<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION VIA EDGAR ON OCTOBER 5,
2000
REGISTRATION NO. 333-42238
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LUMINENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 95-4798130
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
</TABLE>
20550 NORDHOFF STREET
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 576-9456 (FAX)
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
WILLIAM R. SPIVEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20550 NORDHOFF STREET
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 576-9456 (FAX)
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENTS FOR SERVICE)
------------------------
COPIES TO
<TABLE>
<S> <C>
MARK A. KLEIN, ESQ. NORA L. GIBSON, ESQ.
THOMAS J. POLETTI, ESQ. AMY E. REES, ESQ.
MELISSA K. STACK, ESQ. ELIZABETH A. CHEEVER, ESQ.
KIRKPATRICK & LOCKHART LLP WILSON SONSINI GOODRICH & ROSATI
9100 WILSHIRE BLVD., 8TH FLOOR EAST PROFESSIONAL CORPORATION
BEVERLY HILLS, CALIFORNIA 90212 ONE MARKET, SPEAR STREET TOWER
TELEPHONE (310) 273-1870 SAN FRANCISCO, CALIFORNIA 94105
FACSIMILE (310) 274-8357 TELEPHONE (415) 947-2000
FACSIMILE (415) 947-2099
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------------
Common stock, $.001 par value per share... 13,800,000(2) $15.00 $207,000,000 $54,648(3)
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
(2) Includes 1,800,000 shares for which the underwriters have the option to
purchase to cover over-allotments, if any.
(3) The filing fee of $54,648 was paid on July 26, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and we are not soliciting offers to
buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 5, 2000
12,000,000 Shares
[LUMINENT LOGO]
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $13.00 and $15.00 per share. We applied to have our common stock quoted
on The Nasdaq Stock Market's National Market under the symbol "LMNE."
The underwriters have an option to purchase a maximum of 1,800,000
additional shares from us to cover over-allotments of shares.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 9.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LUMINENT
-------- ------------- -----------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about
, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
CIBC WORLD MARKETS
ROBERTSON STEPHENS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
The date of this prospectus is , 2000
<PAGE> 3
[INSIDE FRONT COVER]
The inside front cover page of the prospectus contains drawings depicting a
residential access network connecting to a metropolitan network connecting to a
business access network.
At the top of the page there are drawings, connected by lines, depicting "Cable
Television Services, Data and Telephony Services, Optical Networking Equipment
and Fiber Optic Networks." These drawings are in turn connected to a drawing of
a ring of routers, with the caption "Metropolitan Network" in the center of the
ring.
To the right, beneath a drawing of buildings connected on a ring under the
caption "Business Access Network", there is a photograph of four Luminent
products, enclosed by a box, with the caption "Products for Metropolitan and
Business Access Networks." Beneath this box there is the additional caption
"Products for Metropolitan and Business Access Networks."
In the middle of the page, beneath the caption "Optical Networking Equipment",
there are three boxes, each containing photographs of Luminent products,
appearing (clockwise) with the captions "Wavelength Control", "Data
Transmitting" and "Fiber Amplifier." In between the three boxes there is the
additional caption "Products for Metropolitan Networks."
To the left, beneath a drawing of homes connected on a ring under the caption
"Residential Access Network" there is a photograph of three Luminent products,
enclosed in a box, with the caption "Multiservice to the Home." Underneath the
box, there is the additional caption "Products for Residential Access Networks."
2
<PAGE> 4
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 5
RISK FACTORS.......................... 9
SPECIAL NOTE REGARDING FORWARD-
LOOKING STATEMENTS.................. 24
OUR RELATIONSHIP WITH MRV AFTER THE
OFFERING............................ 25
USE OF PROCEEDS....................... 27
DIVIDEND POLICY....................... 27
CAPITALIZATION........................ 28
DILUTION.............................. 29
SELECTED FINANCIAL DATA............... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 32
BUSINESS.............................. 41
MANAGEMENT............................ 55
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RELATED PARTY TRANSACTIONS............ 64
ARRANGEMENTS BETWEEN LUMINENT AND
MRV................................. 65
PRINCIPAL STOCKHOLDERS................ 73
DESCRIPTION OF CAPITAL STOCK.......... 74
SHARES ELIGIBLE FOR FUTURE SALE....... 76
UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS........ 77
UNDERWRITING.......................... 80
NOTICE TO CANADIAN RESIDENTS.......... 83
LEGAL MATTERS......................... 84
EXPERTS............................... 84
ADDITIONAL INFORMATION................ 84
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3
<PAGE> 5
(This page intentionally left blank)
4
<PAGE> 6
PROSPECTUS SUMMARY
The following summary highlights information we present more fully
elsewhere in this prospectus. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking statements as a result
of factors described under the heading "Risk Factors" and elsewhere in this
prospectus.
LUMINENT, INC.
We design, manufacture and sell a comprehensive line of fiber optic
components that enable communications equipment manufacturers to provide optical
networking equipment for the rapidly growing intercity and intracity portions,
or metropolitan segment, and business and home access segments of the
communications network. Our products are designed to meet the increasing
requirements for transmission capacity and speed, or bandwidth, between
nationwide, or long-haul, telecommunication networks and end users. We
specialize in fiber optic components for high-capacity data transmission in the
metropolitan and access markets. We provide a broad product line of fiber optic
components, the technical depth to continue to offer optical components, a quick
response to new customer requirements and volume manufacturing for these
components. Our customers include major communications equipment manufacturers,
including Cisco Systems, General Instrument, Marconi Communications and
Pandacom, which were our largest customers by revenues during the six months
ended June 30, 2000. In addition we sell our products to customers through our
distributors. The three largest customers by revenue for our products sold
through our distributors during the six months ended June 30, 2000 were
Cabletron Systems, Extreme Networks and Foundry Networks.
Rapid growth in Internet use, combined with the adoption of data intensive
applications have placed capacity strains on the legacy copper-based
communications network that was originally developed for voice traffic. In order
to meet this demand for high capacity, service providers are deploying fiber
optic networks. Optical networks, specifically those using singlemode fiber, are
used to send information at high data rates or bandwidths. Singlemode fiber is
narrow diameter fiber-optic cable that allows only one route for a light wave to
pass through and can transmit signals over considerable distances. This rapid
growth in data traffic, along with congestion between the long-haul and end user
segments, are driving the need for optical networks in the metropolitan and
access segments of the communications network. As a result, significant demand
has been generated for high-performance fiber optic components. Ryan, Hankin &
Kent, a leading market research and consulting firm, estimates that the market
for fiber optic components was approximately $6.6 billion in 1999 and is
expected to grow to over $23 billion by 2003.
We provide a broad product line of high-performance active and passive
fiber optic components optimized for metropolitan and access networks. Active
components require electrical power to generate, boost or transform optical
signals. Our active components consist of lasers, transmitters, receivers,
integrated transmitters and receivers, or transceivers, and light-switching
devices, or modulators for use with singlemode fiber. Passive components are
used to direct, split and merge optical signals without the use of electricity.
Our passive components consist of couplers, wavelength division multiplexing, or
WDM, modules, isolators, circulators and products to concentrate the intensity
of the light signal. Our active and passive components can be further integrated
to provide WDM subsystems. WDM is used to separate or combine light of different
wavelengths or colors, which increases capacity by enabling simultaneous
transmission of data along numerous wavelengths on the same fiber optic cable.
Our objective is to become the leading supplier of singlemode fiber optic
components for the metropolitan and access networks. To achieve this objective,
we plan to leverage our 12 years of experience in designing, packaging and
manufacturing fiber optic components in an effort to gain market share and
expand our customer base. We intend to maintain our technological expertise in
long-reach fiber optic transmission through continual expansion of our existing
products and the development of new products. We plan to continue to invest in
expanding our manufacturing and packaging capabilities and improving process
efficiencies by adding and enhancing automated processes, quality systems and
capacity. We also
5
<PAGE> 7
intend to selectively expand both our direct sales force and our distribution
network to provide better service to our existing customers and target new
customers effectively. In addition, we plan to expand our products and
technology portfolio through selected acquisitions of complementary products and
businesses.
Based on preliminary analysis of our operating results for the three months
ended September 30, 2000, we expect to report net sales of approximately $35.0
million and a net loss as a result of charges for deferred compensation and
amortization of goodwill associated with the acquisitions discussed below under
"Recent Acquisitions."
OUR RELATIONSHIP WITH MRV
We are currently a wholly-owned subsidiary of MRV Communications, Inc., a
Delaware corporation. MRV's common stock is quoted on The Nasdaq Stock Market's
National Market under the symbol "MRVC." After the completion of this offering,
MRV will own approximately 92% of the outstanding shares of our common stock or
approximately 91% if the underwriters exercise their over-allotment option in
full. MRV plans to complete its divestiture of Luminent by the later of three
months after the receipt of a favorable private letter ruling from the Internal
Revenue Service or six months after this offering by distributing all of the
shares of Luminent common stock owned by MRV to the holders of MRV's common
stock.
There are various conditions which must be satisfied or waived by MRV in
its sole discretion, prior to the distribution. These conditions include, among
other things, the receipt of a private letter ruling from the Internal Revenue
Service that MRV's distribution of its shares of Luminent common stock to the
holders of MRV common stock will be tax-free to MRV and its stockholders for
United States federal income tax purposes.
Prior to the completion of this offering, we will enter into agreements
with MRV that govern the separation of our business operations from MRV. The
agreements between MRV and us also govern our various interim and ongoing
relationships. All of the agreements providing for our separation from MRV were
made in the context of a parent-subsidiary relationship and were negotiated in
the overall context of our separation from MRV. Luminent believes that the terms
of these agreements are fair. However, the terms of these agreements may be more
or less favorable to us than if they had been negotiated with unaffiliated third
parties. See "Risk Factors -- Risks Related to Our Relationship with MRV."
RECENT ACQUISITIONS
We recently benefited from three acquisitions by MRV of manufacturers of
active and passive fiber optic components. On April 24, 2000, MRV acquired 97%
of the outstanding capital stock of Fiber Optic Communications, Inc., a
Taiwanese manufacturer of passive fiber optic components for approximately
$310.4 million in cash, common stock and options to purchase common stock of
MRV. On July 12, 2000, MRV acquired all of the outstanding capital stock of
Quantum Optech Inc., a Taiwanese manufacturer of active and passive fiber optic
components for approximately $36.2 million in stock of MRV. On July 21, 2000,
MRV acquired 99% of the outstanding capital stock of Optronics International
Corp., a Taiwanese manufacturer of active fiber optic components for
approximately $124.2 million in stock of MRV. MRV has contributed the capital
stock of each of these acquired corporations to us as part of one overall plan
to effect our separation from MRV. Prior to the acquisition of Fiber Optic
Communications, our business consisted entirely of active fiber optic
components. The acquisition of Fiber Optic Communications and Quantum added
passive components to our product line. We have accounted for the acquisition of
Fiber Optic Components under the purchase method and therefore have included the
results of operations of Fiber Optic Components in our consolidated financial
statements since April 25, 2000. Revenues from Fiber Optic Components for the
period from April 25, 2000 through June 30, 2000 accounted for 18.6% of our
consolidated revenues for the six months ended June 30, 2000. We will also
account for the acquisition of Quantum and Optronics under the purchase method
and the results of their operations will be consolidated with our results from
July 13 and July 22, 2000, respectively. For further information on these
6
<PAGE> 8
acquisitions and the contribution of the acquired stock to us, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "Arrangements between Luminent and MRV" later in
this prospectus.
THE OFFERING
Common stock offered................ 12,000,000 shares
Common stock to be outstanding after
the offering........................ 156,000,000 shares
Use of proceeds..................... General corporate purposes, including
capital expenditures, working capital
and possible acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market
symbol.............................. LMNE
The number of shares of our common stock that will be outstanding after
this offering is based on the number of shares of common stock outstanding on
September 30, 2000. The number of shares that will be outstanding after this
offering excludes:
- 5,600,000 shares of common stock issuable upon exercise of stock options
outstanding as of September 30, 2000 at a price of $6.25 per share;
- 10,400,000 shares of common stock available as of September 30, 2000 for
future issuance under our 2000 stock option plan; and
- 1,800,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
ADDITIONAL INFORMATION
We own or have rights to trademarks that we use in conjunction with the
sale of our products, and we intend to apply for the registration of other
trademarks. All other trade names and trademarks used in this prospectus are the
property of their respective owners.
We were incorporated in Delaware in March 2000. Our principal executive
offices are located at 20550 Nordhoff Street, Chatsworth, California 91311. Our
telephone number is (818) 773-9044 and our fax number is (818) 576-9456.
All share and per share information in this prospectus gives effect to a
144,000-for-one stock split effective as of July 25th. Except where the context
otherwise indicates, information in this prospectus concerning the percentage
ownership of MRV upon completion of this offering assumes no exercise of
outstanding options at or prior to that time.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA(1)
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales.......................... $ 15,855 $ 24,034 $ 35,081 $ 38,596 $ 65,264 $ 93,262
Cost of sales(2)................... 9,193 13,970 21,659 24,289 43,078 69,051
-------- -------- -------- -------- -------- --------
Gross profit.................... 6,662 10,064 13,422 14,307 22,186 24,211
Operating costs and expenses:
Selling, general and
administrative(2)............... 987 1,160 2,102 2,642 5,675 19,643
Research and development(2)....... 1,282 2,179 3,520 4,974 8,693 18,433
Parent company allocations........ 543 787 797 808 885 885
Amortization of goodwill.......... -- -- -- -- -- 77,946
-------- -------- -------- -------- -------- --------
2,812 4,126 6,419 8,424 15,253 116,907
-------- -------- -------- -------- -------- --------
Operating income (loss)......... 3,850 5,938 7,003 5,883 6,933 (92,696)
Other income (loss), net........... -- -- -- -- 6 (167)
-------- -------- -------- -------- -------- --------
Income (loss) before provision for
income taxes.................... 3,850 5,938 7,003 5,883 6,939 (92,863)
Provision for income taxes......... 1,501 2,297 2,789 2,343 2,764 2,894
Minority interest.................. -- -- -- -- -- (36)
-------- -------- -------- -------- -------- --------
Net income (loss)............... $ 2,349 $ 3,641 $ 4,214 $ 3,540 $ 4,175 $(95,721)
======== ======== ======== ======== ======== ========
Earnings (loss) per share(3):
Basic and diluted earnings (loss)
per share....................... $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.03 $ (0.66)
Basic and diluted weighted average
shares.......................... 144,000 144,000 144,000 144,000 144,000 144,000
======== ======== ======== ======== ======== ========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
PRO FORMA(1)
1999 2000 2000
-------- -------- ------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales.......................... $ 28,469 $ 43,587 $ 56,711
Cost of sales(2)................... 18,506 29,742 41,194
-------- -------- --------
Gross profit.................... 9,963 13,845 15,517
Operating costs and expenses:
Selling, general and
administrative(2)............... 2,373 6,215 11,881
Research and development(2)....... 4,010 6,558 11,212
Parent company allocations........ 442 388 388
Amortization of goodwill.......... -- 9,580 38,505
-------- -------- --------
6,825 22,741 61,986
-------- -------- --------
Operating income (loss)......... 3,138 (8,896) (46,469)
Other income (loss), net........... 10 103 (135)
-------- -------- --------
Income (loss) before provision for
income taxes.................... 3,148 (8,793) (46,604)
Provision for income taxes......... 1,254 1,750 1,750
Minority interest.................. -- 318 287
-------- -------- --------
Net income (loss)............... $ 1,894 $(10,861) $(48,641)
======== ======== ========
Earnings (loss) per share(3):
Basic and diluted earnings (loss)
per share....................... $ 0.01 $ (0.08) $ (0.34)
Basic and diluted weighted average
shares.......................... 144,000 144,000 144,000
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(4)
-------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,982 $ 8,054 $162,894
Working capital............................................. 23,646 29,016 183,856
Total assets................................................ 341,927 495,152 649,992
Long-term debt, less current portion........................ 7,007 8,972 8,972
Parent company investment................................... 302,503 446,841 601,681
</TABLE>
---------------
(1) The pro forma selected statements of operations for the year ended December
31, 1999 and six months ended June 30, 2000, and pro forma balance sheet
data at June 30, 2000 were derived from the pro forma financial statements
of Luminent, Fiber Optic Communications, Optronics and Quantum included
later in this prospectus. The unaudited pro forma condensed consolidated
balance sheet assumes that the acquisitions of Optronics and Quantum took
place on June 30, 2000, and consolidates our consolidated balance sheet at
June 30, 2000, with the balance sheets of Optronics and Quantum. The
unaudited pro forma condensed consolidated statements of operations assume
that the Fiber Optic Communications, Optronics and Quantum acquisitions
occurred on January 1, 1999 for the pro forma year ended December 31, 1999
and January 1, 2000 for the pro forma six months ended June 30, 2000,
respectively, with the statements of operations for those periods of Fiber
Optic Communications, Optronics and Quantum. For more detailed pro forma
information, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements" included later in this prospectus.
(2) Includes amounts related to deferred stock compensation of: $4.3 million,
$744,000 and $2.7 million presented in "cost of sales"; $6.2 million, $1.1
million and $3.9 million presented in "selling, general and administrative";
$6.8 million, $1.2 million and $4.2 million presented in "research and
development", for the pro forma presentation of the year ended December 31,
1999, the six months ended June 30, 2000 and the pro forma presentation of
the six months ended June 30, 2000, respectively.
(3) See note 2 of notes to the consolidated financial statements of Luminent
included later in this prospectus for an explanation of how the number of
shares used in calculating this per share data was determined.
(4) The as adjusted amounts give effect to the sale of shares of common stock in
this offering at an assumed initial public offering price of $14.00 per
share, less estimated underwriting discounts and commissions, estimated
offering expenses and the application of the proceeds to working capital.
8
<PAGE> 10
RISK FACTORS
This offering and any investment in our common stock involve a high degree
of risk. You should carefully consider the risks described below and all of the
information contained in this prospectus before deciding whether to purchase our
common stock.
RISKS RELATED TO OUR FINANCIAL RESULTS
WE CURRENTLY DERIVE A SIGNIFICANT PORTION OF OUR NET SALES FROM TWO CUSTOMERS,
AND OUR NET SALES MAY DECLINE SIGNIFICANTLY IF EITHER OF THESE CUSTOMERS
CANCELS, REDUCES OR DELAYS PURCHASES OF OUR PRODUCTS.
Our success will depend on our ability to develop and manage relationships
with significant customers. For the year ended December 31, 1999, our two
largest customers, Marconi Communications and Cisco Systems, accounted for over
45% of our net sales, with Marconi accounting for 40% and Cisco accounting for
6% of our net sales. For the six months ended June 30, 2000, Marconi accounted
for 11% of our net sales and Cisco accounted for 13% of our net sales. We rely
on one-time purchase orders rather than long-term contracts with both Cisco and
Marconi, and, as a result, we cannot predict the size, timing or terms of their
incoming orders. We have experienced variations in the purchase patterns of
Marconi and Cisco in the past, and we may experience continued variation in the
future. Material reasons for historic variations in the purchase patterns of
these customers, particularly by Marconi, have included weather patterns that
have delayed field installations of systems that incorporate our products and
delays by our customers in qualifying our products that employ new components or
features to assure compatibility with the components of other suppliers that our
customers integrate with our products into our customers' systems. Our sales may
decline significantly with resulting fluctuations or harm to our operating
results and financial condition if either of these customers cancels, reduces or
delays purchases of our products.
WE INCURRED A NET LOSS IN THE SIX MONTHS ENDED JUNE 30, 2000 PRIMARILY AS A
RESULT OF THE AMORTIZATION OF GOODWILL FROM A RECENT ACQUISITION. WE EXPECT TO
CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE FUTURE.
Although we reported net income of $3.5 million and $4.2 million for the
years ended December 31, 1998 and 1999, respectively, we reported a net loss of
$10.9 million for the six months ended June 30, 2000. The net loss was primarily
due to amortization of goodwill and deferred stock compensation related to the
Fiber Optic Communications acquisition. In addition, we will record amortization
of goodwill and deferred stock compensation relating to our acquisitions
Optronics and Quantum and our employment arrangements with our President and
Chief Executive Officer and Vice President of Finance and Chief Financial
Officer going forward. In addition, we will record a compensation expense of
approximately $6.5 million for the nine months ending September 30, 2000 and
approximately $12.2 million the year ending December 31, 2000 related to the
issuance of stock options to our President and Chief Executive Officer and our
Vice President of Finance and Chief Financial Officer, each of whom joined us in
July 2000. As a consequence of these goodwill amortization charges and
compensation expenses, we do not expect to report net income in the foreseeable
future.
In connection with the acquisitions of Fiber Optic Communications,
Optronics and Quantum, we will record a significant amount of goodwill, the
amortization of which will significantly and adversely affect our operating
results. As indicated in the Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of June 30, 2000 included later in this prospectus, we expect goodwill
to equal approximately $380.8 million, which will be amortized over a five-year
period. To the extent that we can not generate sufficient cash flow to recover
the amount of the investment recorded, the investment may be considered impaired
and could be subject to an immediate write-down of up to the full amount of the
investment. In this event, our net loss in any given period could be greater
than anticipated and the market price of our stock could be adversely affected.
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OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE.
Our net sales and operating results have fluctuated significantly from
quarter-to-quarter in the past and may fluctuate significantly in the future as
a result of several factors, some of which are outside of our control. These
factors include:
- changes in our product mix such as resulting from sales of passive
components which typically have lower margins than active components; and
- seasonality of customer demand typically resulting in lower demand in
winter months and the observance of the Chinese New Year.
Because of these and other factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
may be below the expectations of public market analysts and investors. This
failure to meet expectations could cause the trading price of our common stock
to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE NET SALES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of up to one year or more. In addition, some of
our customers require that our products be subjected to life-time and
reliability testing, which can take up to nine months or more. While our
customers are evaluating our products and before they place an order with us, we
may incur substantial sales and marketing and research and development expenses
to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Even
after acceptance of orders, our customers often change the scheduled delivery
dates of their orders. Because of the evolving nature of the optical networking
market, we cannot predict the length of these sales, development or delivery
cycles. As a result, these long sales cycles may cause our net sales and
operating results to vary significantly and unexpectedly from
quarter-to-quarter, which could cause volatility in our stock price.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL SALES AND OPERATIONS THAT COULD
HARM OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
For the year ended December 31, 1999, sales to customers located outside of
the United States were 19% of our net sales and for the six months ended June
30, 2000 sales to customers located outside of the United States were 39% of our
net sales. We expect that sales to customers located outside of the United
States will increase in the future. Our international sales will be limited if
we cannot establish relationships with international distributors, establish
additional foreign operations, expand international sales channels, hire
additional personnel and develop relationships with international service
providers. Even if we are able to successfully continue international
operations, we may not be able to maintain or increase international market
demand for our products.
In addition, the recent acquisition of our operations in Taiwan and
People's Republic of China has increased both the administrative complications
we must manage and our exposure to political, economic and other conditions
affecting Taiwan and People's Republic of China. Currently there is significant
political tension between Taiwan and People's Republic of China, which could
lead to hostilities.
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Risks we face due to international sales and the use of overseas
manufacturing include:
- greater difficulty in accounts receivable collection and longer
collection periods;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe or in the winter months in
Asia when the Chinese New Year is celebrated;
- certification requirements;
- potentially adverse tax consequences;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- trade restrictions;
- limited protection of intellectual property rights;
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
In addition, a portion of our international sales and expenses may be
denominated in foreign currencies in the future. Accordingly, we could
experience the risks of fluctuating currencies and may choose to engage in
hedging activities to reduce these risks.
RISKS RELATED TO OUR BUSINESS
WE HAVE NO HISTORY AS AN INDEPENDENT COMPANY AND HAVE ONLY A LIMITED HISTORY IN
THE PASSIVE OPTICAL COMPONENTS MARKETS. THESE FACTORS MAY MAKE OUR BUSINESS MORE
DIFFICULT TO EVALUATE AND HINDER OUR ABILITY TO IMPLEMENT OUR BUSINESS PLAN
SUCCESSFULLY.
From 1988 until April 2000, we operated as a division of MRV and conducted
business using MRV's trade name. In March 2000, we were incorporated in Delaware
as a wholly-owned subsidiary of MRV. In connection with this offering, we will
become a stand-alone public company. Our entire line of passive optical
components was established through our acquisitions of Fiber Optic
Communications and Quantum in April and July 2000. We expect sales of our
passive optical components will constitute a significant part of our future
business. Therefore, we have no history as an independent company or in
operating in the passive components markets. Our lack of independence and our
limited operating history in the passive optical components markets may limit
your ability to evaluate our prospects due to:
- our lack of historical financial data; and
- our limited experience in addressing emerging trends that may affect our
business.
As a newly independent company with new product lines, we face risks and
uncertainties relating to our ability to implement our business plan
successfully.
IF THE OPTICAL NETWORKING MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE,
DEMAND FOR OUR PRODUCTS MAY DECLINE, WHICH WOULD NEGATIVELY IMPACT OUR NET
SALES.
Our business is completely dependent on the deployment of our optical
component products. Our future success depends on the continued deployment of
the optical networks in the metropolitan and access markets, the continuing
increase in the amount of data transmitted over communications networks, or
bandwidth, and the growth of optical networks to meet the increased demand for
bandwidth. If the deployment of optical networks in the metropolitan and access
markets does not continue to expand, the market for optical networking products
may not continue to develop. Future demand for our products is
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uncertain and will depend to a great degree on the speed of the widespread
adoption and upgrading of optical networks. If the transition to optical
networks occurs too slowly, the market for our products and the growth of our
business will be significantly limited.
The optical networking market is new and characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements, unpredictable rates of product deployment and evolving industry
standards. Because this market is new, it is difficult to predict its potential
size or future growth rate. Widespread adoption of optical networks is critical
to our future success. Potential end-user customers who have invested
substantial resources in their existing copper lines or other systems may be
reluctant or slow to adopt a new approach, like optical networks. Our success in
generating net sales in this emerging market will depend on:
- maintaining and enhancing our relationships with our customers;
- the awareness of potential end-user customers and network service
providers about the benefits of optical networks; and
- our ability to accurately predict and develop our products to meet
industry standards.
If we fail to address changing market conditions, the sales of our products
may decline, which would harm our net sales and operating results.
IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to expand the scope of our operations domestically and
internationally and have increased the number of our employees substantially in
the past year. At December 31, 1999, we had a total of 209 full-time employees,
and at June 30, 2000, we had a total of 645 full-time employees. In addition, we
plan to hire a significant number of employees over the next few quarters. We
currently operate facilities in Chatsworth, California, Hsinchu, Taiwan and
Shanghai, People's Republic of China. The growth in employee headcount and in
revenue, combined with the challenges of managing geographically dispersed
operations, has placed, and will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls, reporting systems and procedures
and continue to expand, train and manage our work force worldwide. While we are
currently implementing stand-alone versions of most of the systems historically
used by MRV, we may decide to purchase new systems in the future that more
closely match our business needs and incur significant additional expense and
diversion of management attention in connection with implementing those systems.
The failure to effectively manage our growth could adversely impact our ability
to manufacture and sell our products, which could reduce our net sales.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND INTRODUCE
NEW AND ENHANCED PRODUCTS THAT MEET THE NEEDS OF OUR CUSTOMERS.
Our future success depends on our ability to anticipate our customers'
needs and develop products that address those needs. Introduction of new
products and product enhancements will require that we effectively transfer
production processes from research and development to manufacturing and
coordinate our efforts with those of our suppliers to rapidly achieve volume
production. If we fail to effectively transfer production processes, develop
product enhancements or introduce new products that meet the needs of our
customers as scheduled, our net sales may decline.
COMPETITION IN THE OPTICAL NETWORKING MARKET MAY INCREASE, WHICH COULD REDUCE
OUR NET SALES AND GROSS MARGINS OR CAUSE US TO LOSE MARKET SHARE.
Competition in the optical networking market in which we compete is
intense. We face competition from several companies, including Agilent
Technologies, Corning Incorporated, Finisar Corporation, Fujitsu, Infineon AG,
International Business Machines Corporation, JDS Uniphase Corporation, Lucent
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Technologies, Inc., Sumitomo and Tyco International, Ltd. Many of our
competitors are larger than we are and have longer operating histories and
significantly greater financial, technical, marketing and other resources than
we have. As a result, these competitors are able to devote greater resources
than we can to the development, promotion, sale and support of their products.
In addition, several of our competitors have large market capitalizations or
cash reserves, and are much better positioned than we are to acquire other
companies in order to gain new technologies or products that may displace our
product lines. Any of these acquisitions could give our competitors a strategic
advantage. Virtually all of our competitors have significantly more established
sales and customer support organizations than we do. In addition, many of our
competitors have much greater name recognition, more extensive customer bases,
better-developed distribution channels and broader product offerings than we
have. These companies can leverage their customer bases and broader product
offerings and adopt aggressive pricing policies to gain market share. Additional
competitors may enter the market, and we are likely to compete with new
companies in the future. We expect to encounter potential customers that, due to
existing relationships with our competitors, are committed to the products
offered by these competitors. As a result of the foregoing factors, we expect
that competitive pressures may result in price reductions, reduced margins and
loss of market share.
In addition, the fiber optics networking industry is dominated by a small
number of large companies and is currently consolidating. Consolidation reduces
the number of potential customers in the industry, and may increase our
dependence on a small number of customers.
WE MUST EXPAND OUR SALES ORGANIZATION SUBSTANTIALLY IN ORDER TO INCREASE MARKET
AWARENESS AND SALES OF OUR PRODUCTS OR OUR NET SALES MAY NOT INCREASE.
The sale of our products requires long and involved efforts targeted at
several key departments within our prospective customers' organizations. Sales
of our products require the prolonged efforts of executive personnel and
specialized systems and applications engineers working together with a small
number of dedicated salespersons. Currently, our sales organization is limited.
We will need to grow our sales force in order to increase market awareness and
sales of our products. Competition for these individuals is intense, and we
might not be able to hire the kind and number of sales personnel and
applications engineers we need. If we are unable to expand our sales operations,
we may not be able to increase market awareness or sales of our products, which
would prevent us from increasing our net sales.
OUR PRODUCTS ARE DEPLOYED IN LARGE AND COMPLEX SYSTEMS AND MAY CONTAIN DEFECTS
THAT ARE NOT DETECTED UNTIL AFTER OUR PRODUCTS HAVE BEEN INSTALLED, WHICH COULD
DAMAGE OUR REPUTATION AND CAUSE US TO LOSE CUSTOMERS.
We design some of our products for deployment in large and complex optical
networks. Because of the nature of these products, they can only be fully tested
for reliability when deployed in networks for long periods of time. Our fiber
optic products may contain undetected defects when first introduced or as new
versions are released, and our customers may discover defects in our products
only after they have been fully deployed and operated under peak stress
conditions. In addition, our products are combined with products from other
vendors. As a result, should problems occur, it may be difficult to identify the
source of the problem. If we are unable to fix defects or other problems, we
could experience, among other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources; and
- legal actions by our customers.
The occurrence of any one or more of the foregoing factors could cause our net
sales to decline.
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BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR CUSTOMERS MAY
CEASE PURCHASING OUR PRODUCTS AT ANY TIME.
We sell our products based on individual purchase orders, rather than
long-term contracts. Our customers can generally cancel or reschedule orders on
short or no notice and discontinue purchasing our products at any time. In
addition, a number of our current customers were acquired through the
acquisitions of Fiber Optic Communications, Optronics and Quantum, and we have
only a limited history with them as customers. We cannot assure you that these
customers will continue to purchase optical components from us. Because we
cannot predict the size, timing or terms of incoming purchase orders, decreases
in orders or failure to fulfill orders may cause our operating results to
suffer.
WE WILL NOT ATTRACT ORDERS AND CUSTOMERS OR WE MAY LOSE CURRENT ORDERS AND
CUSTOMERS AND WILL NOT BE SUCCESSFUL IN OUR INDUSTRY IF WE ARE UNABLE TO COMMIT
TO DELIVER SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SATISFY MAJOR CUSTOMERS'
NEEDS.
Communications service providers and equipment manufacturers typically
require that suppliers commit to provide specified quantities of products over a
given period of time. If we are unable to commit to deliver sufficient
quantities of our products to satisfy a customer's anticipated needs, we will
lose the order and the opportunity for significant sales to that customer for a
lengthy period of time. While we have sufficient manufacturing capacity at
present to pursue large orders and plan to seek to increase capacity annually by
increasing our workforce, dedicating available space for manufacturing and
adding production shifts when necessary, we would be unable to pursue many new
or large orders if we outgrow our current capacity and planned annual increases
in capacity. In the future, if we do not have sufficient manufacturing capacity
to enable us to commit to provide customers with specified quantities of
products, our business could suffer.
IF OUR SENIOR MANAGEMENT TEAM IS UNABLE TO WORK TOGETHER EFFECTIVELY, OUR
BUSINESS MAY BE SERIOUSLY HARMED.
Some of our senior management personnel, including Dr. William R. Spivey,
our President and Chief Executive Officer, and Eric Blachno, our Vice President
of Finance and Chief Financial Officer, only recently joined us in July 2000. As
a result, our senior management team has had limited time to work together. If
they are unable to work together effectively to manage our organization as a
public company, our business may be seriously harmed.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL OR
RETAIN EXISTING PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
Our future success depends upon the continued services of our executive
officers and other key engineering, sales, marketing, manufacturing and support
personnel. Any of our key employees, including our President and Chief Executive
Officer and our Vice President of Finance and Chief Financial Officer, may
terminate his or her employment at any time. In addition, we do not have key
person life insurance policies covering any of our employees.
In order to implement our business plan, we must hire a significant number
of additional employees in 2000, particularly engineering, sales and
manufacturing personnel. Our ability to continue to attract and retain highly
skilled personnel will be a critical factor in determining whether we will be
successful. Competition for highly skilled personnel is intense. We may not be
successful in attracting, assimilating or retaining qualified personnel to
fulfill our current or future needs, which could adversely impact our ability to
manufacture and sell our products.
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FUTURE ACQUISITIONS MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL RESULTS SIMILAR
TO THE EFFECTS OF THE ACQUISITIONS OF FIBER OPTIC COMMUNICATIONS, OPTRONICS AND
QUANTUM OR COULD OTHERWISE HARM OUR BUSINESS.
Our business has grown because of MRV's acquisitions of fiber optic
components manufacturers Fiber Optic Communications in April 2000 and Optronics
and Quantum in July 2000 and its contribution of the capital stock of these
companies to us. In the event we make future acquisitions, we could:
- issue stock that would dilute our current stockholders' percentage
ownership, like the dilution MRV's stockholders incurred when MRV issued
an aggregate of approximately 6.76 million shares of its common stock in
connection with the acquisitions of Fiber Optic Communications, Optronics
and Quantum;
- incur debt such as the $12.6 million of consolidated debt incurred in
connection with the acquisitions of Fiber Optic Communications, Optronics
and Quantum;
- incur additional liabilities such as the $21.3 million of additional
consolidated liabilities incurred in connection with the acquisitions of
Fiber Optic Communications, Optronics and Quantum; or
- incur expenses related to the amortization of goodwill and other
intangible assets and deferred compensation, like the expenses related to
goodwill and other intangible assets aggregating $389.7 million and
deferred compensation charges aggregating $30.2 million incurred in
connection with the acquisitions of Fiber Optic Communications, Optronics
and Quantum.
Future acquisitions also involve numerous risks that could adversely affect
our business, including:
- problems integrating the acquired operations, technologies or products;
- unanticipated costs, capital expenditures or liabilities or changes
related to in process research and development;
- diversion of management's attention from our core business;
- harm to our existing business relationships with suppliers and customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of the acquired
organizations.
We will face all of the above-mentioned risks related to the acquisitions
of Fiber Optic Components, Optronics and Quantum. In particular, these
acquisitions have brought large new manufacturing facilities and we face
significant challenges in integrating these facilities before we can realize
benefits from these acquisitions. Our entire line of passive optical components
was established through our recent acquisitions of Fiber Optic Communications
and Quantum and successful integration of that product line and the associated
manufacturing facilities is essential to our business. We cannot assure you that
we will be able to successfully integrate any businesses, products, technologies
or personnel that we might acquire in the future, and failure to successfully
integrate may harm our business.
IF WE ARE UNABLE TO EXPAND OUR MANUFACTURING CAPACITY IN A TIMELY MANNER, WE MAY
HAVE INSUFFICIENT CAPACITY TO MEET DEMAND.
We currently manufacture a significant portion of our products in our
facilities located in Chatsworth, California. We have devoted significant
resources to expanding our manufacturing capacity at this facility and also
conduct manufacturing at our facilities in Hsinchu, Taiwan and Shanghai,
People's Republic of China. We could experience difficulties and disruptions in
the manufacture of our products, which could prevent us from achieving timely
delivery of products and could result in lost sales. We could also face the
inability to procure and install additional capital equipment, a shortage of raw
materials we use in our products, a lack of availability of manufacturing
personnel to work in our facilities, difficulties in achieving adequate yields
from new manufacturing lines and an inability to predict future order volumes.
We may experience delays, disruptions, capacity constraints or quality control
problems in our manufacturing
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operations, and, as a result, product shipments to our customers could be
delayed, which would negatively impact our net sales, competitive position and
reputation. If we experience disruptions in the future, it may result in lower
yields or delays of our product shipments, which could adversely affect our
sales, gross margins and results of operations. If we are unable to expand our
manufacturing capacity in a timely manner, we will have insufficient capacity,
which could seriously harm our results of operations.
THE LOCATION OF OUR MANUFACTURING FACILITIES IN SOUTHERN CALIFORNIA AND TAIWAN
SUBJECTS US TO INCREASED RISK THAT A NATURAL DISASTER COULD DISRUPT OUR
OPERATIONS.
Substantially all of our products are manufactured at our facilities in
Chatsworth, California and Hsinchu, Taiwan. The risk of earthquakes in Southern
California and Taiwan is significant due to the proximity of major earthquake
fault lines to these manufacturing facilities. In January 1994 and September
1999, major earthquakes near Chatsworth and in Taiwan, respectively, affected
the facilities of manufacturers in these areas including ours, causing power and
communications outages and disruptions that impaired production capacity. While
our facilities did not suffer material damage and our business was not
materially disrupted by these earthquakes, the occurrence of an earthquake or
other natural disaster could result in the disruption of our manufacturing
facilities. Any disruption in our manufacturing facilities arising from such
events could cause significant delays in the production or shipment of our
products until we are able to shift production to different facilities or
arrange for third parties to manufacture our products. We may not be able to
obtain alternate capacity on favorable terms or at all.
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.
