-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LmlCzbC/S4lPbJYf7y9Eep+D/pMhye6Zec1ARXxa/o8aANChndCvSEcSFT9xQCoO ADIkVmRYYfXMzdwCS5FwcA== 0000950148-99-000453.txt : 19990310 0000950148-99-000453.hdr.sgml : 19990310 ACCESSION NUMBER: 0000950148-99-000453 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990309 ITEM INFORMATION: FILED AS OF DATE: 19990309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MRV COMMUNICATIONS INC CENTRAL INDEX KEY: 0000887969 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 061340090 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-11174 FILM NUMBER: 99561084 BUSINESS ADDRESS: STREET 1: 8943 FULLBRIGHT AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187679044 MAIL ADDRESS: STREET 1: 8943 FULLBRIGHT AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 8-K/A 1 FORM 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (Amendment No. 2) CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 MRV COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation) 0-23452 06-1340090 (Commission File Number) (I.R.S. Employer Identification No.) 8917 Fullbright Ave. Chatsworth, CA 91311 (Address of Principal executive offices) (Zip Code) 818 773-9044 (Registrant's telephone number, including area code) N/A (Form name or former address, if changed since last report) 2 This Form 8-K/A amends the registrant's Form 8-K filed February 13, 1998, as amended on April 17, 1998: Although MRV Communications, Inc. reported its first, second and third quarter results of 1998 and its Reports on Form 8-K in accordance with established accounting practice and valuations of purchased technology in progress provided by independent valuators, these valuations have been reconsidered in light of very recent Securities and Exchange Commission guidance regarding valuation methodology. Based on this new valuation methodology, the value of the purchased technology in progress related to the Xyplex acquisition has been reduced to $20,633,000 and the amount of goodwill has been increased. In addition, the provision for income tax previously reported in the unaudited pro forma consolidated financial statements included in this report was increased to clarify the allocation of Xyplex net operating loss benefit. Except for the changes previously noted, these unaudited pro forma consolidated financial statements are presented with the same assumptions as those presented in Amendment Number 1 to this 8-K filed on April 17, 1998. To the extent the information set forth herein differs from the information previously filed, this information supersedes the prior information. Item 7 Financial Statements and Exhibits *(a) Financial Statements of Business Acquired The following financial statements of Xyplex, Inc. are included herewith:
Description Page ----------- ---- AUDITED FINANCIAL STATEMENTS AT OCTOBER 31, 1997 AND 1996 AND FOR THE YEAR ENDED OCTOBER 31, 1997 AND THE PERIOD APRIL 10, 1996 TO OCTOBER 31, 1996 Report of Independent Auditors (Ernst & Young LLP)........................................... 4 Balance Sheets at October 31, 1997 and 1996.................................................. 5 Statements of Operations for the year ended October 31, 1997 and the period April 10, 1996 to October 31, 1996 ................................... 6 Statements of Changes in Stockholders Equity for the year ended October 31, 1997 and the period April 10, 1996 to October 31, 1996................... 7 Statements of Cash Flows for the year ended October 31, 1997 and the period April 10, 1996 to October 31, 1996.................................... 8 Notes to Financial Statements................................................................ 9 AUDITED FINANCIAL STATEMENTS AT APRIL 9, 1996 AND FOR THE PERIOD JANUARY 1, 1996 TO APRIL 9, 1996 Report of Independent Auditors (Coopers & Lybrand L.L.P.).................................... 21 Balance Sheet at April 9, 1996............................................................... 22 Statement of Loss for the period January 1, 1996 to April 9, 1996 ........................... 23 Statement of Parent Company Investment....................................................... 24 Statement of Cash Flows for the period January 1, 1996 to April 9, 1996...................... 25 Notes to Financial Statements................................................................ 26 (b) Pro Forma Financial Information The following pro forma financial information is included herewith: Unaudited Pro Forma Consolidated Financial Statements........................................ 33 Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 1997....................... 34 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1997.................................................................... 36 Notes and Assumptions to Unaudited Pro Forma Consolidated Financial Statements.............. 37
- ---------- *Previously filed 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MRV COMMUNICATIONS, INC. Date: March 9, 1999 BY: /s/ EDMUND GLAZER ------------------------------------- Edmund Glazer Chief Financial Officer 4 Report of Independent Auditors Board of Directors Whittaker Corporation We have audited the accompanying balance sheets of Xyplex, Inc. (the Company) as of October 31, 1997 and 1996, and the related statements of operations, changes in stockholder's equity, and cash flows for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xyplex, Inc. at October 31, 1997 and 1996, and the results of its operations and its cash flows for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996, in conformity with generally accepted accounting principles. /S/ Ernst & Young ERNST & YOUNG LLP November 26, 1997, except Note 13, as to which the date is March 11, 1998 5 Xyplex, Inc. Balance Sheets (In thousands)
OCTOBER 31 1997 1996 ---------------------------- ASSETS Cash and cash equivalents $ 1,037 $ 1,225 Notes receivable 8 344 Accounts receivable, less reserve of $1,712 and $1,042 in 1997 and 1996, respectively 12,319 14,543 Inventory 3,276 6,694 Deferred income taxes 5,071 6,281 Prepaid expenses and other current assets 864 928 ---------------------------- Total current assets 22,575 30,015 ---------------------------- Property and equipment, net 4,832 6,974 Other assets 320 1,464 Goodwill - 61,025 Developed technology 7,968 13,344 Customer relations 12,110 19,264 Other intangible assets 1,529 3,556 ---------------------------- Total assets $49,334 $135,642 ============================ LIABILITIES AND PARENT COMPANY INVESTMENT Current liabilities: Accounts payable $ 5,257 $ 5,964 Accrued payroll taxes and deductions 489 130 Accrued warranty expense 1,029 1,183 Other accrued expenses 5,096 6,265 Deferred revenue 3,296 3,359 Current portion of capital lease obligations 57 150 ---------------------------- Total current liabilities 15,224 17,051 ---------------------------- Long-term portion of capital lease obligations 112 - Deferred income taxes 5,688 11,197 Due to parent company 6,932 4,290 Commitments and contingencies Parent company investment 21,378 103,104 ---------------------------- Total liabilities and parent company investment $49,334 $135,642 ============================
