructure equipment and mobile operators and service providers for the third generation of wireless solutions for the next generation of mobile communications systems. These new systems provide enhanced services to those available today i.e. voice, text and data. CEScomm specializes in products that provide the real-time conversion of radio signals generated by Internet ready mobile devices into asynchronous transfer mode traffic streams. iTouch Communications, Inc. -- iTouch is wholly-owned subsidiary of MRV providing next-generation Internet infrastructure solutions that enable service providers and carriers to deliver and monitor, on a real-time basis, high-speed Internet services. iTouch's products combine transaction management with Internet protocol (IP) routing and wide area networks (WAN), high-speed data acquisition and management systems. NBase-Xyplex, Inc. -- NBas-Xyplex is a wholly-owned subsidiary of MRV providing products and services to enhance network infrastructures for city carriers, service providers, cable operators and campus and enterprise networks. Its products and technologies have been utilized in metropolitan area based fiber-based networks, enabling smart access to WAN, as well as in local area networks (LAN), switching, building enterprise/corporate data networks. Charlotte's Networks, Inc. -- Charlotte is a 90 percent-owned subsidiary of MRV developing a core router for large service providers and carriers. Its product is capable of carrying both IP packets and time-division multiplexing voice traffic and enables the current WAN to increase processing power and rate of transmission. In addition, the router provides multi-services required by telecommunication companies for efficient and flexible transmission of voice over data networks. F-6 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 Zuma Networks, Inc. -- Zuma is a wholly-owned subsidiary of MRV developing a next generation gigabit Ethernet switch router platform. Optical Crossing, Inc. -- Optical Crossing is a 60 percent-owned subsidiary of MRV designing, developing and manufacturing advanced fiber optic communication components and systems for the telecommunications industry. Zaffire, Inc. -- Zaffire is a 22 percent-owned, on a fully diluted basis, affiliate of MRV focused on developing a next-generation, optical services networking system for service providers. RedC Optical Networks, Inc. -- RedC is a 35 percent-owned, on a fully diluted basis, affiliate of MRV that has developed a complete line of optical modules used for operating, monitoring and protecting optical networks including: optical amplifiers, add/drop modules, protection and restoration modules and dense wave division multiplexing monitoring. Hyperchannel Ltd. -- Hyperchannel, which does business under its trademark Hyporium, is a 42 percent-owned, on a fully diluted basis, affiliate of MRV and an independent Internet market maker for the information technology industry (IT), enabling IT vendors, distributors and resellers to trade online. In November 2000, Luminent, a publicly owned subsidiary, completed an initial public offering of its common stock, selling 12.0 million shares at $12 per share and raising net proceeds of approximately $132.3 million. As of December 31, 2000, MRV owned 92% of the outstanding capital stock of Luminent. MRV has announced plans to distribute all of its shares of Luminent common stock to its stockholders on the later of three months after receipt of a favorable private letter ruling from the Internal Revenue Service or six months after the offering, although it is not obligated to do so. As of December 31, 2000, MRV owned all of the outstanding capital stock of Optical Access. On October 6, 2000, Optical Access filed a registration statement with the Securities and Exchange Commission (SEC) for the initial public offering of its common stock, which has not yet become effective. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of MRV and its wholly-owned and majority owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. MRV consolidates the financial results of related development stage enterprises when it has effective control, voting control or has provided the entity's working capital. When others invest in these enterprises reducing its voting control below 50 percent, MRV discontinues consolidation and uses the equity method of accounting for these investments. FOREIGN CURRENCY TRANSLATION Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Transactions and balances in other currencies are converted into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in determining net income or loss. For foreign operations with the local currency as the functional currency, assets and liabilities are translated from the local currencies into U.S. dollars at the exchange rate prevailing at the balance sheet date. Revenues, expenses and cash flows are translated at weighted average exchange rates for the period to approximate translation at the exchange rates prevailing at the dates those elements are recognized in F-7 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 the financial statements. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. REVENUE RECOGNITION MRV generally recognizes product revenue, net of sales discounts, returns and allowances, when persuasive evidence of an arrangement exists, delivery has occurred and all significant contractual obligations have been satisfied, the fee is fixed or determinable and collection is considered probable. Products are generally shipped "FOB shipping point" with no rights of return. Sales with contingencies, such as rights of return, rotation rights, conditional acceptance provisions and price protection, are rare and insignificant and are deferred until the contingencies have been satisfied or the contingent period has lapsed. MRV's major revenue-generating products consist of: passive and active optical components; switches and routers; remote device management; and network infrastructure equipment. Revenue generated through the sales of services and systems support has been insignificant. MRV generally warrants our products against defects in materials and workmanship for one year. The estimated cost of warranty obligations and sales returns and other allowances are recognized at the time of revenue recognition based on contract terms and prior claims experience. CASH AND CASH EQUIVALENTS MRV considers all highly liquid investments with an original maturity of 90 days or less to be cash equivalents. MRV maintains cash balances and investments in highly qualified financial institutions. At various times such amounts are in excess of insured limits. In connection with MRV's interest rate swap agreement and its long-term debt (see Note 9, Interest Rate Swap), $56.2 million in cash has been restricted until the term loan and the swap expire in 2003. As of December 31, 2000, $132.9 million of cash, cash equivalents and short-term investments were held by MRV's publicly traded subsidiary, Luminent. INVESTMENTS MRV accounts for its investments under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As of December 31, 1999 and 2000, short and long-term investments consisted principally of U.S. Treasury notes. As defined by SFAS No. 115, MRV has classified its investments in these debt securities as "held-for-maturity" investments and all investments are recorded at their amortized cost basis, which approximated their fair value at December 31, 1999 and 2000. As of December 31, 2000, all held-for-maturity investments were short-term expiring at various dates through 2001. INVENTORIES Inventories are stated at the lower of cost or market and consist of material, labor and overhead. Cost is determined by the first-in, first out method. F-8 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 Inventories consisted of the following as of December 31, 1999 and 2000 (in thousands):
1999 2000 ------- ------- Raw materials............................................... $ 8,475 $36,278 Work-in-process............................................. 8,083 17,721 Finished goods.............................................. 18,834 23,006 ------- ------- $35,392 $77,005 ======= =======
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Useful lives range from three to thirty-three years. Maintenance and repairs are charged to expense as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. GOODWILL AND OTHER INTANGIBLES Intangible assets represent intellectual property acquired, purchased intangible assets and the excess acquisition cost over the fair value of tangible and identified intangible net assets of the businesses acquired (goodwill). Purchased intangible assets include patents, assembled work forces, customer contracts and goodwill. Goodwill is amortized using the straight-line method over five years. Other intangible assets are amortized using the straight-line method over estimated useful lives ranging from 1 to 12 years. The components of intangible assets as of December 31, 1999 and 2000 are as follows (in thousands):