We are subject to a variety of environmental regulations relating to the
use, storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure by
us to comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, such regulations could
restrict our ability to expand our facilities or could require us to acquire
costly equipment or to incur other significant expenses to comply with
environmental regulations. We cannot assure you that these legal requirements
will not impose on us the need for additional capital expenditures or other
requirements. If we fail to obtain required permits or otherwise fail to operate
within these or future legal requirements, we may be required to pay substantial
penalties, suspend our operations or make costly changes to our manufacturing
processes or facilities.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. It is very important that we accurately predict both
the demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier requirements,
the size of the order, contract terms and current market demand for the
components. For substantial increases in production levels, some suppliers may
need six months or more lead time. If we overestimate our component and material
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component and material requirements, we may have inadequate
inventory, which could interrupt our manufacturing and delay delivery of our
products to our customers. Any of these occurrences would negatively impact our
net sales.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE SELLING PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS WILL SUFFER.
We have experienced decreases in the average selling prices of some of our
products. We anticipate that as products in the optical networking market become
more of a commodity, the average selling price of our products may decrease in
response to competitive pricing pressures, new product introductions by us
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or our competitors or other factors. If we are unable to offset the anticipated
decrease in our average selling prices by increasing our sales volumes or
product mix, our net sales and gross margins will decline. In addition, to
maintain our gross margins, we must continue to reduce the manufacturing cost of
our products and we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our
financial position may be harmed and our stock price may decline.
WE DEPEND ON SINGLE OR LIMITED SOURCE SUPPLIERS FOR SOME OF THE KEY COMPONENTS
AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR
PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We typically purchase our components and materials through purchase orders,
and in general we have no guaranteed supply arrangements with any of our
suppliers. We currently purchase several key components and materials used in
the manufacture of our products from single or limited source suppliers,
including Corning Incorporated, Mitsubishi Electric, Nippon Sheet Glass,
Phillips Semiconductor and Sumitomo. If our relationship with any of these key
suppliers terminates, we may not be able to find another manufacturer that can
meet our specifications and anticipated supply requirements. We may fail to
obtain required components in a timely manner in the future. We may experience
difficulty identifying alternative sources of supply for certain components used
in our products. We would experience further delays from evaluating and testing
the products of these potential alternative suppliers. Furthermore, financial or
other difficulties faced by these suppliers or significant changes in demand for
these components or materials could limit the availability of these components.
Any interruption or delay in the supply of any of these components or materials,
or the inability to obtain these components and materials from alternate sources
at acceptable prices and within a reasonable amount of time, would impair our
ability to meet scheduled product deliveries to our customers and could cause
customers to cancel orders.
IF WE DO NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS OR SUFFICIENT PRODUCT
RELIABILITY, OUR ABILITY TO SHIP PRODUCTS TO OUR CUSTOMERS COULD BE AFFECTED AND
OUR NET SALES MAY SUFFER.
The manufacture of our products involves complex and precise processes.
Changes in our manufacturing processes or those of our suppliers, or the use of
defective components or materials, could significantly reduce our manufacturing
yields and product reliability. Our manufacturing costs are relatively fixed,
and, thus, manufacturing yields are critical to our results of operations. We
may experience manufacturing problems in the future, which could result in lower
than expected production yields, delayed product shipments and impaired gross
margins. In some cases, existing manufacturing techniques involve substantial
manual labor. In addition, we may experience manufacturing delays and reduced
manufacturing yields upon introducing new products to our manufacturing lines.
In order to improve our gross margins, we may need to develop new, more
cost-effective manufacturing processes and techniques, and if we fail to do so,
our gross margins may be adversely affected.
IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR OPERATING RESULTS COULD SUFFER.
Generally, customers do not purchase our products, other than limited
numbers of evaluation units, prior to qualification of the manufacturing line
for volume production. Our existing manufacturing lines, as well as each new
manufacturing line, must pass through varying levels of qualification with our
customers. This customer qualification process determines whether our
manufacturing lines meet the customers' quality, performance and reliability
standards. If there are delays in qualification of our products, our customers
may drop the product from a long-term supply program, which would result in
significant lost revenue opportunity over the term of that program. Moreover,
customers may require that we be registered under international quality
standards, such as ISO 9000. Our Taiwan facilities have received ISO 9001
certification and our facilities in the People's Republic of China are certified
ISO 9002. Our Chatsworth facilities have no ISO certification and we do not
expect to receive ISO 9000 certification until sometime in 2001, at the
earliest.
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WE WILL LOSE SIGNIFICANT CUSTOMER SALES AND OPPORTUNITIES AND MAY NOT BE
SUCCESSFUL IF OUR CUSTOMERS DO NOT QUALIFY OUR PRODUCTS TO BE DESIGNED INTO
THEIR PRODUCTS AND SYSTEMS.
In the communications industry, service providers and communications
equipment manufacturers often undertake extensive qualification processes prior
to placing orders for large quantities of products such as ours, because these
products must function as part of a larger system or network. Once they decide
to use a particular supplier's product or component, these potential customers
design the product into their system, which is known as a design-in win.
Suppliers whose products or components are not designed in are unlikely to make
sales to that company until at least the adoption of a future redesigned system.
Even then, many companies may be reluctant to design entirely new products into
their new systems, as it could involve significant additional redesign efforts.
If we fail to achieve design-in wins in our potential customer's qualification
process, we will lose the opportunity for significant sales to that customer for
a lengthy period of time.
THE ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS MAY BE EXPENSIVE AND COULD
DIVERT VALUABLE RESOURCES.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We may need to engage in litigation to enforce our intellectual
property rights, protect our trade secrets and determine the validity and scope
of proprietary rights of others. Any such litigation, regardless of outcome,
could be expensive and time consuming, and adverse determinations in any such
litigation could seriously harm our business.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to infringement
claims as the number of products and competitors in our market grows and the
functioning of products overlaps. In this regard, in early 1999, we received a
written notice from Rockwell Corporation in which Rockwell claimed to have
patent rights in certain technology related to our metal organic chemical vapor
deposition processes. Rockwell requested that we review our processes in light
of one of Rockwell's issued patents which we have done and determined that the
cited patent has expired. In October 1999, we received a written notice from
Ortel Corporation, which has since been acquired by Lucent Technologies, Inc.,
in which Ortel claimed to have patent rights in certain technology related to
our triplexer and duplexer products. Ortel requested that we review our products
in connection with one of Ortel's issued patents. We are evaluating the
information provided to us thus far by Ortel and are also evaluating the
validity of Ortel's patent noted in Ortel's letter. We are presently seeking to
determine whether we may have violated and the extent of our usage of, and
related revenues from, technology covered by the Ortel patent. Based on our
evaluation to date, we have concluded that Ortel's claim relates to an aspect of
our triplexers. Net sales of our triplexers accounted for approximately 23.1% of
total net sales during the year end December 31, 2000 and 3.7% of total net
sales during six months ended June 30, 2000. Ortel's patent, and other patents
of which we are not presently aware that may relate to our products may be
determined to be valid, or some of our products may ultimately be determined to
infringe Ortel patent, or those of other companies. Ortel or other companies may
pursue litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. In the event of an adverse result in any
litigation with respect to intellectual property rights relevant to our products
that could arise in the future, to pay substantial damages under applicable law,
to cease the manufacture, use and sale of infringing products or to expend
significant resources to develop non-infringing technology. In addition,
litigation frequently involves substantial expenditures and can require
significant management attention, even if we ultimately prevail. Accordingly,
any infringement claim or litigation against us could significantly harm our
business, operating results and financial condition.
In the future, we may initiate claims or litigation against third parties
for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or
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<PAGE> 20
the proprietary rights of competitors. These claims could result in costly
litigation and the diversion of our technical and management personnel.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements or to resolve
infringement claims with respect to intellectual property rights in our existing
products. We cannot assure you that third-party licenses such as from Rockwell
or Ortel will be available to us on commercially reasonable terms, if at all.
The inability to obtain any third-party license required to develop new products
and product enhancements or to resolve infringement claims on our existing
products could require us to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
our ability to manufacture and sell our products.
RISKS RELATED TO OUR RELATIONSHIP WITH MRV
WE WILL NOT BE ABLE TO RELY ON MRV TO FUND OUR FUTURE CAPITAL REQUIREMENTS, AND
FINANCINGS FROM OTHER SOURCES MAY NOT BE AVAILABLE ON FAVORABLE TERMS OR AT ALL.
In the past, our capital needs have been satisfied by MRV. However,
following our separation, MRV will no longer provide funds to finance our
working capital or other cash requirements. We cannot assure you that financing
from other sources, if needed, will be available on favorable terms or at all.
We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results, financing activities, acquisitions and investments and
inventory and receivables management. We believe that the net proceeds from this
offering, along with our future cash flow 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. Future equity financings would be dilutive
to the existing holders of our common stock. Future debt financings could
involve restrictive covenants. We will likely not be able to obtain financing
with interest rates as favorable as those that MRV could obtain.
OUR NEW NAME IS NOT YET RECOGNIZED AS A BRAND IN THE MARKETPLACE, AND AS A
RESULT OUR PRODUCT SALES COULD SUFFER. IN ADDITION, OTHER COMPANIES WITH SIMILAR
NAMES OR TRADEMARKS COULD CHALLENGE OUR USE OF LUMINENT.
The loss of our ability to use the MRV Communications brand name may hinder
our ability to establish new relationships. In addition, our current customers,
suppliers and partners may react negatively to the separation. In connection
with our separation from MRV, we will change our brand name and most of the
trademarks and trade names under which we conduct our business. This transition
to our new name will occur rapidly in the case of some products and over
specified periods of time in the case of other products. We believe that sales
of our products have benefited from the use of the MRV brand name. In addition,
there are numerous companies which have names or trademarks of varying degrees
of similarity to Luminent. Although we believe we have all necessary rights to
use the new brand name, our rights to use it may be challenged by others who
have names or trademarks similar to our name. Challenges resulting in
litigation, regardless of outcome, could be expensive to defend and time
consuming and adverse determinations could harm our business.
OUR BUSINESS MAY SUFFER IF MRV DOES NOT COMPLETE ITS DISTRIBUTION OF OUR COMMON
STOCK.
MRV has advised us that it currently intends to distribute to its
stockholders all of our common stock by the later of three months after the
receipt of a favorable private letter ruling from the IRS or six months after
this offering, although it is not obligated to do so. There are various
conditions to the
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<PAGE> 21
completion of the distribution and we cannot assure you as to whether or when it
will occur. If the distribution does occur, we may not obtain the benefits we
expect as a result of this distribution, including direct access to capital
markets, better incentives for employees, greater strategic focus, facilitated
customer relationships and future partnerships and increased speed and
responsiveness. In addition, until this distribution occurs, the risks discussed
below relating to MRV's control of us and the potential business conflicts of
interest between MRV and us will continue to be relevant to our stockholders.
We will be controlled by MRV as long as it owns a majority of our common
stock, and our other stockholders will be unable to affect the outcome of
stockholder voting during such time.
After the completion of this offering, MRV will own approximately 92% of
our outstanding common stock or approximately 91% if the underwriters exercise
their over-allotment option in full. As long as MRV owns a majority of our
outstanding common stock, MRV will continue to be able to elect our entire board
of directors and to remove any director, with or without cause, without calling
a special meeting. Investors in this offering will not be able to affect the
outcome of any stockholder vote prior to the planned distribution of our stock
to the MRV stockholders. As a result, MRV will control all matters affecting us,
including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- the allocation of business opportunities that may be suitable for us and
MRV;
- any determinations with respect to mergers or other business
combinations;
- our acquisition or disposition of assets;
- our financing;
- changes to the agreements providing for our separation from MRV;
- the payment of dividends on our common stock; and
- determinations with respect to our tax returns.
MRV COULD SELL A CONTROLLING INTEREST IN US TO A THIRD PARTY PREVENTING THE
PLANNED DISTRIBUTION OF OUR COMMON STOCK.
MRV has agreed with the underwriters not to offer or sell any shares of our
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of the underwriters. After the 180-day period,
however, MRV is not prohibited from selling a controlling interest in us to a
third party. A sale of a controlling interest in us by MRV would prevent the
distribution of our shares to MRV's shareholders as currently planned and could
have a depressive effect of the market price of our common stock. Moreover,
because MRV can dispose of all or a portion of its ownership of our common stock
at some future date, it may transfer a controlling interest in us without
allowing you to participate or realize a premium.
BECAUSE MRV WILL OWN MORE THAN 90 PERCENT OF OUR OUTSTANDING CAPITAL STOCK, IT
MAY MERGE US INTO MRV AT ANY TIME.
Although MRV currently plans and anticipates that it will distribute all of
our common stock that it owns to the holders of MRV common stock on the later of
three months after the receipt of a favorable private letter ruling from the IRS
or six months after this offering, it is not obligated to do so, and it is
possible that MRV may decide not to complete the distribution. Under Delaware
law, a parent corporation that owns at least 90 percent of the outstanding
capital stock of a subsidiary corporation may merge the subsidiary into the
parent without the vote of the subsidiary's stockholders. Therefore, in the
event MRV elects not to complete the distribution, it may merge us into itself
without the vote of our stockholders. In such event, our outstanding shares of
common stock would be converted into shares of common stock of MRV at an
exchange ratio to be determined at the time of the transaction. Our stockholders
would be
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<PAGE> 22
entitled to appraisal rights under Delaware law, but these rights may not
entitle our stockholders to receive consideration equivalent to the price they
paid for our common stock.
SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE DISTRIBUTION,
WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
MRV currently plans to distribute to its stockholders all of the shares of
our common stock it owns by the later of three months after the receipt of a
favorable private letter ruling from the IRS or six months after this offering.
If MRV completes the distribution, substantially all of these shares would be
eligible for immediate resale in the public market. Any sales of substantial
amounts of common stock in the public market, or the perception that such sales
might occur, whether as a result of this distribution of otherwise, could harm
the market price of our common stock. We are unable to predict whether
significant amounts of common stock will be sold in the open market in
anticipation of, or following, this distribution or whether a sufficient number
of buyers will be in the market at that time.
AT THE TIME OF THE DISTRIBUTION BY MRV OF ITS LUMINENT COMMON STOCK, WE PLAN TO
GRANT TO MRV OPTION HOLDERS OPTIONS TO PURCHASE A SUBSTANTIAL AMOUNT OF LUMINENT
COMMON STOCK, WHICH WILL CAUSE DILUTION TO THE INTERESTS OF EXISTING LUMINENT
STOCKHOLDERS AND MAY HAVE A DEPRESSIVE EFFECT ON THE MARKET PRICE OF LUMINENT'S
COMMON STOCK.
Concurrently with MRV's distribution of shares of our common stock to its
stockholders, we intend to grant stock options to substantially all of the
eligible employees, directors, or consultants of Luminent or MRV who hold an
option to purchase MRV common stock granted prior to September 8, 2000 by MRV.
We understand that MRV intends to simultaneously adjust options to purchase MRV
stock to these same individuals. The MRV adjustment and our grant are intended,
in the aggregate, to be in a number and at prices that will preserve the
pre-distribution economic position of the options to purchase MRV stock held by
these individuals on September 8, 2000. For information concerning the method to
be used by MRV and us to adjust and grant our respective options, please see the
discussion under "Management -- Treatment of MRV Options" appearing later in
this prospectus. Based on
- the number and exercise prices of MRV options outstanding and eligible on
September 8, 2000,
- an assumed initial public offering price of $14 in this offering and
- the closing price of MRV's common stock on October 4, 2000 of $44.8125,
we would have granted Luminent options to purchase a total of approximately
11,691,000 shares of our common stock in connection with the distribution to MRV
stockholders. Under the method used to determine the number of options to be
granted, a lower number of options would be issued if at the time of the
distribution there was an increase in our share price over the filing range
and/or a smaller difference between MRV's share price and ours then existed.
Conversely, a higher number of options would be issued if at the time of the
distribution there was a decrease in our share price over the filing range
and/or a larger difference between MRV's share price and ours then existed.
Based on
- 156,000,000 shares of our common stock to be outstanding upon completion
of this offering,
- assuming no exercise of any options outstanding at that time and
- no exercise or conversion of any other securities exercisable for or
convertible into our common stock that we may issue between that time and
the distribution,
the full exercise of these new Luminent options to purchase 11,691,000 shares of
our common stock will dilute equity ownership of Luminent's stockholders,
including those purchasing our shares in this offering, by approximately 7.5%.
Further, the exercise, and even the existence of these options, could have an
adverse effect on the market price of our shares.
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<PAGE> 23
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
The historical financial information we have included in this prospectus
has been carved out from MRV's consolidated financial statements and may not
accurately reflect what our financial position, results of operations and cash
flows would have been, had we been a separate, stand-alone entity during the
periods presented. MRV did not account for us as, and we were not operated as, a
single stand-alone entity for the periods presented. In addition, the historical
information is not necessarily indicative of what our results of operations,
financial position and cash flows will be in the future. We have not made
adjustments to reflect many significant changes that will occur in our cost
structure, funding and operations as a result of our separation from MRV,
including changes in our employee base, changes in our tax structure, increased
costs associated with reduced economies of scale, increased marketing expenses
related to establishing a new brand identity and increased costs associated with
being a public, stand-alone company.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH MRV WITH RESPECT TO
OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS OPERATIONS.
Conflicts of interest may arise between MRV and us in a number of areas
relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from MRV;
- intellectual property matters;
- employee retention and recruiting;
- major business combinations involving us;
- sales or distributions by MRV of all or any portion of its ownership
interest in us;
- the nature, quality and pricing of transitional services MRV has agreed
to provide us; and
- business opportunities that may be attractive to both MRV and us.
In addition to the conflicts of interests relating to the separation of our
operations from MRV as described above, we also may face business conflicts of
interest with MRV because MRV is one of our customers. Like other customers, we
do not have long-term contracts with MRV for the purchase of our components.
Because MRV controls all matters relating to us, MRV may be able to require us
to enter into a customer relationship with it on terms that are less favorable
to us than those we could negotiate with an unrelated customer, however, we
believe terms of such agreements would be consistent with market-based terms.
Nothing restricts MRV from competing with us.
We may not be able to resolve any potential conflicts, and even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. The agreements we have entered into with MRV may be amended
upon agreement between the parties. While we are controlled by MRV, MRV may be
able to require us to agree to amendments to these agreements that may be less
favorable to us than the current terms of the agreement, however, we believe
terms of such agreements would be consistent with market-based terms.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF MRV COMMON STOCK.
Some of our directors and executive officers have a substantial amount of
their personal financial portfolios in MRV common stock and options to purchase
MRV common stock. Ownership of MRV common stock by our directors and officers
after our separation from MRV could create, or appear to create, potential
conflicts of interest when directors and officers are faced with decisions that
could have different implications for MRV and us.
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<PAGE> 24
IF MRV'S PROPOSED DISTRIBUTION OF OUR COMMON STOCK IS NOT TAX-FREE, WE COULD BE
LIABLE TO MRV FOR THE RESULTING TAXES, WHICH WOULD SIGNIFICANTLY HARM OUR
BUSINESS.
MRV currently plans to distribute to its stockholders the shares of our
common stock that it owns by the later of three months after the receipt of a
favorable private letter ruling from the IRS or six months after this offering.
We have agreed to indemnify MRV in the event the distribution is not tax-free to
MRV or its stockholders because of actions taken by us or our failure to take
various actions, all as set forth in our tax sharing agreement with MRV. We may
not be able to control some of the events that could trigger this liability. In
particular, certain acquisitions of us by a third party within two years of the
distribution could result in the distribution not being tax-free and therefore
give rise to our obligation to indemnify MRV for any resulting tax or other
liability. If we were to become obligated to indemnify MRV for this liability,
our financial condition and business would be significantly harmed.
RISKS RELATED TO THIS OFFERING
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK, AND A PUBLIC MARKET FOR OUR
SECURITIES MAY NOT DEVELOP OR BE SUSTAINED, WHICH COULD CAUSE OUR STOCK PRICE TO
FALL BELOW THE INITIAL PUBLIC OFFERING PRICE.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering, and the market price might fall below the initial
public offering price. The initial public offering price may bear no
relationship to the price at which the common stock will trade upon completion
of this offering. The initial public offering price will be determined based on
negotiations between the representatives of the underwriters and us, based on
factors that may not be indicative of future market performance.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION THAT COULD RESULT IN
SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the potential volatility of our stock price, we may be the target of
securities litigation in the future. Securities litigation could result in
substantial costs and divert management's attention and resources.
DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.
We are authorized to issue up to 30,000,000 shares of preferred stock. This
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any such series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently outstanding.
The issuance of any such preferred stock could materially adversely affect the
rights of the holders of our common stock, and therefore, reduce the value of
our common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell our
assets to, a third party and thereby preserve control by the present management.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline.
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<PAGE> 25
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or by other
comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform these
statements to actual results.
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<PAGE> 26
OUR RELATIONSHIP WITH MRV AFTER THE OFFERING
OVERVIEW
We are currently a wholly-owned subsidiary of MRV. After the completion of
this offering, MRV will own approximately 92% of our outstanding common stock or
approximately 91% if the underwriters exercise their over-allotment option in
full. Until MRV holds less than a majority of the voting power of our
outstanding common stock, MRV will be able to control the vote on all matters
submitted to stockholders, including the election of directors and the approval
of extraordinary corporate transactions.
THE PLANNED DISTRIBUTION BY MRV OF OUR COMMON STOCK
MRV has advised us that it plans to distribute to its stockholders all of
our common stock that it owns by the later of three months after the receipt of
a favorable private letter filing from the IRS or six months after this
offering, although it is not obligated to do so. There are, however, various
conditions to the completion of the distribution and we cannot assure you as to
whether or when it will occur.
Because there are certain conditions to effecting the distribution, MRV has
advised us that it has not definitely determined whether and when it expects to
complete the distribution. These conditions include:
- the issuance by the Internal Revenue Service of a ruling that the
proposed distribution would be tax-free to MRV and its stockholders;
- the relative market prices of our common stock and MRV's common stock;
- the absence of any court orders or regulations prohibiting or restricting
the completion of the distribution; and
- other conditions affecting our business or that of MRV.
ANTICIPATED BENEFITS OF THE DISTRIBUTION
We believe that we will realize certain benefits from our anticipated
complete separation from MRV, including the following:
Direct Access to Capital Markets. As a separate company, we will be able to
directly access the capital markets to issue debt and equity securities and we
will be able to grow through acquisitions.
Better Incentives for Employees. We expect the motivation of our employees
and the focus of our management will be strengthened by incentive compensation
programs tied to the market performance of our common stock. The separation will
enable us to offer our employees compensation directly linked to the performance
of our business, which we expect to enhance our ability to attract and retain
qualified personnel.
Greater Strategic Focus. We expect to have a sharper focus on our business
and strategic opportunities as a result of our board of directors and management
teams focusing only on our business. We will also have greater ability to modify
business processes to better fit the needs of our customers, business units and
employees.
Facilitate Customer Relationships and Future Partnerships. MRV competes
with several of our customers in supplying equipment for data networking. As a
separate company, we believe we can expand our business with existing and
potential customers which may be unwilling to do business with us due to our
relationship with MRV. In addition, we believe we will have a greater ability to
partner with other companies. In particular, certain companies that compete with
MRV directly in the sale of products not currently developed or sold by us may
be more willing to enter into arrangement with us as a separate company.
Increased Speed and Responsiveness. As a significantly, smaller company, we
expect to be able to make decisions more quickly, deploy resources more rapidly
and efficiently and operate with more agility
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<PAGE> 27
than when we were a part of MRV. In addition, we expect to enhance our
responsiveness to customers and partners.
POTENTIAL DISADVANTAGES OF THE DISTRIBUTION
There are also potential disadvantages from our complete separation from
MRV. These disadvantages include:
- our lack of history as an independent company which may make it more
difficult to evaluate our business or hinder our ability to implement our
business plan successfully;
- our inability to rely on MRV to fund our future capital requirements and
the uncertainty of alternative sources of funding;
- our lack of brand name recognition independent of MRV;
- the risk that as a result of the distribution there will be substantial
sales of our common stock in the open market or the perception that there
may be substantial sales of our shares, either of which could have a
depressive effect on the prevailing market price of our shares;
- the dilution in ownership to be suffered by our shareholders and the
potential depressive effect on the market price of our shares resulting
from our grant of options to purchase our shares to MRV option holders at
the time of the distribution;
- potential conflicts of interest resulting from our past and ongoing
relationships with MRV or as a result of the ownership of MRV common
stock by certain of our directors and executive officers; and
- our potential liability to MRV if the distribution is not tax-free to MRV
stockholders.
The foregoing potential disadvantages are more fully discussed under the
sections of this prospectus called "Risk Factors -- Risks Related to Our
Business" and "-- Risks Related to Our Relationship with MRV" appearing earlier
in this prospectus.
SEPARATION AND TRANSITIONAL ARRANGEMENTS
Prior to completion of this offering, we will enter into agreements with
MRV that govern the separation of our business operations from MRV. These
agreements generally provide for, among other things:
- the transfer from MRV to us of assets and the assumption by us of
liabilities relating to our business;
- the allocation of intellectual property between MRV and us; and
- various interim and ongoing relationships between MRV and us.
All of the agreements providing for our separation from MRV were made in
the context of a parent-subsidiary relationship and were negotiated in the
overall context of our separation from MRV. Luminent believes the terms of these
agreements are fair; however, terms of these agreements may be more or less
favorable to us than if they had been negotiated with unaffiliated third
parties. See "Risk Factors -- Risks Related to Our Relationship With MRV" and
"Arrangements Between Luminent and MRV."
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 12,000,000 shares of
common stock we are offering will be approximately $154.8 million, or $178.3
million if we sell an aggregate of 13,800,000 shares upon underwriters exercise
their over-allotment option in full, assuming an initial public offering price
of $14.00 per share, after deducting underwriting discounts and commissions and
after deducting estimated offering expenses. The primary purposes of this
offering are to obtain additional equity capital, create a public market for our
common stock and facilitate future access to public markets.
We intend to use the net proceeds we receive from the offering for general
corporate purposes, including capital expenditures and working capital. Except
for approximately $2.5 million, which we plan to use from the proceeds of this
offering to pay for capital equipment for our facilities in Taiwan, we have no
additional capital commitments and have not determined the amount of net
proceeds that we will use for each of these purposes. Accordingly, we will have
a broad discretion to use the proceeds as we see fit. Although we may use a
portion of the net proceeds to acquire technology or businesses that are
complementary to our business, there are no current plans in this regard.
Pending their use, we plan to invest the net proceeds in short-term,
interest-bearing and investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain future earnings, if any, to finance the expansion of
our business, and we do not expect to pay any cash dividends in the foreseeable
future.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis (after giving effect to the amendment of our
Certificate of Incorporation to split the outstanding shares, increase
our authorized capital stock to occur prior to this offering and the
transfer of the net assets to Luminent from MRV);
- on a pro forma basis assuming the acquisitions of Optronics and Quantum
occurred on June 30, 2000,
- and on a pro forma as adjusted basis reflecting our receipt of the net
proceeds from the sale of the shares of common stock in this offering at
an assumed initial public offering price of $14.00 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses.
You should read this table with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the related notes.
<TABLE>
<CAPTION>
JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt, net of current portion.................... $ 7,007 $ 8,972 $ 8,972
Minority interest......................................... 332 332 332
Stockholders' equity:
Preferred stock, $0.001 par value, (30,000,000 shares
authorized, none issued actual, pro forma or pro
forma as adjusted)................................... -- -- --
Common stock, $0.001 par value, (300,000,000 shares
authorized, 144,000,000 issued actual and 144,000,000
issued pro forma, 156,000,000 issued pro forma as
adjusted)............................................ 144 144 156
Additional paid-in capital.............................. 314,337 474,772 629,600
Deferred stock compensation............................. (11,097) (27,177) (27,177)
Accumulated other comprehensive loss.................... (881) (898) (898)
-------- -------- --------
Total stockholders' equity................................ 302,503 446,841 601,681
-------- -------- --------
Total capitalization............................... $309,842 $456,145 $610,985
======== ======== ========
</TABLE>
The total number of outstanding shares of our common stock as of June 30,
2000 was 144,000,000, excluding:
- 5,600,000 shares of common stock issuable upon exercise of stock options
outstanding as of August 31, 2000 at a price of $6.25 per share;
- 10,400,000 shares of common stock available as of August 31, 2000 for
future issuance under our 2000 stock option plan;
- shares of our common stock that may be issued upon exercise of Luminent
options granted to holders of MRV options to purchase MRV common stock
following MRV's distribution of our common stock to its stockholders
(please see discussion in "Management -- Treatment of MRV Options" later
in this prospectus for information regarding these options); and
- 1,800,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the initial public offering price per share of
our common stock and the pro forma net tangible book value per share of our
common stock after this offering. We calculate pro forma net tangible book value
per share by dividing the net tangible book value, tangible assets less total
liabilities, by the number of outstanding shares of common stock.
Our pro forma net tangible book value at June 30, 2000, was $66.0 million,
or $0.46 per share, based on 144,000,000 shares of our common stock outstanding
and held by MRV.
After giving effect to the sale of the 12,000,000 shares of common stock by
us at the assumed initial public offering price of $14.00 per share, less the
underwriting discounts and commissions and our estimated offering expenses, our
pro forma net tangible book value at June 30, 2000, would be $220.9 million, or
$1.42 per share. This represents an immediate increase in the pro forma net
tangible book value of $0.96 per share to existing stockholders and an immediate
dilution of $12.58 per share to new investors purchasing shares at the initial
public offering price of $14.00 per share. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Pro forma net tangible book value per share at June 30,
2000................................................... $0.46
Increase per share attributable to new investors.......... 0.96
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.42
------
Dilution per share to new investors in this offering........ $12.58
======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after the offering would be $1.55 per
share, the increase in net tangible book value per share attributable to new
investors would be $1.09 per share and the dilution per share to new investors
in this offering would be $12.45 per share.
The following table shows on a pro forma basis at June 30, 2000 the number
of shares of common stock purchased from us, the total consideration paid to us
and the average price paid per share by existing stockholders and by new
investors purchasing common stock in this offering:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED (IN THOUSANDS)
--------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
MRV............................. 144,000,000 92% $474,916 74% $ 3.30
New investors................... 12,000,000 8 168,000 26 $14.00
----------- --- -------- ---
Total......................... 156,000,000 100% $642,916 100%
=========== === ======== ===
</TABLE>
The above information is based on shares outstanding as of June 30, 2000.
It excludes up to
- 5,600,000 shares of common stock issuable upon exercise of stock options
outstanding as of August 31, 2000 at a price of $6.25 per share;
- 10,400,000 shares of common stock available as of August 31, 2000 for
future issuance under our 2000 stock option plan;
- shares of our common stock that may be issued upon exercise of Luminent
options granted to holders of options to purchase MRV common stock
following MRV's distribution of our common stock to its stockholders
(please see discussion in "Management -- Treatment of MRV Options" later
in this prospectus for information regarding these options); and
- 1,800,000 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
29
<PAGE> 31
SELECTED FINANCIAL DATA
The following selected statement of operations data for the three years in
the period ended December 31, 1999 and the balance sheet data as of December 31,
1998 and 1999 are derived from our consolidated financial statements and notes
thereto included later in this prospectus which have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report
included with such financial statements. The selected statement of operations
data for the two years in the period ended December 31, 1996 and the balance
sheet data as of December 31, 1995, 1996 and 1997 were derived from our
unaudited financial statements, which are not included in this prospectus. The
unaudited pro forma selected statement of operations data for the year ended
December 31, 1999 and the six months ended June 30, 2000 and the selected
unaudited pro forma balance sheet data at June 30, 2000 were derived from the
unaudited pro forma financial statements of Luminent, which are included later
in this prospectus. The selected statement of operations data for the six months
ended June 30, 1999 and 2000 and the balance sheet data at June 30, 2000 were
derived from our unaudited consolidated financial statements, which are included
later in this prospectus. In our opinion, all necessary adjustments, consisting
only of normal recurring adjustments, have been included to present fairly the
financial position and results of operations for each of the periods presented
in our unaudited financial statements. Historical results are not necessarily
indicative of results that may be expected for any future period. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our Consolidated Financial
Statements and the Unaudited Pro Forma Condensed Consolidated Financial
Statements of Luminent, including the related footnotes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
PRO FORMA(1)
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales....................... $ 15,855 $ 24,034 $ 35,081 $ 38,596 $ 65,264 $ 93,262
Cost of sales(2)................ 9,193 13,970 21,659 24,289 43,078 69,051
-------- -------- -------- -------- -------- --------
Gross profit................ 6,662 10,064 13,422 14,307 22,186 24,211
Operating costs and expenses:
Selling, general and
administrative(2)........... 987 1,160 2,102 2,642 5,675 19,643
Research and development(2)... 1,282 2,179 3,520 4,974 8,693 18,433
Parent company allocations.... 543 787 797 808 885 885
Amortization of goodwill...... -- -- -- -- -- 77,946
-------- -------- -------- -------- -------- --------
2,812 4,126 6,419 8,424 15,253 116,907
-------- -------- -------- -------- -------- --------
Operating income (loss)..... 3,850 5,938 7,003 5,883 6,933 (92,696)
Other income (loss), net........ -- -- -- -- 6 (167)
-------- -------- -------- -------- -------- --------
Income (loss) before provision
for income taxes............ 3,850 5,938 7,003 5,883 6,939 (92,863)
Provision for income taxes...... 1,501 2,297 2,789 2,343 2,764 2,894
Minority interest............... -- -- -- -- -- (36)
-------- -------- -------- -------- -------- --------
Net income (loss)........... $ 2,349 $ 3,641 $ 4,214 $ 3,540 $ 4,175 $(95,721)
======== ======== ======== ======== ======== ========
Earnings (loss) per share(3):
Basic and diluted earnings
(loss) per share............ $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.03 $ (0.66)
Basic and diluted weighted
average shares.............. 144,000 144,000 144,000 144,000 144,000 144,000
======== ======== ======== ======== ======== ========
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
PRO FORMA(1)
1999 2000 2000
-------- -------- ------------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales....................... $ 28,469 $ 43,587 $ 56,711
Cost of sales(2)................ 18,506 29,742 41,194
-------- -------- --------
Gross profit................ 9,963 13,845 15,517
Operating costs and expenses:
Selling, general and
administrative(2)........... 2,373 6,215 11,881
Research and development(2)... 4,010 6,558 11,212
Parent company allocations.... 442 388 388
Amortization of goodwill...... -- 9,580 38,505
-------- -------- --------
6,825 22,741 61,986
-------- -------- --------
Operating income (loss)..... 3,138 (8,896) (46,469)
Other income (loss), net........ 10 103 (135)
-------- -------- --------
Income (loss) before provision
for income taxes............ 3,148 (8,793) (46,604)
Provision for income taxes...... 1,254 1,750 1,750
Minority interest............... -- 318 287
-------- -------- --------
Net income (loss)........... $ 1,894 $(10,861) $(48,641)
======== ======== ========
Earnings (loss) per share(3):
Basic and diluted earnings
(loss) per share............ $ 0.01 $ (0.08) $ (0.34)
Basic and diluted weighted
average shares.............. 144,000 144,000 144,000
======== ======== ========
</TABLE>
30
<PAGE> 32
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 2000
----------------------------------------------- -----------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA(1)
------- ------- ------- ------- ------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ -- $ -- $ -- $ -- $ 220 $ 4,982 $ 8,054
Working capital................................ 3,844 5,387 4,694 7,453 12,561 23,646 29,016
Total assets................................... 7,821 11,779 13,305 14,742 23,127 341,927 495,152
Long-term debt less current portion............ -- -- -- -- -- 7,007 8,972
Parent company investment...................... 6,327 7,109 5,782 8,090 13,974 302,503 446,841
</TABLE>
---------------
(1) The pro forma selected statements of operations for the year ended December
31, 1999 and six months ended June 30, 2000, and pro forma balance sheet
data at June 30, 2000 were derived from the pro forma financial statements
of Luminent, Fiber Optic Communications, Optronics and Quantum included
later in this prospectus. The unaudited pro forma condensed consolidated
balance sheet assumes that the Optronics and Quantum acquisitions took place
on June 30, 2000 and consolidates our June 30, 2000 consolidated balance
sheet with the balance sheets of Optronics and Quantum. The unaudited pro
forma condensed consolidated statements of operations assume that the Fiber
Optic Communications, Optronics and Quantum acquisitions occurred on of
January 1, 1999 for the pro forma year ended December 31, 1999 and January
1, 2000 for the pro forma ended June 30, 2000, consolidates our consolidated
statements of operations for the year ended December 31, 1999 and six months
ended June 30, 2000 with the statements of operations for those periods of
Fiber Optic Communications, Optronics and Quantum. See "Unaudited Pro Forma
Condensed Consolidated Financial Statements" included herein.
(2) Includes amounts related to deferred stock compensation of: $4.3 million,
$744,000 and $2.7 million presented in "cost of sales"; $6.2 million, $1.1
million and $3.9 million presented in "selling, general and administrative";
$6.8 million, $1.2 million and $4.2 million presented in "research and
development"; for the pro forma presentation of the year ended December 31,
1999, the six months ended June 30, 2000 and the pro forma presentation of
the six months ended June 30, 2000, respectively.
(3) See note 2 of notes to consolidated financial statements for an explanation
of how the number of shares used in calculating this per share data was
determined.
31
<PAGE> 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our consolidated financial statements and related notes appearing elsewhere in
this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. The actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including, but not limited to, those presented
under "Risk Factors" on page 9 and elsewhere in this prospectus.
OVERVIEW
We design, manufacture and sell a comprehensive line of fiber optic
components that enable communications equipment manufacturers to provide optical
networking equipment for the rapidly growing metropolitan and access segments of
the communications network. Directly and through its subsidiaries, MRV designs,
manufactures and sells data networking products, including networking and
Internet infrastructure products such as switching and router management
systems, and through Luminent, MRV is engaged in the fiber optics components
business. Our fiber optic components business was the original business of MRV
when MRV began operations in July 1988. From inception in 1988 until our
separation in July 2000, we have operated as a division of MRV and have
conducted business using MRV's trade name. In March 2000, we were incorporated
in Delaware as a wholly owned subsidiary of MRV. In April 2000, we began doing
business under the Luminent trade name. After the completion of this offering,
MRV will own approximately 92% of the outstanding shares of our common stock, or
approximately 91% if the underwriters exercise their over-allotment option in
full. MRV intends to divest its remaining equity interest in us on the later of
three months after the receipt of a favorable private letter ruling from the IRS
or six months after this offering by distributing all of its shares of our
common stock to the holders of MRV's common stock, although it is not obligated
to do so. The effective date of MRV's contribution and transfer to us of our
business was September 8, 2000.