See accompanying notes. 6 Xyplex, Inc. Statements of Operations (In thousands)
PERIOD APRIL 10 YEAR ENDED 1996 TO OCTOBER 31 OCTOBER 31 1997 1996 -------------------------------- Net sales $ 75,663 $ 52,021 Cost of sales 37,004 25,168 -------------------------------- Gross profit 38,659 26,853 Operating expenses: Selling and marketing 25,542 17,963 General and administrative 8,170 2,719 Research and development 13,465 7,797 Parent company allocations 3,346 1,895 Amortization of goodwill and other intangible 12,064 4,827 assets Impairment of goodwill and other intangible assets 63,172 - Write off of acquired in-process research and development - 11,700 -------------------------------- Total operating expenses 125,759 46,901 -------------------------------- Operating loss (87,100) (20,048) Interest expense (5) (9) Interest income 18 - -------------------------------- Net loss before income tax benefit (87,087) (20,057) Benefit from federal income taxes (6,778) (6,704) -------------------------------- Net loss $ (80,309) $(13,353) ================================
See accompanying notes. 7 Xyplex, Inc. Statements of Changes in Stockholder's Equity Period April 10, 1996 to October 31, 1997 (In thousands)
PARENT COMPANY INVESTMENT -------------- Acquisition by Whittaker $116,457 Net loss (13,353) -------------- Balance at October 31, 1996 103,104 Dividend to parent (1,417) Net loss (80,309) -------------- Balance at October 31, 1997 $ 21,378 ============== See accompanying notes.
8 Xyplex, Inc. Statements of Cash Flows (In thousands)
PERIOD APRIL 10 YEAR ENDED 1996 TO OCTOBER 31 OCTOBER 31 1997 1996 ----------------------------- OPERATING ACTIVITIES Net loss $(80,309) $(13,353) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 16,050 6,855 Impairment of goodwill and other intangible assets 63,172 - Loss on sale and retirement of equipment 241 34 Write off of acquired in-process research and development - 11,700 Write off of other intangible assets 220 - Deferred income tax benefit (4,299) (5,278) Deferred revenue (63) (37) Changes in assets and liabilities: Accounts receivable 807 2,647 Inventory 3,418 68 Prepaid expenses and other current assets 64 269 Accounts payable 439 (1,846) Accrued expenses (363) (4,648) -------- -------- Net cash used in operating activities (623) (3,589) INVESTING ACTIVITIES Purchase of equipment (1,940) (1,017) Proceeds from sale of equipment 45 - Notes receivable 336 - Other 662 (1,358) -------- -------- Net cash used in investing activities (897) (2,375) FINANCING ACTIVITIES Change in cash overdrafts (1,146) (450) Principal payments on capital lease obligations (164) (243) Net receipts from parent company 2,642 4,290 -------- -------- Net cash provided by financing activities 1,332 3,597 -------- -------- Net decrease in cash and cash equivalents (188) (2,367) Cash and cash equivalents at beginning of the period 1,225 3,592 -------- -------- Cash and cash equivalents at end of the period $ 1,037 $ 1,225 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 13 $ 23 Income taxes 388 115
See accompanying notes. 9 Xyplex, Inc. Notes to Financial Statements October 31, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Xyplex, Inc. (the Company or Xyplex) designs, manufactures, markets and supports data networking products. On April 10, 1996, Xyplex was acquired by Whittaker Corporation (Whittaker) for total consideration of $116.5 million, and, during the period from April 10, 1996 to January 13, 1997, Xyplex was a wholly-owned subsidiary of Whittaker. Since January 13, 1997, the Company has been owned by Whittaker Xyplex, Inc., a wholly-owned subsidiary of Whittaker. Pursuant to the purchase method of accounting, the assets and liabilities acquired by Whittaker were revalued to their fair value at the date of acquisition. As a result of the transaction, the Company recorded intangible assets of $37.2 million and goodwill of $62.8 million. Acquired in-process research and development valued at $11.7 million was expensed at the acquisition date. The accompanying historical financial statements represent the Company's results of operations and its financial condition as a wholly-owned subsidiary of Whittaker. Interest expense associated with Whittaker's general corporate debt has not been allocated to the Company's financial statements. Certain costs and expenses presented in the financial statements represent intercompany allocations and management's estimates of the costs of services provided to the Company by Whittaker. During the first quarter of 1997, certain operations of another subsidiary of Whittaker were integrated into the operations of the Company. The financial statements of the Company for 1997 reflect the results of operations and its financial position net of certain costs and balance sheet amounts allocated to this integrated operation. (See Note 2 for further discussion of allocations and amounts due to parent company.) PARENT COMPANY INVESTMENT The parent company investment account represents the net assets of the Company and includes a $1.4 million dividend distribution in the form of a transfer of assets to Whittaker in 1997. 10 Xyplex, Inc. Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES The accompanying financial statements include the accounts of the Company. The preparation of financial statements in conformity with generally accepted accounting principles may require management to make certain estimates and assumptions that could affect the amounts reported in the financial statements and accompanying notes. Actual costs could differ from those estimates. REVENUE RECOGNITION The Company recognizes product revenue upon shipment of goods and software. Maintenance and support fees greater than $10,000 are recognized ratably over the life of the contract. INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense, while the costs of significant improvements are capitalized. Depreciation is computed using the straight-line method and allocates the cost of these assets over their estimated useful lives as follows:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE - -------------------- ----------- Equipment 3-5 years Computer equipment 3 years Furniture and fixtures 5 years Leasehold improvements Term of lease Equipment under capital lease Term of lease
Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated, and the related gains or losses are reflected in income. 11 Xyplex, Inc. Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS Until May of 1997, goodwill and other intangible assets were amortized on a straight-line basis over periods of 20 years in the case of goodwill, 15 years in the case of developed technologies and customer relations, and five years in the case of other intangible assets. Beginning in May of 1997, the amortization periods for goodwill and customer relations were reduced to seven years. At October 31, 1997 and 1996, intangible assets consisted of the following (in thousands):
1997 1996 --------------------------------------------------------- ACCUMULATED ACCUMULATED COST AMORTIZATION COST AMORTIZATION --------------------------------------------------------- Goodwill $62,786 $1,761 Developed technology $12,624 $4,656 15,000 1,656 Customer relations 16,388 4,278 20,000 736 Other intangibles 4,141 2,612 4,956 1,400
IMPAIRMENT OF LONG-LIVED ASSETS When indicators of impairment of long-lived assets used in operations or long-lived assets to be disposed of are present, and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying value of such assets, an impairment loss would be recorded by the Company (see Note 3). RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, capitalization of internally developed computer software costs begins upon the establishment of technological feasibility. The Company believes that once a working model has been established, the additional development costs to bring the product to a commercially acceptable level are not significant. There were no software development costs capitalized as of October 31, 1997 and 1996. 12 Xyplex, Inc. Notes to Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES The Company records income taxes based on an asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. For purposes of these financial statements, income taxes have been calculated as if Xyplex had prepared a tax return on a stand-alone basis. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income, effective for the 1999 fiscal year. SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in the equity of a business enterprise during a period from transactions and other events from nonowner sources. The Company does not expect the adoption of SFAS No. 130 will have a material effect on its financial statements. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, effective for the 1999 fiscal year. SFAS No. 131 requires the reporting of certain information about operating segments of a business enterprise and supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirements to report information about major customers. The Company does not expect the adoption of SFAS No. 131 to have a material effect on its financial statements. 2. ALLOCATED COSTS AND DUE TO PARENT COMPANY The historical statements of operations include charges from Whittaker representing the Company's share of the cost of support services provided. These charges are allocations of allowable corporate expenses, as defined in the Federal Acquisitions Regulation, associated with legal, marketing, management and financial services. The basis of the allocation is the Company's relative amount of payroll, sales and the year-to-date change in fixed assets and inventory compared to Whittaker's consolidated balances for such amounts. 13 Xyplex, Inc. Notes to Financial Statements (continued) 2. ALLOCATED COSTS AND DUE TO PARENT COMPANY (CONTINUED) Following the acquisition of the Company by Whittaker, the Company has participated in the Whittaker cash management program. All of this cash management activity is reflected in "due to parent company." Intercompany activity also includes, among other things, allocations of corporate expenses, state and federal income tax payments and credits, and insurance costs. An analysis of due to parent company for the period from April 10, 1996 to October 31, 1997 is as follows (in thousands):
Balance at April 10, 1996 $ - Net cash transferred from parent company (2,747) Allocation of costs from parent company (1,895) Net payments on behalf of affiliates 352 -------- Balance at October 31, 1996 (4,290) -------- Net cash transferred from parent company (4,157) Allocation of costs from parent company (3,605) Net payments on behalf of affiliates 345 Transfers to affiliates 4,775 -------- Balance at October 31, 1997 $(6,932) ========
The average amount due to parent for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996 was $6.3 million and $4.1 million, respectively. During the first quarter of 1997, certain operations of Whittaker Communications, Inc., another wholly-owned subsidiary of Whittaker formerly located in Santa Clara, California, were integrated into the Company. The results of operations and the financial position of the two operations are segregated and reported separately. This segregation procedure involves the allocation of certain costs and balance sheet amounts which cannot be directly assigned to the appropriate operation. Management of the Company believes the methods used to allocate the costs are reasonable based on the Company's use of such services. 14 Xyplex, Inc. Notes to Financial Statements (continued) 3. IMPAIRMENT CHARGE In connection with the April 1996 acquisition of the Company by Whittaker, goodwill and other intangible assets of $62.8 million and $37.2 million, respectively, were recorded. These assets were being amortized, on a straight-line basis, over periods of 20 years in the case of goodwill and five to 15 years in the case of other intangible assets. During the third quarter of 1997, the Company reduced the amortization periods for goodwill and certain other intangible assets from 20 and 15 years, respectively, to seven years. This adjustment resulted in an $8.1 million goodwill and other intangible asset impairment charge which represents the increased amortization from the date of acquisition to the beginning of the third quarter of 1997. As a result of the Company's declining revenues and continued operating losses in 1997, an additional goodwill and other intangible asset impairment charge of $55.1 million was recorded by the Company in the fourth quarter of 1997. The fair value of these assets was based on the estimated value of consideration offered to Whittaker by a third party in November 1997 for the sale of the Company. 4. INVENTORY Inventories, net of reserves for excess and obsolete inventory of $3.0 million and $7.0 million at October 31, 1997 and 1996, respectively, consist of the following (in thousands):
1997 1996 ----------------------------- Raw materials $ 410 $ 928 Work in process 319 2,002 Finished goods 2,547 3,764 ----------------------------- $3,276 $6,694 =============================