1999 2000 ------- -------- Patents..................................................... $ -- $ 64,600 Assembled work forces....................................... -- 1,790 Customer contracts.......................................... -- 720 Goodwill.................................................... 33,909 510,426 ------- -------- 33,909 577,536 Less -- Accumulated amortization............................ (6,695) (73,509) ------- -------- $27,214 $504,027 ======= ========
IMPAIRMENT OF INTANGIBLES AND OTHER LONG-LIVED ASSETS MRV evaluates its long-term assets, such as patents, assembled work forces, customer contracts, goodwill and property and equipment, for impairment at the acquired business unit level whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. MRV considers events or changes such as product discontinuance, plant closures, product dispositions, a history of operating losses or other changes in circumstances that indicate that the carrying amount may not be recoverable. The carrying value of an asset is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value. Fair market value is determined using the anticipated cash flows discounted at a rate based on MRV's weighted average costs of capital, which represents the blended after-tax costs of debt and equity. F-9 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 FAIR VALUE OF FINANCIAL INSTRUMENTS MRV's financial instruments, including cash and cash equivalents, investments, accounts receivable, accounts payable, accrued liabilities and short-term debt obligations are carried at cost, which approximates their fair market value due to the short-term nature of those instruments. The fair value of long-term debt obligations is estimated based on current interest rates available to MRV for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their fair values. SOFTWARE DEVELOPMENT COSTS In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," development costs related to software products are expensed as incurred until the technological feasibility of the product has been established. Technological feasibility in MRV's circumstances occurs when a working model is completed. After technological feasibility is established, additional costs would be capitalized. MRV believes its process for developing software is essentially completed concurrent with the establishment of technological feasibility, and, accordingly, no software development costs have been capitalized to date. ADVERTISING COSTS Advertising costs are charged to expense as incurred. INCOME TAXES Deferred income tax assets and liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. EARNINGS PER SHARE Basic earning (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income by the sum of the weighted average number of common shares outstanding, plus all additional common shares that would have been outstanding if potentially dilutive securities or common stock equivalents had been issued. Options to purchase 4.1 million, 4.0 million and 8.2 million shares were not included in the computation of years 1998, 1999 and 2000 diluted earnings (loss) per share because such options were considered anti-dilutive. Warrants to purchase 5.8 million, 3.3 million and 2.4 million shares were not included in the computation of years 1998, 1999 and 2000 diluted earnings (loss) per share because such options were considered anti-dilutive. Shares associated with MRV's $89.6 million outstanding convertible subordinated notes were not included in the computation of earnings (loss) per share as they were considered anti-dilutive. F-10 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 The following schedule summarizes the information used to compute earnings per share (in thousands, except per share data) for each of the three years in the period ended December 31, 2000:
1998 1999 2000 -------- -------- --------- Loss before extraordinary item............................ $(22,897) $(12,909) $(152,953) Extraordinary item -- gain on repurchase of convertible subordinated notes, net of tax.......................... 2,791 -- -- -------- -------- --------- Net loss........................................ $(20,106) $(12,909) $(152,953) ======== ======== ========= Weighted average number of shares used to compute basic and diluted loss per share.............................. 53,064 53,920 65,669 ======== ======== ========= Basic and diluted loss per share before extraordinary item.................................................... (0.43) (0.24) (2.33) Extraordinary gain per basic and diluted share............ 0.05 -- -- -------- -------- --------- Basic and diluted loss per share.......................... (0.38) (0.24) (2.33) ======== ======== =========
STOCK-BASED COMPENSATION MRV accounts for its employee stock plan under the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." MRV accounts for option and warrant grants to non-employees using the guidance prescribed by SFAS No. 123, Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 44, "Accounting for Certain Transactions Involving Stock Compensation (an interpretation of APB Opinion No. 25)," and Emerging Issue Task Force (EITF) No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods, or Services," whereby the fair value of such option and warrant grants are measured using the fair value at the earlier of the date at which the non-employee's performance is completed or a performance commitment is reached. Deferred stock compensation expense is being amortized using the graded vesting method. Using this method, approximately 57%, 26%, 13% and 4%, respectively, of each option's compensation expense is amortized in each of the four years following the date of grant. Deferred stock compensation generated during 2000 was $160.8 million of which $106.6 million was generated through acquisitions (see Note 3) and $54.2 million was generated through stock options granted to Luminent's Chief Executive Officer and its Chief Financial Officer (see Note 12). Total deferred stock compensation expense for the year ended December 31, 2000 was $59.9 million. There was no deferred stock compensation expense incurred for the year ended December 31, 1999. TRANSACTIONS WITH STOCK OF A SUBSIDIARY At the time a subsidiary sells its stock to unrelated parties at a price in excess of its book value, the book value of MRV's investment in that subsidiary increases. If at that time, the subsidiary is not a newly-formed, non-operating entity, nor a research and development, start-up or development stage company, nor does MRV contemplate subsequent capital transactions or intend to spin-off the subsidiary to stockholders, MRV records the increase in its investment as a gain in Other Income, net in its Consolidated Statements of Operations. Otherwise, the increase in its investment is considered as additional paid-in capital, which is included in Effect of Subsidiary Equity Transactions in MRV's Consolidated Statements of Stockholders' Equity. F-11 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 On November 9, 2000, Luminent, a wholly-owned subsidiary of MRV, issued 12.0 million shares of its common stock for $12 per share, or $144.0 million, to complete its initial public offering. As part of MRV's plan to spin-off Luminent to MRV stockholders, the purchase price in excess of its book value, or $49.7 million has been included in Effect of Subsidiary Equity Transactions in MRV's Consolidated Statements of Stockholders' Equity for the year ended December 31, 2000. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for Derivative Investments and Hedging Activities," and SFAS No. 137, which delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS No. 138, which provides additional guidance for the application of SFAS No. 133 for certain transactions. MRV will adopt the statement in January 2001 and does not expect the adoption of this statement to have a material impact on its financial position or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements," and related interpretations. SAB 101 summarizes certain of the SEC's views in applying accounting principles generally accepted in the Unites States to revenue recognition in financial statements. MRV has applied the provisions of SAB 101, which did not have a material impact on its financial position or results of operations. In March 2000, the FASB issued FIN 44, which clarifies the application of APB No. 25 for certain issues, including the definition of an employee, the treatment of the acceleration of stock options and the accounting treatment for options assumed in business combinations. FIN 44 became effective on July 1, 2000, but is applicable for certain transactions dating back to December 1998. The adoption of FIN 44 did not have a significant impact on MRV's financial position or results of operations. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year presentation. 3. BUSINESS ACQUISITIONS The following table presents information about acquisitions by MRV in each of the three years in the period ended December 31, 2000. All of these acquisitions were accounted for under the purchase method of accounting, and the results of operations of each business have been included in the accompanying consolidated statements of operations from the date of acquisition.