On April 24, 2000, MRV acquired approximately 97% of the outstanding
capital stock of Fiber Optic Communications, a Taiwanese manufacturer of passive
fiber optic components with facilities in both Taiwan and the People's Republic
of China. The purchase price paid was approximately $310.4 million in cash,
common stock and options to purchase common stock of MRV. The acquisition was
accounted for using the purchase method. The outstanding capital stock of Fiber
Optic Communications purchased by MRV has been contributed to us as of the date
of acquisition. Therefore, the results of operations of Fiber Optic
Communications have been included in our consolidated financial statements from
April 25, 2000.
On July 12, 2000, MRV acquired all of the outstanding capital stock of
Quantum, a Taiwanese manufacturer of active and passive fiber optic components.
The purchase price paid was approximately $36.2 million in common stock and
options to purchase common stock of MRV. On July 21, 2000, MRV acquired
approximately 99.9% of the outstanding capital stock of Optronics, a Taiwanese
manufacturer of active fiber optic components. The purchase price paid was
approximately $124.2 million in common stock and options to purchase common
stock of MRV.
The acquisitions were made to expand our product offerings, enhance our
technology expertise and expand our manufacturing capabilities.
The acquisitions of Optronics and Quantum were also contributed to us by
MRV effective as of the date of their acquisitions and they will be accounted
for using the purchase method. The results of operations of Optronics and
Quantum will be included in our consolidated financial statements from July 13,
2000 and July 22, 2000, respectively. As these acquisitions were completed
subsequent to June 30, 2000, the date of the most recent historical results of
operations presented in this prospectus, Optronics and Quantum have not been
included in any historical financial data presented in this prospectus.
In connection with the acquisitions of Fiber Optic Communications,
Optronics and Quantum, a portion of the purchase prices paid represented
deferred stock compensation relating to options to purchase
32
<PAGE> 34
the common stock of MRV. These options had fair values of approximately $14.1
million, $13.4 million and $2.7 million for Fiber Optic Communications,
Optronics and Quantum, respectively. Deferred stock compensation amortization
expense for the six months ended June 30, 2000 relating to these stock options
was approximately $3.0 million. In connection with these acquisitions, we expect
to incur approximately $30.2 million of total deferred stock compensation, which
will be fully amortized by 2004. Deferred stock compensation will be amortized
using the graded method over a four-year period.
Goodwill resulting from the Fiber Optic Communications, Optronics and
Quantum acquisitions totaled $262.1 million, $99.7 million and $27.9 million,
respectively. For the six months ended June 30, 2000, we recorded amortization
of goodwill of $9.6 million relating to the acquisition of Fiber Optic
Communications. We expect to record amortization of goodwill charges for Fiber
Optic Communications, Optronics and Quantum of approximately $19.5 million per
quarter until they are fully amortized in 2005.
Fiber Optic Communications was the largest and most significant of the
acquisitions. Fiber Optic Communications produces margins similar to Luminent,
however, it has not experienced the growth in net sales or operating income that
Luminent has experienced during the last three fiscal years. We are not aware of
any unusual trends specific to the businesses of our acquired companies.
In July 2000, MRV and we entered into four year employment agreements with
our President and Chief Executive Officer and Vice President of Finance and
Chief Financial Officer. The agreements provide for annual salaries, performance
bonuses and combinations of stock options to purchase shares of MRV's common
stock and Luminent's common stock. The options to purchase MRV's common stock
are immediately exercisable. The options to purchase Luminent's common stock
vest over four years. See "Management -- Employment Agreements." These options
were granted to our President and Chief Executive Officer and Vice President of
Finance and Chief Financial Officer at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation relating
to these options is expected to be approximately $54.5 million through 2004.
Although we reported net income of $3.5 million and $4.2 million for the
years ended December 31, 1998 and 1999, respectively, we reported a net loss of
$10.9 million for the six months ended June 30, 2000. The net loss was primarily
due to amortization of goodwill and deferred stock compensation related to the
Fiber Optic Communications acquisition. In addition, we will record amortization
of goodwill and deferred stock compensation relating to our acquisitions
Optronics and Quantum and our employment arrangements with our President and
Chief Executive Officer and Vice President of Finance and Chief Financial
Officer going forward. As a consequence of these amortization of goodwill
charges and deferred stock compensation charges, we do not expect to report net
income in the foreseeable future.
We have entered into various agreements related to interim and ongoing
relationships with MRV. These agreements provide for transitional services and
support in the areas of data processing and telecommunications services (such as
voice telecommunications and data transmission and information technology
support services) for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal, procurement and other
administrative functions. Services are generally cost plus 5%, but may increase
to cost plus 10% if the services extend beyond a one year period. The transition
period varies depending on the agreement but is generally one year. Although the
fees provided for in the agreements are intended to represent the fair market
value of these services, we cannot assure you that these fees necessarily
reflect the costs of obtaining the services from unrelated third parties or of
our providing these services internally. However, we believe that purchasing
these services from MRV provides an efficient means of obtaining these services
during the transition period. We must also negotiate new or revised agreements
with various third parties as a separate, stand-alone entity. We cannot assure
you that the terms we will be able to negotiate will be as favorable as those
that we enjoyed as part of MRV. In addition, as part of MRV, we benefited from
various economies of scale including shared global administrative functions,
facilities and volume purchase discounts. We expect our costs will increase as a
result of the loss or renegotiation of these arrangements, although the amount
of the cost increase is not determinable at this time.
33
<PAGE> 35
BASIS OF PRESENTATION
Our consolidated financial statements have been carved out from the
consolidated financial statements of MRV using the historical results of
operations and historical bases of the assets and liabilities of the MRV
businesses that our company comprises. The consolidated financial statements
also include allocations to us of certain MRV corporate assets, liabilities and
expenses, including centralized legal, accounting, employee benefits, real
estate, insurance services, information technology services, treasury and other
MRV corporate and infrastructure costs. The expense allocations have been
determined on bases that MRV and we considered to be a reasonable reflection of
the utilization of the services provided to us or the benefit received by us.
The expense allocation methods included relative sales, headcount, square
footage, transaction processing costs and adjusted operating expenses.
The financial information presented in this prospectus is not indicative of
our financial position, results of operations or cash flows in the future nor is
it necessarily indicative of what our financial position, results of operations
or cash flows would have been had we been a separate, stand-alone entity for the
periods presented. The consolidated financial statements described below give
effect to our 144,000-for-one stock split to our stockholder of record on July
25, 2000. The financial information presented in this prospectus does not
reflect the many significant changes that will occur in our funding and
operations as a result of our becoming a stand-alone entity, the offering and
the distribution.
RESULTS OF OPERATIONS
The following table sets forth selected consolidated historical and pro
forma financial data for the periods indicated, expressed as a percentage of net
sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------
PRO FORMA PRO FORMA
1997 1998 1999 1999 1999 2000 2000
---- ---- ---- ----------- ---- ---- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ 100% 100% 100% 100% 100% 100% 100%
Cost of sales.................... 62 63 66 74 65 68 73
--- --- --- ---- --- --- ---
Gross profit..................... 38 37 34 26 35 32 27
--- --- --- ---- --- --- ---
Operating costs and expenses
Selling, general and
administrative.............. 6 7 9 21 8 14 21
Research and development....... 10 13 13 20 14 15 20
Parent company allocations..... 2 2 1 1 2 1 1
Amortization of goodwill....... -- -- -- 84 -- 22 68
--- --- --- ---- --- --- ---
Total operating costs............ 18 22 23 125 24 52 109
--- --- --- ---- --- --- ---
Operating income (loss).......... 20 15 11 (100) 11 (20) (82)
--- --- --- ---- --- --- ---
Net income (loss)................ 12% 9% 6% (103)% 7% (25)% (86)%
=== === === ==== === === ===
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Net Sales. We generally recognize revenue upon shipment of our products.
Net sales for the six months ended June 30, 2000 increased 53%, to $43.6 million
from $28.5 million for the six months ended June 30, 1999. Our growth is a
result of the growth of the Internet and e-commerce and the corresponding
increased bandwidth requirements. Approximately $8.1 million of this increase
was due to the contribution of Fiber Optic Communications' net sales from the
period of April 25, 2000 through June 30, 2000. We also experienced growth and
increased acceptance in our transceiver business for the data networking market.
When we consolidate the operations of Optronics and Quantum, we expect to
realize continued
34
<PAGE> 36
growth and expansion in our strategic markets. Finally, we experienced a
significant improvement in customer diversification during the six months ended
June 30, 2000.
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
1999 2000
----- -----
<S> <C> <C>
Marconi Communications..................................... 40% 11%
Cisco Systems.............................................. 5 13
Other...................................................... 55 76
--- ---
Net sales................................................ 100% 100%
=== ===
</TABLE>
We rely on one-time purchase orders rather than long-term contracts with
both Cisco and Marconi, and, as a result, we cannot predict the size, timing or
terms of their incoming orders. We have experienced variations in the purchase
patterns of Marconi and Cisco in the past, and we may experience continued
variation in the future. Material reasons for historic variations in the
purchase patterns of these customers, particularly Marconi, have included
weather patterns that have delayed field installations of systems that
incorporate our products and delays by our customers in qualifying our products
that employ new components or features to assure compatibility with the
components of other suppliers that are integrated with our products into our
customers' systems.
Gross Profit. Gross profit is equal to our net sales less our cost of
sales. Our cost of sales includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method. Gross profit for the
six months ended June 30, 2000, increased 38%, to $13.8 million from $10.0
million for the six months ended June 30, 1999. Gross profit for the six months
ended June 30, 2000, prior to deferred compensation amortization expense of
$744,000, would have increased 46%, to $14.6 million. Our gross margins (defined
as gross profit as a percentage of net sales) are generally affected by price
changes over the life of the products and improved production efficiencies as a
result of increased utilization. The former effect will generally decrease gross
margins over the products' respective life cycles, whereas as the latter effect
typically increases gross margins. Prices for existing products are generally
expected to continue to decrease over their respective life cycles.
Our gross margin decreased to 32% for the six months ended June 30, 2000,
from 35% for the six months ended June 30, 1999. Gross margin would have
decreased to 33% for the six months ended June 30, 2000, prior to deferred
compensation amortization expense of $744,000. The decrease in margin was
attributed primarily to increased sales to lower margin customers. While our
customer diversification improved as a percentage of net sales, absolute dollars
shipped to lower margin customers increased for the six months ended June 30,
2000. Our lower margin customers typically operate in highly competitive markets
where price of our products is a key factor. Although we sacrifice margins to
these customers, our volumes are greater than the volumes achieved with higher
margin customers. As we seek to continue to diversify our customer base, we plan
to target markets with improved margins and less competitive end-markets.
Historically, Fiber Optic Communications has realized lower margins than we
have, due to an overall lower margin market for passive components. For example,
the gross margin percent for Fiber Optic Communications was 26.7% for the six
months ended June 30, 2000. In the short term, we expect margins to remain
constant or decline slightly due to the integration of the acquired companies
with historically lower margins. In the middle to long term, we expect margins
to improve due to increased operating efficiencies associated with capacity
utilization in Taiwan and China, diversification of sales to higher margin
customers, and a favorable shift towards a higher margin customer base.
Operating Costs and Expenses. Operating costs and expenses generally
consist of selling, general and administrative, research and development costs,
costs associated with acquisitions, and other operating related charges.
Operating costs and expenses, increased to 52% of net sales, or $22.7 million,
for the six months ended June 30, 2000, from 24% of net sales, or $6.8 million,
for the six months ended June 30, 1999. Operating costs and expenses, prior to
deferred compensation amortization expense of $2.2 million, would have increased
to 47% of net sales, or $20.5 million, for the six months ended June 30, 2000.
Operating costs and expenses, as a percentage of net sales, are higher for the
first six months ended
35
<PAGE> 37
June 30, 2000 than previous levels due to the amortization of goodwill and
deferred stock compensation, the inclusion of Fiber Optic Communications,
greater focus on selling and marketing efforts and an increase in spending on
research and development. Fiber Optic Communications accounted for $1.6 million
of operating costs and expenses for the six months ended June 30, 2000.
Selling, general and administrative expenses for the six months ended June
30, 2000, increased to 14% of net sales, or $6.2 million, from 8% of net sales,
or $2.4 million, for the six months ended June 30, 1999. Selling, general and
administrative expenses for the six months ended June 30, 2000, prior to
deferred stock compensation amortization expense of $1.1 million, would have
increased to 12% of net sales, or $5.1 million. Approximately $1.1 million of
the increase is due to the inclusion of Fiber Optic Communications. The balance
of the increase in expenditures was due primarily to the overall growth of our
business. In response to the growth of our markets, we expanded our selling
efforts and established new sales offices in Asia.
Research and development expenses, decreased to 15% of net sales, or $6.6
million, during the six months ended June 30, 2000, from 14% of net sales, or
$4.0 million, for the six months ended June 30, 1999. Research and development
expenses, prior to deferred stock compensation amortization expense of $1.2
million, would have decreased to 12% of net sales, or $5.4 million, during the
six months ended June 30, 2000. Research and development expenses, as a
percentage of net sales, decreased primarily due to the addition of FOCI in the
current period, which has realized a significant increase in shipments during
the six months ended June 30, 2000. During the six months ended June 30, 2000 we
began development of our next generation products for applications such as
fiber-to-the-home and fiber-to-the-curb. Fiber-to-the-home and fiber-to-the-curb
are industry terms referring to the deployment of fiber optic cable for
residential access to communications networks. Research and development
expenditures also included additional development of our duplexers, triplexers
and high-speed transceivers. We continue to invest heavily in areas targeted at
broadening our customer base, product lines and end-product applications.
During the six months ended June 30, 2000, we incurred amortization of
goodwill and deferred stock compensation of $9.6 million and $3.0 million,
relating to the acquisition of Fiber Optic Communications. We expect to incur
amortization of goodwill from the Fiber Optic Communications acquisition of
approximately $13.1 million each quarter through 2005. We expect to report
additional deferred stock compensation totaling approximately $11.1 million
through 2004 for Fiber Optic Communications. The acquisitions of Optronics and
Quantum will provide additional amortization of goodwill each quarter of
approximately $6.4 million. Deferred stock compensation charges for Optronics
and Quantum will generate approximately $16.1 million in total expense through
2004. Deferred stock compensation is amortized over the related expected
employee service period, in this case four years.
Provision for Income Taxes. The effective tax rate for the six months ended
June 30, 2000 was (20)%. The rate was negatively impacted by the amortization of
goodwill and deferred stock compensation which are not tax deductible. The
effective tax rate for the first six months of 1999 remained constant at 40%.
36
<PAGE> 38
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Net Sales. Net sales for 1999 increased 69%, to $65.3 million from $38.6
million in 1998. Net sales for 1998 were 10% higher than the $35.1 million for
1997. The growth in net sales in 1999 and 1998 was primarily driven by increased
shipments of our duplexer and triplexer components to Marconi Communications. In
1999, we also experienced greater acceptance and demand for our transceivers,
which are designed for the data communications equipment market. A summary of
net sales is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Marconi Communications...................................... 15% 18% 40%
Cisco Systems............................................... 4 5 6
Other....................................................... 81 77 54
--- --- ---
Net sales................................................. 100% 100% 100%
=== === ===
</TABLE>
Gross Profit. Gross profit for 1999 increased 55%, to $22.2 million from
$14.3 million in 1998. Gross profit for 1998, increased 7% over the gross profit
of $13.4 million for 1997. The gross margins for 1999, 1998 and 1997 were 34%,
37% and 38%, respectively. The decline in gross margin was attributed to higher
sales volume of lower margin products to Marconi Communications. We expect to
realize increased gross margins in the future as we further diversify our
customers, product offerings and realize operating efficiencies.
Operating Costs and Expenses. Operating costs and expenses for 1999
increased 81% to $15.3 million from $8.4 million in 1998. For 1998, operating
costs and expenses increased 31% over $6.4 million for 1997.
Selling, general and administrative expenses grew 115% in 1999 over 1998,
and 26% in 1998 over 1997. These increases reflect the investment we made in
hiring additional sales and administrative personnel to support a larger sales
volume. Selling, general and administrative expenses have increased rapidly in
1999 in order to facilitate the current and future expansion in our business.
In 1999, 1998, and 1997, we spent approximately $8.7 million, $5.0 million
and $3.5 million, respectively, on research and development. The consistent
increase reflects an increase in the number of personnel and an increase in
engineering expense related to design, development and testing of our
transceiver, duplexer and triplexer product lines. We expect absolute dollars
spent on research and development to continue to increase as we invest in key
technical personnel, expand our current product lines and develop new product
offerings.
Provision for Income Taxes. The provision for income taxes was $2.8 million
in 1999, compared to $2.3 million in 1998 and $2.8 million in 1997. The
effective tax rate for 1999, 1998, and 1997 remained constant at 40%. Our
effective tax rates in future years may fluctuate due to amortization of
goodwill and deferred stock compensation partially offset by favorable tax
programs available in certain foreign tax jurisdictions where we currently have
operating facilities.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our unaudited consolidated statements of
income data for each of the six quarterly periods ended June 30, 2000, as well
as that data expressed as a percentage of our net sales for the quarters
presented. You should read this information in conjunction with our consolidated
financial statements and related notes appearing elsewhere in this prospectus.
We have prepared this unaudited consolidated information on a basis consistent
with our audited consolidated financial statements, and in the opinion of our
management, it reflects all normal recurring adjustments that we consider
necessary for
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<PAGE> 39
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future results
from the operating results for any quarter.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales...................... $ 12,342 $ 16,127 $ 18,215 $ 18,580 $ 14,899 $ 28,688
Cost of sales(1)............... 7,911 10,595 12,040 12,532 9,654 20,088
-------- -------- -------- -------- -------- --------
Gross profit................... 4,431 5,532 6,175 6,048 5,245 8,600
-------- -------- -------- -------- -------- --------
Operating costs and expenses
Selling, general and
administrative(1)......... 1,111 1,262 1,440 1,862 1,985 4,230
Research and
development(1)............ 1,889 2,121 2,363 2,320 2,449 4,109
Parent company allocations... 221 221 221 222 193 195
Amortization of goodwill..... -- -- -- -- -- 9,580
-------- -------- -------- -------- -------- --------
Total operating costs.......... 3,221 3,604 4,024 4,404 4,627 18,114
-------- -------- -------- -------- -------- --------
Operating income............... 1,210 1,928 2,151 1,644 618 (9,514)
Other income (expense),
net....................... 3 7 5 (9) -- 103
-------- -------- -------- -------- -------- --------
Income before taxes............ 1,213 1,935 2,156 1,635 618 (9,411)
-------- -------- -------- -------- -------- --------
Provision for income taxes... 483 771 859 651 246 1,504
Minority interest............ -- -- -- -- 190 128
-------- -------- -------- -------- -------- --------
Net income..................... $ 730 $ 1,164 $ 1,297 $ 984 $ 182 $(11,043)
======== ======== ======== ======== ======== ========
Basic and diluted earnings per
share........................ $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.00 $ (0.08)
Basic and diluted weighted
average shares............... 144,000 144,000 144,000 144,000 144,000 144,000
======== ======== ======== ======== ======== ========
</TABLE>
---------------
(1) Includes amounts relating to deferred stock compensation of $744,000, $1.1
million and $1.2 million presented in "cost of sales", "selling, general and
administrative" and "research and development", respectively, for the three
months ended June 30, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
AS A PERCENTAGE OF NET SALES (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales.......................... 100% 100% 100% 100% 100% 100%
Cost of sales...................... 64 66 66 67 65 70
--- --- --- --- --- ---
Gross profit....................... 36 34 34 33 35 30
--- --- --- --- --- ---
Operating costs and expenses:
Selling, general and
administrative................ 9 8 8 10 13 15
Research and development......... 15 13 13 12 16 14
Parent company allocations....... 2 1 1 1 1 1
Amortization of goodwill......... -- -- -- -- -- 33
--- --- --- --- --- ---
Total operating costs.............. 26 22 22 24 31 63
--- --- --- --- --- ---
Operating income (loss)............ 10 12 12 9 4 (33)
Other income (expense), net...... -- -- -- -- -- --
--- --- --- --- --- ---
Income (loss) before taxes......... 10 12 12 9 4 (33)
--- --- --- --- --- ---
Provision for income taxes....... 4 5 5 4 2 5
Minority interest................ -- -- -- -- 1 --
--- --- --- --- --- ---
Net income (loss).................. 6% 7% 7% 5% 1% (38)%
=== === === === === ===
</TABLE>
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<PAGE> 40
Our net sales increased quarter over quarter in five of the six quarters
ended June 30, 2000. We experienced delays in shipments of product to Marconi
Communications in the quarter ended March 31, 2000 due to temporary delays in
orders, which have since been received. The increase in net sales in the quarter
ended June 30, 2000 reflects the impact of our acquisition of FOCI, increased
shipments to Marconi Communications and Cisco Systems and more favorable market
conditions in the overall fiber optic component industry.
Gross profit as a percentage of net sales, ranged from 30% to 36% during
the six quarters ended June 30, 2000. The downward trend of our gross margin
reflects the increase in business with higher volume customers, such as Marconi
Communications. The increase in gross margin in the quarter ended March 31, 2000
reflects the delay of shipments to Marconi Communications. In the short term, we
expect margins to remain constant or decline slightly due to the integration of
the acquired companies with historically lower margins. In the mid to long term,
we expect margins to improve due to increased operating efficiencies associated
with capacity utilization in Taiwan and People's Republic of China,
diversification of sales to higher margin customers, and a favorable shift
towards a higher margin customer base.
Operating expenses increased each of the last six quarters primarily due to
increased staffing levels and other expenditures in research and development and
sales and marketing. During the quarter ended June 30, 2000, we incurred
amortization of goodwill and deferred stock compensation relating to the
acquisition of Fiber Optic Communications in April 2000. We expect costs in
these areas to continue to increase. Prior to the amortization of goodwill and
deferred stock compensation, operating costs and expenses increased in the later
quarters due to increasing selling efforts and establishment of sales offices
throughout Asia. Furthermore, we focused more attention to marketing of our
current products. We expect to increase expenditures on selling, marketing and
establishing our brand name.
LIQUIDITY AND CAPITAL RESOURCES
Historically, MRV has managed cash on a centralized basis. Cash receipts
associated with our business have been transferred to MRV on a daily basis, and
MRV has provided funds to cover our disbursements. Accordingly, we have reported
no cash or cash equivalents at December 31, 1998. Cash and cash equivalents at
December 31, 1999 and June 30, 2000 represent positive cash flows generated from
our wholly-owned subsidiaries.
On June 30, 2000, we had working capital of $23.6 million, compared with
$12.6 million at December 31, 1999. The ratio of current assets to current
liabilities at June 30, 2000 was 1.7 to 1, compared to 2.4 to 1 at December 31,
1999. This increase was primarily due to the inclusion of the operations of
Fiber Optic Communications at June 30, 2000.
Cash provided by operating activities was $989,000 for the six months ended
June 30, 2000, compared to $2.8 million for the six months ended June 30, 1999.
Net operating cash flows for the six months ended June 30, 2000 were favorably
impacted by a decrease in accounts receivable of $1.2 million and an increase in
accounts payable of $5.0 million. The decrease in accounts receivable was due to
increased collection efforts and accounts payable increased due to Luminent's
implementation of cash management techniques. Results of operations for the
first six months of 2000 were reduced by non-cash charges for the amortization
of goodwill of $9.6 million and deferred stock compensation of $3.0 million.
These items were partially offset by a $3.3 million increase in inventories and
decreased accrued payroll and related expenses of $1.5 million.
Cash provided by operating activities was $748,000 in 1999, $1.8 million in
1998 and $8.0 million in 1997. We experienced a decrease in operating cash flows
from 1999 over 1998 despite an increase in net income year over year, due
primarily to net accounts receivable of $10.5 million in 1999 compared to $6.4
million in 1998. The increase in accounts receivable is due primarily to
increased sales. This increase in accounts receivable was partially offset by an
increase in accounts payable. We also experienced a decrease in operating cash
flows from 1998 over 1997 due primarily to a decrease in net income of
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<PAGE> 41
$674,000, an increase in inventories of $2.2 million and a decrease in income
tax liabilities of $915,000. Inventory levels increased in anticipation of
increased sales.
Capital expenditures for property and equipment represent all of our cash
used in investing activities in 1999, 1998 and 1997 and each of the six months
ended June 30, 2000 and 1999. The capital expenditures reflect our investment in
expanding production and research and development capacity.
We believe that the net proceeds from this offering, along with 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 have ordered additional capital equipment amounting to
approximately $2.5 million for our facilities in Taiwan and additional purchases
of such capital equipment are anticipated as we continue to build our
manufacturing capabilities and enable continued expansion of our research and
development programs. Our future capital requirements will depend on many
factors, including 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.
FOREIGN CURRENCY
We operate on an international basis. A majority of our revenues and
expenses are incurred in U.S. dollars. For the six months ended June 30, 2000,
approximately 21% and 7% of our revenues and expenses, respectively, were
incurred in currencies other than the U.S. dollar. The New Taiwan dollar is the
most significant of such currencies.
The New Taiwan dollar has been relatively stable in relation to the U.S.
dollar in recent years, and accordingly, we have not experienced any significant
fluctuations in operating results due to exchange rate fluctuations in the New
Taiwan dollar in relation to the U.S. dollar.
Fluctuations in the value of the currencies in which 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 can not predict the effect of
exchange rate fluctuations upon future operating results. However, because we
have expenses as well as 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.
INFLATION
We believe that our revenue and results of operations have not been
significantly impacted by inflation during the last three years.
RECENT ACCOUNTING PRONOUNCEMENT
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. Luminent will adopt the statement in
January 2001 and does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," as
amended. SAB 101 summarizes certain of the Securities and Exchange Commission's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. We have applied the provisions of SAB 101
in the consolidated financial statements. The adoption of SAB 101 did not have a
material impact on our financial condition or results of operations.
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<PAGE> 42
BUSINESS
OVERVIEW
We design, manufacture and sell a comprehensive line of fiber optic
components that enable communications equipment manufacturers to provide optical
networking equipment for the rapidly growing metropolitan and access segments of
communications networks. Our products are designed to meet the increasing
bandwidth requirements between long-haul telecommunication networks and end
users. We specialize in singlemode fiber optic components and subsystems for
high-capacity data transmission for long-reach applications in the metropolitan
and access markets. We provide a broad product line of high performance fiber
optic components, the technical depth to offer next generation optical
components, a quick response to new requirements and volume manufacturing for
these components. Our direct sales customers include communications equipment
manufacturers, such as Cisco Systems, General Instrument, Marconi Communications
and Pandacom which were our largest customers by revenues during the six months
ended June 30, 2000. In addition, we sell our products to customers through our
distributors. The three largest customers by revenues for our products sold
through our distributors were Cabletron Systems, Extreme Networks and Foundry
Networks during the six months ended June 30, 2000.
INDUSTRY BACKGROUND
Increased Demand for Bandwidth
The communications network infrastructure has experienced significant
growth and change during the last decade. Exponential growth in Internet access,
combined with the adoption of other data intensive applications have placed
capacity constraints on communication networks originally developed for voice
traffic. The increase in traffic has driven service providers to invest
significant resources in new network infrastructure, causing communication
equipment vendors to rapidly upgrade equipment to provide greater network
bandwidth and increased transmission speeds. According to Ryan, Hankin & Kent, a
leading market research and consulting firm, Internet and other data traffic
will increase over 4000% between 1999 and 2003.
Deployment of Optical Networks
In order to meet the demand for high capacity or high-speed data
transmission, service providers are deploying fiber optic networks. Fiber optic
technology involves the transmission of data in optical fiber via pulses of
light and provides higher quality and greater bandwidth over longer distances
than traditional copper wire. The proliferation of fiber optic networks has
generated significant demand for singlemode fiber optic components and
subsystems. Singlemode fiber optic components are split into two broad
categories: active components and passive components. Active components are the
core technology for optical networks and require some input of power to
generate, boost or transform optical signals. Passive components are used to
direct, split and merge optical signals without the use of electricity and are
necessary for wavelength division multiplexing, or WDM, systems.
The Multimedia Telecommunications Association, a market research firm,
estimates that communications service providers worldwide invested approximately
$33 billion in network infrastructure in 1999. Despite the aggressive deployment
of this infrastructure, data traffic growth continues to strain available
capacity. Given the extreme cost and time involved in laying additional fiber to
support this infrastructure growth, service providers seek component solutions
that maximize utilization of the installed fiber optic networks rather than
replacing or adding to them. For example, the application of WDM in
communications equipment enables service providers to greatly increase capacity
of their existing optical networks in a cost-effective manner. WDM is used to
separate or combine light of different wavelengths or colors, which increases
capacity by enabling simultaneous transmission of data along numerous
wavelengths on the same fiber optic cable.
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<PAGE> 43
The Existing Network Infrastructure.
Optical fiber is currently being deployed across the three major segments
of communications networks: long-haul, metropolitan and access.
Long-haul networks. Long-haul networks connect the communications networks
of metropolitan areas around the world and transport large amounts of data and
voice traffic. To solve congestion problems, service providers have invested
significant resources in the deployment of optical infrastructure including the
use of dense WDM. As a result, current long-haul networks provide very high
bandwidth for transmitting data over very long distances. The build-out of
long-haul networks represents an important step in improving network
infrastructure to support increased demand for new services and greater traffic
volumes.
Metropolitan networks. Metropolitan networks connect long-haul networks
and access networks. Due to the increase in data traffic and the demand for
enhanced services, the existing metropolitan network infrastructure has become a
bottleneck for the provision of communication services to businesses.
Subsequently, service providers have begun to invest in infrastructure to help
reduce capacity constraints in this portion of the network.
Access networks. Access networks include business and residential
networks. Business access networks connect metropolitan networks and businesses.
Traditional business access networks use existing copper based solutions, which
are slow compared to high-speed networks commonly used within businesses.
Established and new service providers are deploying new technologies in order to
provide high bandwidth connectivity to the business user.
Residential access networks provide connectivity between the metropolitan
network and the home. Currently, multiple services such as cable television,
satellite, telephony and high-speed data lines are being offered to home users
based on multiple copper solutions. As high data rates and new services become
widely available to the home user, copper solutions will become increasingly
insufficient to meet the consumer's demands. Service providers are beginning to
deploy fiber to the home and fiber to the curb enabling the residential user to
obtain a wide range of current and future services.
Need for Singlemode Optical Components
We believe the widespread introduction of optical networks servicing the
metropolitan and access markets will generate significant demand for singlemode
fiber optic components. Singlemode components are coupled to singlemode optical
fiber and have superior transmission characteristics in high capacity, longer
distance applications as compared to multimode fiber. Singlemode fiber has
physically pure pulses of light which do not overlap with each other as quickly
as the pulses of light on multimode fiber. Pulses of light that overlap result
in the information carried by the fiber being lost. As data transmission speeds
have increased, singlemode fiber has become necessary for even relatively short
transmission distances due to its superior performance. As a result, singlemode
fiber has progressed from being the fiber of choice in the long-haul market to
being accepted as the preferred fiber for most high-speed transmission
applications. As speeds and distances continue to increase for the metropolitan
and access markets, we believe the need for high performance singlemode fiber
optic components will continue to grow.
The increasing use of WDM technology in metropolitan and access markets is
also driving demand for singlemode fiber optic components. WDM systems require
extensive use of active and passive fiber optic components to enable
communication equipment manufacturers to increase system capacity by adding
additional light signals on a single optical fiber. The significant growth in
the use of WDM systems, combined with the increased use of singlemode fiber in
the metropolitan and access markets is driving the demand for singlemode fiber
optic components.
Market Opportunity
In order to deliver singlemode active and passive components to
communications equipment manufacturers, fiber optic component vendors must
address a number of challenges, including complex
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<PAGE> 44
manufacturing and packaging processes and improved delivery times. Component
vendors must meet the following requirements in order to supply next generation
technologies to the metropolitan and access portions of the network:
High performance, cost-effective components. Communications equipment
manufacturers require singlemode fiber optic components that are reliable and
cost-effective and operate with minimal power requirements over a wide range of
temperatures. Service providers need to upgrade their networks rapidly in a
cost-effective manner. Equipment manufacturers need to procure fiber optic
components in the quantities they require in the shortest possible time in order
to satisfy this demand.
Broad product offerings. As optical communications networks continue to
expand, and systems grow in size and complexity, communications equipment
manufacturers will seek to work with fewer vendors that offer more complete
product lines. Vendors that provide both active and passive components are able
to introduce integrated products more rapidly. Integrated components are
typically smaller in size, consume less power and are more reliable and accurate
than discrete products that are linked together.
Innovation and flexibility. The rapidly changing communications market
demands that component manufacturers continue to enhance product performance.
Component manufacturers must provide innovative and flexible solutions to meet
the evolving needs of next generation networks.
Strong manufacturing capabilities. The widespread deployment of singlemode
optical fiber in metropolitan and access networks, particularly in
fiber-to-the-curb and fiber-to-the-home applications, requires singlemode
components that can be manufactured in higher volumes at lower unit costs. The
processes involved in coupling singlemode fiber to components are highly complex
due to the small core size of the fiber. The design complexity and production
techniques of most singlemode components have created capacity constraints.
As a result of these challenges, a significant opportunity exists for
component vendors that are able to continually innovate and deliver next
generation products.
THE LUMINENT SOLUTION
We design, manufacture and sell a comprehensive line of singlemode fiber
optic components that enable communications equipment manufacturers to build
advanced fiber optic communications systems for the rapidly growing metropolitan
and access markets. Our approach combines our extensive research and development
expertise along with design, engineering and manufacturing capabilities to
deliver a wide array of high quality, cost-effective and reliable, active and
passive components. We believe our ability to integrate active and passive
technologies, our years of expertise in fiber-to-the-curb and fiber-to-the-home
components, our ability to provide innovative customer solutions, our strong
relationships with key communication equipment manufactures and our ability to
scale manufacturing to meet high volume customer requirements provide us with
significant competitive advantages. We believe our products provide the
following key benefits to our customers:
High performance, cost-effective components. Our active and passive
products are designed to maximize both distance and bandwidth over singlemode
fiber while providing efficient and reliable transmission. We offer high
performance and reliable components that can be tailored to meet a wide range of
customer specifications. Our fiber optic components incorporate proprietary
technology that delivers high performance under demanding environmental
conditions. We believe our high performance and reliable singlemode fiber optic
components have enabled us to advance our position in the long-reach fiber optic
market.
Broad product offerings. We offer a broad product line of active and
passive components in a variety of packaging configurations. Our active
components include custom wavelength distributed feedback lasers, high
temperature lasers, vertical cavity surface emitting lasers, edge emitting light
emitting diodes or LEDs, surface emitting LEDs and detectors with electrical
amplifiers. Our passive components include WDM add/drop components, thin film
filters, high-speed external modulators, fiber amplifiers, fused biconical
couplers, fused biconical WDM couplers and WDM multiplexers, circulators,
isolators and
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<PAGE> 45
collimators. These broad product offerings allow us to satisfy a wide array of
customer requirements in metropolitan and access networks. In addition, we offer
a number of products integrating active and passive components and plan to
expand these offerings.
Innovation and flexibility. Our 11 years of experience in device
fabrication, packaging and integration provides us with the knowledge and
capability to meet the changing needs of our customers. Our intellectual
property and technical expertise enables us to innovate next generation products
for our customers. We were an early developer of single fiber WDM optical
component technology for fiber-to-the-curb and fiber-to-the-home applications.
These components currently provide next generation high-speed services to
hundreds of thousands of homes. In addition, we recently introduced coarse WDM,
components that enable communication equipment manufacturers to implement WDM
inside their equipment at a fraction of the cost of dense WDM. Coarse WDM
utilizes our expertise in laser fabrication, passive component fabrication,
packaging and electronic design. As a result of our manufacturing capabilities
in all these areas, we can significantly reduce our time to market for
innovative product designs. We have close working relationships with many key
customers, allowing us to be involved in the initial stages of new designs. This
exposure provides us with a better understanding of customer demands and helps
focus our development effort towards their evolving needs.
Strong manufacturing capabilities. Our ability to manufacture a broad
range of active and passive components is key to our success and enables us to
respond to customers' requirements with significantly reduced lead times. In
addition, our advanced packaging process enables us to manufacture high volume,
cost-effective, singlemode components. We believe that our advanced wafer
fabrication facilities, our thin film deposition lab, our wave-guide fabrication
facilities and our proprietary packaging technology provide us with a
significant competitive advantage for manufacturing fiber optic components.
THE LUMINENT STRATEGY
Our objective is to become the leading supplier of singlemode fiber optic
components for the metropolitan and access networks. We intend to expand our
business by providing high quality customer service, maintaining short
production lead times, delivering high product volumes and providing a wide
selection of active, passive and integrated components. As key elements of our
strategy we intend to:
Leverage core competencies across multiple, high-growth markets. We intend
to use our core competencies in high-speed electronics, passive and active
component design, packaging and manufacturing in order to expand market share
and offer new components adding functionality and performance. To achieve this,
we must work closely with our customers' research and development teams to
understand emerging markets and technologies. We are focused on developing
components for high speed and long-reach data transmission, WDM subsystems and
residential access products. We believe our ability to design and develop
singlemode fiber optic components for high-speed, long distance solutions is a
key competitive advantage.
Maintain technology expertise in long-reach fiber optic transmission. We
believe that demand for long-distance transmission in metropolitan and access
networks is growing. Accordingly, we intend to leverage our design and packaging
expertise in long-reach singlemode fiber optic components. We intend to use our
strengths in high-speed electronics, semiconductor lasers, modulators,
receivers, fiber components, micro-optic components and optical wave-guide
components in order to capitalize on the growing demand for longer-reach, higher
capacity singlemode fiber transmission. We intend to maintain our technological
expertise through continual enhancement of our existing products and the
development of new products permitting higher speed transmission of data, with
greater capacity, over longer distances.
Leverage manufacturing expertise. We intend to enhance our manufacturing
and packaging expertise, expand our manufacturing capabilities and improve
process efficiencies by adding and refining automated processes, quality systems
and capacity. We believe that our manufacturing expertise and ability to expand
capacity will provide us with competitive advantages, including faster time to
market, better cost control and improved customer satisfaction.
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<PAGE> 46
Enhance and leverage strategic relationships. We believe successful
deployment of singlemode fiber optic components necessitates close working
relationships with communication equipment manufacturers and service providers.
We believe that the strong customer relationships we have established since our
inception are key elements for our long-term success. We will continue to work
closely with our customers to better understand their future needs and provide
solutions tailored to those needs.