Work in process and finished goods inventories include materials, labor and manufacturing overhead. 15 Xyplex, Inc. Notes to Financial Statements (continued) 5. PROPERTY AND EQUIPMENT Property and equipment at October 31, 1997 and 1996 consist of the following (in thousands):
1997 1996 ----------------------------- Equipment $ 5,669 $ 6,381 Furniture and fixtures 990 1,167 Leasehold improvements 752 852 Equipment under capital lease 444 452 Construction in progress 104 57 ------- ------- 7,959 8,909 Less accumulated depreciation and (3,127) (1,935) amortization ------- ------- $ 4,832 $ 6,974 ======= =======
Depreciation expense, which includes amortization expense of assets under capital leases, was approximately $4.0 million and $2.0 million for the twelve months ended October 31, 1997 and the period April 10, 1996 to October 31, 1996, respectively. Equipment under capital leases has accumulated amortization of $0.2 million and $0.2 million as of October 31, 1997 and 1996. Acquisitions of equipment under capital lease obligations totaled $0.2 million in 1997. There were no such acquisitions in 1996. 16 Xyplex, Inc. Notes to Financial Statements (continued) 6. LONG-TERM DEBT Long-term debt at October 31, 1997 and 1996 consisted of the following (dollars in thousands):
1997 1996 --------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST INTEREST AMOUNT RATE AMOUNT RATE --------------------------------------------------- Capitalized lease obligations with monthly installments through July of 2000, with interest rates ranging to 11.36% $169 9.15% $150 7.05% Less current maturities 57 150 ------------- ----------- $112 $ - ============= ===========
Since April 10, 1996, the Company has guaranteed the obligations of Whittaker under Whittaker's bank credit agreement. Since such date, the Company has also pledged its accounts receivable, inventory, equipment and certain other assets to secure such obligations. 7. INCOME TAXES Income tax benefit for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996 consists of the following (in thousands):
1997 1996 --------------------------- Components of the provision: Federal $(6,778) $(5,972) State - (732) --------------------------- $(6,778) $(6,704) =========================== Classification of the provision: Current $(2,479) $(1,426) Deferred (4,299) (5,278) --------------------------- $(6,778) $(6,704) ===========================
17 Xyplex, Inc. Notes to Financial Statements (continued) 7. INCOME TAXES (CONTINUED) Foreign income taxes were not material. A reconciliation of income tax computed at the U.S. federal statutory tax rate to the effective tax rate for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996 is as follows:
1997 1996 ----------------------------- U.S. federal statutory rate (34.0)% (34.0)% State taxes, net of U.S. federal income tax benefit 0.0 (2.4) Goodwill amortization 24.1 3.0 Valuation allowance 1.8 0.0 Other items 0.3 0.0 ----------------------------- Effective tax rate (7.8)% (33.4)% =============================
Deferred income taxes reflect the net tax effects of temporary differences between the reported amounts of assets and liabilities in the financial statements and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at October 31, 1997 and 1996 were as follows (in thousands):
1997 1996 --------------------------- Deferred tax assets: Receivables valuation $ 719 $ 438 Inventory valuation 2,023 4,277 Excess of book over tax depreciation 1,689 1,081 Benefits from net operating loss carryforward 1,584 - Other 3,670 3,806 --------------------------- Total before valuation allowance 9,685 9,602 Valuation allowance (1,584) - --------------------------- Net deferred tax assets $ 8,101 $ 9,602 =========================== Deferred tax liabilities: Intangible assets $ 8,718 $14,518 ===========================
In 1997 and 1996, the Company was reimbursed by its Parent $3.5 million and $1.6 million, respectively, for the tax benefit of its sustained losses. In 1997, the Company established a full allowance against its net operating loss carryforward in compliance with SFAS No. 109. At October 31, 1997, the Company has $4.7 million total net operating loss carryforwards, which will expire in the years 2011 and 2012. 18 Xyplex, Inc. Notes to Financial Statements (continued) 8. 401(K) RETIREMENT PLAN The Company sponsors a defined contribution 401(k) plan covering a majority of its domestic employees under which participants can make pretax contributions of up to 15% of eligible compensation and receive a matching contribution of 75% on up to 6% of their eligible compensation. The Company has recorded as expense for the year ended October 31, 1997 and the period April 10, 1996 to October 31, 1996 $0.8 million and $0.2 million, respectively, representing its contributions to this plan. 9. LEASE COMMITMENTS The Company has both operating and capital lease commitments for certain facilities and equipment. Future minimum payments under capital leases and under noncancellable operating leases, net of rentals to be received from existing noncancellable operating subleases, as of October 31, 1997 were as follows (in thousands):
OPERATING CAPITAL YEAR LEASES LEASES ---------------------------------------------- 1998 $1,329 $ 70 1999 664 70 2000 414 52 2001 281 - ------------ ------------ Total minimum lease payments $2,688 192 ============ Less amount representing interest 23 ------------ Present value of net minimum lease payments $169 ============
Rent expense was $2.6 million and $1.6 million for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996, respectively. 19 Xyplex, Inc. Notes to Financial Statements (continued) 10. SIGNIFICANT CUSTOMERS AND EXPORT SALES No single customer accounted for more than 10% of net sales during 1997 or 1996. Export sales as a percentage of net sales for the year ended October 31, 1997 and the period from April 10, 1996 to October 31, 1996 were as follows:
1997 1996 -------------------------- Europe 13.5% 13.9% Pacific Rim 4.5 3.9 Canada 4.5 4.8 Other 7.1 5.8 -------------------------- 29.6% 28.4% ===========================