DATE OF TOTAL FORM OF CONSIDERATION AND ACQUIRED COMPANY ACQUISITION CONSIDERATION OTHER NOTES TO ACQUISITION ---------------- ---------------- -------------- ------------------------------ YEAR ENDED DECEMBER 31, 2000 Fiber Optic Communications, April 24, 2000 $309.7 million $48.6 million in cash and 5.4 Inc. million shares of common stock and options issued; approximately 97% of capital stock assumed; goodwill recorded of $261.5 million; deferred stock compensation recorded of $14.1 million. Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and intangibles recorded of $33.7 million; deferred stock compensation recorded of $25.0 million. Quantum Optech Inc. July 12, 2000 $36.1 million 1.2 million shares of common stock and options issued; 100% of capital stock assumed; goodwill recorded of $27.8 million; deferred stock compensation recorded of $2.7 million. AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and options issued; 100% of capital stock assumed; goodwill and intangibles recorded of $108.4 million; deferred stock compensation recorded of $50.0 million. Optronics International Corp. July 21, 2000 $123.9 million 4.2 million shares of common stock and options issued; approximately 99% of capital stock assumed; goodwill recorded of $99.4 million; deferred stock compensation recorded of $13.4 million.
F-13 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000
DATE OF TOTAL FORM OF CONSIDERATION AND ACQUIRED COMPANY ACQUISITION CONSIDERATION OTHER NOTES TO ACQUISITION ---------------- ---------------- -------------- ------------------------------ Other Various $16.5 million 507,000 shares of common stock issued; 100% of capital stock assumed; goodwill recorded of $14.9 million; deferred stock compensation recorded of $1.4 million. YEAR ENDED DECEMBER 31, 1998 Whittaker Xyplex, Inc.(1) January 30, 1998 $38.3 million $35.0 million in cash and 843,000 options to purchase common stock issued(3). 100% of capital stock assumed; $20.6 million in-process technology expensed(2); goodwill recorded of $10.3 million.
------------------------- (1) Whittaker Xyplex, Inc.'s name was subsequently changed to Nbase-Xyplex and most recently, to iTouch Communications. (2) Technology in-process was valued according to the "milestone" or percentage complete method. (3) In connection with the acquisition of Whittaker Xyplex, MRV issued three-year warrants, expiring in January 2001, to purchase 843,000 shares of common stock at an exercise price of $35.00 per share. Using the fair value method, these warrants were valued at $3.3 million. On April 24, 2000, MRV completed the acquisition of approximately 97% of the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of China corporation. Fiber Optic Communications is a manufacturer of passive fiber optic components for Wavelength Division Multiplexing. Under the terms of the purchase agreement, Fiber Optic Communications shareholders received approximately $48.6 million in cash and approximately 4.7 million shares of MRV common stock and options to purchase 680,000 shares of MRV common stock for a total purchase price of approximately $309.7 million. The issuance price of the MRV common stock was approximately $53 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have an aggregate intrinsic value of $14.1 million, and vest over a four-year period. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $261.5 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. On May 1, 2000, MRV completed the acquisition of all of the outstanding capital stock of Jolt, an Israeli corporation. Jolt designs, manufactures and sells multi-port wireless optics communications equipment. Under the terms of the purchase agreement, shareholders received approximately 1.1 million shares of MRV common stock. In addition, the employees of Jolt received options to purchase approximately 849,000 shares of common stock of MRV. The purchase price aggregated approximately $57.7 million. The issuance price of the common stock was approximately $31 per share, which was determined based on the average market price five days before and after the terms of the acquisition were agreed upon. The options to purchase common stock are exercisable at $6 per share, have an aggregate intrinsic value of $25.0 million, and vest over an employment period of four years. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $33.7 million has been recorded as goodwill and is being F-14 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 amortized on a straight-line basis over 5 years. The deferred compensation of approximately $25.0 million is being amortized using the graded vesting method over four years. On July 12, 2000, MRV completed the acquisition of all of the outstanding capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum Optech is a manufacturer of optical thin film coating and filters for Dense Wavelength Division Multiplexing. Under the terms of the purchase agreement, Quantum Optech shareholders received approximately 1.0 million shares of MRV common stock and options to purchase approximately 160,000 shares of MRV common stock for a total purchase price of approximately $36.1 million. The issuance price of the MRV common stock was approximately $30 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have a fair value of $4.0 million, of which unvested options have an intrinsic value of $2.7 million and vested options have a fair value of $1.3 million, and the remaining vest over a four-year period. The excess purchase price paid over the fair value of the net identifiable assets acquired of $27.8 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. On July 12, 2000, MRV completed the acquisition of AstroTerra, a California corporation that develops and manufactures free-space optical wireless communication systems to connect data and telecommunications networks. MRV exchanged approximately 1.6 million shares of its common stock for all of the outstanding capital stock of AstroTerra. In addition, the employees of AstroTerra received options to purchase approximately 809,000 shares of common stock of MRV. The purchase price aggregated approximately $160.3 million. The issuance price of the common stock was approximately $65 per share, which was determined based on the average market price five days before and after the terms of the agreement were agreed upon. The options to purchase common stock are exercisable at approximately $3 per share, have a fair value of approximately $50.0 million and vest over an employment period of four years. The deferred compensation is being amortized using the graded vesting method over four years. The excess purchase price paid over the fair value of the net identifiable assets acquired of $108.4 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. On July 21, 2000, MRV completed the acquisition of approximately 99% of the outstanding capital stock of Optronics International Corp., a Republic of China corporation. Optronics International is a manufacturer of high temperature semiconductor lasers, transceivers and detectors for optical networks. Under the terms of the purchase agreement, Optronics International shareholders received approximately 3.4 million shares of MRV common stock and options to purchase approximately 800,000 shares of MRV common stock for a total purchase price of approximately $123.9 million. The issuance price of the MRV common stock was approximately $30 per share, which was determined based on the average market price five days before and after the terms were agreed upon. The options to purchase MRV common stock are exercisable at $3.00 per share, have a fair value of $20.0 million, of which unvested options have an intrinsic value of $13.4 million and vested options have a fair value of $6.6 million, and the remaining vest over a four-year period. The acquisition is being accounted for using the purchase method of accounting. The excess purchase price paid over the fair value of the net identifiable assets acquired of $99.4 million has been recorded as goodwill and is being amortized on a straight-line basis over 5 years. The deferred compensation is being amortized using the graded vesting method over 4 years. F-15 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 The purchase price of Fiber Optic Communications, Jolt, Quantum Optech, AstroTerra, Optronics International and Other were allocated as follows (in thousands, unaudited): Purchase Price.............................................. $704,241 Allocation of purchase price: Net tangible assets....................................... 51,902 Deferred stock compensation............................... 106,602 Goodwill and other intangibles............................ 545,737
The results of operations of these acquisitions have been included in MRV's consolidated financial statements from the date of acquisition. The following unaudited pro forma financial information presents the combined results of operations of these acquisitions as if the acquisitions had occurred as of January 1, 1999, giving effect to certain adjustments, including amortization of goodwill and other intangibles and deferred stock compensation charges. The unaudited pro forma share data assumes the shares issued in connection with these acquisitions were outstanding as of January 1, 1999 (in thousands, except per share amounts, unaudited). The following unaudited pro forma financial information presents the combined results of operations of these acquisitions as if the acquisitions had occurred as of January 1, 1999, giving effect to certain adjustments, including amortization of goodwill and other intangibles and deferred stock compensation charges. The unaudited pro forma share data assumes the shares issued in connection with these acquisitions were outstanding as of January 1, 1999. (in thousands, except per share amounts, unaudited).