Expand sales and marketing effort. We currently have an extensive network
of direct sales and distributors worldwide. Selling sophisticated and
technologically advanced products requires prolonged interaction with customers
and a focused effort by the sales and marketing group during the qualification
process. We intend to expand both our direct sales force and our distribution
network to provide better service for our existing customers and target new
customers effectively. We also plan to enhance the Luminent brand throughout the
communications industry by engaging in a range of marketing programs.
Pursue strategic acquisitions to complement product offerings. We intend
to expand our products and technology portfolio through selected acquisitions.
These acquisitions may include complementary products, technologies and
businesses that further enhance our technology expertise or product breadth. We
also believe that establishing relationships with companies that provide
complementary products will enable us to bring greater value to our customers
and extend our lead over existing and potential competitors.
PRODUCTS
We provide an extensive offering of active and passive singlemode fiber
optic components that support a wide range of requirements for the metropolitan
and access networks. Prior to the acquisition of Fiber Optic Communications on
April 24, 2000, our business consisted entirely of active fiber optic
components. During the six months ended June 30, 2000, active components
accounted for $35.5 million, or 81% of our net sales and passive components
accounted for $8.1 million or 19% of our net sales. We are currently shipping a
variety of active and passive fiber optic components.
ACTIVE COMPONENTS
Active components are the core technology for optical networks and require
electrical power to generate, boost or transform optical signals.
Mixed signal, single fiber components. These components are capable of
transmitting bi-directional digital and analog information over a single fiber.
Our products in this category are called duplexers and triplexers. A duplexer
transmits and receives light simultaneously and independently. A triplexer is a
component that both transmits and receives at one wavelength of light, while
also receiving a second wavelength of light. These components offer high
performance in many critical parameters, including laser power, linearity,
receiver responsivity, receiver frequency response and cross talk between the
laser and receiver. These components are used to provide cable television,
satellite distribution, data services and telephony, all over a single fiber for
residential access.
Transceivers. A transceiver, the most common fiber-optic data link, has
both a transmitter and receiver built into one unit. A transmitter converts
electrical signals into optical signals and launches them into the fiber. A
receiver receives the optical signal, converts it back to an electrical signal
and amplifies it.
We offer a wide variety of transceivers designed for a number of
applications. This broad product line enables us to meet a wide variety of
customer requirements for singlemode fiber-based transceivers. These
transceivers vary in package style, distance requirements, speed requirements
and protocols, including the most widely used protocols, asynchronous transfer
mode, Fiber Channel and Ethernet. We have packaged several of our transceivers
to have advantages over our standard components. For example, the small form
factor transceiver allows an equipment vendor to achieve twice the number of
fibers connected from the equipment; the pluggable transceiver can be removed
and inserted in an operational network, which makes it well suited for field
upgrades; and the single fiber transceiver provides transceiver functionality
over one fiber instead of two. We are also aggressively adding next generation
transceivers to this product line.
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<PAGE> 47
Due to high output power and high receiver sensitivity, our products
achieve long reach transmissions. Additional options include a wide-operating
temperature range, lower operating voltages for reduced power consumption and a
wide range of wavelengths. Applications for custom wavelength transceivers
include optical network monitoring and management coarse WDM.
Coarse WDM subsystems. Coarse WDM subsystems are a combination of active
and passive components that can be integrated into a communication equipment
vendor's product. These subsystems enable communications equipment manufacturers
to implement wavelength division multiplexing inside their equipment at a
fraction of the cost of dense WDM. Coarse WDM technology is more cost-effective
because it uses un-cooled transceivers that do not require costly and power
consuming thermoelectric coolers. We offer coarse WDM subsystems in multiple
versions for varying transmission speeds, including the highest speed Ethernet
connection currently in development.
LEDs for fiber optic communications. Our light emitting diodes, or LEDs,
are used as a light source for fiber optic transmission because they require
less expensive control circuitry as compared to laser diodes. We manufacture two
types of LEDs, surface emitting LEDs and edge emitting LEDs. Our surface
emitting LEDs are designed for use in low cost, high volume, high speed and
short-reach transceivers. In some singlemode fiber low speed applications
customers prefer to use edge emitting LEDs instead of laser diodes, as they are
easier to use. Our edge emitting LEDs provide high power performance for
singlemode fiber.
Laser diodes. Laser diodes convert electrical signals to optical signals
and are the most widely used light sources for optical communications systems.
Our cost-effective packaging technology currently supports high-speed laser
modulation for networks in our target market. Both cooled and un-cooled devices
can be configured with high suppression of reflection. Our extensive line of
different packaging allows us to provide flexible solutions for the customer's
applications.
We provide distributed feed back and Fabry-Perot lasers that operate at
standard wavelengths, as well as special wavelengths. Distributed feed back
lasers use a mirror that reflects one wavelength while Fabry-Perot lasers use
mirrors that reflect all wavelengths. Our high temperature lasers are stable
over a wide range of temperatures and can operate above 100 degrees Centigrade.
These un-cooled lasers are particularly suitable for use in transceivers where
heat dissipation is a concern and in uncontrolled environments, such as those
involved with fiber-to-the-curb.
Analog fiber optic links. Analog links, unlike digital links, do not use a
single, high-speed data stream. Instead, a typical analog link is made up of
multiple data streams. This, in turn, requires the laser and receiver to meet
more stringent performance criteria. Our analog technologies are used in cable
television, cellular, satellite and wireless local area networks. In addition,
our analog links are utilized throughout the cable television industry in both
the downstream and upstream transmissions.
Our analog fiber-optic links avoid the high losses associated with the
transport of radio frequency signals over coaxial cables. Our linear lasers and
high-speed receivers enable the components to be used in very stringent analog
applications. We also offer high levels of integration of our analog
sub-assemblies, which we believe results in greater overall value to our
customers.
Photo detectors and receivers. Photo detectors convert optical signals into
electrical signals. In addition to photo detectors we offer receivers that
include photo detectors with electrical amplifiers for greater functionality.
Our packaging technology allows us to improve performance and increase speeds
over standard products.
Electro-optic modulators. Lithium niobate electro-optic, modulators are
used to transfer information onto a light signal without the modifying
wavelength of the light. These modulators enable data to travel extended
transmission distances compared to a directly modulated laser. Electro-optic
modulators can be used to modulate the phase or amplitude of an optical signal
depending on the design of the device.
Vertical cavity surface emitting lasers. Vertical cavity surface emitting
lasers are one of our only products targeted for multimode applications.
Vertical cavity surface emitting lasers emit light
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<PAGE> 48
perpendicular to the semiconductor surface. Our devices have stable
fiber-coupled power, good high temperature characteristics and are designed for
use in short reach gigabit Ethernet transceivers. Vertical cavity surface
emitting lasers are ideal for applications involving short distances as they can
be coupled to the fiber through passive alignment techniques allowing for very
high volume, low cost manufacturing. Our vertical cavity surface emitting lasers
are carefully designed and processed to avoid signal degradation that can occur
when operated at high speeds.
PASSIVE COMPONENTS
Passive components are used to direct, split and merge optical signals
without the use of electricity. These components have become critical due to the
use of fiber amplifiers, passive networks and WDM technology.
Couplers. Couplers are used to combine and/or split optical signals. We
offer a wide variety of singlemode and multimode fused biconical couplers. A
fused biconical coupler is made when the cores of two fibers are fused together.
By precisely controlling the manufacturing process not only can different ratios
of power from each fiber be controlled, but also the coupler can act as a WDM
element by coupling light of one wavelength over one fiber and light of a
separate wavelength over the other fiber.
Couplers are one of the most common components of any optical network, WDM
system, optical amplifier, or optical switch. Our couplers provide low
reflection and low power loss and operate over a wide range of temperatures and
wavelengths. Our couplers are designed for robust operation under difficult
environmental conditions.
Isolators. Isolators allow transmission of optical signals in one direction
but block transmission in the other direction. Our high performance isolators
are used with fiber amplifiers and lasers to prevent reflections from entering
the device. Our isolators are highly reliable and feature high suppression of
reflection and low power loss over wide ranges of temperature and wavelength.
WDM thin film add/drop components. Thin film filters enable the
transmission of specific optical wavelengths and the reflection of others. These
filters are comprised of multiple layers of differing materials deposited in
vacuum chambers. Thin film filter add/drop components allow for the removal and
insertion of wavelengths in WDM systems with minimal power losses. These modules
are designed for building flexible solutions and for architectures where only a
few wavelengths are dropped at one location.
We offer a family of thin film based WDM modules for band splitting,
bi-directional multiplexing and demultiplexing, supervisory add/drop and band
add/drop applications. Our thin film filter products have important features,
including low power loss, uniform performance over a wavelength band and high
suppression of reflection.
Circulators. Optical circulators are used in wavelength management
applications to direct optical signals to the appropriate sections of the
system. These circulators enable new services such as adding or dropping
individual channels at defined points in the network. We offer fiber-coupled
circulators with wide bandwidth, high suppression of reflection, low
polarization sensitivity and low power loss characteristics.
Variable fiber optic attenuator. Attenuators reduce the amplitude of a signal
without distorting the waveform. A variable fiber optical attenuator is a
component used to equalize the power between different WDM channels before being
amplified by a fiber amplifier. In addition, attenuators can protect receivers
from excessively strong signals that might otherwise increase error rates.
Fiber gratings. A grating is a series of reflections over a length of fiber.
Several products can be made by tailoring the characteristic of the fiber
grating, including dense WDM wavelength separation, dispersion compensation and
wavelength locking. Our fiber grating technology allows us to support new system
designs based on the flexibility of fiber grating components.
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<PAGE> 49
Optical connectors and adapters. Optical connectors are used to couple light
either directly from a component or from another fiber. Adapters are the
components that facilitate the connection of any two connectors. The overall
performance and reliability of various fiber optic network systems depends upon
these components. These parts feature low power loss and low reflection over a
wide range of temperatures, wavelengths and mechanical stresses. We have
developed a wide range of both normal and hybrid adapters to meet most industry
requirements.
TECHNOLOGY
Our technical capabilities span several key areas. We believe our technical
depth can enable rapid development and deployment of new singlemode fiber optic
components and subsystems. The development and manufacturing of superior
singlemode fiber optic components requires expertise in the following technology
areas:
Device fabrication. Active components are necessary elements for every optical
communication link as electrical signals must be converted to optical signals in
an optical network. We operate two device fabrication facilities for the
production of active components. Device fabrication is an extremely complex
procedure that requires the use of multiple advanced processes. The key
technology for optimized laser performance is the growth of material where an
electrical signal is converted into an optical signal, which we perform with
metal organic chemical vapor deposition. Metal organic chemical vapor deposition
is the most advanced growth technology available and is capable of achieving
atomic level thickness control and exact composition control allowing for the
highest level of device performance. Our control of these difficult processes
enables us to manufacture lasers that operate effectively at extremely high
temperatures and lasers for WDM systems.
Thin film filter fabrication. Thin film, filter based add/drop components are
used in WDM systems and allow for the removal and insertion of a particular
wavelength while permitting other wavelengths to continue through the module.
Thin film filters are comprised of multiple layers of differing materials
deposited in a large vacuum chamber onto the surface of a glass like material.
Band pass filters for dense WDM and coarse WDM applications require over one
hundred layers of deposition with extremely tight tolerances. Manufacturing
these filters to the required degree of precision is extremely difficult for
tightly-spaced channels.
Our advanced thin film capabilities include 200 GHz dense WDM filters,
coarse WDM band pass filters and advanced antireflective coatings for a variety
of applications. Our thin film filter products have important features,
including low insertion loss, flat top band-pass, high suppression of reflection
and low polarization sensitivity. Our ability to manufacture filters with high
levels of performance is a direct result of substantial experience in process
development and equipment enhancement.
Optics. Micro-optics design is a critical element in order to achieve a
high degree of coupling between components and a singlemode fiber. Our expertise
in optical design has allowed us to provide cost-effective source lasers with
high output power. In addition, our passive component characteristics directly
benefit from the expertise we have in optics design. We utilize optics design
software, production experience and close relationships with optics suppliers to
achieve new product development. Our capability to manufacture individual
fundamental components allows us to maintain technological competitiveness in
the design of integrated components, such as distributed feed back lasers with
isolators, receivers with filters, coarse WDM transceiver modules and dense WDM
add/drop switching modules.
In addition to micro-optics, we have developed advanced fiber based
technology. The most common of the products developed from this technology are
couplers used to combine and split signals in an optical network. A fused
biconical coupler is made when the cores of two fibers are fused together. The
light coming in on one fiber is then split between the two fibers on the output
side. A WDM coupler either couples or splits the light of one wavelength on one
fiber with light of a separate wavelength on the other fiber. Our precise
control of the manufacturing process allows us to provide a wide range of WDM
and
48
<PAGE> 50
fixed ratio couplers. Our coupler manufacturing techniques allow us to meet
varying customer specifications while achieving both high volume manufacturing
and highly reliable components.
We have also developed advanced optical technologies based on the
wave-guide approach. The design and manufacturing of wave-guides in materials
such as silicon, lithium niobate and indium phosphide all require high degrees
of wave-guide modeling, layer growth/deposition and process control. Our
technology in the area has enabled us to produce electro-optic modulators and
lasers with high coupling efficiencies into singlemode fiber. We are currently
developing arrayed wave-guide gratings, and other components necessary for dense
WDM and integrated WDM technologies.
Packaging. For over 11 years, we have continued to develop packaging
techniques needed for high volume, cost-effective, singlemode fiber optic
component manufacturing. Our active components employ proprietary packaging
technology as well as automated laser-welding technology in order to achieve
extremely accurate sub-micron alignment. Sub-micron alignment is required for
coupling light out of a laser into singlemode fiber that has a diameter of 9
microns. Our passive components also employ proprietary packaging technology to
achieve the same degree of precision alignments. Our packaging techniques
provide coupling stability over the wide temperature range that is necessary to
meet even the most demanding applications.
The combination of our packaging technologies and our expertise in lasers,
filters and electronics has enabled us to design several highly integrated
modules. Examples of these products include small form factor transceivers,
single fiber modules and coarse WDM subsystems.
Electronic design. As data rates increase, circuit design becomes more
critical to the performance of our products. We have a team of digital design
engineers dedicated to electronic design and development for integrated
components such as transmitters, receivers and transceivers. We also have a team
of design engineers dedicated to analog product lines that include return path
transmitters and receivers, cellular/personal communications services band
transceivers and subsystems for a variety of outdoor applications.
INTELLECTUAL PROPERTY
We rely on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality agreements and licensing arrangements, to
establish and protect our proprietary rights. As of June 30, 2000 we owned five
issued patents in Taiwan and one issued patent in the U.S. relating to our
technologies.
These patents include:
- "Optical Isolator with low polarization mode dispersion" applying to our
family of isolators, which is valid in Taiwan until August 2008;
- "Reflective Parallel Fiber Optic Circulator" applying to our circulator
design and which is valid in Taiwan until March 2017;
- "Optical Circulator" applying to our circulator design and is valid in
the USA until August 2017 and Taiwan until March 2017;
- "Optical Fiber Polisher" applying to the polishing equipment we use
internally for manufacturing and is valid in Taiwan until October 2010;
- "Used on Solid State CCD Camera Optical Photometric Filter" apply to our
deposition science and is used on coatings on crystals and applies in
Taiwan until April 2009.
We have six additional patents pending, two in Taiwan and four in the U.S.
We also utilize unpatented proprietary know-how and trade secrets and employ
various methods to protect them. Luminent has no licenses which it believes are
material to its business.
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<PAGE> 51
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard, in early 1999,
we received a written notice from Rockwell Corporation in which Rockwell claimed
to have patent rights in certain technology related to metal organic chemical
vapor deposition processes. Rockwell requested that we review our processes in
light of one of Rockwell's issued patents. In the spring of 2000, we began to
review Rockwell's claim in detail and thereafter determined that the patent upon
which Rockwell based its claim expired in January 2000. This limits the scope of
Rockwell's claim to damages, if any, for matters arising prior to expiration of
the patent and MRV has indemnified us from such claims. See "Arrangements
between Luminent and MRV -- Indemnification and Insurance Matters Agreement." We
are presently seeking to determine the validity of Rockwell's patent, whether
the processes we have employed violated the patent, if valid, and the extent of
our usage of, and related revenues derived from, the process covered.
In October 1999, we received a written notice from Ortel Corporation, which
has since been acquired by Lucent Technologies, Inc., in which Ortel claimed to
have patent rights in certain technology related to our triplexer and duplexer
products. Ortel requested that we review our products in connection with one of
Ortel's issued patents. In August 2000, Lucent provided us the first detailed
information concerning the basis of Ortel's patent claim and is continuing to
provide follow-up information on the claim. We are currently evaluating the
information provided by Lucent and have scheduled a subsequent meeting with its
representatives in the fall of 2000 to discuss the claim. We are also evaluating
the validity of Ortel's patent. We are presently seeking to determine whether we
may have violated the patent and the extent of our usage of, and related
revenues derived from, technology covered by Ortel's patents.
Ortel's patent, and other patents of which we are presently unaware that
may relate to our products, may be determined to be valid, or some of our
products may ultimately be determined to infringe the Ortel patent, or these of
other companies. Ortel or other companies may pursue litigation with respect to
their or other claims. The results of any litigation are inherently uncertain.
In the event of an adverse result in any litigation with respect to intellectual
property rights relevant to our products that could arise in the future, we
could be required to obtain licenses to the infringing technology, to pay
substantial damages under applicable law, to cease the manufacture, use and sale
of infringing products or to expend significant resources to develop
non-infringing technology. Licenses may not be available from third parties,
including Ortel, either on commercially reasonable terms or at all. In addition,
litigation frequently involves substantial expenditures and can require
significant management attention, even if we ultimately prevail. Accordingly,
any infringement claim or litigation against us could significantly harm our
business, operating results and financial condition.
RESEARCH AND DEVELOPMENT
We believe that in order to maintain our technological competitiveness, we
must enhance our existing products and continue to develop new products. Our
research and development expenses for 1998 and 1999 were approximately $5.0
million and $8.7 million, respectively and $5.4 million for the six months ended
June 30, 2000. At June 30, 2000, we had 60 employees engaged in research and
development, including 38 engineers with advanced degrees, 13 of whom are PhDs.
We continually recruit highly qualified scientists and engineers in the
industry and have established a work environment that fosters creativity and
rapid pursuit of technology. Our research and development team stays current
with new technologies in order to develop products for emerging market
opportunities. We also continually assess the potential needs and requirements
of our customers. Our research and development team designs products based on
the following principles: reliability, manufacturability and cost effectiveness.
We own, or are applying for, 12 U.S. and foreign patents on making dielectric
filters, isolators, circulators, couplers, arrayed wave-guide gratings and long
reach transceivers.
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CUSTOMERS
Our customers include major communications equipment manufacturers in the
U.S. and international markets, which incorporate our products into their
equipment that they in turn sell to network service providers. The following
table sets forth those of our customers which accounted for over $500,000 of our
net sales during the six months ended June 30, 2000.
Alcatel(1)(4)
Amphenol Corporation(2)
Appletec Ltd.(2)(3)
Baycom
Cabletron Systems, Inc.(1)(4)
Canoga Perkins Corporation
Cisco Systems, Inc.(4)
EXFO Electro-Optical Engineering Inc.
Extreme Networks, Inc.(1)
FONS Corp.
Foundry Networks, Inc.(1)
General Instruments Corp.
Hung Chong Co.
IMC Networks Corp.
International Fiber Systems, Inc.
JDS Uniphase Corp.(2)
JP Optoelectronics(3)
Lucent Taiwan(2)
Marconi Communications
NBase(5)
Noyes Fiber Systems
Pandacom
Preston Engineering Co.(2)
RAD
Taiwan Telephone Co.(2)
Unique Technologies(3)
---------------
(1) Sales to this customer include both direct sales and sales through our
distributors.
(2) This customer has been a customer of Fiber Optic Communications for the six
months ended June 30, 2000, but we have experience with this customer only
since our acquisition of Fiber Optic Communications in April 2000.
(3) This customer is a distributor that resells our products to many of its
customers.
(4) Combines sales made to contract manufacturers that incorporate our
components into products manufactured for this customer and directly to the
customers.
(5) This customer refers to divisions and subsidiaries of MRV, our parent, which
conduct the data networking equipment business of MRV. See "Related Party
Transactions."
The following table provides information concerning our only customers
which accounted for 10% or more of net sales during the years ended December 31,
1998 or 1999, or the six months ended June 30, 2000:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
------------ JUNE 30,
CUSTOMER 1998 1999 2000
-------- ---- ---- ----------------
<S> <C> <C> <C>
Marconi Communications................................ 18% 40% 11%
Cisco Systems......................................... 5 6 13
</TABLE>
We have no long-term contracts with our customers and sales are typically
made pursuant to individual purchase orders, often with extremely short lead
times. A number of our current customers were acquired through the acquisitions
of Fiber Optic Communications, Optronics and Quantum, and we have only a limited
history with them as customers.
SALES, MARKETING AND TECHNICAL SUPPORT
We market our products worldwide through a direct sales force as well as
through distributors and manufacturers' representatives. Our sales force
maintains close relationships with decision-makers at most of our key customers.
The direct sales force also manages the relationship of our distributors and
manufacturers' representatives. Our sales people have strong technical
backgrounds, typically with at least a B.S. or the equivalent in engineering.
Our sales offices are located in Chatsworth, San Francisco and San Jose,
California; Austin, Texas; Sandown, New Hampshire; Raleigh, North Carolina, and
Nagold, Germany.
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Our main distributor in North America is Unique Technologies, a subsidiary
of the Veba Corporation. Unique Technologies provides extensive coverage in the
United States and Canada for our two tier customers. Other distributorships have
been established in Germany, Japan, the United Kingdom, Taiwan, People's
Republic of China, Korea, Benelux, Israel, South Africa, Australia, Spain,
France and Denmark.
Our highly trained staff provides technical support to our customers,
distributors and representatives. All customer support engineers are trained and
typically have a degree in physics or electrical engineering. We believe that
customer service and support is as valuable and as important as our technology.
COMPETITION
The fiber optic component industry is highly competitive and subject to
rapid technological change. We believe that the principal competitive factors in
the active fiber optic component market are support for multiple optical
interfaces, output power, wavelength selection, electrical interface standards,
mechanical packaging, price, lead times and reliability. We believe that the
principal competitive factors in the passive component market are optical
performance of components, quality and reliability, manufacturing capacity,
timely delivery, customer relationships, pricing, comprehensiveness of product
offerings and customization to customer specifications. We believe we compete
favorably in each of these factors for both active and passive components. We
also believe that our products are favorably priced compared to equivalent
products currently available from our competitors. Based on our assessment of
the price performance ratio of competitive products, we believe that our
products currently compare favorably with similar products, although we cannot
assure you that they will continue to do so.
Our current competitors include Agilent Technologies, Corning Incorporated,
Finisar Corporation, Fujitsu, Infineon AG, International Business Machines
Corporation, JDS Uniphase Corp., Lucent Technologies, Inc., Sumitomo, Tyco
International, Ltd. and other companies that offer or have announced similar
products. Many of our competitors have substantially greater financial,
marketing, technical, human and other resources than us, and greater brand
recognition and market share which may give them certain competitive advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. We cannot assure you that we will be able to compete
successfully with existing or future competitors or that competitive pressures
will not seriously harm our business, operating results and financial condition.
Fiber optic technology competes with other technologies such as satellite
transmission and wireless technologies which are less expensive and easier to
deploy. If these technologies are preferred over fiber optics, the demand for
our products may decline, which would result in a material adverse effect on our
business.
MANUFACTURING
We currently design and manufacture our products at our facilities in the
United States, Taiwan, and People's Republic of China. Active components are
manufactured in Hsinchu, Taiwan and Chatsworth, California. These manufacturing
operations consist of wafer fabrication facilities for semiconductor laser
diodes and LEDs; a high precision optical and mechanical assembly; electrical
design; and assembly and final testing. We currently design and manufacture
passive components in Hsinchu, Taiwan consisting of thin film filter
manufacturing, wave-guide processing, precision optical and mechanical assembly
and final testing. We also manufacture passive components in Shanghai, People's
Republic of China consisting of precision optical and mechanical assembly and
final testing. Many of the key processes used in the manufacture and test of our
products are proprietary. Consequently, many of the key components of our
products are designed and produced internally. Although we generally use
standard parts and raw materials, certain parts and components are only
available from a limited number of suppliers. Our policy is to maintain a
reserve of necessary parts and raw materials to help minimize any disruption as
a result of temporary unavailability of such parts. We outsource certain board
level products to contract manufacturers and we maintain a modular and flexible
manufacturing approach to facilitate rapid changes of product mix.
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We assemble substantially all our active and passive products in a clean
room environment. Relevant assembly processes include die attach, wire bond,
substrate attachment and fiber coupling. We also conduct tests throughout our
manufacturing process using commercially available and in-house built testing
systems that incorporate proprietary procedures. To maintain reliability and
quality, we implement a stringent set of quality assurance programs throughout
the design, assembly, integration and test processes. Our policy is to perform
final product tests on 100% of our products prior to shipment.
We are subject to a variety of federal, state and local government
regulations related to the storage, use, discharge and disposal of toxic,
volatile, or otherwise hazardous chemicals used in our manufacturing processes.
Further, we are subject to other safety, labeling and training regulations as
required by local, state and federal law. Although we believe that we are in
material compliance and have complied with all applicable legal requirements,
any failure by us to comply with present and future regulations could subject us
to future liabilities or the suspension of production. In addition, such
regulations could restrict our ability to expand our facilities or could require
us to acquire costly equipment or to incur other significant expenses to comply
with environmental regulations. We cannot assure you that these legal
requirements will not impose on us the need for additional capital expenditures
or other requirements.
We typically purchase our components and materials through purchase orders,
and in general we have no guaranteed supply arrangements with any of our
suppliers. We currently purchase several key components and materials used in
the manufacture of our products from single or limited source suppliers,
including Corning Incorporated, Mitsubishi Electric, Nippon Sheet Glass,
Phillips Semiconductor and Sumitomo.
EMPLOYEES
At June 30, 2000, we employed a total of 645 full-time employees. Of these,
employees with science or engineering degrees numbered over 55 with Bachelor of
Science (or four year equivalent), 50 with a Masters Degrees and 18 with Ph.D.
degrees. Our employees are not represented by any collective bargaining
agreement and we have never suffered any work stoppage. We believe that our
relations with our employees are good.
FACILITIES
We maintain our main manufacturing, development and office facilities in
California, Taiwan and People's Republic of China. The table below lists the
locations, square footage and expiration dates of our leased facilities for our
major operations.
<TABLE>
<CAPTION>
SQUARE
FOOTAGE
LOCATION LEASED/OWNED LEASE EXPIRATION DATES
-------- ------------ ----------------------
<S> <C> <C>
Chatsworth, California, USA............................... 50,000 July 13, 2004(1)
Chatsworth, California, USA............................... 5,000 December 31, 2002
Hsinchu, Taiwan........................................... 165,910 March 14, 2016
Hsinchu, Taiwan........................................... 12,712 Owned
Hsinchu, Taiwan........................................... 18,895 June 15, 2001
Hsinchu, Taiwan........................................... 9,437 February 15, 2001
Hsinchu, Taiwan........................................... 7,876 September 30, 2000
Miao-Li County, Taiwan.................................... 24,398 Owned
Chu-Pei, Taiwan........................................... 15,989 Owned
Shanghai, People's Republic of China...................... 48,495 October 20, 2047
Shanghai, People's Republic of China...................... 139,008 January 2049
</TABLE>
---------------
(1) We have an option to renew this lease for three more years.
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We also occupy portions of two buildings in Chatsworth, California that are
leased by MRV and used for its other businesses. Following our separation from
MRV, we will license these portions of MRV's buildings in accordance with the
terms of the Real Property Matters Agreement we are signing with MRV. See
"Arrangements between Luminent and MRV -- Real Estate Matters Agreement." We
believe that our facilities are adequate to meet our demands for the near
future.
LEGAL PROCEEDINGS
From time to time, we may become involved in litigation relating to claims
arising from our ordinary course of business. We are currently not a party to
any material legal proceedings. See "Intellectual Property" for a description of
certain intellectual property claims we have received alleging infringement of
third party patents.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth specific information regarding our executive
offices and directors as of July 15, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Noam Lotan................................. 48 Chairman of the Board
Dr. William R. Spivey...................... 53 President, Chief Executive Officer and a
Director
Eric Blachno............................... 38 Vice President, Finance and Chief Financial
Officer and Secretary
Dr. Mark Heimbuch.......................... 31 Vice President and Chief Technology Officer
Steve Lin.................................. 39 President, Fiber Optic Communications
Dr. C. J. Hwang............................ 62 President, Optronics
Daniel A. Acton............................ 45 Vice President of Operations
James S. Locke............................. 54 Vice President of Marketing and Sales
Dr. Shlomo Margalit........................ 58 Director
Dan Avida.................................. 37 Director
Richard S. Hill............................ 48 Director
Amos Wilnai................................ 61 Director
</TABLE>
Noam Lotan has served on our board of directors since our incorporation and
became Chairman of the Board in July 2000. Mr. Lotan has served as the
President, Chief Executive Officer and a Director of MRV since May 1990. From
October 1993 to June 1995, Mr. Lotan also served as MRV's Chief Financial
Officer. Mr. Lotan holds a B.S. in electrical engineering from the Technion, the
Israel Institute of Technology and an M.A. in business administration from the
European Institute of Business Administration.
Dr. William R. Spivey has served us as our President and Chief Executive
Officer and as a member of our board of directors since July 2000. From October
1997 to July 2000, Dr. Spivey served as Group President of the Network Products
group of Lucent Technologies. From February 1994 to September 1997, he served as
vice president, systems and components group, member of the Office of the
President and Co-chair of the Executive Committee of AT&T Microelectronics. Dr.
Spivey holds a B.S. in physics from Duquesne University, an M.S. in physics from
Indiana University in Indiana, Pennsylvania and a Ph.D. in
administration/management from Walden University. Dr. Spivey also serves as a
director of Lyondell Chemical Co., Novellus Systems, Inc. and Raytheon Company.
Eric Blachno has served us as our Vice President of Finance and Chief
Financial Officer and Secretary since July 2000. From February 1999 to July
2000, he served as Managing Director of Research and a Financial Analyst for
Pennsylvania Merchant Group, an investment banking firm, where he headed its
Technology Group and served as Senior Communications Equipment Analyst. From
September 1995 to July 1998, he served as Managing Director -- Equity Research
for Bear Stearns & Co., Inc. Mr. Blachno holds a B.S. in computer science from
University of Florida, an M.S. in telecommunications from Pace University and an
MBA from the Wharton School of the University of Pennsylvania.
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<PAGE> 57
Dr. Mark Heimbuch has served as our Chief Technical Officer since June
2000. From March 1997 to June 2000, he served as Director of Research and
Development for the optical components division of MRV. From August 1990 to
March 1997, Dr. Heimbuch attended graduate school, working for MRV part time as
a scientist from May 1996 to March 1997, while finishing his education. Dr.
Heimbuch holds a B.S. in engineering physics from Oregon State University and an
M.A. and a Ph.D. degree in electrical engineering from the University of
California, Santa Barbara.
Steve Lin has served as our President, Fiber Optic Communications since
July 2000. Mr. Lin co-founded Fiber Optic Communications in June 1995 and since
then has served Fiber Optic Communications in various senior executive
capacities, including its Vice President of Technology, Executive Vice President
of Operations and Chief Operating Officer. Since February 2000, Mr. Lin has
served as President and Chief Executive Officer of Fiber Optic Communications.
Mr. Lin holds a B.S. in physics from Central University and an M.S. in
optoelectronic physics from Fu-Jen Catholic University.
Dr. C. J. Hwang has served as our President, Optronics since July 2000. Dr.
Hwang founded Optronics and has served as the President of Optronics since
November 1996. From December 1993 to June 1996, he served as the Chief Advisor,
Telecommunication Laboratories for the Ministry of Transportation and
Communications of Taiwan. Mr. Hwang holds a B.S. in electrical engineering from
the National Taiwan University and an M.A. and a Ph.D. in electrical engineering
from University of Washington.
Daniel A. Acton has served as our Vice President of Operations since
September 2000. From January 2000 to August 2000, he served as President and
Chief Operating Officer of LaserComm, Inc. From January 1997 to January 2000, he
served as Director and Business Manager of Business Development for the
Optoelectronics Division of Corning, Inc., where his duties included serving as
Vice President and General Manager of Corning OCA, a wholly owned
optoelectronics subsidiary of Corning based in California and later serving as
Corning OCA's chief executive from Corning. During this period, Mr. Acton also
served as a member of Corning's Corporate Policy Group. From October 1995 to
December 1996, Mr. Acton served as a corporate director of business development
at Unisys. Mr. Acton holds a B.S.S.E in control systems engineering from the
U.S. Naval Academy and M.S. in computer science and engineering from the Johns
Hopkins University.
James S. Locke has served as our Vice President of Marketing and Sales
since September 2000. From June 1999 to September 2000, he served as Director of
High Frequency and Optoelectronics Marketing for Mitsubishi Electronics U.S.
From June 1998 to January 1999, he served as a senior consultant in sales and
marketing with the Clarkston Potomac Group. From September 1996 to June 1998,
Mr. Locke served as Director of Sales for Honeywell's MicroSwitch. From March
1995 to September 1996, he served as regional sales manager with Leeds &
Northrup. Mr. Locke holds a BA in Economics from the Colgate University.
Dr. Shlomo Margalit has served a member of our board of directors since our
incorporation. Dr. Margalit is a co-founder of MRV and has been its Chairman of
the Board of Directors and Chief Technical Officer since MRV's inception in July
1988. Dr. Margalit holds a B.S., M.A. and Ph.D. in electrical engineering from
the Technion.
Dan Avida has served a member of our board of directors since July 2000.
From July 1989 until January 2000, Mr. Avida served in various executive
capacities for Electronics for Imaging, Inc. a company engaged in enabling
networked printing solutions, his last as Chairman of the Board and Chief
Executive Officer. Mr. Avida holds a B.S. in computer engineering from the
Technion.
Richard S. Hill has served a member of our board of directors since July
2000. Since December 1993, Mr. Hill has been the Chief Executive Officer and
Chairman of the Board of Directors of Novellus Systems, Inc., a capital
equipment supplier to the semiconductor device market. In May 1996 he was
appointed Chairman of the Board of Directors of Novellus. Since October 1997,
Mr. Hill has been a member of the Board of Directors of Speedfam International,
Inc. Mr. Hill holds a B.S. in engineering from the University of Illinois and an
M.B.A. from Syracuse University.
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<PAGE> 58
Amos Wilnai has served as a member of our board of directors since July
2000. Since September 1992, Mr. Wilnai has been the Chairman of the Board for
MMC Networks, Inc., a provider of network processor chipsets used to build
networking and communications platforms. Mr. Wilnai holds a B.S. in electrical
engineering from the Technion and an M.S. in electrical engineering from the
Polytechnic Institute of Brooklyn.
BOARD OF DIRECTORS
Our Board of Directors currently consists of seven members. Our board of
directors is elected annually and hold office until the next annual meeting of
stockholders and until their successors shall have been elected and shall have
qualified.
Our Board of Directors appoints our executive officers on an annual basis
to serve until their successors have been elected and qualified. There are no
family relationships among any of our Board of Directors or officers.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation from us for
their services as members of the Board of Directors, although they are
reimbursed for travel and lodging expenses in connection with attendance at
Board and Committee meetings. Concurrently with the offering, we plan to grant
options to purchase 10,000 shares of common stock under our 2000 Stock Plan to
each director who is not our employee or an employee of MRV at an exercise price
equal to the initial public offering price. We plan to establish a policy that
outside directors will receive grants of options to purchase 10,000 shares of
our common stock annually for their services as a director.
BOARD COMMITTEES
Our Board of Directors established the Compensation Committee and the Audit
Committee. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all our officers and establishes and
reviews general policies relating to compensation and benefits of our employees.
The Compensation Committee consists of Dan Avida, Noam Lotan and Amos Wilnai.
The Audit Committee reviews our internal accounting procedures and consults with
and reviews the services provided by our independent accountants. The Audit
Committee consists of Dan Avida, Richard S. Hill and Amos Wilnai.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of these directors has ever been an officer or employee of Luminent.
Prior to establishing the Compensation Committee in July 2000, the Board of
Directors as a whole performed the functions delegated to the Compensation
Committee. Except for Dr. Spivey, none of our executive officers has served or
currently serves on a board of directors or on a compensation committee of any
other entity that had officers who served or will serve upon the closing of this
offering on our Board of Directors or on our Compensation Committee. Dr. Spivey
serves on the compensation committee of Novellus Systems, Inc. for which Mr.
Hill also serves as a director and a member of the compensation committee.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our common stock is currently owned by MRV, and thus none of our
officers or directors owns any of our common stock. To the extent our directors
and officers own shares of MRV common stock at the time of the distribution,
they will participate in the distribution on the same terms as other holders of
MRV common stock.
The following table sets forth the number of shares of MRV common stock
beneficially owned on September 30, 2000 by each of our directors, each of our
executive officers named in the Summary Compensation Table "-- Executive
Compensation" section below and all of our directors and executive
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<PAGE> 59
officers as a group. Except as otherwise noted, the individual director or
executive officer had sole voting and investment power with respect to such
securities. The total number of shares of MRV common stock outstanding as of
September 30, 2000 was 72,403,510.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED(1)
----------------------
NAME NUMBER PERCENT
---- ---------- --------
<S> <C> <C>
Noam Lotan(2)............................................... 1,503,874 2.1
William R. Spivey(3)........................................ 316,315 *
Eric Blachno(4)............................................. 22,000 *
Shlomo Margalit............................................. 3,372,060 4.6
Dan Avida................................................... -- --
Richard S. Hill............................................. -- --
Amos Wilnai................................................. -- --
All directors and executive officers as a group (12
persons)(5)............................................... 5,195,041 7.1
</TABLE>
---------------
* Less than 1%.
(1) Pursuant to the rules of the SEC, shares of common stock that an individual
or group has a right to acquire within 60 days pursuant to the exercise of
options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown in the table.
(2) Includes 60,000 shares issuable pursuant to stock options exercisable within
60 days from September 30, 2000.
(3) Consists of 316,315 shares issuable pursuant to stock options exercisable
within 60 days from September 30, 2000.
(4) Consists of 22,000 shares issuable pursuant to stock options exercisable
within 60 days from September 30, 2000.
(5) Includes 414,115 shares issuable pursuant to stock options exercisable
within 60 days from September 30, 2000.