11. EMPLOYMENT AGREEMENTS During 1997, the Company initiated a long-term retention bonus program covering certain key employees. Payments under the plan will be made, on varying dates from March 1998 to December 1998, to individuals covered under the plan who are active, full-time employees of the Company at various dates ranging from January 1, 1998 to December 31, 1998. Potential payments under the program total approximately $1.7 million. 12. YEAR 2000 COMPLIANCE (UNAUDITED) In 1997, the Company upgraded its information management system to be Year 2000 compliant. The Company has also communicated with its suppliers and others it does business with and has addressed any significant issues identified. No further significant expenditures are expected to be made related to Year 2000 compliance. 20 Xyplex, Inc. Notes to Financial Statements (continued) 13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT AUDITORS On January 30, 1998, Whittaker sold all of the common stock of its wholly-owned subsidiary, Whittaker Xyplex, Inc., which, since January 13, 1997, has been the parent company of Xyplex, Inc., to MRV Communications, Inc. (MRV) for $35 million in cash plus warrants to purchase 421,402 shares of common stock of MRV. Whittaker shall be entitled to receive warrants to purchase an additional 78,598 shares of common stock of MRV upon Whittaker's timely performance of certain covenants. The stock purchase agreement provides for the reattribution of the Company's net operating losses to Whittaker. Concurrently with the sale of the Company, the liens on the Company's assets securing Whittaker's obligations under Whittaker's bank credit agreement were released, and the Company's guarantee of such obligations was canceled. 21 [COOPERS & LYBRAND LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Raytheon Company: We have audited the accompanying balance sheet of Xyplex, Inc. as of April 9, 1996, and the related statements of loss, parent company investment and cash flows for the period January 1, 1996 through April 9, 1996. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. As discussed in Note 1, interest expense associated with Raytheon Company's general corporate debt bas not been allocated to Xyplex, Inc.'s financial statements. Also as discussed in Note 1, Xyplex, Inc. has earned interest income primarily on its intercompany receivable from Raytheon based on an agreed-upon rate. As discussed in Note 2, certain costs and expenses presented in the financial statements represent allocations of the costs of services provided to Xyplex, Inc. by Raytheon Company. As a result of these factors, the financial statements presented may not be indicative of the financial position or results of operations that would have been achieved had Xyplex, Inc. operated as a nonaffiliated entity. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Xyplex, Inc. as of April 9, 1996, and the results of its operations and its cash flows for the period January 1, 1996 through April 9, 1996 in conformity with generally accepted accounting principles. /s/ COOPERS & LYBRAND L.L.P. Boston, Massachusetts May 24, 1996 22 XYPLEX, INC. BALANCE SHEET April 9, 1996 ASSETS Current assets: Cash and cash equivalents $ 200,000 Accounts receivable, less reserve of $585,000 18,159,000 Inventory 9,695,000 Other current assets 922,000 Receivable from parent company 32,412,000 ------------ Total current assets 61,388,000 Property and equipment, net 7,840,000 Deferred tax asset 6,790,000 Other assets 2,025,000 Goodwill 83,357,000 ------------ Total assets $161,400,000 ============ LIABILITIES AND PARENT COMPANY INVESTMENT Current liabilities: Current portion of capital lease obligations 366,000 Accounts payable 5,392,000 Accrued payroll and employee benefits 4,386,000 Other accrued expenses 1,973,000 Deferred revenue 3,900,000 ------------ Total current liabilities 16,017,000 Long-term portion of capital lease obligations 27,000 Commitments and contingencies Parent company investment 145,356,000 ------------ Total liabilities and parent company investment $161,400,000 ============
The accompanying notes are an integral part of the financial statements. 23 XYPLEX, INC. STATEMENT OF LOSS for the period January 1, 1996 through April 9, 1996 Net sales $ 28,100,000 Cost of sales 13,141,000 ------------ Gross profit 14,959,000 ------------ Operating expenses: Selling and marketing 9,456,000 General and administrative 1,573,000 Research and development 4,458,000 Parent company allocations 100,000 Amortization of goodwill 2,267,000 ------------ Total operating expenses 17,854,000 ------------ Loss from operations (2,895,000) Interest expense (10,000) Interest income from parent company 698,000 ------------ Net loss before income tax provision (2,207,000) Provision for federal income taxes 62,000 ------------ Net loss $ (2,269,020) ============
The accompanying notes are an integral part of the financial statements. 24 XYPLEX, INC. STATEMENT OF PARENT COMPANY INVESTMENT for the period January 1, 1996 through April 9, 1996
PARENT COMPANY INVESTMENT Balance, January 1, 1996 $ 147,625,000 Net loss (2,269,000) ------------- Balance, April 9, 1996 $ 145,356,000 =============
The accompanying notes are an integral part of the financial statements. 25 XYPLEX, INC. STATEMENT OF CASH FLOWS for the period January 1, 1996 through April 9, 1996 Cash flows from operating activities: Net loss $(2,269,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 3,554,000 Deferred income tax provision (654,000) Changes in assets and liabilities: Accounts receivable 1,425,000 Inventory (721,000) Other current assets (132,000) Accounts payable and accrued expenses (4,508,000) Deferred revenue 766,000 ----------- Net cash used in operating activities (2,539,000) ----------- Cash flows from investing activities: Purchase and sale of equipment, net (1,154,000) Purchase of licenses and other intangible assets (112,000) Proceeds from maturities of securities 400,000 ----------- Net cash used in investing activities (866,000) ----------- Cash flows from financing activities: Increase in accounts payable related to cash overdrafts 2,293,000 Payments of capital leases (163,000) Net receipts from parent company 1,362,000 ----------- Net cash provided by financing activities 3,492,000 ----------- Net increase in cash and cash equivalents 87,000 Cash and cash equivalents, beginning of period 113,000 ----------- Cash and cash equivalents, end of period $ 200,000 ===========
The accompanying notes are an integral part of the financial statements. 26 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION Xyplex, Inc. (the "Company" or "Xyplex") designs, manufactures, markets and supports data networks. On October 7, 1994, Xyplex was acquired by Raytheon Company ("Raytheon") for total consideration of $186,000,000. Pursuant to the purchase method of accounting, the assets and liabilities acquired by Raytheon were revalued to their fair value. The excess of the purchase price over the fair value of the net assets acquired was approximately $125,000,000 and accordingly, goodwill and the parent company investment were increased by $125,000,000. Effective on the close of business on April 9, 1996, Xyplex was acquired by Whittaker Corporation. The accompanying historical financial statements present the Company's results of operations and its financial condition as a wholly-owned subsidiary of Raytheon from January 1, 1996 through April 9, 1996. Interest expense associated with Raytheon's general corporate debt has not been allocated to the Company's financial statements. Certain costs and expenses presented in