DECEMBER 31, ---------------------- 1999 2000 --------- --------- Pro forma revenue........................................... $ 322,645 $ 335,486 Pro forma net loss.......................................... $(115,775) $(143,044) Pro forma basic and diluted net loss per share.............. $ (1.75) $ (1.83) Pro forma basic and diluted weighted average shares outstanding............................................... 66,247 77,996
ACQUISITION-RELATED UNEARNED STOCK COMPENSATION During 2000, MRV recorded acquisition-related purchase consideration of $106.6 million as unearned stock-based compensation, in accordance with Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." This amount represents the portion of the purchase consideration related to shares issued contingent on continued employment of certain employee stockholders and the intrinsic value of stock options assumed that are earned as future services are provided by employees. The compensation is being recognized over the related employment period using the graded vesting method. A total of $43.7 million of expense was recognized for 2000. F-16 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 4. INVESTMENTS IN SUBSIDIARIES The following table presents information regarding investments made by MRV in subsidiaries accounted for under the equity method of accounting or consolidated. Subsidiaries in which MRV owns greater than 50% ownership or exercises control have been consolidated in the accompanying consolidated financial statements.
SUBSIDIARY OWNERSHIP % FORM OF CONSIDERATION(5) ---------- ----------- ------------------------ CONSOLIDATED SUBSIDIARIES EDSLan SRL 80%(1) Purchased an additional 10% ownership in 2000 for approximately $1.5 million; purchased an additional 10% ownership in 1999 for approximately $1.5 million; purchased an additional 10% ownership in 1997 for approximately $500,000; purchased 50% ownership in 1996 for approximately $1.1 million. Tecnonet SRL 60%(2) Purchased an additional 10% ownership in 1999 for approximately $600,000; purchased 50% ownership in 1998 for approximately $3.1 million. RDS 62.5% Purchased an additional 12.5% ownership in 1999 for approximately $2.4 million; purchased 50% ownership in 1998 for approximately $8.0 million. Charlotte's Networks 90%(3) Issued 1.0 million shares of common stock valued at approximately $61.5 million for approximately 10% in 2000. EQUITY METHOD SUBSIDIARIES RedC Optical 35% $5.0 in cash and issued 150,000 shares of common stock valued at approximately $11.5 million for approximately 32% in 2000. Other Various(4) Issued 646,000 shares of common stock valued at approximately $16.7 million for ownership interest in various non-consolidated equity investments.
------------------------- (1) MRV receives 95 percent of EDSLan's profits or losses from the date of each investment. (2) MRV receives 90 percent of Tecnonet's profits or losses from the date of each investment. (3) MRV's ownership on a fully diluted basis (assuming exercise of all stock options) is approximately 53 percent. (4) Represents various investments, all of which are less than 50% ownership and not consolidated. Income and losses from non-consolidated equity method subsidiaries are included in "other income (expense)" in the accompanying consolidated statements of operations. (5) The purchase price for each of these acquisitions is based on the common stock and cash consideration provided. The issuance prices of MRV common stock used in the calculation of the purchase price is based on the average market price five days before and after the terms were agreed upon. F-17 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 5. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands):
1999 2000 ------- ------- Payroll and related......................................... $ 7,055 $16,851 Other....................................................... 8,348 17,193 ------- ------- $15,403 $34,044 ======= =======
6. INCOME TAXES The provision (benefit) for income taxes for the three years in the period ended December 31, 2000 (including provision of $1.6 million related to the extraordinary gain in 1998) is as follows (in thousands):
1998 1999 2000 ------ ------- -------- Current Federal............................................. $3,306 $(2,139) $ 7,344 State............................................... 1,093 (413) 5,622 Foreign............................................. 3,324 1,701 6,841 ------ ------- -------- 7,723 (851) 19,807 Deferred Federal............................................. (176) (1,487) (17,354) State............................................... (31) 45 (7,137) Foreign............................................. (170) 140 (714) ------ ------- -------- (377) (1,302) (25,205) ------ ------- -------- $7,346 $(2,153) $ (5,398) ====== ======= ========
The income tax provision (benefit) differs from the amount computed by applying the federal statutory income tax rate to income before taxes as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 1998 1999 2000 ---- ---- ---- Income tax provision (benefit) at statutory federal rate.... (35)% 34% 34% State and local income taxes, net of federal income tax effect.................................................... (6) 6 6 Permanent differences....................................... -- (15) (30) Research and development credit............................. 6 6 -- Income tax on extraordinary gain............................ (10) -- Foreign taxes at rates different than domestic rates........ (2) (17) (3) Change in valuation reserve................................. -- -- (10) --- --- --- (43)% 14% (3)% === === ===
F-18 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 The components of deferred income taxes as of December 31, 1999 and 2000 are as follows (in thousands):
1999 2000 ------- -------- Allowance for doubtful accounts............................. $ 2,548 $ 2,083 Inventory reserve........................................... 3,811 6,133 Warranty reserve............................................ 1,072 647 Deferred stock compensation................................. -- 6,630 Net operating losses........................................ -- 29,014 Accrued liabilities......................................... -- 2,158 Other....................................................... (524) 1,463 ------- -------- 6,907 48,128 Valuation allowance.................................... -- (16,901) ------- -------- Net short-term deferred income tax assets.............. 6,907 31,227 Purchased technology in progress............................ 5,724 -- Depreciation and amortization............................... (400) 6,209 ------- -------- Net long-term deferred income tax assets............... 5,324 6,209 ------- -------- $12,231 $ 37,436 ======= ========
Realization of the net deferred tax assets is dependent on MRV's ability to carry losses back to prior periods or on generating sufficient taxable income during the periods in which temporary differences will reverse. Management reviews its deferred tax assets and has provided a valuation allowance based on its assessment of the expected future benefit to be ultimately received from each asset identified. Although realization is not assured, management believes it is more likely than not that the net deferred tax assets will be realized. MRV generated net operating loss carryforwards available of approximately $56.4 million and $56.4 million for federal and state income tax purposes, respectively for the year ended December 31, 2000. Prior to December 31, 2000, there were no federal net operating loss carryforwards available. Prior to December 31, 2000, MRV had generated total state net operating losses of $50.3 million available to offset future taxable income through 2014. For federal and state income tax purposes, the net operating losses generated during 2000 are available to offset future taxable income through 2020. In 1995, MRV, through a subsidiary in Israel, qualified for a program under which it is eligible for a tax exemption on its income for a period of ten years from the beginning of the benefits period. This benefit is due to expire in 2006. Due to operating losses at this subsidiary, no tax benefit was received in 2000. MRV received a tax benefit of approximately $300,000 in 1999. MRV does not provide United States federal income taxes on the undistributed earnings of its foreign operations. MRV's policy is to leave the income permanently invested in the country of origin. Such amounts will only be distributed to the United States to the extent any federal income tax can be fully offset by foreign tax credits. 7. SHORT-TERM OBLIGATIONS Short-term obligations consist of secured and unsecured lines of credit, short-term loans and notes entered into with certain financial institutions. As of December 31, 2000, these short-term obligations totaled $9.1 million. Approximately $2.9 million in assets of MRV's subsidiaries have been pledged as collateral on these borrowings. The weighted average interest rate on these obligations is 6.1 percent. F-19 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 These obligations are incurred and settled in the local currencies of the respective subsidiaries. As of December 31, 2000, MRV had approximately $8.7 million of available short-terms borrowings. 8. LONG-TERM DEBT Long-term debt consisted of the following as of December 31, 2000 (in thousands): Secured notes payable to financial institutions bearing interest ranging from 6.5% to 18.0%, payable in monthly and quarterly installments of principal and interest through October 2012...................................... $13,031 Term loan with a financial institution bearing interest at 7.0% as of December 31, 2000, payable in full in 2003..... 50,000 ------- 63,031 Less -- Current portion................................... (2,774) ------- $60,257 =======