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of the law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence on the part of indemnified parties. Our bylaws
also permit us to secure insurance on behalf of any officer, director, employee
or other agent for any liability arising out of his or her actions in their
capacity as an officer, director, employee or other agent, regardless of whether
the bylaws would permit indemnification.
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<PAGE> 60
We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification for judgments fines,
settlement amounts and expenses, including attorneys' fees incurred by the
director or executive officer in any action or proceeding, including any action
by or in our right, arising out of the person's services as a director or
executive officer, or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The limitations on liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty and
may reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth compensation earned by our Chief Executive
Officer and our other most highly compensated executive officers whose annual
salary and bonus for the year ended December 31, 1999 exceeded $100,000 based on
compensation earned as an employee of MRV for the year ended December 31, 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING MRV
NAME AND PRINCIPAL POSITION WITH MRV SALARY ($) BONUS ($) OPTIONS (#)
------------------------------------ ---------- --------- --------------
<S> <C> <C> <C>
Noam Lotan
President and Chief Executive Officer................ $100,000 -- --
</TABLE>
Dr. Spivey and Mr. Blachno joined us subsequent to December 31, 1999 and
earn compensation at annual rates of $300,000 and $150,000, respectively. Mr.
Lotan resigned as our President and Chief Executive Officer in July 2000.
EMPLOYMENT AGREEMENTS
Luminent and MRV entered into a four-year employment agreement with Dr.
Spivey in July 2000. Under the agreement, we agreed to pay to Dr. Spivey an
annual salary of $300,000 with a bonus targeted at $75,000 for 2000 and at
$150,000 for the following years as determined at the discretion of our board of
directors. MRV granted Dr. Spivey an option to purchase 316,315 shares of MRV
Common Stock exercisable at $32.56 per share for five years. Luminent granted to
Dr. Spivey an option to purchase 4,800,000 shares of Luminent common stock at an
exercise price of $6.25 per share. The term of these options is 10 years. Dr.
Spivey's option to purchase MRV common stock is fully exercisable as of the date
of grant, and his option to purchase Luminent common stock vests in annual
installments of 25%, beginning on July 11, 2000, provided, however, that in the
event his employment is terminated by Luminent other than for cause, he is
entitled to receive from the date of termination over a one year period an
amount equal to two times the sum of his annual salary plus bonus and all of his
unvested options will automatically vest and become exercisable. One-half of any
unvested options will automatically vest and become exercisable upon a change of
control of Luminent, and all of his unvested options will vest and become
exercisable if such change of control of Luminent also constitutes a sale of the
company. The definition of change in control and sale of the company excludes
the proposed distribution by MRV of its Luminent common stock to MRV's
stockholders. Upon any termination of his employment,
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<PAGE> 61
Dr. Spivey's options are exercisable for two years following termination of his
employment. In the event Dr. Spivey voluntarily terminates his employment, he
has agreed to return any MRV shares he obtained upon exercise of his MRV options
less 2.78% of such shares for each full month of his employment against MRV's
repayment of the exercise price. Further, if he no longer owns all of such MRV
shares, he has agreed upon such voluntary termination to pay MRV the difference
between (i) the profit obtained upon sale of such shares less 2.78% of such
profit for each full month of his employment and (ii) any nonrefundable taxes he
incurred, plus expenses of $300,000 and his exercise price of the options. MRV
and Luminent have also agreed to use their best efforts to register the shares
underlying Dr. Spivey's options under the Securities Act of 1933 at the earliest
practical date.
Luminent and MRV entered into a four-year employment agreement with Mr.
Blachno in July 2000. Under the agreement, we agreed to pay to Mr. Blachno an
annual salary of $150,000 with a bonus targeted at $37,500 for 2000 and at
$75,000 for the following years as determined at the discretion of our board of
directors. MRV granted Mr. Blachno an option to purchase 22,000 shares of MRV
common stock exercisable at $33.44 per share for five years. Luminent granted to
Mr. Blachno an option to purchase 800,000 shares of Luminent common stock at an
exercise price of $6.25 per share. The term of these options is 10 years. Mr.
Blachno's option to purchase MRV common stock is fully exercisable as of the
date of grant and his option to purchase Luminent common stock vests in annual
installments of 25%, beginning on July 12, 2000, provided, however, that in the
event his employment is terminated by Luminent other than for cause, he is
entitled to receive from the date of termination over a one year period an
amount equal to two times the sum of his annual salary plus bonus and all of his
unvested options will automatically vest and become exercisable. All of his
unvested options will vest and become exercisable upon a sale of Luminent. The
definition of sale of the company excludes the proposed distribution by MRV of
its Luminent common stock to MRV's stockholders. Upon any termination of his
employment, Mr. Blachno's options are exercisable for two years following
termination of his employment. In the event Mr. Blachno voluntarily terminates
his employment, he has agreed to return any MRV shares he obtained upon exercise
of his MRV options less 2.78% of such shares for each full month of his
employment against MRV's repayment of the exercise price. Further, if he no
longer owns all of such MRV shares, he has agreed upon such voluntary
termination to pay MRV the difference between (i) the profit obtained upon sale
of such shares less 2.78% of such profit for each full month of his employment
and (ii) any nonrefundable taxes he incurred, plus expenses of $50,000 and his
exercise price of the options. MRV and MRV and Luminent have also agreed to use
their best efforts to register the shares underlying Mr. Blachno's options under
the Securities Act of 1933 at the earliest practical date.
OPTION GRANTS, AGGREGATE OPTION EXERCISES AND FISCAL YEAR END OPTION VALUES
No options to acquire MRV common stock were granted to any of our executive
officers named in the Summary Compensation Table during the year ended December
31, 1999. The following table provides summary information concerning the shares
of common stock of MRV represented by outstanding MRV stock options held by our
executive officers named in the Summary Compensation Table as of December 31,
1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Noam Lotan................................ 60,000 -- $1,698,750 --
</TABLE>
---------------
(1) Based on the difference between $34.4375 per share (the closing price per
share of Common Stock on December 31, 1999 as reported on The Nasdaq
National Market adjusted for MRV's two-for-one stock split effected in May
2000) and the per share exercise price.
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<PAGE> 62
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan, (the "2000 Stock Plan") provides for the grant
of qualified incentive stock options ("ISOs") that meet the requirements of
Section 422 of the Internal Revenue Code, stock options not so qualified
("NQSOs"), deferred stock and restricted stock awards ("Awards"). The Board of
Directors adopted, and our stockholder approved, the 2000 Stock Plan in July
2000. We have reserved a total of 9,600,000 shares of our common stock for
issuance under the 2000 Stock Plan, which is subject to anti-dilution provisions
for stock splits, stock dividends, recapitalization and similar events.
Administration. The Board of Directors may administer the 2000 Stock Plan
or the Board of Directors may appoint a committee to administer the 2000 Stock
Plan, each known as the "administrator." The Board of Directors currently
administers the 2000 Stock Plan. The administrator of our 2000 Stock Plan has
the power to select participants among eligible persons and to determine the
terms of options or Awards, including the number of shares subject to an option,
the nature of the option, the exercise price and the exercisability of options.
Under current law, ISOs may be granted to any individual who is an officer or
employee of us or any future subsidiary.
Options. The exercise price for an ISO granted under the 2000 Stock Plan
may not be less than 100% of the fair market value of the common stock on the
date of grant. The exercise price of a NQSO may not be less than 85% of the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock representing more than 10% of the voting power of all
classes of outstanding capital stock, the exercise price of any ISO granted must
be at least equal to 110% of the fair market value on the grant date and the
term of any ISO must not exceed five years. The term of all other options
granted under the 2000 Stock Plan may not exceed ten years.
The exercise price of any option granted under the 2000 Stock Plan is
payable in full in cash, or if approved by the administrator prior to exercise
by:
- surrender of shares of our common stock already owned by the optionee
having a market value equal to the aggregate exercise price of all shares
to be purchased including, in the case of the exercise of NQSOs,
restricted stock subject to a Award under the 2000 Stock Plan;
- cancellation of indebtedness owed by us to the optionee;
- a full recourse promissory note executed by the optionee;
- requesting that we withhold whole shares of common stock then issuable
upon exercise of an option; or
- any combination of the foregoing.
The terms of any promissory note may be changed by the administrator from
time to time to comply with applicable Internal Revenue Service or Securities
and Exchange Commission regulations or other relevant pronouncements.
Under the 2000 Stock Plan, we may make loans available to optionees,
subject the administrator's approval, in connection with the exercise of stock
options granted under the 2000 Stock Plan. If shares of common stock are pledged
as collateral for such indebtedness, such shares may be returned to us in
satisfaction of such indebtedness. If so returned, such shares shall again be
available for issuance in connection with future stock options and Awards under
the 2000 Stock Plan.
Options granted under the 2000 Stock Plan must generally be exercised
within three months after the end of the optionee's status as an employee,
director or consultant of ours, or within six months after the optionee's
termination by death of disability, but in no event later than the expiration of
the option's term.
Adjustments upon Sale of the Company. In the event of a sale of the
company, unless otherwise determined by the administrator or the Board of
Directors, all unvested stock options, restricted stock and deferred stock will
fully vest and any indebtedness will be forgiven. Pursuant to the 2000 Stock
Plan, a "sale of the company" means the consummation of a transaction (i) that
by its terms offers to all or
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<PAGE> 63
substantially of the stockholders of Luminent an opportunity to receive cash or
securities in exchange for all or a portion of their shares of common stock of
Luminent, however a sale of Luminent shall not be considered to have occurred as
a result of the pro rata distribution by MRV to its stockholders of capital
stock of Luminent. (ii) in which the stockholders of Luminent approve a plan of
complete liquidation of Luminent; or (iii) that involves the consummation of the
sale or disposition by the Luminent of all or substantially all its assets.:
Transferability of Options. Options and Awards granted under the 2000
Stock Plan are generally not transferable by the optionee, and each option and
Award is exercisable during the lifetime of the optionee only by the optionee.
Amendment and Termination. Our Board of Directors may from time to time
revise or amend the 2000 Stock Plan, and may suspend or discontinue it at any
time. However, no such revision or amendment may:
- impair the rights of any participant under any outstanding option or
Award without such participant's consent;
- without stockholder approval, increase the number of shares subject to
the 2000 Stock Plan or decrease the exercise price of a stock option to
less than 100% of fair market value on the date of grant, with the
exception of adjustments resulting from changes in capitalization;
- materially modify the class of participants eligible to receive options
or Grants under the 2000 Stock Plan;
- materially increase the benefits accruing to participants under the 2000
Stock Plan; or
- extend the maximum option term under the 2000 Stock Plan.
Unless terminated earlier, the 2000 Stock Plan will terminate automatically
in July 2010.
As of September 11, 2000, no options to purchase shares have been granted
under the 2000 Stock Option Plan. At September 11, 2000, Luminent expected that
options to purchase 3,030,500 shares of common stock will be granted to certain
of our employees and non-employee directors on the effective date of this
offering at an exercise price equal to the initial public offering price, which
options will vest 25% at the end of each year after their hire date, in the case
of employees, and their appointment date, in the case of directors.
TREATMENT OF MRV OPTIONS
Concurrently with MRV's distribution of shares of Luminent common stock to
MRV's stockholders, certain options to acquire MRV stock will be adjusted as
follows. Luminent intends to grant stock options to substantially all of the
eligible employees, directors, or consultants of Luminent and MRV, who hold an
option to purchase MRV common stock, which were granted by MRV prior to
September 8, 2000. On the distribution date, MRV intends to simultaneously
adjust the economic terms of such options to purchase MRV stock for these
individuals. Luminent's stock option grant and MRV's adjustment are intended, in
the aggregate, to result in the individuals holding MRV and Luminent stock
options in a number and at prices necessary to maintain each option holder's
pre-distribution economic position. Further, each Luminent option and MRV
adjusted option will be identical, in all other material respects, to the terms
and provisions of the current MRV options being adjusted.
For purpose of the following discussion, the "intrinsic value" of an option
means the difference between the exercise price of the option and the market
price of the underlying MRV shares. The number of options to purchase Luminent
stock to be granted by Luminent, and the exercise price thereof, will be
designed to:
- For Luminent Employees -- replace 80% of the total intrinsic value of
MRV options held by Luminent employees, directors and consultants
immediately prior to the distribution; and to
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- For MRV Employees -- replace 20% of the total intrinsic value of MRV
options held by MRV employees, directors and consultants immediately
prior to the distribution.
None of these Luminent options will permit the purchase of fractional
shares of our common stock.
The adjustment to MRV options existing immediately prior to distribution,
and the exercise price thereof will be designed to:
- For Luminent Employees -- preserve 20% of the intrinsic value of MRV
options held by Luminent employees, directors and consultants
immediately prior to the distribution; and to
- For MRV Employees -- preserve 80% of the intrinsic value of MRV options
held by MRV employees, directors and consultants immediately prior to
the distribution.
The actual number of options to purchase shares of our common stock that
will be issued to MRV option holders at the time of the distribution will be
determined based on
- the number and exercise prices of MRV options outstanding and eligible
for this treatment on September 8, 2000,
- the market price of our shares at the time of the distribution, and
- the market price of MRV's common stock at the time of the distribution.
The greater the difference between the market price of MRV's common stock
and the market price of our common stock at the time of the distribution, the
greater the number of Luminent options that will be issued to MRV option
holders. While the exact number of our options to be issued to MRV option holder
cannot be determined until the time of distribution when the market prices of
our common stock and MRV's common stock are known, the table below is intended
to illustrate different determinations of that amount resulting from changes in
the market price of MRV's common stock. The information in the table has been
calculated using:
- the number and exercise prices of MRV options outstanding on September 8,
2000 and eligible for the exchange with Luminent options;
- an assumed market price of Luminent common stock of $14 per share, which
is equal to the assumed initial public offering price of Luminent common
stock in this offering;
- the high and low closing sale prices of MRV common stock as reported by
The Nasdaq Stock Market during the quarter ended September 30, 2000; and
- the closing sale price of MRV common stock as reported by The Nasdaq
Stock Market on the most recent practical date.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MOST
SEPTEMBER 30, 2000 RECENT
----------------------- PRACTICAL
HIGH LOW DATE
---------- ---------- ----------
<S> <C> <C> <C>
Date....................................................... 1-Sep-00 29-Sep-00 4-Oct-00
Closing sale price ($) of MRV common stock................. 80.375 45.3125 44.8125
Number (#) of Luminent options to MRV option holders....... 20,969,000 11,822,000 11,691,000
</TABLE>
The resulting Luminent options will vest, be exercisable, expire and
otherwise essentially mirror the provisions of MRV options existing immediately
prior to the distribution.
In some cases, Luminent will not issue options to certain holders of MRV
options. In these circumstances, the holders of MRV options will have their
options adjusted at the date of distribution in a manner designed to preserve
the option holder's pre-distribution economic position. Specifically, but not
limited to, this shall apply to options issued by MRV as part of any
acquisitions or granted by MRV to its employees after September 8, 2000.
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<PAGE> 65
RELATED PARTY TRANSACTIONS
Divisions and subsidiaries of MRV are our customers and purchase
substantial quantities of our fiber optic components. These customers accounted
for sales of $2.1 million during each of 1997 and 1998, $2.5 million during 1999
and $1.1 million during the six months ended June 30, 2000. Like other
customers, sales to our MRV-related customers are based on purchase orders and
we have no long-term arrangements with them. We expect this vendor-customer
relationship with MRV to continue following this offering. We believe that our
sales to the MRV-related customers have been on terms no more favorable that
those we provide to our other customers and we expect that sales to MRV and its
affiliates in the future will be on terms no more favorable than those we
provide to our other customers.
Under the employment contracts which MRV and Luminent entered into with Dr.
Spivey and Mr. Blachno at the time they joined Luminent, MRV and Luminent each
agreed to use its best efforts to register the shares underlying the options
granted to Dr. Spivey and Mr. Blachno under the Securities Act of 1933 at the
earliest practical date. For information concerning these options, see
"Management -- Employment Agreements."
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<PAGE> 66
ARRANGEMENTS BETWEEN LUMINENT AND MRV
We have provided below a summary description of the executed master
separation and distribution agreement along with the key related agreements.
This description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of these agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
Conflicts may develop between MRV and us regarding the terms of our
agreements with MRV. We have not established any procedures to minimize the
potential for these conflicts of interest and such conflicts may not be resolved
in our favor. It is our policy and the policy of MRV that transactions between
MRV and us will generally be on terms and conditions comparable to those between
unaffiliated third parties. However, because our agreements with MRV were
negotiated in the context of a parent-subsidiary relationship, we cannot assure
you that these agreements, or the transactions with MRV contemplated by such
agreements, will be effected on terms as favorable to us as could have been
obtained from unaffiliated third parties. For a discussion of the risks
associated with these potential conflicts of interest, please see "Risk
Factors -- We may have potential business conflicts of interest with MRV with
respect to our past and ongoing relations that could harm our business
operations."
Luminent has been advised by MRV that MRV has approved Luminent's initial
public offering at this time because of its perception of favorable market
conditions for the securities of companies engaged in the fiber optics industry
and its desire to provide Luminent with an alternative source of funding for
Luminent's operations and capital requirements.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
MRV and we have entered into a master separation and distribution agreement
that contains the key provisions relating to our separation from MRV, this
offering and the distribution of our shares to MRV stockholders.
The Separation. The separation will occur prior to completion of this
offering and this offering will not proceed if the separation and related
agreements are terminated prior to completion of this offering. The separation
agreement provides for the transfer to us of assets and liabilities from MRV
related to our business as described in this prospectus, effective on the
contribution date. The various ancillary agreements that are exhibits to the
separation agreement and which detail the separation and various interim and
ongoing relationships between MRV and us following the contribution date
include:
- a general assignment and assumption agreement;
- technology, patent and trademark ownership and license agreements;
- an employee matters agreement;
- a tax sharing agreement;
- a transitional services agreement;
- a real estate matters agreement;
- a confidential disclosure agreement; and
- an indemnification and insurance matters agreement.
To the extent that the terms of any of these ancillary agreements conflict
with the separation agreement, the terms of these agreements will govern. These
agreements are described more fully below.
The Initial Public Offering. Under the terms of the separation agreement
MRV will own at least 80.1% of our outstanding common stock following this
offering. We are obligated to use our reasonable
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commercial efforts to satisfy the following conditions to the consummation of
this offering, any of which may be waived by MRV:
- the registration statement containing this prospectus must be effective;
- United States securities and blue sky laws must be satisfied;
- our common stock must be listed on the Nasdaq National Market;
- all our obligations under the underwriting agreement must be met or
waived by the underwriters;
- MRV must own at least 80.1% of our stock and must be satisfied that the
distribution will be tax-free to its United States stockholders;
- no legal restraints must exist preventing the separation or this
offering;
- the separation must have occurred; and
- the separation agreement must not have been terminated.
The Distribution. MRV plans to complete the distribution by the later of
three months after the receipt of a favorable private letter ruling from the IRS
or six months after the date of this offering. We have agreed to cooperate with
MRV in all respects to complete the distribution. MRV intends to seek a private
letter ruling from the IRS that the distribution of its shares of our common
stock to its stockholders would be tax-free to MRV and its stockholders for U.S.
federal income tax purposes. We cannot assure you that the IRS will provide MRV
with a favorable ruling.
There are various conditions which must be satisfied or waived by MRV in
its sole discretion, prior to the distribution. MRV's final determination to
proceed with the distribution will require a declaration of MRV's board of
directors. The declaration is not expected until the various conditions are
satisfied, many of which are outside the control of MRV, including:
- the Internal Revenue Service must issue a ruling that the distribution of
Luminent common stock will be tax-free to MRV stockholders and that the
transaction will qualify as a reorganization for United States federal
income tax purposes;
- all required government approvals must be in effect;
- no legal restraints must exist preventing this distribution; and
- nothing must have happened in the intervening time between this offering
and the distribution, including a future change in market or economic
conditions or in MRV or Luminent's business and financial condition, that
causes MRV's board of directors to conclude that the distribution is not
in the best interest of MRV or MRV's stockholders.
MRV and we have engaged Credit Suisse First Boston to serve as our
financial advisor in connection with the distribution. For its services, we have
agreed to pay Credit Suisse First Boston, as our share, a distribution fee
measured on the value of the distribution, such fee not to exceed $7,500,000.
Covenants Between MRV and Luminent. In addition to signing documents that
transfer control and ownership of various assets and liabilities of MRV relating
to our business, we have agreed with MRV to enter into additional transitional
service agreements, exchange information, engage in auditing practices and
resolve disputes in particular ways.
Information Exchange. Both MRV and we have agreed to share information
relating to governmental, accounting, contractual and other similar requirements
of our ongoing businesses, unless the sharing would be commercially detrimental.
In furtherance of this, both MRV and we have agreed as follows:
- Each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting obligations and prepare its
own financial statements.
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- Each party will retain records beneficial to the other party for a
specified period of time. If the records are going to be destroyed, the
destroying party will give the other party an opportunity to retrieve all
relevant information from the records, unless the records are destroyed
in accordance with adopted record retention policies.
- Each party will use commercially reasonable efforts to provide the other
party with directors, officers, employees, other personnel and agents who
may be used as witnesses in and books, records and other documents which
may reasonably be required in connection with legal, administrative or
other proceedings.
Auditing Practices. So long as MRV is required to consolidate our results
of operations and financial position, we have agreed to:
- not select a different independent accounting firm from that used by MRV
without MRV's consent;
- use reasonable commercial efforts to enable our auditors to date their
opinion on our audited annual financial statements on the same date as
MRV's auditors date their opinion on MRV's financial statements;
- exchange all relevant information needed to prepare financial statements;
- grant each other's internal auditors access to each other's records; and
- notify each other of any change in accounting principles.
Dispute Resolution. If problems arise between MRV and us, we have agreed
to the following procedures:
- The parties will make a good faith effort to first resolve the dispute
through negotiation.
- If negotiations fail, the parties agree to attempt to resolve the dispute
through non-binding mediation.
- If mediation fails, the parties can resort to binding arbitration. In
addition, nothing prevents either party acting in good faith from
initiating litigation at any time if failure to do so would cause serious
and irreparable injury to one of the parties or to others.
No Representations and Warranties. Neither party is making any promises to
the other regarding:
- the value of any asset that MRV is transferring;
- whether there is a lien or encumbrance on any asset MRV is transferring;
or
- the legal sufficiency of any conveyance of title to any asset MRV is
transferring.
No Solicitation. Each party has agreed not to directly solicit or recruit
employees of the other party without the other party's consent for two years
after the distribution date. However, this prohibition does not apply to general
recruitment efforts carried out through public or general solicitation or where
the solicitation is employee-initiated.
Expenses. All of the costs and expenses related to this offering as well
as the costs and expenses related to the separation and distribution will be
allocated between MRV and us. It is anticipated that we will bear the costs and
expenses associated with this offering and MRV will bear the costs and expenses
associated with the distribution. We will each bear our own internal costs
incurred in consummating these transactions.
Termination of the Agreement. MRV in its sole discretion can terminate the
separation agreement and all ancillary agreements and abandon the distribution
at any time prior to the closing of this offering. Both MRV and Luminent must
agree to terminate the separation agreement and all ancillary agreements at any
time between the closing of this offering and the distribution.
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GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The general assignment and assumption agreement identifies the assets MRV
will transfer to us and the liabilities we will assume from MRV in the
separation. The agreement also describes when and how these transfers and
assumptions will occur. As of the contribution date, MRV contributed and
transferred to us all of the capital stock held by MRV in subsidiaries and other
entities that conducted our business and all other assets and liabilities
associated with our business. The capital stock transferred to us consists of:
- all of the capital stock of Fiber Optic Communications;
- all of the capital stock of Quantum;
- all of the capital stock of Optronics; and
- all of the capital stock of Luminent -- Korea held by MRV, which consist
of 51% of the outstanding capital stock of that corporation.
The assets transferred to us include:
- all assets reflected on our balance sheet as of June 30, 2000, minus any
assets disposed of after June 30, 2000,
- all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of June 30, 2000 if we had not written
off, expensed or fully depreciated them;
- all assets that MRV acquired after June 30, 2000 that would have appeared
in our financial statements as of the contribution date if we prepared
such financial statements using the same principles we used in preparing
our balance sheet dated June 30, 2000;
- all assets that our business primarily uses as of the contribution date
but are not reflected in our balance sheet as of June 30, 2000 due to
mistake or omission;
- all contingent gains related primarily to our business;
- all supply, vendor, capital, equipment lease or other contracts that
relate primarily to our business, including contracts representing
obligations reflected on our balance sheet as of June 30, 2000;
- all computers, desks, equipment and other assets used primarily by
employees of MRV who will become our employees due to the contribution;
- specified rights under existing insurance policies; and
- other specified assets.
The subsidiaries and assets listed above comprise:
- all business operations whose financial performance is reflected in our
combined financial statements for the period ended June 30, 2000, as set
forth elsewhere in this prospectus; and
- all business operations relating to our business initiated or acquired by
MRV after June 30, 2000.
Assumption of Liabilities. Effective on the contribution date, we assumed
liabilities from MRV, to the extent that these liabilities were, prior to the
contribution date, liabilities held by MRV related to our business and except as
provided in an ancillary or other agreement.
Excluded Liabilities. The general assignment and assumption agreement also
provides that we will not assume specified liabilities, including:
- any liabilities that would otherwise be allocated to us but which are
covered by MRV's insurance policies, unless we are a named insured under
such policies; and
- other specified liabilities.
Delayed Transfers. If it is not practicable to transfer specified assets
and liabilities on the contribution date, the agreement provides that these
assets and liabilities will be transferred after the contribution date.
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Terms of Other Ancillary Agreements Govern. If another ancillary agreement
expressly provides for the transfer of an asset or an assumption of a liability,
the terms of the other ancillary agreement will determine the manner of the
transfer and assumption.
Obtaining Approvals and Consents. The parties have agreed to use all
reasonable efforts to obtain any required consents, substitutions or amendments
required to novate or assign all rights and obligations under any contracts that
will be transferred in the contribution.
Expenses. We have agreed to pay all costs of the transfer of assets from
MRV to us incurred on or after contribution date, including:
- moving expenses;
- transfer taxes;
- expenses related to notices to customers, suppliers and other third
parties;
- fees related to the transfer or issuance of licenses, permits and
franchises;
- fees and expenses related to the assignment or transfer of contracts,
agreements and intellectual property; and
- costs related to the transfer of any employee.
Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that
are not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.
MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT
The master technology ownership and license agreement, or the master
technology agreement, allocates rights in technology other than patents, patent
applications and invention disclosures. In the master technology agreement, MRV
confirmed that we own all technology developed by us and, to the extent that any
such technology is registered in MRV's name or to the extent MRV otherwise has
any ownership rights in that technology, MRV will assign it to us. MRV will not
restrict our right to use the assigned or jointly owned technology. In the event
of an acquisition of either party, the acquired party may assign the master
technology agreement to its acquirer. Nothing in the master technology agreement
or in any of the other intellectual property agreements summarized below limit
or facilitate MRV's right to compete with us. However, the technology agreements
do give us control over the intellectual property needed for MRV to compete with
us thus requiring MRV to independently develop technology before it competes
with us.
MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT
The master patent ownership and license agreement, or the master patent
agreement, allocates rights relating to patents, patent applications and
invention disclosures. In the master patent agreement, MRV will confirm that we
own patents, patent applications and invention disclosures that were developed
by us and, to the extent that any of these patents or patent applications is
recorded in MRV's name, MRV will assign them to us. The specific patents, patent
applications and invention disclosures being assigned are identified in the
master patent agreement. MRV will not restrict our rights to practice the
assigned patents.
In addition, each party covenants not to sue the other party or the other
party's customers or suppliers for infringement of its patents that exist as of
the contribution date or that are based on applications or invention disclosures
that exist as of the contribution date. The products and services that are
covered by the covenant are the products and services of each party's business,
as it exists as of the contribution date.
In the event of an acquisition of either party, the acquired party may
assign the master patent agreement except that the licenses and covenants not to
sue may not be assigned.
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The master patent agreement also provides that MRV and we will assist each
other in specified ways for a period of five years after the contribution date
in the event either party is subject to patent litigation.
MASTER TRADEMARK OWNERSHIP AND LICENSE AGREEMENT
The master trademark ownership and license agreement, or the master
trademark agreement, allocates rights relating to trademarks, service marks and
trade names. In the master trademark agreement, MRV confirmed that we own our
trademarks, service marks and trade names that we use in connection with our
business. Moreover, to the extent that any of our trademarks, service marks and
trade names are registered in MRV's name or to the extent that MRV otherwise has
ownership rights in any of our trademarks, service marks and trade names, MRV
will assign such rights to us. Similarly, it will assign any right to any cause
of action and any rights of recovery for past infringement of those of
trademarks, service marks and trade names. In addition, MRV will grant us a
license to use certain of its trademarks, service marks and trade names in
marketing our products and will agree not to license such trademarks, service
marks or trade names to our competitors. In the event of an acquisition of
either MRV or us, the acquired party may assign this agreement to the acquirer.
EMPLOYEE MATTERS AGREEMENT
We will enter into an employee matters agreement with MRV to allocate
assets, liabilities and responsibilities relating to current and former
employees of Luminent and their participation in the benefits plans, including
stock plans, that MRV currently sponsors and maintains.
All eligible Luminent employees will continue to participate in the MRV
benefits plans on comparable terms and conditions to those for MRV employees
until the distribution date or until we establish benefit plans for our
employees, or elect not to establish comparable plans, if it is not legally or
financially practical. We intend to establish our own benefit program no later
than the time of the distribution.
Once we establish our own benefits plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. No Luminent
benefit plan will provide benefits that overlap benefits under the corresponding
MRV benefit plan at the time of the distribution. Each Luminent benefit plan
will provide that all service, compensation and other benefit determinations
that, as of the distribution, were recognized under the corresponding MRV
benefits plan will be taken into account under that Luminent benefit plan.
Assets relating to the employee liabilities will be transferred to Luminent
or the related Luminent plans and trusts from trusts and other funding vehicles
associated with MRV's benefits plans.
Options. We will establish a replacement stock plan for eligible Luminent
employees on or before the distribution. We may assume all MRV options held by
Luminent employees. These options will convert at the distribution into options
to purchase our common stock. The number of shares and the exercise price of MRV
options that convert into Luminent options will be adjusted using a conversion
formula. The conversion formula will be based on the opening per-share price of
our common stock on the first trading day after the distribution relative to the
closing per-share price of MRV common stock on the last trading day before the
distribution. The resulting Luminent options will maintain the original vesting
provisions and option period.
TAX SHARING AGREEMENT
We will enter into a tax sharing and indemnification agreement with MRV,
which will allocate tax liabilities between MRV and us and address several other
tax matters such as responsibility for filing tax returns, control of and
cooperation in tax litigation and qualification of the distribution as a
tax-free transaction. Generally, MRV will be responsible for taxes that are
allocable to periods prior to the contribution date, and each of MRV and
Luminent will be responsible for its own tax liabilities (including its
allocable share of taxes shown on any consolidated, combined or other tax return
filed by MRV) for
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periods after the contribution date. The tax sharing and indemnification
agreement will prohibit MRV and our company from taking actions that could
jeopardize the tax-free treatment of the distribution, and will require MRV and
Luminent to indemnify each other for any taxes or other losses that result from
these actions. In addition, other events over which we do not have control may
also give rise to our indemnification obligation.
TRANSITIONAL SERVICES AGREEMENT
The transitional services agreement governs the provision of transitional
services by MRV and us to each other, on an interim basis, until one year after
the separation date, unless extended for specific services or otherwise
indicated in the agreement. The agreement provides for transitional services,
systems and support to our operations, including data processing and
telecommunications services (such as voice telecommunications and data
transmission and information technology support services) for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement and other administrative functions. Services are
generally cost plus 5%, but may increase to cost plus 10% if the services extend
beyond the one-year period. The master transitional services agreement also
covers the provision of additional transitional services identified from time to
time after the separation date that were inadvertently or unintentionally
omitted from the specified services, or that are essential to effectuate an
orderly transition under the separation agreement, so long as the provision of
such services would not significantly disrupt MRV's operations or significantly
increase the scope of its responsibility under the agreement.
REAL ESTATE MATTERS AGREEMENT
The real estate matters agreement addresses real estate matters relating to
the MRV leased properties that MRV will transfer to or share with us. The
agreement describes the manner in which MRV will transfer to or share with us
various leased properties, including the following types of transactions:
- assignments to us of MRV's leases for specified leased properties;
- subleases to us of portions of specified properties leased by MRV; and
- short-term licenses between MRV and us permitting short-term occupancy of
selected leased sites.
The real estate matters agreement includes a description of each property
to be transferred to or shared with us for each type of transaction. The
standard forms of the proposed transfer documents, such as lease, sublease and
license, are contained in schedules.
The real estate matters agreement also requires both parties to use
reasonable efforts to obtain any landlord consents required for the proposed
transfers of leased sites, including our paying commercially reasonable consent
fees, if required by the landlords, and our agreeing to provide the security
required under the applicable leases.
The real estate matters agreement further provides that we will be required
to accept the transfer of all sites allocated to us, even if a casualty has
damaged a site before the contribution date. Transfers with respect to leased
sites where the underlying lease is terminated due to casualty or action by the
landlord prior to the contribution date will not be made, and neither party will
have any liability related thereto.
The real estate matters agreement also gives the parties the right to
change the allocation and terms of specified sites by mutual agreement based on
changes in the requirements of the parties. The real estate matters agreement
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorneys' fees, will be paid by MRV.
MASTER CONFIDENTIAL DISCLOSURE AGREEMENT
The master confidential disclosure agreement provides that both parties
agree not to disclose confidential information of the other party except in
specific circumstances. MRV and we also agree not to use this information in
violation of any use restrictions in one of the other written agreements between
us.
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INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
General Release of Pre-Separation Claims. Effective as of the contribution
date, subject to specified exceptions, we will release MRV and its affiliates,
agents, successors and assigns, and MRV will release us, and our affiliates,
agents, successors and assigns, from any liabilities arising from events
occurring on or before the contribution date, including events occurring in
connection with the activities to implement the separation, this offering and
the distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
Indemnification. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify MRV and its affiliates, agents, successors and assigns from all
liabilities arising from:
- our business, any of our liabilities or any of our contracts; and
- any breach by us of the separation agreement or any ancillary agreement.
MRV has agreed to indemnify us and our affiliates, agents, successors and
assigns from all liabilities arising from:
- MRV's business other than the Luminent business; and
- any breach by MRV of the separation agreement or any ancillary agreement.
- patent claims related to or stemming from notices received from Rockwell
Corporation in early 1999 and Ortel Corporation in October 1999,
respectively, as described in "Business -- Intellectual Property."
These indemnification provisions do not apply to amounts collected from
insurance. The agreement also contains provisions governing notice and
indemnification procedures.
Liability Arising From This Prospectus. We and MRV will bear any liability
arising from any untrue statement of a material fact or any omission of a
material fact in this prospectus.
Insurance Matters. The agreement also contains provisions governing our
insurance coverage from the contribution date until the distribution date. In
general, we agree to reimburse MRV for premium expenses related to insurance
coverage during this period. Prior to the distribution, MRV will maintain
insurance policies on our behalf. We will work with MRV to secure additional
insurance if desired and cost effective.
Environmental Matters. MRV has agreed to indemnify us and our affiliates,
agents, successors and assigns from all liabilities arising from environmental
conditions existing as of the contribution date at facilities transferred to us,
or which arise out of operations occurring before the contribution date at these
facilities. Further, MRV has agreed to indemnify us and our affiliates, agents,
successors and assigns from all liabilities arising from environmental
conditions caused by operations occurring at any time, whether before or after
the contribution date, at any MRV facility.
We have agreed to indemnify MRV and its affiliates, agents, successors and
assigns from all liabilities arising from environmental conditions caused by
operations after the contribution date at any of the facilities transferred to
us, and from environmental conditions at our facilities arising from an event
that occurs on or after the contribution date.
Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party post-separation.
Assignment. The indemnification and insurance matters agreement is not
assignable by either party without prior written consent.
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PRINCIPAL STOCKHOLDERS
The table below sets forth certain information known to us with respect to
the beneficial ownership of our common stock at September 30, 2000 and after
giving effect to our sale of 12,000,000 shares of our common stock in this of
this offering, by:
- each stockholder beneficially owning 5% or more of our common stock,
- each of our directors who beneficially own our common stock,
- each of our executive officers who beneficially own our common stock, and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable or will become exercisable within 60 days after September 30, 2000
are deemed outstanding, while such shares are not deemed outstanding for
purposes of computing percentage ownership of any other person. To our
knowledge, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws where applicable. In providing the information in the
table below, we have
- assumed that neither MRV nor any of our officers or directors purchases
any of our shares in this offering, and
- have not (except as noted below) given effect to the proposed
distribution of our common stock by MRV after this offering. See
"Management -- Stock Ownership of Directors and Executive Officers" for a
description of the ownership of MRV stock by our directors and executive
officers.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OWNED(2)
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
------------------------------------ --------------------- -------- --------
<S> <C> <C> <C>
MRV Communications, Inc.(1)....................... 144,000,000 100% 92%
William R. Spivey(2).............................. 1,200,000(3) * *
Eric Blachno(2)................................... 200,000(3) * *
All directors and executive officers as a group
(12 persons).................................... 1,400,000(3)(4) 1%(4) *(4)
</TABLE>
---------------
* Less than 1%.
(1) MRV's address is 20415 Nordhoff Street, Chatsworth California 91311.
(2) Dr. Spivey's and Mr. Blachno's address is Luminent, Inc., 20550 Nordhoff
Street, Chatsworth California 91311.
(3) Consists of shares of our common stock issuable upon exercise of stock
options which are currently or exercisable within 60 days of September 30,
2000. See "Management -- Employment Agreements" for more information
concerning the stock options we have granted to Dr. Spivey and Mr. Blachno.
(4) Based on the beneficial ownership by our officers and directors of MRV
common stock on September 30, 2000, if MRV had distributed its Luminent
shares to its stockholders on that date, our officers and directors as a
group would have owned 12,393,837 shares of our common stock, or
approximately 8.5% of our shares before this offering and approximately 7.9%
of our shares after giving effect to this offering.
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DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, we will be authorized to issue
300,000,000 shares of common stock, $.001 par value per share, and 30,000,000
shares of undesignated preferred stock, $.001 par value per share. The following
description of our capital stock does not purport to be complete and is subject
to and qualified by our certificate of incorporation and bylaws, which are
included as exhibits to the Registration Statement of which this prospectus
forms a part.