the financial statements represent intercompany allocations and management's estimates of the costs of services provided to the Company by Raytheon. (See Note 2 for further discussion of allocations.) Additionally, as discussed in further detail below, Xyplex earned interest income primarily on its intercompany receivable from Raytheon based on an agreed-upon rate. As a result of these factors, the financial statements presented may not be indicative of the results that would have been achieved had the Company operated as a non-affiliated entity. The Company has had transactions in the normal course of business with Raytheon and its subsidiaries. Revenues from these transactions, totaling $142,000 for the period ended April 9, 1996, are in accordance with Xyplex's normal terms and conditions. The remaining receivables from these transactions with Raytheon are included in trade accounts receivable and totaled $26,000 as of April 9, 1996. Additionally, Xyplex transferred a substantial amount of its cash and investments to Raytheon upon the acquisition date and has subsequently participated in the Raytheon cash management program. All of this cash management activity is recorded in the receivable from parent company account. Intercompany activity also includes allocations of corporate expenses, state and federal income tax payments and credits, and interest earned on the intercompany receivable balance itself. Interest is earned on the intercompany receivable balance at a rate of 6.50% in 1996 and totaled approximately $698,000 for the period ended April 9, 1996. PARENT COMPANY INVESTMENT The parent company investment account represents the net assets of the company. As described above, this account was credited with the excess of the purchase price over the fair value of Xyplex's net assets at the time of Raytheon's purchase. Continued 27 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED USE OF ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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. CASH EQUIVALENTS Cash equivalents include all highly liquid investments with original maturities of ninety days or less at the time of acquisition. Under the Company's cash management system with Raytheon, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes. The Company has determined the net overdraft balance by bank and has correspondingly reclassified these amounts to Accounts Payable. REVENUE RECOGNITION The Company recognizes product revenue upon shipment of goods and software. Maintenance and support fees greater than $10,000 are recognized ratably over the life of the contract. A provision is made at the time of shipment for estimated warranty costs to be incurred. INVENTORY Inventories are stated at the lower of cost (first-in, first-out method) or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs are charged to expense while the costs of significant improvements are capitalized. Depreciation is computed using the straight-line and accelerated methods in amounts that allocate the cost of these assets over their estimated useful lives as follows:
ESTIMATED ASSET CLASSIFICATION USEFUL LIFE -------------------- ----------- Equipment 5 years Computer equipment 3 years Furniture and fixtures 5 years Leasehold improvements Term of Lease Demonstration units 3 years Equipment under capital lease Term of Lease
Upon retirement or sale, the cost of assets disposed and the related accumulated depreciation are eliminated and the related gains or losses are reflected in income. Continued 28 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED INTANGIBLES Goodwill, which represents the amount Raytheon incurred in excess of the fair value of the net assets of Xyplex on the date of purchase, is amortized on a straight-line basis over a period of 15 years. For the period ended April 9, 1996, the Company incurred amortization expense related to this asset of $2,267,000. Accumulated amortization related to goodwill totaled $42,018,000 as of April 9, 1996. Other intangible assets, consisting primarily of licenses, are included in other assets. These assets are amortized over a one to three year period based on net realizable value. For the period ended April 9, 1996, the Company incurred amortization expense of $60,000. Accumulated amortization related to these other assets totaled $684,000 as of April 9, 1996. The Company periodically reviews the carrying value of its intangible assets as well as the amortization periods to determine whether current events and circumstances warrant adjustment to the carrying values or estimated useful lives. At each balance sheet date, management evaluates the carrying value of intangible assets to determine whether there has been any permanent impairment. No such adjustments were made for the period ended April 9, 1996. RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS Research and development costs are charged to expense as incurred. In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, capitalization of internally developed computer software costs begins upon the establishment of technological feasibility. The Company believes that once a working model has been established, the additional development costs to bring the product to a commercially acceptable level are not significant. There were no software development costs capitalized as of April 9, 1996. INCOME TAXES The Company records income taxes based on an asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. For purposes of these financial statements, income taxes have been calculated as if Xyplex had prepared a tax return on a stand alone basis. In accordance with Raytheon's policy, all state and local taxes have been included in general and administrative expenses. 2. ALLOCATED COSTS: The historical statements of operations include charges from Raytheon representing the Company's share of the cost of support services provided. These charges are allocations of corporate expenses associated with legal, marketing, management, financial and facilities management services. The Continued 29 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED basis of the allocation is dependent on the functions and includes net sales, square feet occupied, and percentage share of all other corporate assessments. For these services, the Company was charged $100,000 for the period ended April 9, 1996. Management believes the methods used to allocate the costs are reasonable based on the company's use of such facilities and services. 3. INVENTORY: Inventories consist of the following at April 9, 1996: Raw materials $ 756,000 Work in process 3,454,000 Finished goods 5,485,000 ---------- $9,695,000 ==========