The following summarizes the required principal payments on long-term debt as of December 31, 2000 (in thousands):
YEAR ENDING DECEMBER 31, 2001...................................................... $ 2,774 2002...................................................... 1,905 2003...................................................... 52,061 2004...................................................... 1,666 2005...................................................... 1,608 Thereafter................................................ 3,017 ------- $63,031 =======
Certain assets of MRV, primarily through its foreign subsidiaries, have been pledged as collateral under these obligations. 9. INTEREST RATE SWAP In April 2000, MRV entered into an interest rate swap agreement to effectively change the interest rate characteristics of its $50.0 million variable-rate term loan presented in Long-Term Debt, with the objective of eliminating fluctuations in its overall borrowing costs. The swap was entered into concurrently with the issuance of the related debt. The notional amount, interest payment and maturity dates of the swap match the principal, interest payment and maturity dates of the related debt. Both the swap and term loan expire in 2003. Accordingly, any market risk or opportunity associated with this swap is offset by the opposite market impact on the related debt. Under the agreement, MRV is committed to pay the financial institution interest based on a principal balance of $50.0 million at a fixed rate of 7.11 percent as of December 31, 2000, in exchange for the financial institution's commitment to pay MRV interest on the same principal at the one-month LIBOR rate (6.6 percent as of December 31, 2000). MRV includes the outcome of this interest rate swap agreement in interest expense ($217,000 for the year ended December 31, 2000). 10. CONVERTIBLE SUBORDINATED NOTES In June 1998, MRV completed a private placement of $100.0 million principal amount five-year, convertible subordinated notes (the Notes). The Notes bear interest at five percent per year, payable semi- F-20 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 annually, and are convertible into common stock at the option of the holders. The conversion rate is 73.94 shares of common stock per $1,000 principal amount of the Notes, equivalent to a conversion price of $13.52 per share, an initial premium above market price. The conversion rate is subject to adjustment in certain circumstances, including dividends payable in common stock, issuance of stock rights to all holders of common stock or stock splits or distributions to common stockholders in connection with a tender offer. If a change in control, as defined, occurs, the holders of the Notes have the right to require MRV to repurchase the Notes at face value along with any interest accrued. MRV has the right, after June 2001, to redeem the Notes at 102 percent of face value, and after June 2002 for 101 percent of face value. The Notes are not entitled to the benefits of any sinking fund. In connection with the private placement, MRV incurred costs of $4.0 million. These costs are being amortized using the effective interest method over five years, the life of the Notes. Amortization expense for the years ended December 31, 1999 and 2000 was $681,000 and $723,000, respectively. In November 1998, MRV repurchased $10.0 million of the Notes for $5.3 million. MRV recorded an extraordinary gain of $2.8 million, net of tax, related to the repurchase of the Notes. Included in this amount is the portion of the Notes amortization of expense of the costs attributable to the Notes repurchased. 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases all of its facilities and certain equipment under noncancelable capital and operating lease agreements expiring in various years through 2049. The aggregate minimum annual lease payments under leases in effect on December 31, 2000 were as follows (in thousands):
CAPITAL OPERATING LEASES LEASES ------- --------- 2001...................................................... $ 207 $ 3,756 2002...................................................... 200 3,007 2003...................................................... 200 2,256 2004...................................................... 152 777 2005...................................................... 64 467 Thereafter................................................ 68 2,242 ----- ------- $ 891 $12,505 ======= Less -- Amount representing interest...................... (107) ----- 784 Less -- Current portion................................... (163) ----- $ 621 =====
Annual rental expense under noncancelable operating lease agreements for the years ended December 31, 1998, 1999 and 2000 was $2.8 million, $4.7 million and $4.9 million, respectively. ROYALTY COMMITMENT Through subsidiaries in Israel, MRV is obligated to the Office of the Chief Scientist of the Government of Israel (Chief Scientist) with respect to the government's participation in research and development expenses for certain products. Amounts received by MRV from the participation of the Chief Scientist were offset against the related research and development expenses incurred. Accordingly, MRV's F-21 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 royalty to the Chief Scientist is calculated at a rate of three percent to five percent of sales of such products developed with the participation up to the dollar amount of such participation. MRV received participation of $350,000 and $500,000 for the year ended December 31, 1998 and 1999, respectively. No participation was received for the year ended December 31, 2000. The remaining future obligation as of December 31, 2000 is approximately $913,000 which is contingent on generating sufficient sales of this selected product line. ACCOUNTS RECEIVABLE MRV, through foreign subsidiaries, has agreements with several financial institutions to sell its receivables with recourse; in the event of customer's default, MRV must repurchase the receivables. At December 31, 2000 the Company is contingently liable for approximately $23.4 million relating to such receivables sold with recourse. No gain or loss on the sale of these receivables has been included in the accompanying consolidated statements of operations. LITIGATION In December, 1996, Datapoint brought an action against Nbase Communications, Inc., a subsidiary of the Company ("Nbase") and several other defendants in the United States District Court, for the Eastern District of New York alleging infringement of two of Datapoint's patents related to LANs, more particularly to claimed improved LANs which interoperatively combine additional enhanced capability and/or which provide multiple different operational capabilities. In the same lawsuit, Datapoint alleges that other defendants including Dayna Communications, Inc., Sun Microsystems, Inc., Adaptec, Inc., International Business Machines Corporation, Lantronix and SVEC America Computer Corporation have infringed the same two patents. The Company has been advised that several other companies, including Intel Corporation and Cisco Systems, Inc., have also had actions brought against them by Datapoint with respect to the same two patents. The action against Nbase and its codefendants seeks, among other things, an injunction against the manufacture or sale of products which embody the inventions set forth