COMMON STOCK
As of July 15, 2000, there were 144,000,000 shares of common stock
outstanding. Upon completion of this offering, there will be 156,000,000 shares
of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option or of outstanding options.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably dividends, if any, as may be declared from time to
time by the board of directors out of funds legally available for that purpose.
In the event of our liquidation, dissolution or winding up of, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of preferred stock, if any,
then outstanding. The common stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable, and the shares of common stock to be issued upon the
closing of this offering will be fully paid and non-assessable.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol LMNE.
PREFERRED STOCK
Under our Certificate of Incorporation, the Board of Directors has the
authority to issue 30,000,000 shares of Preferred Stock in one or more series
and to fix the powers, designations, preferences and relative, participating,
optional, or other rights of such Preferred Stock, including
- dividend rights,
- conversion rights,
- voting rights,
- redemption terms,
- liquidation preferences and
- the number of shares constituting any series.
without any further vote or action by Luminent's stockholders. The issuance of
Preferred Stock in certain circumstances may have the effect of delaying,
deferring, or preventing a change of control, may discourage bids for our common
stock at a premium over the market price of the common stock, and may adversely
affect the market price of, and the voting and other rights of the holders of,
our common stock. Luminent has no shares of Preferred Stock outstanding and has
no plans to issue any such shares of market conditions.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless, with exceptions, the business combination or the
transaction in
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which the person became an interested stockholder is approved in a prescribed
manner. Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together with
affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Co., New York, New York.
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<PAGE> 77
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of our common stock sold in this offering will be freely
tradable without restriction under the Securities Act, except for any shares
which be may acquired by an affiliate of Luminent, as that term is defined in
Rule 144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Luminent and may include directors and officers
of Luminent as well as significant stockholders of Luminent, if any.
MRV currently plans to complete its divestiture of Luminent approximately
six to 12 months following this offering by distributing all of the shares of
Luminent common stock owned by MRV to the holders of MRV's common stock. Shares
of our common stock distributed to MRV stockholders in the distribution
generally will be freely transferable, except for shares of common stock
received by persons who may be deemed to be affiliates. Persons who are
affiliates will be permitted to sell the shares of common stock that are issued
in this offering or that they receive in the distribution only through
registration under the Securities Act, or under an exemption from registration,
such as the one provided by Rule 144.
The shares of our common stock held by MRV before distribution are deemed
"restricted securities" as defined in Rule 144, and may not be sold other than
through registration under the Securities Act or under an exemption from
registration, such as the one provided by Rule 144. MRV, our directors and
officers and we have agreed not to offer or sell any shares of our common stock,
subject to exceptions, for a period of 180 days after the date of this
prospectus, without the prior written consent of the underwriters. To induce
them to join us, we have agreed to grant stock options to purchase 4,800,000 and
800,000, respectively, shares of our common stock to our President and Chief
Executive Officer and our Vice President of Finance and Chief Financial Officer.
See "Management -- Employment Agreements." We expect to grant additional options
to purchase common stock under our 2000 Stock Plan. See "Management." We
currently expect to file a registration statement under the Securities Act to
register shares reserved for issuance under the Stock Option Agreements of our
President and Chief Executive Officer and our Vice President of Finance and
Chief Financial Officer and our 2000 Stock Option Plan. Management -- 2000 Stock
Option Plan. Shares issued pursuant to awards after the effective date of the
registration statement, other than shares issued to affiliates and those subject
to lockup arrangements, generally will be freely tradable without further
registration under the Securities Act.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 1,560,000 shares immediately after this offering (or
1,578,000 if the underwriter's over-allotment option is exercised in
full).
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to other requirements regarding the manner
of sale, notice filing and the availability of current public information about
us.
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<PAGE> 78
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of the material United States federal
income tax consequences of the ownership and disposition of our common stock to
a non-United States Holder. For the purpose of this discussion, a non-United
States Holder is any holder that for United States federal income tax purposes
is not a United States person. For purposes of this discussion, the term United
States person means:
- a citizen or resident of the United States;
- a corporation or other entity taxable as a corporation created or
organized in the United States or under the laws of the United States or
any political subdivision thereof;
- an estate whose income is included in gross income for United States
federal income tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
If a partnership holds common stock, the tax treatment of a partner will
generally depend on the status of the partner and upon the activities of the
partnership.
This discussion does not address all aspects of United States federal
income taxation that may be relevant in light of a non-United States Holder's
special tax status or special tax situations. United States expatriates, life
insurance companies, tax-exempt organizations, dealers in securities or
currency, banks or other financial institutions, investors whose functional
currency is other than the United States dollar, and investors that hold common
stock as part of a hedge, straddle or conversion transaction are among those
categories of potential investors that are subject to special rules not covered
in this discussion. This discussion does not address any tax consequences
arising under the laws of any state, local or non-United States taxing
jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986, as amended, and administrative
and judicial interpretations thereof, all as in effect on the date hereof, and
all of which are subject to change, possibly with retroactive effect.
ACCORDINGLY, EACH NON-UNITED STATES HOLDER SHOULD CONSULT A TAX ADVISOR
REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND NON-UNITED STATES INCOME
AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF SHARES OF OUR
COMMON STOCK.
DIVIDENDS
Distributions on our common stock will constitute dividends for United
States tax purposes to the extent paid from our current and accumulated earnings
and profits, as determined under Untied States federal income tax principles. To
the extent those dividends exceed our current and accumulated earnings and
profits, the dividends will constitute a return of capital and will first reduce
a holder's basis, but not below zero, and then will be treated as gain from the
sale of stock.
Any dividend paid to a non-United States Holder of common stock generally
will be subject to United States withholding tax either at a rate of 30% of the
gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. In order to receive a reduced treaty rate, a non-United
States Holder must provide us with an IRS form W-8BEN certifying to your
qualification for the reduced rate.
Dividends received by a non-United States Holder that are effectively
connected with a United States trade or business conducted by the non-United
States Holder are exempt from such withholding tax. In order to obtain this
exemption, a non-United States Holder must provide us with an IRS Form W-8ECI
certifying to such exemption. Such effectively connected dividends, although not
subject to withholding tax, are taxed at the same graduated rates applicable to
United States persons, net of certain deductions and credits.
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<PAGE> 79
In addition to the graduated tax described above, dividends received by a
corporate non-U. S. Holder that are effectively connected with a United States
trade or business of the corporate non-U.S. Holder may also be subject to a
branch profits tax at a rate of 30% or such lower rate as may be specified by an
applicable tax treaty.
A non-United States Holder of common stock that is eligible for a reduced
rate of withholding tax pursuant to a tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the Internal Revenue Service ("IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
our common stock unless:
- the gain is effectively connected with a United States trade or business
of the non-United States Holder (which gain, in the case of a corporate
non-United States Holder, must also be taken into account for branch
profits tax purposes);
- the non-United States Holder is an individual who holds his or her common
stock as a capital asset (generally, an asset held for investment
purposes) and who is present in the United States for a period or periods
aggregating 183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met;
- we are or have been a "U.S. real property holding corporation" for U.S.
Federal income tax purposes at any time during the shorter of the
five-year period ending on the date of the disposition or the period
during which the non-U.S. holder held the common stock. We believe that
we currently are a U.S. real property holding corporation for U.S.
Federal income tax purposes. Nevertheless, a non-U.S. holder still will
not be subject to U.S. tax if the shares were considered to be "regularly
traded on an established securities market" and the non-U.S. holder did
not own, actually or constructively, at any time during the shorter of
the periods described above, more than five percent of our common stock.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we must report annually to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payer. Backup withholding generally will not apply to dividends paid to
non-United States Holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a United
States person. Under recently finalized Treasury Regulations regarding
withholding and information reporting, payment of dividends to non-United States
Holders at an address outside the United States after December 31, 2000 may be
subject to backup withholding at a rate of 31% unless such non-United States
Holder satisfies various certification requirements.
Under current Treasury Regulations, the payment of the proceeds of the
disposition of common stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. Generally, the payment of the
proceeds of the disposition by a non-United States Holder of common stock
outside the United States to or through a foreign office of a broker will not be
subject to backup withholding but will be subject to information reporting
requirements if the broker is a United States person or has certain other
connections to the United States, unless the broker has documentary evidence in
its files of the holder's non-United States status and certain other
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<PAGE> 80
conditions are met, or the holder otherwise establishes an exemption. Neither
backup withholding nor information reporting generally will apply to a payment
of the proceeds of a disposition of common stock by or through a foreign office
of a foreign broker not subject to the preceding sentence.
In general, the recently promulgated final Treasury Regulations, described
above, do not significantly alter the substantive withholding and information
reporting requirements but would alter the procedures for claiming benefits of
an income tax treaty and change the certifications procedures relating to the
receipt by intermediaries of payments on behalf of the beneficial owner of
shares of common stock. Non-United States Holders should consult their tax
advisors regarding the effect, if any, of those final Treasury Regulations on an
investment in our common stock. Those final Treasury Regulations generally are
effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the United States
income tax liability of persons subject to backup withholding will be reduced by
the amount of tax withheld. If withholding results in an overpayment of taxes, a
refund may be obtained, provided that the required information is furnished to
the IRS.
ESTATE TAX
Common stock owned or treated as owned at the time of death by an
individual who is not a citizen or resident of the United States for federal
estate tax purposes will be included in such individual's estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
applies other rules, and as a result may be subject to United States federal
estate tax.
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<PAGE> 81
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation CIBC World Markets
Corp., Robertson Stephens, Inc., U.S. Bancorp Piper Jaffray Inc. and First
Security Van Kasper, Inc. are acting as representatives, the following
respective numbers of shares of common stock:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITER ----------
<S> <C>
Credit Suisse First Boston Corporation......................
CIBC World Markets Corp. ...................................
Robertson Stephens, Inc. ...................................
U.S. Bancorp Piper Jaffray Inc. ............................
First Security Van Kasper, Inc. ............................
----------
Total..................................................... 12,000,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,800,000 additional shares at the initial public offering
price less the underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a selling concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
-------------------------------- --------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us........... $ $ $ $
Expenses payable by us............. $ $ $ $
</TABLE>
The representatives have informed us that the underwriters do not expect
discretionary sales to exceed 5% of the shares of common stock being offered.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation for
a period of 180 days after the date of this prospectus, except issuances
pursuant to the exercise of employee stock options outstanding on the date
hereof.
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<PAGE> 82
Our officers and directors and MRV have agreed that they will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock, enter into a transaction which
would have the same effect, or enter into any swap, hedge or other arrangement
that transfers, in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions are to be
settled by delivery of our common stock or such other securities, in cash or
otherwise, or publicly disclose the intention to make any offer, sale, pledge or
disposition, or to enter into any of these types of transactions, swap, hedge or
other arrangement, without, in each case, the prior written consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
prospectus.
The underwriters have reserved for sale, at the initial public offering
price up to six percent of the shares of the common stock to be offered in this
offering for employees, directors and other persons associated with us who have
expressed an interest in purchasing common stock in the offering. The number of
shares available for sale to the general public in the offering will be reduced
to the extent these persons purchase the reserved shares. Any reserved shares
not so purchased will be offered by the underwriters to the general public on
the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments, which the underwriters may be
required to make in that respect.
We have applied to have the shares of common stock quoted on The Nasdaq
Stock Market's National Market under the symbol "LMNE."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the offering price include:
- the information in this prospectus and otherwise available to the
underwriters;
- the history and the prospects for the industry in which we will compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that an active trading market for the common stock will develop
and continue after this offering.
In connection with the offering the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may
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<PAGE> 83
close out any short position by either exercising their over-allotment
option and/or purchasing shares in the open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option -- a naked short position -- that
position can only be closed out by buying shares in the open market. A
naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares
in the open market after pricing that could adversely affect investors
who purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short position.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of the common
stock or preventing or retarding a decline in the market price of the common
stock. As a result the price of the common stock may be higher than the price
that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters for
sale to their online brokerage account holders. Internet distributions will be
allocated by the underwriters that will make internet distributions on the same
basis as other allocations.
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<PAGE> 84
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are made. Any resale of the common stock in Canada must
be made under applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made under available
statutory exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers are advised to
seek legal advice prior to any resale of the common stock.
REPRESENTATIONS OF PURCHASERS
By purchasing common stock in Canada and accepting a purchase confirmation,
a purchaser is representing to us and the dealer from whom the purchase
confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase the common stock without the benefit of a prospectus qualified
under those securities laws,
- where required by law, the purchaser is purchasing as principal and not
as agent, and
- the purchaser has reviewed the text above under "Resale Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. The report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one report must
be filed for common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the eligibility of the common
stock for investment by the purchaser under relevant Canadian legislation.
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<PAGE> 85
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Kirkpatrick & Lockhart LLP, Beverly Hills, California. Certain
legal matters will be passed upon for the underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, San Francisco, California.
EXPERTS
The consolidated financial statements of Luminent, Inc. included in this
prospectus and elsewhere in the registration statement, to the extent and for
the periods indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of Fiber Optic Communications, Inc. and Optronics
International Corp. included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
report, have been audited by T N Soong & Co., a Member Firm of Andersen
Worldwide, SC, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of Quantum Optech Incorporation and
Subsidiary as of December 31, 1998 and 1999 and for the period from May 27, 1999
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999 have been included herein and in the registration statement in reliance
upon the report of KPMG Certified Public Accountants, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to our common stock
and us, we refer you to the registration statement and the exhibits and schedule
that were filed with the registration statement. Statements contained in this
prospectus about the contents of any contract or any other document that is
filed as an exhibit to the registration statement are not necessarily complete,
and we refer you to the full text of the contract or other document filed as an
exhibit to the registration statement. A copy of the registration statement and
the exhibits and schedules that were filed with the registration statement may
be inspected without charge at the public reference facilities maintained by the
Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of all or any part of the registration
statement may be obtained from the SEC upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Commission at 1(800) SEC-0330. The Securities and Exchange
Commission maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission. The address of the site is
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with the requirements of the Securities Exchange Act will file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the Securities and Exchange
Commission referred to above.
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<PAGE> 86
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Luminent, Inc.:
Report of Independent Public Accountants.................. F-3
Consolidated Balance Sheets at December 31, 1998 and 1999
(audited) and at June 30, 2000 (unaudited)............. F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 (audited) and for the
six months ended June 30, 1999 and 2000 (unaudited).... F-5
Statements of Parent Company Investment for the years
ended December 31, 1997, 1998 and 1999 (audited) and
for the six months ended June 30, 2000 (unaudited)..... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 (audited) and for the
six months ended June 30, 1999 and 2000 (unaudited).... F-7
Notes to Consolidated Financial Statements................ F-8
Consolidated Financial Statements of FOCI Fiber Optic
Communications, Inc.:
Independent Auditors' Report.............................. F-18
Consolidated Balance Sheets at December 31, 1997, 1998 and
1999................................................... F-19
Consolidated Statements of Operations and Comprehensive
Income for the years ended December 31, 1997, 1998 and
1999................................................... F-20
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999........... F-21
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-22
Notes to Consolidated Financial Statements................ F-23
Consolidated Financial Statements of Optronics International
Corp.:
Independent Auditors' Report.............................. F-38
Balance Sheets at December 31, 1997, 1998 and 1999........ F-39
Statements of Operations and Comprehensive Income for the
years ended December 31, 1997, 1998 and 1999........... F-40
Statements of Shareholders' Equity for the years ended
December 31, 1997, 1998 and 1999....................... F-41
Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999.................................... F-42
Notes to Financial Statements............................. F-43
Balance Sheets at December 31, 1999 (audited) and June 30,
2000 (unaudited)....................................... F-54
Statements of Operations and Comprehensive Income for the
six months ended June 30, 1999 and 2000 (unaudited).... F-55
Statements of Cash Flows for the six months ended June 30,
1999 and 2000 (unaudited).............................. F-56
Notes to Financial Statements............................. F-57
Consolidated Financial Statements of Quantum Optech
Incorporation and Subsidiary:
Independent Auditors' Report.............................. F-66
Consolidated Balance Sheets at December 31, 1998 and
1999................................................... F-67
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the period from May 27, 1997
(inception) to December 31, 1997 and years ended
December 31, 1998 and 1999............................. F-68
Consolidated Statements of Stockholders' Equity for the
period from May 27, 1997 (inception) to December 31,
1997 and years ended December 31, 1998 and 1999........ F-69
Consolidated Statements of Cash Flows for the period from
May 27, 1997 (inception) to December 31, 1997 and years
ended December 31, 1998 and 1999....................... F-70
</TABLE>
F-1
<PAGE> 87
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Notes to Consolidated Financial Statements (unaudited).... F-71
Consolidated Balance Sheet at June 30, 2000 (unaudited)... F-81
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the six months ended June 30, 1999
and 2000 (unaudited)................................... F-82
Consolidated Statements of Cash Flows for the six months
ended June 30, 1999 and 2000 (unaudited)............... F-83
Notes to Consolidated Financial Statements................ F-84
Unaudited Pro Forma Condensed Consolidated Financial
Statements:
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................ F-85
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 2000.................................... F-86
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended June 30, 2000...... F-87
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999........ F-88
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information.................................. F-89
</TABLE>
F-2
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Luminent, Inc.:
We have audited the accompanying consolidated balance sheets of Luminent,
Inc. (a Delaware corporation and a wholly owned subsidiary of MRV
Communications, Inc.) and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, parent company investment and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Luminent, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Los Angeles, California
July 25, 2000
F-3
<PAGE> 89
LUMINENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ -- $ 220 $ 4,982
Accounts receivable, net of allowance of $1,347 in 1998,
$1,724 in 1999 and $3,252 in 2000...................... 6,439 10,544 19,540
Inventories............................................... 6,502 8,755 21,620
Deferred income taxes..................................... 1,164 2,190 2,540
Prepaids and other current assets......................... -- 5 6,639
------- ------- ---------
Total current assets.............................. 14,105 21,714 55,321
------- ------- ---------
Property and Equipment, net:
Land...................................................... -- -- 3,245
Building.................................................. -- -- 17,900
Machinery and equipment................................... 2,328 4,483 13,126
Furniture and fixtures.................................... 12 12 1,808
Computer hardware and software............................ 874 890 890
Leasehold improvements.................................... 114 180 380
Construction in progress.................................. -- -- 1,792
------- ------- ---------
3,328 5,565 39,141
Less -- Accumulated depreciation.......................... (2,691) (4,152) (6,726)
------- ------- ---------
637 1,413 32,415
Goodwill, net............................................... -- -- 253,184
Other assets................................................ -- -- 1,007
------- ------- ---------
Total assets...................................... $14,742 $23,127 $ 341,927
======= ======= =========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current Liabilities:
Current portion of long-term debt......................... $ -- $ -- $ 879
Accounts payable.......................................... 3,358 4,200 10,891
Short-term borrowings..................................... -- -- 12,884
Accrued payroll and related............................... 179 322 324
Accrued product warranty.................................. 500 702 856
Other accrued expenses.................................... 103 139 3,315
Income taxes payable...................................... 2,512 3,790 2,526
------- ------- ---------
Total current liabilities......................... 6,652 9,153 31,675
Long-term debt, net of current portion...................... -- -- 7,007
Other long-term liabilities................................. -- -- 410
Minority interest........................................... -- -- 332
Commitments and contingencies
Parent company investment................................... 8,090 13,974 302,503
------- ------- ---------
Total liabilities and parent company investment... $14,742 $23,127 $ 341,927
======= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 90
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................... $35,081 $38,596 $65,264 $28,469 $ 43,587
Cost of sales(1)........................ 21,659 24,289 43,078 18,506 29,742
------- ------- ------- ------- --------
Gross profit....................... 13,422 14,307 22,186 9,963 13,845
Operating costs and expenses:
Selling, general and
administrative(1).................. 2,102 2,642 5,675 2,373 6,215
Research and development(1)........... 3,520 4,974 8,693 4,010 6,558
Parent company allocations............ 797 808 885 442 388
Amortization of goodwill.............. -- -- -- -- 9,580
------- ------- ------- ------- --------
6,419 8,424 15,253 6,825 22,741
------- ------- ------- ------- --------
Operating income (loss)............... 7,003 5,883 6,933 3,138 (8,896)
Other income, net.................. -- -- 6 10 103
------- ------- ------- ------- --------
Income (loss) before provision for
Income taxes..................... 7,003 5,883 6,939 3,148 (8,793)
Provision for income taxes.............. 2,789 2,343 2,764 1,254 1,750
Minority Interest....................... -- -- -- -- 318
------- ------- ------- ------- --------
Net Income (loss).................. $ 4,214 $ 3,540 $ 4,175 $ 1,894 $(10,861)
======= ======= ======= ======= ========
Basic and diluted net earnings (loss)
per share............................. $ 0.03 $ 0.02 $ 0.03 $ 0.01 $ (0.08)
======= ======= ======= ======= ========
Basic and diluted weighted average
shares................................ 144,000 144,000 144,000 144,000 144,000
======= ======= ======= ======= ========
</TABLE>
---------------
(1) Includes amounts relating to deferred stock compensation of $744,000, $1.1
million and $1.2 million presented in "cost of sales", "selling, general and
administrative" and "research and development", respectively, for the six
months ended June 30, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 91
LUMINENT, INC.
STATEMENTS OF PARENT COMPANY INVESTMENT
<TABLE>
<CAPTION>
ACCUMULATED
PARENT DEFERRED OTHER
COMPANY STOCK COMPREHENSIVE
INVESTMENT COMPENSATION LOSS TOTAL
---------- ------------ ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at December 31, 1996..................... $ 9,306 $ -- $ -- $ 9,306
Net income..................................... 4,214 -- -- 4,214
Net distributions to MRV Communications,
Inc. ....................................... (7,738) -- -- (7,738)
-------- -------- ----- --------
Balance at December 31, 1997..................... 5,782 -- -- 5,782
Net income..................................... 3,540 -- -- 3,540
Net distributions to MRV Communications,
Inc. ....................................... (1,232) -- -- (1,232)
-------- -------- ----- --------
Balance at December 31, 1998..................... 8,090 -- -- 8,090
Net income..................................... 4,175 -- -- 4,175
Net advances from MRV Communications, Inc. .... 1,709 -- -- 1,709
-------- -------- ----- --------
Balance at December 31, 1999..................... 13,974 -- -- 13,974
Comprehensive loss:
Net loss (unaudited)........................ (10,861) -- -- (10,861)
Foreign translation adjustment
(unaudited)............................... -- -- (881) (881)
-------- -------- ----- --------
Comprehensive loss (unaudited)................. (10,861) -- (881) (11,742)
Net advances from MRV Communications, Inc.
(unaudited)................................. 297,298 -- -- 297,298
Deferred stock compensation (unaudited)........ 14,070 (14,070) -- --
Amortization of deferred stock compensation
(unaudited)................................. -- 2,973 -- 2,973
-------- -------- ----- --------
Balance at June 30, 2000 (unaudited)............. $314,481 $(11,097) $(881) $302,503
======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 92
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- --------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................... $ 4,214 $ 3,540 $ 4,175 $ 1,894 $(10,861)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization.... 860 1,000 1,461 730 10,578
Provision for doubtful
accounts....................... 219 778 500 167 167
Amortization of deferred stock
compensation................... -- -- -- -- 2,973
Minority Interest................ -- -- -- -- 318
Deferred income taxes............ (637) (168) (1,026) (938) (350)
Changes in assets and liabilities,
net of effects from acquisitions:
Accounts receivable.............. (2,292) (326) (4,605) (1,346) 1,189
Inventories...................... 930 (2,172) (2,253) 1,303 (3,324)
Prepaid and other current
assets......................... -- -- (5) -- (1,852)
Accounts payable................. 1,187 (72) 842 942 5,014
Accrued payroll and related...... 116 63 143 110 (1,781)
Accrued product warranty......... 300 50 202 300 154
Other accrued expenses........... -- 3 36 (3) 28
Income taxes payable............. 3,068 (915) 1,278 (321) (1,264)
------- ------- ------- ------- --------
Net cash provided by
operating activities...... 7,965 1,781 748 2,838 989
------- ------- ------- ------- --------
Cash Flows from Investing Activities:
Purchases of property and
equipment........................ (227) (549) (2,237) (1,569) (1,860)
Net cash received in connection with
Fiber Optic Communications
acquisition...................... -- -- -- -- 1,892
Other Assets..................... 380
------- ------- ------- ------- --------
Net cash provided by (used
in) investing
activities................ (227) (549) (2,237) (1,569) 412
------- ------- ------- ------- --------
Cash Flows from Financing Activities:
Borrowings on long-term debt........ -- -- -- -- 329
Payments on long-term debt.......... -- -- -- -- (445)
Borrowings on short-term debt....... -- -- -- -- 4,266
Payments on short-term debt......... -- -- -- -- (1,740)
Net change in other liabilities..... -- -- -- -- (7)
Net cash (distributed to) advances
from MRV Communications.......... (7,738) (1,232) 1,709 (1,269) 1,311
------- ------- ------- ------- --------
Net cash provided by (used in)
financing activities................ (7,738) (1,232) 1,709 (1,269) 3,714
Effect of exchange rate on cash and
cash equivalent..................... -- -- -- -- (353)
Net increase in cash and cash
equivalents......................... -- -- 220 -- 4,762
Cash and cash equivalents, beginning
of year............................. -- -- -- -- 220
------- ------- ------- ------- --------
Cash and cash equivalents, end of
year................................ $ -- $ -- $ 220 $ -- $ 4,982
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 93
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS AND BASIS OF PRESENTATION
On April 29, 2000, MRV Communications, Inc. (MRV) announced a plan to
create a separate company, subsequently named Luminent, Inc. (Luminent or the
Company), comprised of MRV's fiber optic transmission business. Luminent
designs, manufactures and sells a comprehensive line of fiber optic components
that enable communications equipment manufactures to provide optical networking
solutions for the rapidly growing metropolitan and access segments of the
communications network. Its products are designed to meet the increasing
bandwidth requirements between long-haul telecommunication networks and end
users. Luminent specializes in singlemode fiber optic components and subsystems
for high-capacity data transmission for long-reach applications in the
metropolitan and access markets. After completion of Luminent's planned initial
public offering, MRV will own at least 80.1% of Luminent's outstanding common
stock.
Luminent was incorporated in Delaware in December, 1999 as a wholly owned
subsidiary of MRV issuing to MRV 1,000 shares of its common stock. In July,
2000, Luminent authorized 30,000,000 shares of $.001 par value of preferred
stock and 300,000,000 shares of $.001 par value common stock and effected a
144,000-for-one stock split of outstanding common stock (see Note 9). There are
no shares of preferred stock issued and outstanding.
On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the Separation Agreement) to be effective on September
8, 2000 (the separation date), under which MRV will continue to fund working
capital and other needs for the first few months of operation as a separate,
stand-alone entity. Additionally, MRV will transfer to Luminent, on or about the
separation date, substantially all of the assets and liabilities associated with
Luminent's business.
The accompanying consolidated financial statements include the assets,
liabilities, operating results and cash flows of Luminent, Inc. and have been
prepared using MRV's historical bases in the assets and liabilities and the
historical results of operations that are transferred to Luminent. Additionally,
the consolidated financial statements include allocations of certain MRV
corporate expenses, including centralized legal, accounting, employee benefits,
real estate, insurance services, information technology services, treasury and
other MRV corporate and infrastructure costs. The expense allocations have been
determined on bases that MRV and Luminent considered to be a reasonable
reflection of the utilization of services provided for the benefit received by
Luminent. The allocation methods are based on relative revenues, headcounts or
square footage. However, the financial information included herein may not
reflect the consolidated financial position, operating results, changes in
parent company investment and cash flows of Luminent in the future or what they
would have been had Luminent been a separate, stand-alone entity during the
periods presented.
The Company faces numerous risks related to the fact that it has no history
as an independent company. In addition, the Company faces risks commonly
associated with a technology company such as operating in a sector that is new
and characterized by rapid technological change, evolving industry standards,
the need to generate capital to fund operations and uncertainty regarding market
acceptance of its products and products under development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PARENT COMPANY INVESTMENT
The parent company investment account represents the book value of net
assets transferred to Luminent.
F-8
<PAGE> 94
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Luminent and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements for the interim periods
included herein are unaudited. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. The results for the interim periods presented are not
necessarily indicative of results to be expected for a full year.
REVENUE RECOGNITION
Luminent recognizes product revenue upon shipment of products, at which
time, customer acceptance of the products have been attained and collection is
considered probable. Products are shipped "FOB shipping point" with no rights of
return other than normal warranty rights. Luminent generally warrants its
products against defects in materials and workmanship for one year. The
estimated cost of warranty obligations is recognized at the time of revenue
recognition.
INVENTORIES
Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first-in, first-out
method.
PROPERTY AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and equipment............................. 3 years
Furniture and fixtures.............................. 5 years
Computer hardware and software...................... 3 years
Leasehold improvements.............................. Lesser of lease term or useful lives
</TABLE>
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Luminent evaluates its long-lived assets, including certain intangibles,
for impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows (undiscounted and without interest charges) expected to
be generated by the asset. If these assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
F-9
<PAGE> 95
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are carried at cost,
which approximates their fair market value.
INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period. For purposes of these financial
statements, income taxes have been calculated as if Luminent had prepared a tax
return on a stand-alone basis.
DEFERRED STOCK COMPENSATION
The deferred compensation charges are being amortized using the graded
vesting method. Using this method, approximately 57%, 26%, 13% and 4%,
respectively, of each option's compensation expense is amortized in each of the
four years following the date of grant.
EARNINGS PER SHARE
Basic and diluted earnings per common share are computed using the weighted
average number of common shares (adjusted for the effect of the stock split
discussed in Note 9) outstanding. The weighted average number of shares used for
computation of basic and diluted earnings per shares used for all periods
presented were 144,000,000.
STATEMENTS OF CASH FLOWS (UNAUDITED)
In connection with the "push down" of the assets and liabilities of Fiber
Optic Communications in April, 2000 (see Note 3), the Company recorded net
assets of approximately $310.4 million. This non-cash transaction, except for
the effect of the net cash received of $1.9 million, has been excluded from the
accompanying Unaudited Consolidated Statement of Cash Flows for the six months
ended June 30, 2000.
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. The Company will adopt the statement
in January 2001 and does not expect the adoption of this statement to have a
material impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commissions (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition." SAB No. 101
provides additional guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company has reviewed this bulletin and
believes that it current revenue recognition policy is consistent with the
guidance of SAB No. 101.
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
F-10
<PAGE> 96
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
3. BUSINESS ACQUISITIONS
In December 1999, MRV acquired 51 percent of the outstanding stock of
Luminent Korea in exchange for approximately $250,000 in cash. This investment
was accounted for using the purchase method. The assets and liabilities of this
acquired entity have been "pushed down" to Luminent.
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of
common stock and options to purchase 300,000 shares of common stock for a total
purchase price of approximately $310.4 million. The issuance price of the 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 common stock are exercisable at $6.00 per share, have an aggregate
intrinsic value of $14.1 million, and vest over a four-year period. The
acquisition is being accounted for using the purchase method of accounting. The
assets and liabilities of the acquired entity have been "pushed down" to
Luminent. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $262.1 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 four years.
The outstanding capital stock of Fiber Optic Communications, purchased by
MRV, has been contributed to Luminent. The results of operations of Fiber Optic
Communications have also been included in Luminent's consolidated financial
statements from April 25, 2000. The following unaudited pro forma financial
information presents the combined results of operations of Luminent and Fiber
Optic Communications as if the acquisition had occurred as of January 1, 1999
and 2000, giving effect to certain adjustments, including amortization of
goodwill and other intangibles and deferred compensation charges.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 2000
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $ 37,322 $ 50,645
Net loss.................................................... $(29,342) $(29,058)
Basic and diluted net loss per share........................ $ (0.20) $ (0.20)
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................... $3,896 $4,291 $10,890
Work in process............................................. 1,507 3,655 8,504
Finished goods.............................................. 1,099 809 2,226
------ ------ -------
Total inventories...................................... $6,502 $8,755 $21,620
====== ====== =======
</TABLE>
F-11
<PAGE> 97
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.
For the three years ended December 31, 1997, 1998 and 1999, the Company had
one customer that accounted for more than 10% of net sales. As of December 31,
1997, 1998 and 1999, one customer accounted for approximately 13%, 23% and 30%,
respectively of total accounts receivable at December 31, 1997, 1998 and 1999,
respectively. Certain geographical area information follows (in thousands).
Geographical Area Net Sales:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1997 1998 1999 1999 2000
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States.................... $26,387 $22,808 $52,737 $20,649 $26,651
Asia-Pacific..................... 916 7,646 3,812 3,047 8,910
European......................... 3,385 3,056 4,678 2,133 5,324
Other............................ 4,393 5,086 4,037 2,640 2,702
------- ------- ------- ------- -------
Total net sales............. $35,081 $38,596 $65,264 $28,469 $43,587
======= ======= ======= ======= =======
</TABLE>
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- ----------------
1997 1998 1999 1999 2000
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current
Federal............................. $2,719 $1,944 $2,968 $1,699 $1,530
State............................... 707 567 822 493 570
------ ------ ------ ------ ------
3,426 2,511 3,790 2,192 2,100
Deferred
Federal............................. (549) (121) (817) (724) (253)
State............................... (88) (47) (209) (214) (97)
------ ------ ------ ------ ------
(637) (168) (1,026) (938) (350)
------ ------ ------ ------ ------
Provision for income taxes............ $2,789 $2,343 $2,764 $1,254 $1,750
====== ====== ====== ====== ======
</TABLE>
As of June 30, 2000, the effective income tax rate differs from the
statutory rate primarily due to amortization of goodwill and deferred stock
compensation, which are not expected to provide any tax benefit.
F-12
<PAGE> 98
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the net deferred income tax assets at December 31, 1998,
1999 and June 30, 2000 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued expenses...................................... $ 239 $ 320 $ 181
Allowance for doubtful accounts....................... 537 687 1,088
Reserve for excess and obsolescence................... 196 905 1,077
State income taxes.................................... 192 278 194
------ ------ ------
1,164 2,190 2,540
Valuation allowance................................... -- -- --
------ ------ ------
Net deferred tax asset........................... $1,164 $2,190 $2,540
====== ====== ======
</TABLE>
Realization of the net deferred tax assets is dependent on its ability to
carry losses back to prior periods or on generating sufficient taxable income
during the periods in which temporary differences will reverse. Although
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized. No valuation allowance has been
provided for the net deferred tax assets.
Income (Loss) before Provision for Income Taxes:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------- -----------------
1997 1998 1999 1999 2000
------ ------ ------ ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States........................ $7,003 $5,883 $6,940 $3,148 $(9,484)
Non-United States.................... -- -- (1) -- 691
------ ------ ------ ------ -------
Income (loss) before provision
for income taxes.............. $7,003 $5,883 $6,939 $3,148 $(8,793)
====== ====== ====== ====== =======
</TABLE>
7. TRANSACTIONS WITH MRV COMMUNICATIONS, INC.
Luminent's sales of products to MRV and its affiliates was $2.1 million in
1997 and 1998, $2.5 million in 1999, $1.1 million (unaudited) for the six months
ended June 30, 1999 and $1.3 million (unaudited) for the six months ended June
30, 2000.
For the periods presented, intercompany transactions and balances between
Luminent and MRV consisted of the following (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, --------------------
----------------------------- JUNE 30, JUNE 30,
1997 1998 1999 1999 2000
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period........................ $(9,406) $(7,738) $(1,232) $(1,232) $ 1,709
Intercompany sales.............. 2,144 2,104 2,503 1,052 1,428
Operating expenses.............. (7,965) (1,781) (748) (2,838) (989)
Fair value of Fiber Optic
Communications transferred
from MRV...................... -- -- -- -- 310,360
------- ------- ------- ------- --------
Net cash (distributions to)
advances from MRV............. 7,489 6,183 1,186 4,958 (15,210)
======= ======= ======= ======= ========
Balance at end of period........ $(7,738) $(1,232) $ 1,709 $ 1,940 $297,298
======= ======= ======= ======= ========
Average balance during the
period........................ $ 8,500 $ 4,500 $ 500 $ 500 $104,000
======= ======= ======= ======= ========
</TABLE>
F-13
<PAGE> 99
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Luminent's costs and expenses include allocations from MRV for centralized
legal, accounting, employee benefits, real estate, insurance services,
information technology services, treasury and other MRV corporate and
infrastructure costs. These allocations have been determined on bases that MRV
and Luminent considered to be a reasonable reflection of the utilization of
services provided for the benefit received by Luminent. The allocation methods
are based on relative revenues, headcount or square footage.
For purposes of governing the ongoing relationships between Luminent and
MRV at and after the separation and to provide for an orderly transition,
Luminent and MRV have entered or will enter into various agreements. A brief
description of each of the agreements follows.
Master Separation and Distribution Agreement. MRV and Luminent have
entered into a master separation agreement, which contains key provisions
relating to the separation, Luminent's initial funding, initial public offering
and the distribution of Luminent's common stock to MRV's stockholders. The
agreement lists the documents and items that the parties must deliver in order
to accomplish the transfer of assets and liabilities from MRV to Luminent,
effective on the separation date. The agreement also contains conditions that
must occur prior to the initial public offering and the distribution. The
parties also entered into ongoing covenants that survive the transactions,
including covenants to establish interim service level agreements, exchange
information, engage in certain auditing practices and resolve disputes in
particular ways.
General Assignment and Assumption Agreement. The General Assignment and
Assumption Agreement identifies the assets that MRV will transfer to Luminent
and the liabilities that Luminent will assume from MRV in the separation. The
agreement also describes when and how these transfers and assumptions will
occur. In general, these assets and liabilities are those that appear in the
consolidated balance sheet.
Intellectual Property Agreements. The Master Technology Ownership and
License Agreement, the Master Patent Ownership and License Agreement and the
Master Trademark Ownership and License Agreement together are referred to as the
Intellectual Property Agreements. Under the Intellectual Property Agreements,
MRV will confirm that Luminent owns or will transfer to Luminent its rights in
specified patents, patent applications, invention disclosures, specified
trademarks and other intellectual property related to Luminent's current
business and research and development efforts.
Employee Matters Agreement. The Employee Matters Agreement outlines how
MRV and Luminent plan to allocate assets, liabilities and responsibilities
relating to current and former employees of Luminent and their participation in
the benefits plans, including stock plans, that MRV currently sponsors and
maintains. The agreement also contains provisions describing some of Luminent's
employee benefit and employee stock plans.
All eligible Luminent employees will continue to participate in the MRV
benefits plans on comparable terms and conditions to those for MRV employees
until the distribution date or until Luminent establishes benefit plans for its
employees, or elects not to establish comparable plans if it is not legally or
financially practical. Luminent intends to establish its own benefit program no
later than the time of the distribution.