Work in process and finished goods inventories include materials, labor and manufacturing overhead. As of April 9, 1996, finished goods include approximately $2,563,000, of demonstration products located at the sales and support offices and potential customer sites. 4. PROPERTY AND EQUIPMENT: Property and equipment consist of the following: Equipment $ 6,126,000 Computer equipment 8,817,000 Furniture and fixtures 1,633,000 Leasehold improvements 2,515,000 Demonstration units 3,528,000 Equipment under capital lease 3,511,000 ------------ 26,130,000 Less - Accumulated depreciation and amortization (18,290,000) ------------ $ 7,840,000 ============
Equipment under capital leases had accumulated amortization of $2,563,000 as of April 9, 1996. Continued 30 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED 5. INCOME TAXES: The provision for income taxes in the accompanying consolidated statements of income consists of the following as of April 9, 1996: Federal: Current $ 716,000 Deferred (654,000) --------- $ 62,000 =========
A reconciliation of the federal statutory rate percentage to the Company's effective tax rate percentage is as follows for the period ended April 9, 1996. Income tax benefit at federal statutory rate (35.0)% Amortization of nondeductible goodwill 35.9 Other 1.9 ----- Effective tax rate 2.8 % =====
The approximate income tax effect of each type of temporary difference comprising the deferred tax asset as of April 9, 1996 is as follows: Inventory $1,940,000 Deferred revenue 1,189,000 Depreciation 1,035,000 Accrued vacation 575,000 Accrued warranty 349,000 Bad debt 205,000 Other, net 299,000 ---------- Total federal deferred tax asset 5,592,000 State deferred tax asset, net 1,198,000 ---------- Total deferred tax asset $6,790,000 ==========
Income taxes paid to the parent company for the period ended April 9, 1996 totaled approximately $6,032,000. Continued 31 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED 6. 401(k) RETIREMENT PLAN: The Company had a 401(k) retirement plan covering all employees who are regularly scheduled to work 1,000 or more hours of service per year. Participants may elect to defer up to 15% of their compensation for deposit under the plan, subject to certain IRS limitations. The Company may elect to make contributions to the plan. The contributions are allocated to each eligible participant's account in proportion to each participant's deferrals for the plan year, subject to IRS limitations; participants' deferrals in excess of 6% of compensation are not matched. The Company elected to make contributions of $124,000 to the plan for the period ended April 9, 1996. 7. LEASE COMMITMENTS: The Company has both operating and capital lease commitments for certain facilities and equipment. These leases expire at various dates through the year 2014. Future minimum lease payments under these noncancelable leases are as follows:
OPERATING CAPITAL YEAR LEASES LEASES ---- ------ ------ 1996 $1,458,000 $ 332,000 1997 761,000 85,000 1998 633,000 - 1999 416,000 - 2000 416,000 - Thereafter 2,278,000 - ---------- --------- Total minimum lease payments $5,962,000 417,000 ========== Less amount representing interest 24,000 --------- Present value of minimum lease payments 393,000 Less current portion of capital lease obligations 366,000 --------- $27,000 =========
Rent expense was approximately $605,000 for the period ended April 9, 1996. Continued 32 XYPLEX, INC. NOTES TO FINANCIAL STATEMENTS, CONTINUED 8. EXPORT SALES: Export sales as a percentage of net sales for the period ended April 9, 1996 are as follows:
1995 ---- Europe 15.6% Pacific Rim 5.4 Canada 4.7 Other 10.3 ---- 36.0% ====
9. EMPLOYMENT AGREEMENTS: During 1995, Raytheon and Xyplex provided strategic resolution bonuses to key employees. These bonuses, totaling approximately $1,500,000, were due and payable on March 1, 1996 for each employee who continued to be an employee on March 1, 1996. Of the $1,500,000 charge, approximately $250,000 was funded by Xyplex with the remainder funded by Raytheon. Also during 1995, Raytheon entered into employment agreements with certain key employees of the Company which provide for salary continuation of up to 12 months in the event of termination of employment without cause. The aggregate commitment under these employment agreements should all covered employees be terminated is approximately $1,500,000. 33 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated financial statements give effect to the Acquisition under the purchase method of accounting. The unaudited pro forma consolidated financial statements are based on the historical consolidated financial statements and notes there to (as applicable) of MRV Communications, Inc. (MRV), which are included in MRV's Form 10-K for the year ended December 31, 1997, and the historical financial statements and notes thereto (as applicable) of Xyplex Inc. (Xyplex) which are included elsewhere herein. The unaudited pro forma consolidated balance sheet assumes that the Acquisition took place on January 1, 1997 and consolidates MRV's December 31, 1997 consolidated balance sheet with Xyplex's October 31, 1997 balance sheet. The unaudited pro forma consolidated statement of income assumes that the Acquisition took place as of January 1, 1997 and consolidates MRV's consolidated statement of operations for the year ended December 31, 1997 with Xyplex's statement of operations for the fiscal year ended October 31, 1997. The unaudited pro forma consolidated financial statements are based on the estimates and assumptions set forth in the notes to such statements. The pro forma adjustments made in connection with the development of the pro forma information are preliminary and have been made solely for purposes of developing such pro forma information for illustrative purposes necessary to comply with the disclosure requirements of the Securities and Exchange Commission. The unaudited pro forma consolidated financial statements do not purport to be indicative of the results of operations for future periods or the consolidated financial position or the results that actually would have been realized had the entities been consolidated during the period. The pro forma adjustments and purchase price allocations are preliminary estimates only and are subject to change. In connection with the Acquisition, MRV expects to restructure certain operations. The restructure is expected to include closing of certain facilities, reductions in workforce and settlement of distribution agreements. The pro forma adjustments and financial statements do not include any amounts related to the restructure of operations due to the Xyplex acquisition. MRV estimates that it will incur direct transaction costs of approximately $2,500,000 associated with the Acquisition. The purchase price also includes $7,000,000 as the fair value of certain warrants given to the seller. The warrants were valued using the Black Scholes method. These unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements and the related notes thereto of MRV, which are included in MRV's Form 10-K for the year ended December 31, 1997, and the historical financial statements and the related notes thereto of Xyplex, which are included elsewhere herein. 34 MRV COMMUNICATIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 (in thousands)