in the two patents and single and treble damages for the alleged infringement. Datapoint's complaint also seeks to have the court determine that the named defendants shall serve as representatives of a defendant class of manufacturers, vendors and users of products allegedly infringing on Datapoint's claimed patents from which defendant class Datapoint seeks the same relief as from the individual defendants. In February 1999, the court entered judgement in favor of the defendants and Datapoint filed a notice of appeal. The Company is cooperating with several of the defendants in pursuit of common defenses and believes the claim is without merit. If a conclusion unfavorable to the Company is reached, however, Datapoint's claim could materially affect the business, operating results and financial condition of the Company. The Company has received notices from third party alleging possible infringement of patents with respect to product features or manufacturing processes. Management believes such notices are common in the communications industry because of the large number of patents that have been filed on these subjects. The Company's policy is to discuss these notices with the senders in an effort to demonstrate that the Company's products and/or processes do not violate any patents. The Company is currently involved in such discussions with Lucent, Ortel, Rockwell and the Lemelson Foundation. The Company does not believe that any of its products or processes violate any of the patents asserted by these parties and the Company further believes that it has meritorious defenses if any legal action is taken by any of these parties. However, if one or more of these parties was to assert a claim and gain a conclusion unfavorable to the Company such claims could materially and adversely affect the business, operating results and financial condition of the Company. F-22 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 From time to time, MRV is a defendant in lawsuits involving matters which are routine to the nature of its business. Management is of the opinion that the ultimate resolution of all such matters will not have a material adverse effect on the accompanying consolidated financial statements. 12. STOCKHOLDERS' EQUITY AUTHORIZED SHARES On May 10, 2000, the Board of Directors and stockholders of MRV approved an increase in the authorized number of shares of its $0.0017 par value common stock from 80.0 million to 160.0 million shares relating to the two-for-one stock split distributed on May 26, 2000. MRV is authorized to issue up to 1.0 million shares of its $0.01 par value preferred stock, of which none has been issued or outstanding as of December 31, 1999 and 2000. STOCK SPLIT The Board of Directors authorized the splitting of MRV's common stock on a two-for-one basis for stockholders of record on May 11, 2000 and the resulting shares from the split were distributed on May 26, 2000. All references to share and per-share data for all periods presented have been adjusted to give effect to this two-for-one stock split. STOCK OPTIONS MRV has various stock option and warrant plans that provide for granting options and warrants to purchase shares of MRV's common stock to employees, directors and non-employees performing consulting or advisory services for MRV. The plans provide for the granting of options, which meet the Internal Revenue Code requirements for qualification as incentive stock options, as well as nonstatutory options. Under these plans, stocks option and warrant exercise prices generally equal the fair market value of MRV's common stock at the date of grant. The options and warrants generally vest over three to five years with expiration dates ranging from six and ten years from the date of grant depending on the plan. The plans provide for the issuance of 13.4 million shares of common stock over the remaining life of the plans. In connection with the anticipated separation of Luminent, in July 2000, Luminent's Board of Directors and MRV approved Luminent's 2000 Stock Option Plan (Luminent's Plan). Luminent's Plan provides for grants of qualified incentive stock options, non-qualified stock options, restricted stock awards and other stock-based awards to purchase Luminent common stock to officers, employees, directors, consultants and advisors of Luminent. Stock-based awards are generally granted at not less than fair market value at the grant date, and typically vest over a four-year period and expire ten years after the grant date. There have been 10.4 million shares of Luminent common stock reserved for issuance under Luminent's Plan. As of December 31, 2000, 4.7 million options to purchase Luminent common stock have been granted under Luminent's Plan. In July 2000, Luminent and MRV entered into four-year employment contracts with the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of Luminent. The agreements provide for annual salaries, performance bonuses and a combination of stock options to purchase common stock of MRV and Luminent. The CEO received approximately 316,000 options to purchase shares of MRV common stock at $32.56 per share (a substantial discount) expiring in five years. The CFO received approximately 22,000 options to purchase shares of MRV common stock at $33.44 per share (a substantial discount) expiring in five years. These options are immediately exercisable, however they provide for the repurchase in the event of voluntary termination. These grants have been accounted for under APB No. 25 F-23 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 and the intrinsic value (fair market value less exercise price) results in additional deferred stock compensation of approximately $10.8 million that is being amortized over the four year vesting period. Furthermore, Luminent granted 4.8 million and 800,000 of its stock options to the CEO and CFO, respectively. The options are exercisable at $6.25 per share and vest over four years. These grants have been accounted for in accordance with APB No. 25 and the intrinsic value (original mid point of filing range, $14, less $6.25) resulted in aggregate deferred stock compensation of approximately $43.4 million. The deferred stock compensation is being amortized using the graded vesting method over four years. The deferred stock compensation incurred from the granting of MRV and Luminent options for a total of $54.2 million has been included in the consolidated financial statements of MRV. Stock option information with respect to MRV's stock option and warrant plans is as follows:
1998 1999 2000 ------------------ ------------------ ------------------ WTD. AVG. WTD. AVG. WTD. AVG. SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE ------ --------- ------ --------- ------ --------- Outstanding, beginning of year.............. 2,416 $4.39 4,082 $2.49 3,980 $ 4.36 Granted..................................... 2,000 9.24 1,122 9.21 5,959 8.14 Exercised................................... (236) 2.26 (744) 2.31 (1,660) 2.52 Forfeited................................... (98) 5.55 (480) 2.63 (67) 2.56 Cancelled in repricing...................... (2,996) 8.93 -- -- -- -- Granted in repricing........................ 2,996 2.63 -- -- -- -- Outstanding, end of year.................... 4,082 $2.49 3,980 $4.36 8,212 $ 6.29 ===== ===== ====== Weighted average fair value of options granted during year....................... $3.11 $7.33 $20.58 ===== ===== ======
During 2000, MRV granted 3.8 million options to purchase MRV common stock with exercises that differed from the market price of the stock on the grant date. The weighted average exercise price and weighted average fair value of these options were $5.67 and $21.99 per share, respectively. Information about MRV stock options outstanding at December 31, 2000 is summarized as follows:
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE EXERCISE PRICE AS OF 2000 REMAINING CONTRACT LIFE AS OF 2000 -------------- ------------------ ----------------------- ------------------ $1.82 - $2.63 3,511 6.29 Years 3,337 $2.75 - $2.94 1,081 8.09 Years 221 $3.00 - 33.00 3,620 9.55 Years 322 ----- ----- 8,212 3,880 ===== =====
F-24 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 Stock option information with respect to Luminent's stock option plan is as follows:
YEAR ENDED DECEMBER 31, 2000 ------------------ WTD. AVG. SHARES EX. PRICE ------ --------- Outstanding, beginning of year.............................. -- -- Granted..................................................... 10,285 $8.77 Exercised................................................... -- -- Forfeited................................................... -- -- ------ ----- Outstanding, end of year.................................... 10,285 $8.77 ====== ===== Weighted average fair value of options granted during year...................................................... $9.57 =====