Once Luminent establishes its own benefits plans, it may modify or
terminate each plan in accordance with the terms of that plan and its policies.
No Luminent benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan at the time of the distribution. Each Luminent
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding MRV benefits plan will be taken into account under that Luminent
benefit plan.
F-14
<PAGE> 100
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following the date of MRV's distribution of its Luminent common stock to
its stockholders, Luminent will be under no obligation to maintain these plans
in the form in which they were established or at all. The transfer to Luminent
of employees at certain of MRV's international operations, and of certain
employee benefit plans, may not take place until Luminent receives consents or
approvals or has satisfied other applicable requirements.
Tax Sharing Agreement. The Tax Sharing Agreement allocates MRV's and
Luminent's responsibilities for certain tax matters. The agreement requires
Luminent to pay MRV for the incremental tax costs of Luminent's inclusion in
consolidated, combined or unitary tax returns with affiliated corporations. In
determining these incremental costs, the agreement takes into account not only
the group's incremental tax payments to the Internal Revenue Service or other
taxing authorities, but also the incremental use of tax losses of affiliates to
offset Luminent's taxable income, and the incremental use of tax credits of
affiliates to offset the tax on Luminent's income. The agreement also provides
for compensation or reimbursement as appropriate to reflect redeterminations of
Luminent's tax liability for periods during which Luminent joined in filing
consolidated, combined or unitary tax returns.
The tax sharing agreement also requires Luminent to indemnify MRV for
certain taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by MRV from Luminent before the distribution, (b) customs
duties or harbor maintenance fees on products exported or imported by MRV on
behalf of Luminent, (c) the additional taxes that would result if an acquisition
of a controlling interest in Luminent's stock after the distribution causes the
distribution not to qualify for tax-free treatment to MRV, and (d) any taxes
resulting from transactions undertaken in preparation for the distribution.
Luminent's indemnity obligations include any interest and penalties on
taxes, duties or fees for which Luminent must indemnify MRV.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a deficiency in the group's
federal income tax liability for a period during which Luminent was a member of
the group even if the Tax Sharing Agreement allocates that liability to MRV or
another member.
Master Transitional Services Agreement. The Master Transitional Services
Agreement governs the provision of information technology services by MRV and
Luminent to each other, on an interim basis, for one year from the date of
separation, unless extended for specific services or otherwise indicated in the
agreement. The services include data processing and telecommunications services,
such as voice telecommunications and data transmission, and information
technology support services, for functions including accounting, financial
management, tax, payroll, stockholder and public relations, legal, procurement,
and other administrative functions. Specified charges for such services are
generally intended to allow the providing company to recover the direct and
indirect costs of providing the services. The Master Transitional Services
Agreement also will cover the provision of certain additional transitional
services identified from time to time after the separation date that were
inadvertently or unintentionally omitted from the specified services, or that
are essential to effectuate an orderly transition under the separation
agreement, so long as the provision of such services would not significantly
disrupt MRV's operations or significantly increase the scope of its
responsibility under the agreement.
In addition, the Master Transitional Services Agreement will provide for
the replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
F-15
<PAGE> 101
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Real Estate Matters Agreement. The Real Estate Matters Agreement addresses
real estate matters relating to the MRV leased and owned properties that MRV
will transfer to or share with Luminent. The agreement describes the manner in
which MRV will transfer to or share with Luminent various leased and owned
properties. The Real Estate Matters Agreement provides that Luminent will be
required to accept the transfer of all sites allocated to Luminent, even if a
site has been damaged by a casualty before the separation date. The Real Estate
Matters Agreement also provides that all reasonable costs required to effect the
transfers, including landlord consent fees and landlord attorneys' fees will be
paid by MRV.
Indemnification and Insurance Matters Agreements. Effective as of the
separation date, subject to specified exceptions, Luminent and MRV will each
release the other from any liabilities arising from events occurring on or
before the separation date, including events occurring in connection with the
activities to implement the separation, the initial public offering and the
distribution. The agreement also contains provisions governing indemnification.
In general, Luminent and MRV will each indemnify the other from all liabilities
arising from their respective businesses or contracts, as well as liabilities
arising from a breach of the separation agreement or any ancillary agreement. In
addition, MRV and Luminent will each indemnify the other against liability for
specified environmental conditions. Luminent will reimburse MRV for the cost of
any insurance coverage from the separation date to the distribution date.
8. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases facilities and certain equipment under lease
arrangements expiring in various years through July 2004. The aggregate minimum
annual lease payments under leases in effect on December 31, 1999 were as
follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
2000....................................................... $ 589
2001....................................................... 574
2002....................................................... 568
2003....................................................... 566
2004....................................................... 324
------
$2,621
======
</TABLE>
Rental expense under lease agreements for the years ended December 31,
1997, 1998 and 1999 was $47,000, $54,000, and $349,000, respectively. Rental
expense under lease agreements for the six month periods ended June 30, 1999 and
2000 was $128,000 and $490,000, respectively.
LITIGATION
Luminent has received notices from third party alleging possible
infringements of patents with respect to product features or manufacturing
processes. Management believes such notices are common in the communications
industry because of the large number of patents that have been filed on these
subjects. The Company's policy is to discuss these notices with the senders in
an effort to demonstrate that the Company's products and/or processors do not
violate any patents. The Company is currently involved in such discussions with
Ortel and Rockwell. The Company is evaluating these claims and presently does
not believe that any of its products or processes violate any of the patents
asserted by these parties. Additionally, the Company intends to vigorously
defend its position if any legal action is taken. Management believes the
ultimate outcome of such claims will not have a material impact on the results
of operations or financial position.
F-16
<PAGE> 102
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
On April 27, 2000, MRV entered into a definitive agreement with Optronics
International Corporation, a Republic of China corporation. The agreement
provides for the exchange of approximately 4.2 million shares of common stock
and options of MRV for all of the outstanding shares of Optronics. The agreement
also provides for a guarantee portion of the purchase price through the issuance
of additional shares of MRV common stock. This acquisition will be accounted for
using the purchase method, and is expected to be completed during the third
quarter of fiscal year 2000. Optronics is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks.
On July 12, 2000, the Company completed the acquisition of all of the
outstanding capital stock of Quantum Optech, Inc., a Republic of China
corporation. The acquisition was accounted for using the purchase method. Under
the terms of the agreement, Quantum shareholders received approximately 1.1
million shares of common stock and options. The agreement also provides for a
guarantee portion of the purchase through the issuance of additional shares of
MRV common stock. Quantum is a manufacturer of optical thin film coating and
filters for Dense Wavelength Division Multiplexing.
These two acquisitions will be contributed and "pushed down" to Luminent as
part of the Master Separation and Distribution Agreement.
Effective July 25, 2000, Luminent's Board of Directors declared a
144,000-for-one stock split. All periods presented have been restated to give
effect to the stock split.
In July 25, 2000, the Board of Directors adopted, and the stockholder
approved the 2000 Stock Option Plan (2000 Plan), providing for grants of
qualified incentive stock options, non-qualified stock options, restricted stock
awards and other stock-based awards to officers, employees, directors,
consultants and advisors of the Company. 10,400,000 shares of common stock are
reserved for issuance under the 2000 Plan.
In July 2000, Luminent and MRV entered into three-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 expiring in five years. These options are immediately
exercisable, however they provide for the repurchase in the event of voluntary
termination. These grants will be accounted for under Accounting Principles
Board Opinion 25 and the intrinsic value (fair market value less exercise price)
will result in additional deferred stock compensation of approximately $11.1
million that will be amortized over the four year vesting period. Since the
employees were hired after June 30, 2000, the accompanying consolidated
financial statements do not include any compensation expense related to the MRV
options. Furthermore, the CEO and CFO received on September 7, 2000 options to
purchase 4,800,000 shares and 800,000 shares, respectively, of capital stock of
Luminent at $6.25 per share. These grants will be accounted for under Accounting
Principles Board Opinion 25 and the intrinsic value (mid point of filing range,
$14, less $6.25) will result in aggregate deferred stock compensation of
approximately $43.4 million. The deferred compensation will be amortized using
the graded vesting method over four years.
F-17
<PAGE> 103
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
FOCI Fiber Optic Communications, Inc.
We have audited the accompanying consolidated balance sheets of FOCI Fiber
Optic Communications, Inc. as of December 31, 1997, 1998 and 1999, and the
related consolidated statements of operations and comprehensive income,
shareholders' equity, and cash flows for the years ended December 31, 1997, 1998
and 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FOCI Fiber
Optic Communications, Inc. at December 31, 1997, 1998 and 1999 and the results
of its operations and its cash flows for the years ended December 31, 1997, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States of America.
T N Soong & Co
A Member Firm of Andersen Worldwide, SC
Taipei, Taiwan, the Republic of China
June 12, 2000
F-18
<PAGE> 104
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
NOTES 1997 1998 1999
--------- ------- ------- -------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................................ 2C $ 532 $ 2,236 $ 3,344
Marketable securities....................................... 2D, 15 911 1,527 174
Notes and accounts receivable -- net........................ 2C, 3, 14 8,119 9,361 10,348
Inventories................................................. 2E, 4 2,787 8,504 11,541
Prepaid expenses and other current assets................... 15 1,252 3,217 4,444
------- ------- -------
Total Current Assets........................................ 13,601 24,845 29,851
------- ------- -------
LONG-TERM STOCK INVESTMENTS................................. 2F, 5 -- 40 31
------- ------- -------
PROPERTIES -- NET........................................... 2G, 6, 15 9,231 15,723 25,559
------- ------- -------
INTANGIBLE ASSETS........................................... 21
Patent...................................................... 149 107 66
Land occupancy rights....................................... -- 270 502
------- ------- -------
Total Intangible Assets..................................... 149 377 568
------- ------- -------
OTHER ASSETS
Deferred charges -- net..................................... 2J -- 197 265
Deferred income tax......................................... 2N, 13 490 368 331
Refundable deposits......................................... 28 100 85
Others...................................................... 10 1,029 789
------- ------- -------
Total Other Assets.......................................... 528 1,694 1,470
------- ------- -------
TOTAL ASSETS................................................ $23,509 $42,679 $57,479
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans....................................... 7 $ 2,099 $ 2,686 $ 8,700
Commercial papers........................................... 8 -- -- 1,659
Notes payable............................................... 867 1,607 1,225
Accounts payable............................................ 304 940 1,787
Income tax payable.......................................... 2N, 13 25 185 188
Current portion of long-term debts.......................... 9, 15 317 641 429
Accrued expenses and other current liabilities.............. 13 1,337 1,579 2,195
------- ------- -------
Total Current Liabilities................................... 4,949 7,638 16,183
------- ------- -------
LONG-TERM DEBTS -- NET OF CURRENT PORTION................... 9, 15 2,473 1,892 7,429
------- ------- -------
OTHER LIABILITIES
Accrued pension cost........................................ 2M, 12 44 66 70
Others...................................................... 254 313 373
------- ------- -------
Total Other Liabilities..................................... 298 379 443
------- ------- -------
Total Liabilities........................................... 7,720 9,909 24,055
------- ------- -------
SHAREHOLDERS' EQUITY........................................ 10
Capital stock, $0.3 par value;
Authorized -- 35,000 thousand shares in 1997, 110,000
thousand shares in 1998 and 1999
Issued -- 35,000 thousand shares in 1997, 56,720 thousand
shares in 1998 and 68,984 thousand shares in 1999....... 12,975 19,787 23,891
Capital surplus............................................. 5,456 13,358 11,592
Retained earnings:
Legal reserve............................................. -- 62 267
Unappropriated earnings................................... 426 1,871 (755)
Cumulative translation adjustment........................... (3,068) (2,308) (1,571)
------- ------- -------
Total Shareholders' Equity.................................. 15,789 32,770 33,424
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $23,509 $42,679 $57,479
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE> 105
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
NOTES 1997 1998 1999
------ ---------- ---------- ----------
(IN THOUSAND U.S. DOLLARS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SALES
Products, net..................................... $ 7,506 $16,939 $19,158
Engineering contracts............................. -- 3,442 600
------- ------- -------
NET SALES........................................... 7,506 20,381 19,758
COST OF SALES
Cost of goods sold................................ 2,688 12,274 12,739
Cost of engineering contracts..................... -- 1,115 668
------- ------- -------
2,688 13,389 13,407
------- ------- -------
GROSS PROFIT........................................ 4,818 6,992 6,351
------- ------- -------
OPERATING EXPENSES
Research and development............................ 2L 895 871 1,256
General and administrative.......................... 1,506 3,358 3,321
Marketing........................................... 1,067 2,132 1,692
------- ------- -------
Total Operating Expenses............................ 3,468 6,361 6,269
------- ------- -------
INCOME FROM OPERATIONS.............................. 1,350 631 82
------- ------- -------
NON-OPERATING INCOME (EXPENSES)
Foreign exchange gain (losses) -- net............... 2P 1,003 (403) (599)
Interest -- net..................................... (9) (63) (322)
Loss on disposal of properties -- net............... (71) (19) (65)
Long-term investment permanent loss................. 2F -- (57) (9)
Unrealized holdings gains (loss) of market
securities........................................ 2D (437) 211 170
Loss on sale of marketable securities............... (421) (106) --
Other -- net........................................ 30 (132) 114
------- ------- -------
Total Non-Operating Income (Expenses)............... 95 (569) (711)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX AND MINORITY
INTERESTS......................................... 1,445 62 (629)
INCOME TAX BENEFIT (EXPENSE)........................ 2N, 13 174 129 (68)
------- ------- -------
NET INCOME BEFORE MINORITY LOSS..................... 1,619 191 (697)
MINORITY LOSS....................................... 15 1,316 36
------- ------- -------
NET INCOME (LOSS)................................... $ 1,634 $ 1,507 $ (661)
======= ======= =======
OTHER COMPREHENSIVE INCOME
Translation adjustment.............................. $(3,068) $ 760 $ 737
------- ------- -------
COMPREHENSIVE INCOME (LOSS)......................... 2S $(1,434) $ 2,267 $ 76
======= ======= =======
EARNINGS (LOSS) PER SHARE --
Retroactively adjusted outstanding common stock
44,665 thousand shares in 1997 and
60,213 thousand shares in 1998 and
68,447 thousand shares in 1999.................... $ 0.04 $ 0.03 $ (0.01)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE> 106
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
CAPITAL SURPLUS
-------------------------------
CAPITAL STOCK ISSUED GAIN ON
------------------------------------------- DISPOSAL OF
SHARES PAID-IN LONG-TERM PROPERTIES LEGAL
(THOUSAND) AMOUNT CAPITAL INVESTMENT (2G) TOTAL RESERVE
---------- ------- ------- ---------- ----------- ------- -------
(IN THOUSAND U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... 19,980 $ 7,519 $ -- $-- $-- $ -- $ --
Issuance of capital stock for
cash............................. 15,020 5,456 5,456 -- -- 5,456 --
Net income for 1997................ -- -- -- -- -- -- --
Translation adjustment............. -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ----
BALANCE, DECEMBER 31, 1997......... 35,000 12,975 5,456 -- -- 5,456 --
Issuance of capital stock for
cash............................. 16,470 4,905 9,809 -- -- 9,809 --
Appropriations of 1997 earnings:
Legal reserve.................... -- -- -- -- -- -- 62
Capital surplus transferred into
capital.......................... 5,250 1,907 (1,907) -- -- (1,907) --
Net income for 1998................ -- -- -- -- -- -- --
Translation adjustment............. -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ----
BALANCE, DECEMBER 31, 1998......... 56,720 19,787 13,358 -- -- 13,358 62
Appropriations of 1998 earnings:
Legal reserve.................... -- -- -- -- -- -- 205
Stock dividends -- 10%........... 5,672 1,759 -- -- -- -- --
Capital surplus transferred into
capital.......................... 5,672 2,060 (2,060) -- -- (2,060) --
Stocks issued as payment of bonus
to employees..................... 920 285 285 -- -- 285 --
Net loss for 1999.................. -- -- -- -- -- -- --
Gain on disposal of properties..... -- -- -- -- 1 1 --
Adjustment of capital reserve due
to change in equity in long-term
investments...................... -- -- -- 8 -- 8 --
Translation adjustments............ -- -- -- -- -- -- --
------ ------- ------- -- -- ------- ----
BALANCE, DECEMBER 31, 1999......... 68,984 $23,891 $11,583 $8 $1 $11,592 $267
====== ======= ======= == == ======= ====
<CAPTION>
RETAINED EARNINGS
(NOTE 10)
------------------------ CUMULATIVE
UNAPPROPRIATED TRANSLATION TOTAL
EARNINGS ADJUSTMENT SHAREHOLDERS'
(DEFICIT) TOTAL (NOTE 2Q) EQUITY
-------------- ------- ----------- -------------
(IN THOUSAND U.S. DOLLARS)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........... $(1,208) $(1,208) $ -- $ 6,311
Issuance of capital stock for
cash............................. -- -- -- 10,912
Net income for 1997................ 1,634 1,634 -- 1,634
Translation adjustment............. -- -- (3,068) (3,068)
------- ------- ------- -------
BALANCE, DECEMBER 31, 1997......... 426 426 (3,068) 15,789
Issuance of capital stock for
cash............................. -- -- -- 14,714
Appropriations of 1997 earnings:
Legal reserve.................... (62) -- -- --
Capital surplus transferred into
capital.......................... -- -- -- --
Net income for 1998................ 1,507 1,507 -- 1,507
Translation adjustment............. -- -- 760 760
------- ------- ------- -------
BALANCE, DECEMBER 31, 1998......... 1,871 1,933 (2,308) 32,770
Appropriations of 1998 earnings:
Legal reserve.................... (205) -- -- --
Stock dividends -- 10%........... (1,759) (1,759) -- --
Capital surplus transferred into
capital.......................... -- -- -- --
Stocks issued as payment of bonus
to employees..................... -- -- -- 570
Net loss for 1999.................. (661) (661) -- (661)
Gain on disposal of properties..... (1) (1) -- --
Adjustment of capital reserve due
to change in equity in long-term
investments...................... -- -- -- 8
Translation adjustments............ -- -- 737 737
------- ------- ------- -------
BALANCE, DECEMBER 31, 1999......... $ (755) $ (488) $(1,571) $33,424
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE> 107
FOCI FIBER OPTIC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1998 1999
------- ------- --------
(IN THOUSAND U.S. DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 1,634 $ 1,507 $ (661)
Adjustments to reconcile net income (loss) to net cash
provided used in operating activities:
Depreciation and amortization............................. 697 972 1,475
Loss on disposal of properties............................ 71 19 65
Long-term investment permanent loss....................... -- 57 9
Accrued pension costs..................................... (4) 22 4
Unrealized holding losses (gains) on marketable
securities.............................................. 437 (211) (170)
Minority interest in net income of consolidated
subsidiaries............................................ (15) (1,316) (36)
Deferred income tax....................................... (485) 122 37
Loss on sale of marketable securities..................... 421 106 --
Changes in operating assets and liabilities
Notes and accounts receivable........................... (5,483) (1,242) (987)
Inventories............................................. (1,354) (5,717) (3,037)
Prepaid expenses and other current assets............... (237) (2,157) (1,227)
Notes and accounts payable.............................. (189) 1,376 465
Accrued expenses and other current liabilities.......... 907 402 619
------- ------- --------
Net Cash Used in Operating Activities....................... (3,600) (6,060) (3,444)
------- ------- --------
INVESTING ACTIVITIES
Acquisitions of:
Marketable securities..................................... (1,769) (511) 1,523
Long-term stock investments............................... -- (40) --
Properties................................................ (6,316) (7,175) (11,388)
Proceeds from disposals of:
Properties................................................ 17 190 56
Long-term stock investment................................ -- 135 --
Increase in deferred charges................................ -- (459) (541)
Decrease (increase) in refundable deposits.................. 176 (72) 15
Decrease (increase) in other assets......................... -- (1,019) 240
------- ------- --------
Net Cash Used in Investing Activities....................... (7,892) (8,951) (10,095)
------- ------- --------
FINANCING ACTIVITIES
Proceeds from (payments of):
Short-term bank loans..................................... 1,605 587 6,014
Commercial paper.......................................... -- -- 1,659
Long-term debts........................................... 971 (257) 5,325
Issuance of capital stock................................. 10,912 14,714 570
Increase in minority interest............................. -- 1,375 96
------- ------- --------
Net Cash Provided by Financing Activities................... 13,488 16,419 13,664
------- ------- --------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE................. (1,754) 296 983
------- ------- --------
NET INCREASE IN CASH........................................ 242 1,704 1,108
CASH AT BEGINNING OF YEAR................................... 290 532 2,236
------- ------- --------
CASH AT END OF YEAR......................................... $ 532 $ 2,236 $ 3,344
======= ======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest...................................... $ 118 $ 284 $ 385
======= ======= ========
Cash paid for income tax.................................... $ 12 $ 34 $ 29
======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 108
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
FOCI Fiber Optic Communications, Inc. (the "Company") was incorporated
under the Company Law of the Republic of China on June 14, 1995 and started its
operation in September 1995. The Company designs, installs, manufactures and
markets fiber optic related products such as components, testing systems,
instruments, network installation, CATV engineering and sensing systems.
The Company has the following subsidiaries:
<TABLE>
<CAPTION>
DATE, PLACE AND OTHER
DETAILS RELATED TO
NAME OWNERSHIP INCORPORATION NATURE OF BUSINESS
---- --------- --------------------- ------------------
<S> <C> <C> <C>
FOCI USA, Inc. ............... 100% Incorporated on March Selling of fiber optic related
11, 1999 in the State of products including components,
California, United testing systems, instruments,
States of America. network installation, CATV
engineering, and sensing
systems.
FOCI Optronic Components,
Inc. ....................... 94% Incorporated on February Designs, installs, manufactures
6, 1999 in the Republic and markets fiber optic related
of China. products including components,
testing systems, instruments,
network installation, CATV
engineering, and sensing
systems.
FIOPTEC Inc................... 93% Incorporated on April 9, Manufacture and markets fiber
1993 in the Republic of optic related products
China. The Company's 93% including fiber optic
investment was acquired components.
on June 29, 1998. Also, it has indirect
investment in Shanghai FOCI
Fiber Optic Communications
Equipment, Inc. through FIOPTEC
Inc. (Cayman Islands).
FIOPTEC Inc. (Cayman
Islands).................... 100% owned by Incorporated on August Investment holding company.
FIOPTEC, Inc. 28, 1998 in Cayman
Islands.
Shanghai FOCI Fiber Optic
Communications Equipment,
Inc. ....................... 100% owned by Incorporated on August Designs, installs, manufactures
FIOPTEC (Cayman 1, 1995 in Shanghai, and markets fiber optic related
Islands) People's Republic of products including components,
China. FIOPTEC Inc.'s testing systems, instruments,
investment was made on network installation, CATV
June 29, 1998. engineering, and sensing
systems.
</TABLE>
F-23
<PAGE> 109
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DATE, PLACE AND OTHER
DETAILS RELATED TO
NAME OWNERSHIP INCORPORATION NATURE OF BUSINESS
---- --------- --------------------- ------------------
<S> <C> <C> <C>
Yuan-Tai Enterprises Pte,
Ltd. ....................... 100% owned by Incorporated on October Import fiber optic products
FIOPTEC Inc. 23, 1993 in Singapore. from the Company for export
FIOPTEC Inc. made its outside Singapore.
investment to the
Company on December 5,
1995 and the investment
was disposed by FIOPTEC
Inc. on October 29,
1998.
</TABLE>
2. ACCOUNTING POLICIES
A. Basis of Presentation
The consolidated financial statements included the following: (a)
1997 -- the Company, FIOPTEC Inc., Shanghai FOCI Fiber Optic Communications
Equipment, Inc., and Yuan-Tai Enterprises Pte., Ltd.; (b) 1998 -- the Company,
FIOPTEC Inc., FIOPTEC Inc. (Cayman Islands), and Shanghai FOCI Fiber Optic
Communications Equipment, Inc.; and (c) 1999 -- the Company, FIOPTEC Inc.,
FIOPTEC Inc. (Cayman Islands), and Shanghai FOCI Fiber Optic Communications
Equipment, Inc., FOCI Optronic Components, Inc., and FOCI USA, Inc.
All transactions and balances with consolidated companies have been
eliminated.
B. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
C. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and accounts receivable. Cash is
deposited with high credit quality financial institutions. As far as the
accounts receivable, the Company performs ongoing credit evaluations of its
customers' financial condition and the Company maintains its allowance for
doubtful accounts receivable based on a review of the collectibility of
individual accounts receivable taking into account the age of the receivable.
D. Marketable Securities
Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings.
The costs of investment sold are determined by the weighted average method.
E. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
F-24
<PAGE> 110
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. Investments in Shares of Stock
These investments are equity securities without readily available market
value. Accordingly, they were carried at costs. The unrealized loss resulting
from the decline in market value of such investment is reported as deduction
from stockholders' equity in the current year's income. When it becomes
evidently clear that there has been a permanent impairment in value and the
chance of recovery is minimal, loss is recognized in the current year's income.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment and interest expense incurred during the
construction period are capitalized, while maintenance and repairs are expensed
currently.
Depreciation is provided on the straight-line method over the estimated
useful lives of the assets. Salvage values of fixed assets still in use after
the end of their original estimated useful lives are depreciated over the
remaining new estimated useful lives. The useful lives of the fixed assets are
2-10 years, except for buildings which are 20-25 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income. Any such gain, less applicable income tax, is transferred to
capital surplus at the end of the year.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the consolidated financial statements of the Company.
I. Intangible Assets
Intangible assets are stated at cost and amortized on straight-line basis
over the following years: patent -- 5 years; land occupancy rights -- 50 years.
J. Deferred Charges
Deferred charges consisting of computer software purchased, and payments
under technology transfer agreements are stated at cost and amortized on
straight basis over 2-5 years.
K. Revenue Recognition
The Company derives its revenue from the sale of fiber optic related
components and contracted projects on engineering services.
Revenue from product sales is recognized when all of following conditions
are met: the product has been shipped, the Company has the right to invoice the
customer at a fixed price, the collection of the receivable is probable and
there are no significant obligations remaining.
Revenue and cost on engineering contracts are accounted for under completed
contract method or the percentage of completion method. The use of the
percentage of completion method depends on the ability to make reasonable
dependable estimates. That is, the Company can estimate the extent of progress
toward completion, contract revenues, and contract costs. The completed contract
method may be used as
F-25
<PAGE> 111
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's basic accounting policy in circumstances in which financial
position and results of operations would not vary materially from those
resulting from use of the percentage of completion method.
Anticipated losses on engineering contracts are provided for when
determined. When the balances of contract in progress excess the one of billing
on contract, the billing on contract is shown in the current asset as a
deduction, on the contrary, the contract in progress is shown in the current
liability as a deduction.
Provisions for sales return and allowances are recorded based on historical
experience at the time revenue is recognized based on the Company's historical
experience. Generally, the Company provides one-year warranty period for its
product sold and engineering contracts provided. Estimated expenses for warranty
obligations are based on its historical field return rates and are accrued as
revenue is recognized and included in cost of goods sold.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company currently complies with SAB 101 and therefore SAB 101 will not have
any effect on our financial position or results of operations.
L. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
M. Pension Costs
The Company, FOCI Optronic Components, Inc. and FIOPTEC Inc. have
non-contributory and funded defined benefit retirement plans covering all their
regular employees. The contribution to an independent fund is deposited with the
Central Trust of China, as the custodian. Net pension cost, with includes
service cost, interest cost, expected return on plan assets and amortization of
net asset or obligation at transition, is recognized based on an actuarial
valuation.
N. Income Tax
The Company, FOCI Optronic Component, Inc. and FIOPTEC Inc. are subject to
tax in the Republic of China (ROC), FIOPTEC Inc. (Cayman Island) is not subject
to income or other taxes in Cayman Island, while FOCI USA, Inc. is subject to
tax in the United States of America and Shanghai FOCI Fiber Optic Communications
Equipment, Inc. is subject to tax in the People Republic of China (PRC).
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
related to a asset or liability in the financial
F-26
<PAGE> 112
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements, then it should be classified as current or noncurrent based on the
expected reversal dates of temporary differences.
O. Bonuses to Employees, Directors and Supervisors
According to ROC regulations and the Articles of Incorporation of FOCI, a
portion of distributable earnings should be set aside as bonuses to employees,
directors and supervisors. Bonuses to directors and supervisors are always paid
in cash. However, bonuses to employees may be granted in cash or stock or both.
All of these appropriations, including stock bonuses which are valued at par
value of $0.30, are charged against retained earnings under ROC GAAP, after such
appropriations are formally approved by the shareholders in the following year.
Under U.S. GAAP, such bonuses are charged to income currently in the year
earned. Stock issued as part of these bonuses is recorded at fair market value,
determined by an independent third parties. Since the amount and form of such
bonuses are not finally determinable until the shareholders' meeting in the
subsequent year, the total amount of the aforementioned bonuses is initially
accrued based on management's estimate regarding the amount to be paid based on
the Company's Articles of Incorporation. Any difference between the initially
accrued amount and the fair market value of the bonuses settled by the issuance
of shares is recognized in the year of approval by shareholders.
P. Foreign-currency Transactions
The functional currency of the Company, FOCI Optronic Components, Inc. and
FIOPTEC Inc. is New Taiwan dollars, that of Shanghai FOCI Fiber Optic
Communications Equipment, Inc. is Remibi, and that of FOCI USA, Inc. and FIOPTEC
Inc. (Cayman Islands) is US dollars. The foreign-currency transactions of the
Company and its subsidiary, except that of FOCI USA, Inc. and FIOPTEC Inc.
(Cayman Islands), are recorded using their respective functional currencies at
the rates of exchange in effect when the transactions occur. Gains or losses,
resulting from the application of different foreign exchange rates when cash in
foreign currency is converted into New Taiwan dollars and Remibi, or when
foreign-currency receivables and payables are settled, are credited or charged
to income in the year of conversion or settlement. At the balance sheet dates,
the balances of foreign-currency assets and liabilities are restated into the
respective functional currencies based on prevailing exchange rates and any
resulting gains or losses are credited or charged to income.
Q. Translation of Foreign-currency Financial Statements
The financial statements of the foreign subsidiary are translated into U.S.
dollars at the following exchange rates: assets and liabilities -- current rate;
income and expenses -- weighted average rate during the year. The resulting
translation adjustment is recorded as separate component of shareholders'
equity.
R. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income". Comprehensive income, as defined, includes all changes in equity during
a period from non-owner sources. As of December 31, 1999, comprehensive income
of the Company included only the translation adjustments on subsidiaries.
S. Earnings (Loss) Per Share
Earnings per share is calculated by dividing net income by the average
number of shares outstanding in each period, adjusted retroactively for stock
dividends issued subsequently.
F-27
<PAGE> 113
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Receivable from related parties (Note 14)................... $ 919 $ 3,140 $ 3,619
Notes receivable............................................ 211 316 320
Accounts receivable -- third parties........................ 7,154 7,303 7,332
------ ------- -------
8,284 10,759 11,271
Allowance for doubtful accounts............................. (165) (1,398) (923)
------ ------- -------
$8,119 $ 9,361 $10,348
====== ======= =======
</TABLE>
4. INVENTORIES
A. The details of inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Finished goods.............................................. $1,177 $ 41 $ 1,780
Work in process............................................. -- 1,798 1,427
Raw materials............................................... 1,658 4,134 4,236
Contract in progress -- net................................. -- 2,607 4,198
------ ------ -------
2,835 8,580 11,641
Allowance for losses...................................... (48) (76) (100)
------ ------ -------
$2,787 $8,504 $11,541
====== ====== =======
</TABLE>
B. The details of contract in progress are summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED CONTRACT
CONTRACT CONTRACT PAID-IN BILLING ON IN
ACCOUNTING METHOD PRICE COST COST CONTRACT PROGRESS
------------------------- -------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
1999
Applied system of fiber
optic.................. Completed contract method $5,400 $5,348 $4,813 $722 $4,091
Others................... Completed contract method 492 394 107 -- 107
------ ------ ------ ---- ------
$5,892 $5,742 $4,920 $722 $4,198
====== ====== ====== ==== ======
1998
Applied system of fiber
optic.................. Completed contract method $5,400 $4,657 $3,312 $705 $2,607
====== ====== ====== ==== ======
</TABLE>
The completion percentage of the construction -- Applied system of fiber
optic was 90% as of December 31, 1999 and will be completed in 2000.
F-28
<PAGE> 114
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVESTMENTS IN SHARES OF STOCK
The details of the investments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
CARRYING % OF CARRYING % OF CARRYING % OF
VALUE OWNERSHIP VALUE OWNERSHIP VALUE OWNERSHIP
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ganso Corp. ....................... $-- -- $22 -- $13 --
Winluck Group Ltd.................. -- -- 18 -- 18 --
-- --- ---
$-- $40 $31
== === ===
</TABLE>
6. PROPERTIES -- NET
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cost
Land...................................................... $ -- $ -- $ 3,186
Buildings................................................. 5,386 5,458 15,255
Machinery and equipment................................... 3,733 5,093 6,852
Test equipment............................................ 343 340 551
Transportation equipment.................................. 18 183 195
Furniture and fixtures.................................... 830 1,041 1,448
Leasehold improvements.................................... -- 76 --
Construction in progress and prepayments.................. 41 5,628 1,704
------- ------- -------
10,351 17,819 29,191
------- ------- -------
Accumulated depreciation
Buildings................................................. 69 280 699
Machinery and equipment................................... 763 1,326 2,151
Test equipment............................................ 50 82 135
Transportation equipment.................................. 3 17 39
Furniture and fixtures.................................... 235 386 608
Leasehold improvements.................................... -- 5 --
------- ------- -------
1,120 2,096 3,632
------- ------- -------
$ 9,231 $15,723 $25,559
======= ======= =======
</TABLE>
Interest expense were amounting to $95 and $151 were capitalized in 1997
and 1999, respectively.
F-29
<PAGE> 115
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT-TERM LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Secured loans from Tai-sin Bank, Far Eastern Bank, Dah An
Commercial Bank and Land Bank of Taiwan................... $ 248 $2,686 $5,426
Unsecured loans from The International Commercial Bank of
China..................................................... 1,851 -- 2,479
Working capital loans from The International Commercial Bank
of China.................................................. -- 795
------ ------ ------
$2,099 $2,686 $8,700
====== ====== ======
3.00% 6.67% 1.12%
-8.15% -7.75% -7.77%
====== ====== ======
</TABLE>
As of December 31, 1999, unused credit for short-term bank borrowings is
about $407.
8. COMMERCIAL PAPERS
Commercial paper will mature between January to May 2000. It bore annual
interest rates ranging from 4.85% to 5.10% and is secured by a guaranty issued
by Tai-sin Bank, Far Eastern Bank and Dah An Commercial Bank.
As of December 31, 1999, unused credit for issuance of commercial paper is
about $2,451.
9. LONG-TERM DEBTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Land Bank of Taiwan:
Loan for plant expansion. Payable in 60 monthly
installments starting from December 1998 to November
2003. Interest at floating rate and actual annual
interest rate was 7.5% in 1997 and 1998. .............. $1,904 $1,893 $ --
Loan for plant expansion. Payable in 72 monthly
installments starting from December 2000 to November
2006. Interest at an annual rate of 7.5%. ............. -- -- 6,161
Loan for the purchase machinery and equipment. Payable in
48 monthly installments starting from July 1997 to June
2001. Interest at floating rate and actual annual
interest rate was 7.5%. ............................... 886 640 393
The International Commercial Bank of China -- loan for the
purchase land. Payable in 16 quarterly installments
starting from October 2000 to September 2004. Interest at
floating rate and actual applicable rate for 1999 was 7.5%
per annum. ............................................... -- -- 1,304
------ ------ -------
2,790 2,533 7,858
Current portion............................................. (317) (641) (429)
------ ------ -------
$2,473 $1,892 $ 7,429
====== ====== =======
</TABLE>
F-30
<PAGE> 116
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999, long-term bank loans mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
During the year 2000.................................... $ 429
During the year 2001.................................... 1,484
During the year 2002.................................... 1,352
During the year 2003.................................... 1,353
During the year 2004.................................... 1,272
During the year 2005.................................... 1,027
During the year 2006.................................... 941
</TABLE>
10. SHAREHOLDERS' EQUITY
According to the ROC Company Law, capital surplus can only be used to
offset a deficit or transferred to capital.
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income (less deficit, if any):
(a) 10% thereof as legal reserve;
(b) Not over 15% special bonus to employees;
(c) Not over 5% compensation to directors and supervisors; and
(d) The remaining amount shall be appropriated as common stockholders'
bonus.
The appropriations and the disposition of the remaining net income shall be
resolved by the shareholders in the following year and given effect to in the
financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
11. LONG-TERM OPERATING LEASES
The Company has an operating lease agreement covering certain parcels of
land with an area of 4,494 square meters. The agreement will is valid until
December 2015 and required payment of fixed annual rental of $58.
12. PENSION PLAN
The Company has a defined benefit pension plan for all regular employees,
which provides benefits based on length of service and average monthly salary
for the last six months prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited in the committee's name in the Central Trust of China which acts
as trustee.