MRV Communications, Xyplex Inc. Inc. Pro forma 1997 1997 Adjustments Consolidated --------------- ------- ------------- ------------ CURRENT ASSETS: Cash and cash equivalents $ 19,428 $ 1,037 $ (1,925)(4) $ 18,540 Notes receivable -- 8 -- 8 Short-term investments 36,413 -- (35,000)(1) 1,413 Accounts receivable, net 47,258 12,319 (1,500)(1) 58,077 Inventories 41,689 3,276 (1,500)(1) 43,465 Deferred income tax asset 2,280 5,071 -- 7,351 Other current 7,248 864 -- 8,112 --------- --------- --------- --------- Total current assets 154,316 22,575 (39,925) 136,966 PROPERTY, PLANT AND EQUIPMENT,net 8,183 4,832 2,000 (1) 15,015 OTHER ASSETS: Investments 62,382 -- -- 62,382 Deferred income tax asset 6,231 -- -- 6,231 Goodwill, net 5,077 -- 19,367 (1) (2,172)(3) 22,272 Other intangibles -- 21,607 (21,607)(1) -- Other 47 320 -- 367 --------- --------- --------- --------- 73,737 21,927 (4,412) 91,252 $ 236,236 $ 49,334 $ (42,337) $ 243,233 ========= ========= ========= =========
See accompanying notes to unaudited pro forma consolidated financial statements. 35 MRV COMMUNICATIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 (in thousands)
MRV Communications, Xyplex Inc. Inc. Pro forma 1997 1997 Adjustments Consolidated --------------- -------- ----------- ------------ CURRENT LIABILITIES: Current portion of capital lease obligations $ 111 $ 57 $ -- $ 168 Accounts payable 30,439 5,257 2,500 (1) 38,196 Accrued liabilities 8,429 6,614 1,203 (1) 16,246 Customer deposit 293 -- 293 Income taxes payable 3,485 -- (600)(5) 2,885 Deferred revenue -- 3,296 3,296 --------- --------- --------- --------- Total current liabilities 42,757 15,224 3,103 61,084 LONG-TERM LIABILITIES: Capital lease obligations, net of current portion 788 112 -- 900 Other long-term liabilities 2,065 -- -- 2,065 Deferred income taxes -- 5,688 -- 5,688 Due to parent company -- 6,932 (6,932)(1) -- --------- --------- --------- --------- Total long-term liabilities 2,853 12,732 (6,932) 8,653 COMMITMENTS AND CONTINGENCIES MINORITY INTEREST 657 -- -- 657 STOCKKHOLDERS' EQUITY: Preferred stock,$0.01 par value: -- -- -- -- Authorized-1,000 shares; no shares issued or outstanding Common stock, $0.0034 par value: Authorized-40,000 shares Issued and outstanding-26,360 88 -- 88 Capital in excess of par value 175,874 -- 7,000 (1) 182,874 Retained earnings (deficit) 14,635 -- (24,130)(6) (9,495) Cumulative translation adjustments (628) -- -- (628) PARENT COMPANY INVESTMENT -- 21,378 (21,378)(1) -- --------- --------- --------- --------- 189,969 21,378 (38,508) 172,839 $ 236,236 $ 49,334 $ (42,337) $ 243,233 ========= ========= ========= =========
See accompanying notes to unaudited pro forma consolidated financial statements. 36 MRV COMMUNICATIONS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (in thousands, expect per share data)
MRV Communications, Xyplex Inc. Inc. Pro forma 1997 1997 Adjustments Consolidated --------------- --------- ----------- ------------ REVENUES, net $ 165,471 $ 75,663 $ -- $ 241,134 COSTS AND EXPENSES: Cost of goods sold 94,709 37,004 -- 131,713 Research and development expenses 13,093 13,465 -- 26,558 Selling, general and administrative expenses 27,365 33,712 -- 61,077 Purchased technology in progress -- -- 20,633 (1) 20,633 Parent company allocations -- 3,346 -- 3,346 Amortization of goodwill and other intangible assets -- 12,064 2,172 (3) 14,236 Impairment of goodwill and other intangible assets -- 63,172 (63,172)(2)(6) -- --------- --------- --------- --------- 135,167 162,763 (40,367) 257,563 --------- --------- --------- --------- Operating income (loss) 30,304 (87,100) 40,367 (16,429) --------- --------- --------- --------- OTHER INCOME (EXPENSE): Interest expense related to convertible debentures and acquisition (843) -- -- (843) Minority interest (146) -- -- (146) Interest income 2,841 18 (1,925)(4) 934 Interest expense (118) (5) -- (123) Other 21 -- -- 21 --------- --------- --------- --------- 1,755 13 (1,925) (157) --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes 32,059 (87,087) 38,442 (16,586) PROVISION (BENEFIT) FOR INCOME TAX 9,474 (6,778) (600)(5) 2,096 --------- --------- --------- --------- NET INCOME (LOSS) $ 22,585 $ (80,309) $ 39,042 (6) $ (18,682) ========= ========= ========= ========= EARNINGS (LOSS) PER COMMON SHARE INFORMATION: Basic earnings (loss) per common share $ 0.95 $ (0.79) Diluted earnings (loss) per common share $ 0.88 $ (0.79) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 23,670 23,670 Diluted 25,734 23,670
See accompanying notes to unaudited pro forma consolidated financial statements 37 NOTES AND ASSUMPTIONS TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Adjustment Number Comments - ------------ ------------------------------------------------------------ (1) The purchase price of Xyplex and the estimated allocation of the purchase price is summarized as follows: Cash $35,000,000 Warrants 7,000,000 Other costs 2,500,000 ----------- $44,500,000 =========== PARENT COMPANY INVESTMENT $21,378,000 Add - Due to parent 6,932,000 ----------- 28,310,000 Less - Intangibles per Xyplex 21,607,000 - Other write-offs 4,203,000 ----------- Net assets before allocation of purchase price to - 2,500,000 Purchased technology in progress 20,633,000 Goodwill and other intangibles 19,367,000 Property, Plant & Equipment 2,000,000 ----------- $44,500,000 ===========
(2) In the fiscal year ended October 31, 1997, Xyplex recorded an impairment loss of $63,172,000 related to goodwill. This pro forma adjustment reflects results as if the write-off was recorded prior to November 1, 1996. (3) To record the amortization of $19,367,000 of goodwill over approximately 11 years or approximately $2,172,000 per year. (4) To reduce interest income by $1,925,000 to reflect use of investments of $35,000,000 to fund purchase price, assumes 5.5 percent return on investments. (5) After the above pro forma adjustments the income (loss) before provision for income tax was a pro forma loss of $38,442,000. This adjustment reflects the recording of a tax benefit related to the taxable portion of the loss at an estimated effective rate of 30 percent or $600,000. (6) The net effect on 1997 income of the pro forma adjustments is $39,042,000. The net effect on retained earnings (deficit) is $(24,130,000), as $63,172,000 of the adjustments to the operations were to move expense from 1997 to earlier periods. -----END PRIVACY-ENHANCED MESSAGE-----