During 2000, Luminent granted 5.2 million options to purchase Luminent common stock with exercises that differed from the market price of the stock on the grant date. The weighted average exercise price and weighted average fair value of these options were $6.25 and $11.10 per share, respectively. Information about Luminent's stock options outstanding at December 31, 2000 is summarized as follows (in thousands, except share prices):
NUMBER OUTSTANDING NUMBER EXERCISABLE AT DECEMBER 31, WEIGHTED AVERAGE AT DECEMBER 31, EXERCISE PRICE 2000 REMAINING CONTRACT LIFE 2000 -------------- ------------------ ----------------------- ------------------ $6.00 - 6.25 5,767 9.53 years 1,400 $12.00 4,518 9.85 years 40 ------ ----- 10,285 1,440 ====== =====
ACCOUNTING FOR STOCK-BASED COMPENSATION SFAS No. 123 permits companies to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. Because MRV's stock-based compensation plans have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, management believes that the existing option valuation models do not necessarily provide a reliable single measure of the fair value of a wards from the plan. Therefore, as permitted, MRV applies the existing accounting rules under APB No. 25 and provides pro forma net income (loss) and pro forma earnings (loss) per share disclosures for stock-based awards made during the year as if the fair value method defined in SFAS No. 123 had been applied. Net loss and net loss per share for each of the three years in the period ended December 31, 2000 would have increased to the following pro forma amounts (in thousands, except per share data):
1998 1999 2000 -------- -------- --------- Additional compensation expense................... $ 1,835 $ 2,888 $ 24,998 Pro forma net loss................................ $(21,941) $(15,797) $(177,951) Pro forma basic net loss per share................ $ (0.41) $ (0.29) $ (2.71) Pro forma diluted net loss per share.............. $ (0.41) $ (0.29) $ (2.71)
F-25 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 The following assumptions were applied: (i) no expected dividend yield for all periods, (ii) expected volatility of 22 percent for 1998, 64 percent for 1999 and 78 percent for 2000, (iii) expected lives of 4 to 6 years for all years, (iv) and risk-free interest rates ranging from 4.23 percent to 6.73 percent for all years. COMMON STOCK PURCHASE WARRANTS In connection with various public and private offerings of common stock and acquisitions MRV has issued warrants to purchase additional shares of common stock. A summary of warrant activities for the three years ended December 31, 2000 is as follows (in thousands, except share prices):
NUMBER OF SHARES EXERCISE PRICES ---------------- --------------- Balance, December 31, 1997............................. 5,212 $0.14 to 16.25 Issued............................................... 842 17.50 Exercised............................................ (132) 2.13 to 2.80 Canceled............................................. (152) 4.21 ------ -------------- Balance, December 31, 1998............................. 5,770 0.14 to 17.50 Issued............................................... -- -- Exercised............................................ (874) 2.40 to 10.00 Canceled............................................. (1,556) 0.14 to 13.38 ------ -------------- Balance, December 31, 1999............................. 3,340 2.13 to 17.50 Issued............................................... -- -- Exercised............................................ (895) 2.29 to 16.25 Canceled............................................. (5) 2.13 ------ -------------- Balance, December 31, 2000............................. 2,440 $2.13 to 17.50 ====== ==============
In November 1996, MRV completed a private placement of 400,000 stock and 1.0 million three-year warrants to purchase common stock for a total price of $4.0 million. During 1999, prior to the expiration of the three-year warrants, 800,000 warrants were exercised at $10.00 per share, for total proceeds of $8.0 million. The remaining 200,000 warrants expired. 13. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION MRV operates under a business model that creates and manages start-up companies and independent business units. These companies fall into two segments: operating entities and development stage enterprises. Segment information is therefore being provided on this basis which differs from prior period presentations. Development stage enterprises that MRV has created or invested in are developing optical components, subsystems and networks and products for the infrastructure of the Internet. Operating entities of MRV design, manufacture and distribute optical components, optical subsystems, optical networking solutions, and Internet infrastructure products. The accounting policies of the segments are the same as those described in the summary of significant accounting polices. MRV evaluates segment performance based on revenues and operating income (loss) of each segment. As such, there are no separately identifiable segment assets nor are there any separately identifiable statements of operations data below operating income. F-26 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 Business segment net revenues for each of the three years in the period ended December 31, 2000 (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- Operating entities................................. $264,075 $288,524 $319,394 Development stage enterprises...................... -- -- -- -------- -------- -------- Total revenues........................... $264,075 $288,524 $319,394 ======== ======== ========
There were no inter-segment sales for the years ended December 31, 2000, 1998 and 1999. Net revenues by groups of products for each of the years in the period ended December 31, 2000 (in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- Optical passive components......................... -- 3,687 29,148 Optical active components.......................... 38,596 67,722 97,335 Switches and routers............................... 110,301 108,000 80,784 Remote device management........................... 37,738 28,698 19,167 Network physical infrastructure equipment.......... 42,765 50,521 56,747 Services........................................... 31,641 23,461 20,892 Other.............................................. 3,034 6,433 15,321 -------- -------- -------- Total revenues........................... $264,075 $288,524 $319,394 ======== ======== ========
Business Segment Operating Income (Loss) for each of the three years in the period ended December 31, 2000 (in thousands):
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1999 2000 -------- -------- --------- Operating entities................................ $(18,141) $ 4,017 $(100,759) Development stage enterprises..................... (2,043) (20,011) (48,810) -------- -------- --------- Total operating loss.................... $(20,184) $(15,994) $(149,569) ======== ======== =========
For each of the three years in the period ended and as of December 31, 2000, MRV had no single customer that accounted for more than 10 percent of revenues or accounts receivable. MRV does not track customer revenue by region for each individual reporting segment. A summary of external revenue by region follows (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1999 2000 -------- -------- -------- United States...................................... $107,376 $122,054 $119,190 European Community................................. 118,881 129,994 160,398 Middle East........................................ 5,634 4,166 2,483 Pacific Rim........................................ 24,892 28,921 31,891 Other.............................................. 7,292 3,389 5,432 -------- -------- -------- Total net sales.......................... $264,075 $288,524 $319,394 ======== ======== ========
F-27 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 Operating loss before other income (expense), provision (benefit) for income taxes and extraordinary item (in thousands):
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1999 2000 -------- -------- --------- United States..................................... $(28,280) $ (5,781) $ (69,671) Foreign........................................... 8,096 (10,213) (79,898) -------- -------- --------- Operating loss.......................... $(20,184) $(15,994) $(149,569) ======== ======== =========
14. LAN BUSINESS In 1999 MRV recorded one-time charges of approximately $13.8 million primarily related to the write-down of inventories related to its LAN product lines. These charges have been included in "cost of goods sold" for the year ended December 31, 1999 in the accompanying consolidated statement of operations. In February 2000, MRV discontinued manufacturing and supporting its LAN product lines. 15. 401(K) PLANS MRV has 401(K) savings plans (the Plans) at certain subsidiaries under which all eligible employees may participate. The Plans provide for MRV to make matching contributions to all eligible employees. In 1999 and 2000, approximately $679,000 and $731,000, respectively, was charged as expense related to these plans. 16. SUPPLEMENTAL STATEMENTS OF CASH FLOW INFORMATION (IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1998 1999 2000 -------- -------- ---------- Supplemental disclosure of cash flow information: Cash paid during period for interest................. $2,569 $1,652 $ 3,635 Cash paid during period for income taxes............. $9,945 $4,887 $ 130 Supplemental schedule of noncash investing and financing activities: Fair value of asset acquired, net of cash received... $ -- $ -- $ 48,611 Less: Liabilities assumed............................ -- -- (44,190) ------ ------ -------- Cash received in acquisitions........................ $ -- $ -- $ 4,421 ------ ------ -------- Cash used in acquisitions............................ -- -- 48,938 ------ ------ -------- Cash used in acquisitions, net of cash received...... $ -- $ -- $ 44,517 ====== ====== ======== Common stock issued in connection with investments in subsidiaries......................................... $ -- $ -- $ 90,126
F-28 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 17. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- YEAR ENDED DECEMBER 31, 2000 Revenues, net......................... $65,072 $ 73,935 $ 82,720 $ 97,667 Costs and expenses: Cost of goods sold.................. 42,736 45,793 47,910 66,932 Research and development............ 11,891 14,758 21,803 25,626 Selling, general and administrative................... 16,028 26,467 52,699 29,506 Amortization of goodwill and other intangibles...................... -- 12,055 27,348 27,411 ------- -------- -------- -------- 70,655 99,073 149,760 149,475 Operating loss................... (5,583) (25,138) (67,040) (51,808) Other income (expense), net........... (488) (1,190) (5,764) (2,136) ------- -------- -------- -------- Loss before provision (benefit) for income taxes and minority interest....................... (6,071) (26,328) (72,804) (53,944) Provision (benefit) for income taxes............................... (494) 1,377 1,005 (7,286) Minority interest..................... (287) (45) (570) 1,698 ------- -------- -------- -------- Net loss......................... $(5,864) $(27,750) $(74,379) $(44,960) ======= ======== ======== ======== Basic and diluted earnings per share............................... $ (0.10) $ (0.44) $ (1.06) $ (0.62) Basic and diluted weighted averages shares.............................. 56,850 62,754 70,122 72,768 ======= ======== ======== ======== YEAR ENDED DECEMBER 31, 1999 Revenues, net......................... $70,116 $ 73,251 $ 71,254 $ 73,903 Costs and expenses: Cost of goods sold.................. 46,366 47,595 44,653 58,828 Research and development............ 9,592 8,572 8,476 9,806 Selling, general and administrative................... 14,718 14,750 15,581 22,474 Amortization of goodwill and other intangibles...................... -- 1,142 951 1,014 ------- -------- -------- -------- 70,676 72,059 69,661 92,122 Operating income (loss).......... (560) 1,192 1,593 (18,219) Other income (expense), net........... 278 132 165 (253) ------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes and minority interest.............. (282) 1,324 1,758 (18,472) Provision (benefit) for income taxes............................... 627 782 1,169 (4,731) Minority interest..................... -- (17) (22) 649 ------- -------- -------- -------- Net income....................... $ (909) $ 525 $ 567 $(13,092) ======= ======== ======== ======== Basic earnings (loss) per share....... $ (0.02) $ 0.01 $ 0.01 $ (0.24) Diluted earnings (loss) per share..... $ (0.02) $ 0.01 $ 0.01 $ (0.24) Basic weighted averages shares........ 53,300 53,472 53,868 55,082 Diluted weighted averages shares...... 53,300 57,621 60,154 55,082 ======= ======== ======== ========
F-29 MRV COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000 18. EVENTS SUBSEQUENT TO FEBRUARY 19, 2001 During the second quarter of 2001, the management of Luminent, MRV's publicly traded subsidiary, approved and implemented a restructuring plan as a result of the dramatic slowdown in demand for communications equipment. During the six months ended June 30, 2001, Luminent recorded restructuring and other one-time charges totaling $41.2 million resulting from the lower demand for Luminent's products and pricing pressures stemming from the continuing deterioration in the communications equipment industry, specifically the optical components sector. In June, 2001, the FASB approved two pronouncements: SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", which provide guidance on the accounting for business combinations to be accounted for using the purchase method. Under the new rules, goodwill will no longer be subject to amortization over its useful life. Rather, goodwill will be subject to at least an annual impairment assessment. This assessment is a fundamentally different two-step approach and is based on a comparison between a reporting unit's fair value and its carrying value. Intangible assets have newly defined criteria and will be accounted for separately from goodwill and will continue to be amortized over their useful lives. MRV plans to adopt these pronouncements on January 1, 2002. MRV is currently reviewing these standards to determine the impact on its results of operations and its financial position. The most significant anticipated effect on MRV's financial statements at adoption would be the discontinuing of the amortization of goodwill and the possible impairment loss measured as of the date of adoption. In September 2001, Luminent's President and Chief Executive Officer resigned. In connection with the resignation, Luminent's President and Chief Executive Officer received a severance package, as defined in the employment agreement dated July 2000, providing severance payments of approximately $1.0 million and the immediate vesting of all outstanding MRV and Luminent stock options held as of the date of resignation. The MRV and Luminent stock options are exercisable through September 11, 2003. Additionally, an immediate recognition of deferred compensation expenses of $18.9 million will be recorded during the third quarter of 2001 as a result of the acceleration of these stock options. In September 2001, MRV and Luminent jointly announced that MRV intends to merge Luminent into MRV through the filing of a short-form merger. All Luminent shareholders are entitled to receive 0.43 shares of MRV common stock for each share of Luminent common stock held. Furthermore, outstanding Luminent employee stock options will convert into options to purchase MRV common stock at the same ratio. The merger is expected to be completed during the fourth quarter of 2001. F-30 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To MRV Communications, Inc.: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of MRV Communications, Inc. and subsidiaries included in this Form 10-K, and have issued our report thereon dated February 19, 2001 (except for matters discussed in Note 18 as to which the date is October 4, 2001). Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule of valuation and qualifying accounts is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and it is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ Arthur Andersen LLP Arthur Andersen LLP Los Angeles, California February 19, 2001 F-31 MRV COMMUNICATIONS, INC. Schedule II -- Valuation and Qualifying Accounts (in thousands)
Balance at Charged to Beginning of Costs and Balance at Period Other Expenses Write-off End of Period ------------ -------- ---------- ---------- ------------- Allowance for Doubtful Accounts Year ended December 31, 1998 $ 4,252 $ 2,647 $ 2,591 $ (1,003) $ 8,487 Year ended December 31, 1999 $ 8,487 $ - $ 1,416 $ (1,452) $ 8,451 Year ended December 31, 2000 $ 8,451 $ - $ 3,833 $ (2,804) $ 9,480
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