F-31
<PAGE> 117
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Certain pension information are summarized as follows:
The components of net periodic benefit costs are as follows:
a. Net periodic pension cost
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Service cost................................. $34 $83 $74
Interest cost................................ 4 9 12
Projected return on plan assets.............. (1) (3) (8)
Amortization of unrecognized loss............ -- 5 --
--- --- ---
Net periodic benefit cost.................... $37 $94 $78
=== === ===
</TABLE>
The change in benefit obligation and plan assets and reconciliation of
fund status are as follows:
b. Change in benefit obligation:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Projected benefit obligation at beginning of
year....................................... $ 56 $144 $188
For the years:
Service cost................................ 34 83 74
Interest cost............................... 4 9 12
Actuarial loss (gain)....................... 49 (57) 24
Foreign currency exchanges................... 1 9 8
---- ---- ----
Projected benefit obligation at end of
year....................................... $144 $188 $306
==== ==== ====
</TABLE>
c. Change in plan assets:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Fair value of plan assets at beginning of
year....................................... $15 $ 45 $124
Employer contributions....................... 29 76 82
Interest income.............................. 1 3 8
--- ---- ----
Fair value of plan assets at end of year..... $45 $124 $214
=== ==== ====
</TABLE>
d. Reconciliation of fund status
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Funded status................................ $ 99 $64 $ 92
Unrecognized actuarial loss.................. (58) (1) (25)
---- --- ----
Net amount of "Prepaid pension costs" shown
in the balance sheets...................... $ 41 $63 $ 67
==== === ====
e. Actuarial assumptions
Discount rate used in determining present
values..................................... 6.75% 6.5% 6.0%
Rate of long-term rate of return on plan
assets..................................... 7.0% 6.5% 6.0%
Rate of compensation increase................ 6.5% 6.5% 6.0%
</TABLE>
F-32
<PAGE> 118
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAX
A. Income tax benefit and income tax payable:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998 1999
----- ----- ----
<S> <C> <C> <C>
Income tax expense -- current..................... $ 42 $ 189 $44
Income tax expense (benefit) -- deferred.......... (216) (319) 24
Translation adjustment............................ -- 1 --
----- ----- ---
Income tax expense (benefit)...................... $(174) $(129) $68
===== ===== ===
</TABLE>
B. As of December 31, 1997, 1998 and 1999, deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998 1999
----- ---- -----
<S> <C> <C> <C>
Current:
Taxable temporary differences................... $(132) $241 $ 354
Investment tax credits.......................... 66 155 69
----- ---- -----
Total........................................... (66) 396 423
Valuation allowance............................. -- (4) --
----- ---- -----
(66) 392 423
----- ---- -----
Noncurrent:
Taxable temporary differences................... 7 4 (4)
Investment tax credits.......................... 483 364 335
Operating loss carryforwards.................... -- 35 --
----- ---- -----
Total........................................... 490 403 331
Valuation allowance............................. -- (35) --
----- ---- -----
490 368 331
----- ---- -----
$ 424 $760 $ 754
===== ==== =====
</TABLE>
C. The Company's income tax returns through taxable year ended December 31,
1997 have been examined by the tax authorities. The Company did not receive any
tax assessment from the tax authorities as a result from the foregoing tax
examinations.
D. Pursuant to the "Statute for the Establishment and Administration of
Science-Based Industrial Park," the Company was granted several periods of tax
holidays with respect to income derived from approved investments and are
eligible until December, 2002.
E. As of December 31, 1999, the Company's unused investment tax credits
amounted to $405. Such tax credits can be utilized until December 2003.
F-33
<PAGE> 119
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
<TABLE>
<CAPTION>
NAME AND RELATIONSHIP OF RELATED PARTIES RELATIONSHIP WITH THE COMPANY
---------------------------------------- -----------------------------
<S> <C>
Pacriminvesting & Developing Co., Ltd.... A shareholder.
Winluck Group Ltd........................ The supervisor is the board chairman of
the Company
Yuan-Tai Enterprises Pte., Ltd........... A consolidated entity until October 29,
1998 (see Note 1)
</TABLE>
B. Significant Related Party Transactions
(1) Sales
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Winluck Group Ltd............................ $1,033 14 $1,755 9 $ 878 4
Yuan-Tai Enterprises Pte., Ltd............... -- -- 2,058 10 387 2
Pacriminvesting & Developing Co., Ltd........ 6 -- -- -- -- --
------ -- ------ -- ------ ---
$1,039 14 $3,813 19 $1,265 6
====== == ====== == ====== ===
</TABLE>
The above sales are dealt with in the ordinary course of business similar
to that with other companies, and the collection period is at sight in the
average 60 days.
(2) Engineering revenues
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Winluck Group Ltd.................. $-- -- $3,050 89 $-- --
== == ====== == == ===
</TABLE>
(3) Accounts Receivable
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Winluck Group Ltd.................. $919 11 $3,140 29 $3,137 28
Yuan-Tai Enterprises Pte, Ltd...... -- -- -- -- 482 4
---- -- ------ -- ------ ---
919 11 3,140 29 3,619 32
== == ===
Allowance for doubtful accounts.... (75) (543) --
---- ------ ------
$844 $2,597 $3,619
==== ====== ======
</TABLE>
F-34
<PAGE> 120
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and listed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------ -------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash.................... $ 532 $ 532 $2,236 $2,236 $ 3,344 $ 3,344
Marketable securities... 911 911 1,527 1,527 174 174
Notes and accounts
receivable -- net.... 8,119 8,119 9,361 9,361 10,348 10,348
Long-term investment.... -- -- 40 40 31 31
Refundable deposits..... 28 28 100 100 85 85
Liabilities
Short-term bank loans... 2,099 2,099 2,686 2,686 8,700 8,700
Commercial papers
payable.............. -- -- -- -- 1,659 1,659
Notes payable........... 867 867 1,607 1,607 1,225 1,225
Accounts payable........ 304 304 940 940 1,787 1,787
Long-term bank borrowing
(including current
portion)............. 2,790 2,790 2,533 2,533 7,858 7,868
</TABLE>
16. ASSETS PLEDGED AS COLLATERAL
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS 1997 1998 1999 SUBJECT OF COLLATERAL
------ ------ ------ ------- --------------------------------
<S> <C> <C> <C> <C>
Land........................... $ -- $ -- $ 3,186 Long-term loans
Marketable securities.......... 361 -- -- Financed stock
Time deposit (shown in other Short-term guarantee and endorse
current assets).............. 154 1,466 3,022 for the bank loan of subsidiary
Machinery and equipment........ 1,307 1,088 905 Long-term loans
Buildings...................... 5,354 5,317 12,741 Long-term loans
------ ------ -------
$7,176 $7,871 $19,854
====== ====== =======
</TABLE>
17. COMMITMENTS AND CONTINGENT LIABILITIES
A. On July 27, 1995, the Company has acquired from Industrial Technology
Research Institute specific product technology know-how related to light source
driver, FBT Fiber Couplers, WIC and WBC, WDM attenuators and FBT attenuators. In
consideration for the foregoing, the Company shall pay royalty, until 2001,
equivalent to 1% of the sales value of the products covered by the agreement.
ITRI, however, have agreed to waive the royalty payments in 1997 and 1998, and,
in 1999, the Company paid royalties of US$5.
B. FIOPTEC Inc. and FOCI Optronic Components Inc. signed several contracts
with third parties for the construction of its new plant amounting to $1,639. As
of December 31, 1999, the two subsidiaries has outstanding obligations of $608
related to these contracts.
F-35
<PAGE> 121
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers.
A. Industry: The Company is engaged in a single industry, which is
manufacturing, selling, designing and installation of fiber optic related
products.
B. Foreign markets
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
AREA 1997 1998 1999
---- ------ ------- -------
<S> <C> <C> <C>
Asia................................................... $6,671 $ 8,731 $ 7,834
United States.......................................... 1,869 2,003 5,196
Europe................................................. 1,303 2,695 4,165
Other.................................................. 114 217 303
------ ------- -------
$9,957 $13,646 $17,498
====== ======= =======
</TABLE>
C. Major customers
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
CUSTOMERS AMOUNT % AMOUNT % AMOUNT %
--------- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
A...................................... $ -- -- $3,050 15 $2,285 12
====== ====== ======
</TABLE>
D. Geographic information
<TABLE>
<CAPTION>
ADJUSTMENTS
AND
ELIMINATING
OVERSEAS TAIWAN ENTRIES CONSOLIDATED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
1997
Sales to customers other than the parent
and its subsidiaries.................. $ -- $ 7,506 $ -- $ 7,506
Intercompany revenue.................... -- 4,914 (4,914) --
------ ------- ------- -------
Total sales............................. $ -- $12,420 $(4,914) $ 7,506
====== ======= ======= =======
Gross profit............................ $ -- $ 9,732 $(4,914) $ 4,818
====== ======= ======= =======
Operating expenses...................... (3,468)
Non-operating income (expenses)......... 95
-------
Income before income tax................ 1,445
Income tax benefit...................... 174
Minority loss........................... 15
-------
Net income.............................. $ 1,634
=======
Identifiable assets..................... $5,743 $23,317 $(5,551) $23,509
====== ======= ======= =======
</TABLE>
F-36
<PAGE> 122
FOCI FIBER OPTIC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
ADJUSTMENTS
AND
ELIMINATING
OVERSEAS TAIWAN ENTRIES CONSOLIDATED
-------- ------- ----------- ------------
<S> <C> <C> <C> <C>
1998
Sales to customers other than the parent
and its subsidiaries.................. $ -- $20,381 $ -- $20,381
Intercompany revenue.................... -- 108 (108) --
------ ------- ------- -------
Total sales............................. $ -- $20,489 $ (108) $20,381
====== ======= ======= =======
Gross profit............................ $ -- $ 7,100 $ (108) $ 6,992
====== ======= =======
Operating expenses...................... (6,361)
Non-operating income (expenses)......... (569)
-------
Income before income tax................ 62
Income tax benefit...................... 129
Minority loss........................... 1,316
-------
Net income.............................. $ 1,507
=======
Identifiable assets..................... $ -- $42,730 $ (91) $42,639
====== ======= ======= =======
1999
Sales to customers other than the parent
and its subsidiaries.................. $3,480 $16,278 $ -- $19,758
Intercompany revenue.................... -- 1,082 (1,082) --
------ ------- ------- -------
Total sales............................. $3,480 $17,360 $(1,082) $19,758
====== ======= ======= =======
Gross profit............................ $ 793 $ 6,640 $(1,082) $ 6,351
====== ======= ======= =======
Operating expenses...................... (6,269)
Non-operating income (expenses)......... (711)
-------
Loss before income tax.................. (629)
Income tax expense...................... (68)
Minority loss........................... 36
-------
Net loss................................ $ (661)
-------
Identifiable assets..................... $1,188 $56,510 $ (250) $57,448
====== ======= ======= =======
</TABLE>
F-37
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Optronics International Corp.
We have audited the accompanying balance sheets of Optronics International
Corp. as of December 31, 1997, 1998 and 1999, and the related statements of
operations and comprehensive income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1997, 1998 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Optronics International
Corp. at December 31, 1997, 1998 and 1999 and the results of its operations and
its cash flows for the years ended December 31, 1997, 1998 and 1999, in
conformity with accounting principles generally accepted in the United States of
America.
T N Soong & Co
A Member Firm of Andersen Worldwide, SC
Taipei, Taiwan, the Republic of China
June 23, 2000
F-38
<PAGE> 124
OPTRONICS INTERNATIONAL CORP.
BALANCE SHEETS
DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
NOTES 1997 1998 1999
--------- ------- ------- -------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................... 2B $ 4,734 $ 6,510 $ 1,841
Restricted cash......................................... 2D 742 64 967
Marketable securities................................... 2B, 2E 1,607 -- 2,307
Notes and accounts receivable -- net.................... 2B, 3, 10 486 2,076 476
Inventories............................................. 2F, 4 248 694 1,046
Prepaid expenses and other current assets............... 53 39 102
------- ------- -------
Total Current Assets.................................... 7,870 9,383 6,739
------- ------- -------
PROPERTIES -- NET....................................... 2G, 2H, 2,741 4,920 5,197
------- ------- -------
5, 10
OTHER ASSETS
Prepaid long-term investment............................ -- 1 --
Deferred pension cost................................... 2L, 8 33 13 --
Deferred charges -- net of accumulated amortization cost
of $2 in 1999......................................... 2I -- -- 32
Refundable deposits..................................... 38 62 41
------- ------- -------
Total Other Assets...................................... 71 76 73
------- ------- -------
TOTAL ASSETS............................................ $10,682 $14,379 $12,009
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable.............................. 10 $ 97 $ 701 $ 537
Income tax payable...................................... 2N, 9 -- 14 62
Current portion of long-term debts...................... 6, 12 -- -- 253
Accrued expenses and other current liabilities.......... 520 1,809 841
------- ------- -------
Total Current Liabilities............................... 617 2,524 1,693
LONG-TERM DEBTS -- NET OF CURRENT PORTION............... 6, 12 -- 495 253
ACCRUED PENSION COST.................................... 2L, 8 34 39 86
------- ------- -------
Total Liabilities....................................... 651 3,058 2,032
------- ------- -------
SHAREHOLDERS' EQUITY.................................... 7
Capital stock, $0.3 par value;
Authorized -- 25,000 thousand shares in 1997 and
45,000 thousand shares in 1998 and 1999
Issued -- 20,000 thousand shares in 1997 and
35,000 thousand shares in 1998 and 1999............ 7,266 11,833 11,833
Advanced capital........................................ 4,324 --
Retained earnings:
Legal reserve......................................... -- -- 50
Unappropriated earnings (Deficit)..................... (499) 365 (1,261)
Cumulative translation adjustment....................... 2Q (1,060) (877) (645)
------- ------- -------
Total Shareholders' Equity.............................. 10,031 11,321 9,977
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............. $10,682 $14,379 $12,009
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 125
OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
NOTES 1997 1998 1999
------ ------- ------- -------
(IN THOUSAND U.S. DOLLARS
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
SALES................................................ $ 1,280 $ 7,940 $ 4,998
SALES RETURNS AND ALLOWANCES......................... (2) (318) (191)
------- ------- -------
NET SALES............................................ 2J, 10 1,278 7,622 4,807
COST OF SALES........................................ 2J, 10 1,164 4,336 4,684
------- ------- -------
GROSS PROFIT......................................... 114 3,286 123
------- ------- -------
OPERATING EXPENSES
Research and development............................. 2K 888 2,086 1,453
General and administrative........................... 187 646 453
Marketing............................................ 169 638 318
------- ------- -------
Total Operating Expenses................... 1,244 3,370 2,224
------- ------- -------
LOSS FROM OPERATIONS................................. (1,130) (84) (2,101)
------- ------- -------
NON-OPERATING INCOME
Interest revenue..................................... 67 236 206
Subsidy.............................................. 492 704 339
Gain on sale of marketable securities................ 2E 177 132 48
Unrealized holdings gains on marketable securities... 13 -- --
Foreign exchange gain................................ 2O 10 -- --
Gain on disposal of properties....................... 10 -- -- 4
Other................................................ -- 1 39
------- ------- -------
Total Non-Operating Income................. 759 1,073 636
------- ------- -------
NON-OPERATING EXPENSE
Foreign exchange loss................................ 2O -- 15 49
Loss on disposal of properties....................... -- 27 --
------- ------- -------
Total Non-Operating Expense................ -- 88 49
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX...................... (371) 901 (1,514)
INCOME TAX EXPENSE................................... 2N, 9 -- (37) (62)
------- ------- -------
NET INCOME (LOSS).................................... $ (371) $ 864 $(1,576)
======= ======= =======
OTHER COMPREHENSIVE INCOME
Translation adjustments.............................. 2Q (1,060) 183 232
------- ------- -------
COMPREHENSIVE INCOME (LOSS).......................... $(1,431) $ 1,047 $(1,344)
======= ======= =======
EARNINGS (LOSS) PER SHARE -- Based on 2R
Weighted average outstanding common stock
18,085 thousand shares in 1997,
33,125 thousand shares in 1998 and
35,000 thousand shares 1999........................ $ (0.02) $ 0.03 $ (0.05)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 126
OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
RETAINED EARNINGS (NOTE 7)
---------------------------------- CUMULATIVE
CAPITAL STOCK ISSUED UNAPPROPRIATED TRANSLATION TOTAL
-------------------- ADVANCED LEGAL EARNINGS ADJUSTMENT SHAREHOLDERS'
SHARES AMOUNT CAPITAL RESERVE (DEFICIT) TOTAL (NOTE 20) EQUITY
---------- ------- -------- ------- -------------- ------- ----------- -------------
(THOUSAND) (IN THOUSAND U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997..... 14,000 $ 5,093 $ -- $-- $ (128) $ (128) $ -- $ 4,965
Issuance of capital stock for
cash....................... 6,000 2,173 -- -- -- -- -- 2,173
Advanced capital............. -- -- 4,324 -- -- -- -- 4,324
Net loss for 1997............ -- -- -- -- (371) (371) -- (371)
Translation adjustments...... -- -- -- -- -- -- (1,060) (1,060)
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1997... 20,000 7,266 4,324 -- (499) (499) (1,060) 10,031
Issuance of capital stock for
cash....................... 15,000 4,567 (4,324) -- -- -- -- 243
Net income for 1998.......... -- -- -- -- 864 864 -- 864
Translation adjustments...... -- -- -- -- -- -- 183 183
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1998... 35,000 11,833 -- -- 365 365 (877) 11,321
Appropriations of 1998
earnings:
Legal reserve.............. -- -- -- 50 (50) -- -- --
Net loss for 1999............ -- -- -- -- (1,576) (1,576) -- (1,576)
Translation adjustments...... -- -- -- -- -- -- 232 232
------ ------- ------- --- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1999... 35,000 $11,833 $ -- $50 $(1,261) $(1,211) $ (645) $ 9,977
====== ======= ======= === ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 127
OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSAND U.S. DOLLARS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ (371) $ 864 $(1,576)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 190 480 647
Loss (gain) on disposal of properties..................... -- 27 (4)
Accrued pension cost...................................... 1 25 60
Unrealized holding gains on marketable securities......... (13) -- --
Gain on sale of marketable securities..................... (177) (132) (48)
Transfer of properties to expense......................... 10 -- --
Changes in operating assets and liabilities
Notes and accounts receivable.......................... (486) (1,590) 1,600
Inventories............................................ (248) (446) (352)
Prepaid expenses and other current assets.............. (39) 14 (63)
Notes and accounts payable............................. 97 604 (164)
Income tax payable..................................... -- 14 48
Accrued expenses and other current liabilities......... 179 1,289 (968)
------- ------- -------
Net Cash Provided by (Used in) Operating Activities......... (857) 1,149 (820)
------- ------- -------
INVESTING ACTIVITIES
Acquisitions of Properties.................................. (2,550) (2,575) (834)
Decrease (increase) in restricted cash...................... (742) 678 (903)
Proceeds from disposals of properties....................... 2 -- 39
Decrease (increase) in marketable securities................ 2,680 1,739 (2,259)
Decrease (increase) in prepaid long-term investments........ -- (1) 1
Increase in deferred charges................................ -- (33)
Decrease (increase) in refundable deposits.................. (9) (24) 21
------- ------- -------
Net Cash Used in Investing Activities....................... (619) (183) (3,968)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from
Issuance of capital stock................................. 6,497 243 --
Long-term debts........................................... -- 495 --
------- ------- -------
Net Cash Provided by Financing Activities................... 6,497 738 --
------- ------- -------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE................. (658) 72 119
------- ------- -------
NET INCREASE (DECREASE) IN CASH............................. 4,363 1,776 (4,669)
CASH AT BEGINNING OF YEAR................................... 371 4,734 6,510
------- ------- -------
CASH AT END OF YEAR......................................... $ 4,734 $ 6,510 $ 1,841
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income tax.................................... $ -- $ 24 $ 15
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 128
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
Optronics International Corp. (the "Company") was incorporated under the
Company Law of the Republic of China on November 21, 1996 and started its
operations in February 1997. The Company is primarily engaged in research,
development, production, manufacture and sale of visible laser diode and module,
communication laser diode and module and high power laser diode and module.
2. ACCOUNTING POLICIES
A. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
B. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, marketable securities and accounts
receivable. Cash and marketable securities are deposited or placed with high
credit quality financial institutions. The Company is exposed to credit risk in
the event of default by these institutions to the extent of the amount recorded
on the balance sheet. As far as the accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and the Company
maintains an allowance for doubtful accounts receivable based upon review of the
expected collectibility of individual accounts receivable.
C. Fair Value of Financial Instruments
The Company's financial instruments, including cash, restricted cash,
marketable securities, notes and accounts receivable, refundable deposits, and
notes and accounts payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Fair value of long-term debts is estimated based on current interest rates
available to the Company with similar terms, degrees of risks and remaining
maturities. The carrying values of long-term debts approximate their respective
fair value.
D. Restricted Cash
Restricted cash is composed of time deposits that the Company maintains as
collateral for obtaining letters of credits.
E. Marketable Securities
Marketable securities are open-end bond funds that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings.
The costs of investment sold are determined by the weighted average method.
F-43
<PAGE> 129
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment are capitalized, while maintenance and
repairs are expensed currently.
Depreciation is provided on the straight-line method over the estimated
useful lives that range as follows: machinery and equipment -- 3 to 8 years;
computer equipment -- 3 years; office equipment -- 5 years; leasehold
improvements -- 5 years; transportation equipment -- 5 years; other
equipment -- 5 to 20 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the financial statements of the Company.
I. Deferred Charges
Deferred charges are stated at cost and amortized on straight-line basis
over the following years: tools -- 3 years.
J. Recognition of Revenue, Cost and Expenses
Revenue is mainly from product sales to customers and is recognized at the
time of shipment, indicating that revenue has been realized and earned. The four
criteria for revenue being realized and earned are the existence of evidence of
sale, actual shipment, fixed or determinable selling price, and reasonable
assurance of collectibility.
Allowances for sales return and discounts are provided at the time of the
recognition of the related revenues based on experience and these provisions are
deducted from sales.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company currently complies with SAB 101 and therefore SAB 101 will not have
any effect on our financial position or results of operations.
K. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
F-44
<PAGE> 130
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
L. Pension Costs
The Company has non-contributory and funded defined benefit retirement
plans covering all its regular employees. The contribution to an independent
fund is deposited with the Central Trust of China, as the custodian. Net pension
cost, with includes service cost, interest cost, expected return on plan assets
and amortization of net asset or obligation at transition, is recognized based
on an actuarial valuation.
M. Subsidy Income
The company recognized subsidy income on a straight-line basis over the
term of the agreements entered into with two Bureaus of ROC Government,
Industrial Development Bureau (IDB) and Administration of Hsin-chu Science-based
Industrial Park (SBIP), for new product developments.
N. Income Tax
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
identified to an asset or a liability in the financial statements, then it
should be classified as current or noncurrent based on the expected reversal
date of temporary difference.
O. Foreign-currency Transactions
The functional currency of the Company is New Taiwan dollars. The
foreign-currency transactions of the Company are recorded using their respective
functional currencies at the rates of exchange in effect when the transactions
occur. Gains or losses, resulting from the application of different foreign
exchange rates when cash in foreign currency is converted into New Taiwan
dollars, or when foreign-currency receivables and payables are settled, are
credited or charged to income in the year of conversion or settlement. At the
balance sheet dates, the balances of foreign-currency assets and liabilities are
restated into the respective functional currencies based on prevailing exchange
rates and any resulting gains or losses are credited or charged to income.
P. Translation of Foreign-currency Financial Statements
The financial statements are translated into U.S. dollars at the following
exchange rates:
assets and liabilities -- current rate; income and expenses -- weighted
average rate during the year. The resulting translation adjustment is
recorded as separate component of shareholders' equity.
Q. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income"; SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. To date,
the Company has only translation adjustments that are required to be reported in
comprehensive income.
F-45
<PAGE> 131
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
R. Earnings (Loss) Per Share
SFAS No. 128 "Earnings Per Share", establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using the
average shares of common share outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either as if converted
method for convertible preferred share or the treasury stock method for options
and warrants. Since the Company's capital structure is simple, therefore, its
basic earnings per share is the same as diluted earnings per share.
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1998 1999
----- ------- -----
<S> <C> <C> <C>
Receivable from related parties (Note 10)................... $ -- $ 13 $ 46
Notes receivable............................................ 207 1,676 46
Accounts receivable -- third parties........................ 397 915 861
----- ------- -----
604 2,604 953
Allowance for doubtful accounts............................. (118) (528) (477)
----- ------- -----
$ 486 $ 2,076 $ 476
===== ======= =====
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998 1999
---- ---- ------
<S> <C> <C> <C>
Finished goods.............................................. $ 34 $246 $ 233
Work in process............................................. 152 297 320
Raw materials............................................... 62 151 493
---- ---- ------
$248 $694 $1,046
==== ==== ======
</TABLE>
F-46
<PAGE> 132
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTIES -- NET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Cost
Machinery and equipment................................... $2,042 $4,090 $5,018
Computer equipment........................................ 41 47 60
Office equipment.......................................... 27 33 36
Leasehold improvements.................................... 100 71 81
Transportation equipment.................................. 41 56 58
Other equipment........................................... 24 1,167 1,230
Prepayments............................................... 632 106 33
------ ------ ------
2,907 5,570 6,516
------ ------ ------
Accumulated depreciation
Machinery and equipment................................... 137 558 1,076
Computer equipment........................................ 7 19 32
Office equipment.......................................... 2 8 13
Leasehold improvements.................................... 15 16 29
Transportation equipment.................................. 4 12 21
Other equipment........................................... 1 37 148
------ ------ ------
166 650 1,319
------ ------ ------
$2,741 $4,920 $5,197
====== ====== ======
</TABLE>
6. LONG-TERM DEBTS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998 1999
---- ---- -----
<S> <C> <C> <C>
Industrial Bureau -- Innovation Products Matching Fund to be
repaid in installment with final payment due in October
2001 (Note 12)............................................ $ -- $495 $ 506
Current portion............................................. -- -- (253)
---- ---- -----
$ -- $495 $ 253
==== ==== =====
</TABLE>
As of December 31, 1999, long-term debts mature as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
During the year 2000.................................... $253
During the year 2001.................................... 253
</TABLE>
7. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income after deducting any previously
accumulated deficit and 10% legal reserve:
(a) 5% - 10% special bonus to employees;
(b) 1% - 3% compensation to directors and supervisors; and
F-47
<PAGE> 133
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(c) Special retained earnings reserve and unappropriated earnings can be
set aside when necessary, and the remaining amount shall be
appropriated as common shareholders' bonus.
The appropriations and the disposition of the remaining net income shall be
resolved by the shareholders in the following year and given effect to in the
financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
8. PENSION PLAN
The Company has a defined benefit pension plan for all regular employees,
which provides benefits based on length of service and average monthly salary
for the last six months prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited in the committee's name in the Central Trust of China which acts
as trustee.
Certain pension information are summarized as follows:
The components of net periodic benefit costs are as follows:
a. Net periodic pension cost
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Service cost................................. $ 51 $ 47 $ 87
Interest cost................................ -- 4 10
Projected return on plan assets.............. -- (1) (3)
Amortization of transition obligation........ -- 4 4
Amortization of unrecognized loss............ -- -- 1
---- ---- ----
Net periodic benefit cost.................... $ 51 $ 54 $ 99
==== ==== ====
</TABLE>
The change in benefit obligation and plan assets and reconciliation of
fund status are as follows:
b. Change in benefit obligation:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Projected benefit obligation at beginning of
year:...................................... $ -- $ 68 $148
For the years:
Service cost................................ 51 47 87
Interest cost............................... -- 4 10
Actuarial loss (gain)....................... 26 26 (6)
Amortization................................ -- -- 1
Foreign currency exchanges................... (9) 3 6
---- ---- ----
Projected benefit obligation at end of
year....................................... $ 68 $148 $246
==== ==== ====
</TABLE>
F-48
<PAGE> 134
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
c. Change in plan assets:
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Fair value of plan assets at beginning of
year....................................... $ -- $ 12 $ 43
Contributions................................ 12 30 41
Interest income.............................. -- 1 3
---- ---- ----
Fair value of plan assets at end of year..... $ 12 $ 43 $ 87
==== ==== ====
</TABLE>
d. Reconciliation of fund status
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Funded status................................ $ 57 $105 $156
Unrecognized transition obligation........... (56) (53) (50)
Unrecognized actuarial loss.................. -- (26) (20)
Additional liability......................... 33 13 --
---- ---- ----
Net amount of accrued pension cost shown in
the balance sheets......................... $ 34 $ 39 $ 86
==== ==== ====
</TABLE>
e. Actuarial assumptions
<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Discount rate used in determining present
values..................................... 6.75% 6.50% 6.00%
Rate of long-term rate of return on plan
assets..................................... 6.50% 6.25% 6.00%
Rate of compensation increase................ 6.00% 6.00% 6.00%
</TABLE>
9. INCOME TAX
A. Income tax benefit and income tax payable:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Income tax expense -- current..................... $-- $126 $--
Income tax benefit -- deferred.................... -- (82) --
Estimated permanent differences................... -- (7) --
Additional 10% income tax on undistributed
earnings........................................ -- -- 60
Adjustment of prior year's income tax............. -- -- 2
-- ---- ---
Income tax expense................................ $-- $ 37 $62
== ==== ===
</TABLE>
F-49
<PAGE> 135
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. As of December 31, 1997, 1998 and 1999, deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Taxable temporary differences................... $ 33 $ 112 $ 119
Investment tax credits.......................... 21 156 5
Operating loss carryforward..................... 109 -- 338
----- ----- -------
Total........................................... 163 268 462
Valuation allowance............................. (163) (268) (462)
----- ----- -------
-- -- --
----- ----- -------
Noncurrent:
Taxable temporary differences................... 33 23 31
Investment tax credits.......................... 329 -- 1,279
Operating loss carryforwards.................... -- 670 51
----- ----- -------
Total........................................... 362 693 1,361
Valuation allowance............................. (362) (693) (1,361)
----- ----- -------
-- -- --
----- ----- -------
$ -- $ -- $ --
===== ===== =======
</TABLE>
C. The Company's income tax returns through taxable year ended December 31,
1996 have been examined by the tax authorities.
D. As of December 31 1999, the Company's unused investment tax credits and
the tax effect of loss carryforward amounted to approximately $1,284 and $389,
respectively, and are available for future use through 2003 and 2004,
respectively.
10. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
<TABLE>
<CAPTION>
NAME AND RELATIONSHIP OF RELATED PARTIES RELATIONSHIP WITH THE COMPANY
---------------------------------------- -----------------------------
<S> <C>
Its chairman is the supervisor of the
Wah Lee Industrial Corp. (WAH LEE)...... Company
Delta Electronics Int. Ltd. (DELTA
LTD.)................................. Same chairman
Delta Electronics Inc. (DELTA INC.)..... Same chairman
Cyntec Co., Ltd. (CYNTEC) Same chairman
</TABLE>
F-50
<PAGE> 136
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. Significant Related Party Transactions
For the period
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Sales
DELTA INC. ............................. $-- -- $ 22 -- $148 3
WAH LEE................................. -- -- 274 4 95 2
-- --- ---- --- ---- ---
$-- -- $296 4 $243 5
== === ==== === ==== ===
Purchases
CYNTEC.................................. $-- -- $ 1 -- $ -- --
DELTA LTD. ............................. -- -- 121 4 265 12
-- --- ---- --- ---- ---
$-- -- $122 4 $265 12
== === ==== === ==== ===
</TABLE>
At end of period
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
AMOUNT % AMOUNT % AMOUNT %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Receivable
DELTA INC. ............................. $-- -- $ 2 -- $25 5
WAH LEE................................. -- -- 11 1 21 4
-- --- --- --- --- ---
$-- -- $13 1 $46 9
== === === === === ===
Accounts payable -- DELTA LTD. ........... $-- -- $65 9 $52 10
== === === === === ===
</TABLE>
a. Sales to related parties are based on normal selling prices. The collection
period is 30-75 days after shipment for related parties and 15-60 days for
other companies.
b. The payment terms for purchases from related parties are the same as those
from other suppliers.
c. As of December 1999, the Company sold certain machinery and equipment to
DELTA INC. for $38 and generated a gain of $4.
F-51
<PAGE> 137
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and are listed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALE VALUE VALE VALUE VALE VALUE
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash............................... $4,734 $4,734 $6,510 $6,510 $1,841 $1,841
Restricted cash.................... 742 742 64 64 967 967
Marketable securities.............. 1,607 1,607 -- -- 2,307 2,307
Notes and accounts
receivable -- net............... 486 486 2,076 2,076 476 476
Prepaid long-term investment....... -- -- 1 1 -- --
Refundable deposits................ 38 38 62 62 41 41
Liabilities
Notes and accounts payable......... 97 97 701 701 537 537
Long-term debts (including current
portion)........................ -- -- 495 495 506 506
</TABLE>
12. COMMITMENTS AND CONTINGENT LIABILITIES
In 1997 and 1999, the Company entered into loan agreements with Industrial
Development Bureau, Ministry of Economic Affairs and Administration of Hsin-chu
Science-based Industrial Park, respectively, for developing new products. Under
the agreements, the Company starts to repay the loan by installment after the
prototypes are completed for one year. In addition, when the new products begin
to sell, the Company shall pay 2% of net sales as feedback fund each quarter for
three years, but the total feedback fund should not be more than 30% of the
loan.
The major subsidy income contracts are summarized as follows:
<TABLE>
<CAPTION>
BUREAU CONTRACT TERM SUBSIDY INCOME
------ ------------- --------------
<S> <C> <C>
Industry Development Bureau, Ministry of
Economic Affairs (IDB)........................ 1997.7.1F1998.12.31 $508
Administration of Hsin-chu Science-based
Industrial Park (SBIP)........................ 1997.7.1F1998.12.31 711
Administration of Hsin-chu Science-based
Industrial Park (SBIP)........................ 1999.10.1F2000.9.30 319
</TABLE>
Generally, if the company can follow the contract policy, the bureaus will
not terminate the contract no matter new products can be produced or not.
13. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas and major customers.
A. Industry: The Company is engaged in a single industry, which is
research, development, production, manufacture and sale of visible laser diode
and module, communication laser diode and module and high power laser diode and
module.
F-52
<PAGE> 138
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. Foreign markets: Export sales were under 10% of total revenues for
1997 and 1998. Sales to Asia and other area in 1999 were $1,865 and $683,
respectively.
C. Major customers
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- -------------
CUSTOMERS AMOUNT % AMOUNT % AMOUNT %
--------- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
A................................... $484 27 $ -- -- $-- --
B................................... 276 16 -- -- -- --
C................................... -- -- 1,212 15 -- --
</TABLE>
D. Geographic information. The Company's operations are entirely in the
Republic of China.
F-53
<PAGE> 139
OPTRONICS INTERNATIONAL CORP.
BALANCE SHEETS
DECEMBER 31, 1999 (AUDITED) AND JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
NOTES 1999 2000
------------ ------------- ---------
(IN THOUSAND U.S. DOLLARS
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................... 2B $ 1,841 $ 2,058
Restricted cash........................................ 2D 967 1,163
Marketable securities.................................. 2B, 2E 2,307 --
Notes and accounts receivable -- net................... 2B, 3, 9 476 1,330
Inventories............................................ 2F, 4 1,046 1,740
Prepaid expenses and other current assets.............. 102 126
------- -------
Total Current Assets................................... 6,739 6,417
------- -------
PROPERTIES -- NET...................................... 2G, 2H, 5, 9 5,197 5,618
------- -------
OTHER ASSETS
Prepaid long-term investment........................... -- --
Deferred pension cost.................................. 2L -- --
Deferred charges -- net of accumulated amortization
cost of $2 as of December 31, 1999 and $13 as of June
30, 2000............................................. 2I 32 108
Refundable deposits.................................... 41 51
------- -------
Total Other Assets..................................... 73 159
------- -------
TOTAL ASSETS........................................... $12,009 $12,194
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and accounts payable............................. 9 $ 537 $ 1,306
Income tax payable..................................... 2M, 8 62 --
Current portion of long-term debts..................... 6, 11 253 259
Accrued expenses and other current liabilities......... 841 753
------- -------
Total Current Liabilities.............................. 1,693 2,318
LONG-TERM DEBTS -- NET OF CURRENT PORTION.............. 6, 11 253 129
ACCRUED PENSION COST................................... 2L 86 141
------- -------
Total Liabilities...................................... 2,032 2,588
------- -------
SHAREHOLDERS' EQUITY................................... 7
Capital stock -- $0.3 par value;
Authorized -- 45,000 thousand shares.................
Issued -- 35,000 thousand shares..................... 11,833 11,833
Retained earnings:
Legal reserve........................................ 50 50
Unappropriated earnings (deficit).................... (1,261) (1,843)
Cumulative translation adjustment...................... 2O, 2P (645) (434)
------- -------
Total Shareholders' Equity............................. 9,977 9,606
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $12,009 $12,194
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE> 140
OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
NOTES 1999 2000
----- -------- -------
(UNAUDITED)
(IN THOUSAND U.S.
DOLLARS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
NET SALES................................................... 2J, 9 $ 2,968 $3,207
COST OF SALES............................................... 9 2,117 2,917
------- ------
GROSS PROFIT................................................ 851 290
------- ------
OPERATING EXPENSES
Research and development.................................... 2K 901 599
General and administrative.................................. 217 354
Marketing................................................... 261 143
------- ------
Total Operating Expenses.................................... 1,379 1,096
------- ------
LOSS FROM OPERATIONS........................................ (528) (806)
------- ------
NON-OPERATING INCOME (EXPENSE)
Interest revenue............................................ 130 38
Subsidy..................................................... 235 174
Gain on sale of marketable securities....................... 2E -- 22
Unrealized holding gains on marketable securities........... -- --
Foreign exchange gain loss.................................. 2N 10 (10)
Gain on disposal of properties.............................. 9 4 --
------- ------
Total Non-Operating Income.................................. 379 224
------- ------
LOSS BEFORE INCOME TAX...................................... (149) (582)
INCOME TAX EXPENSE.......................................... 2M, 8 2 --
------- ------
NET LOSS.................................................... $ (151) $ (582)
======= ======
OTHER COMPREHENSIVE INCOME
Translation adjustments..................................... 2O (97) 211
------- ------
COMPREHENSIVE LOSS.......................................... $ (248) $ (371)
======= ======
LOSS PER SHARE -- Based on weighted average outstanding
common stock 35,000 thousand shares....................... 2Q $(0.004) $(0.02)
======= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE> 141
OPTRONICS INTERNATIONAL CORP.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
1999 2000
------- -------
(UNAUDITED)
(IN THOUSAND U.S.
DOLLARS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $ (151) $ (582)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 314 405
Gain on disposal of properties............................ (4) --
Accrued pension cost...................................... 44 55
Gain on sale of marketable securities..................... -- (22)
Changes in operating assets and liabilities
Notes and accounts receivable.......................... 1,564 (854)
Inventories............................................ (463) (694)
Prepaid expenses and other current assets.............. (281) (24)
Notes and accounts payable............................. 99 769
Income tax payable (14) (62)
Accrued expenses and other current liabilities......... (1,021) (88)
------- -------
Net Cash Provided by (Used in) Operating Activities......... 87 (1,097)
------- -------
INVESTING ACTIVITIES
Acquisitions of properties.................................. (450) (709)
Increase in restricted cash................................. (887) (196)
Proceeds from disposal of properties........................ 38 --
Decrease (increase) in marketable securities................ (400) 2,329
Increase in deferred charges................................ (2) (86)
Decrease (increase) in refundable deposits.................. 23 (10)
------- -------
Net Cash Provided by (Used in) Investing Activities......... (1,678) 1,328
------- -------
FINANCING ACTIVITY
Payment of long-term debts.................................. -- (124)
------- -------
EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATE................. (60) 110
------- -------
NET INCREASE (DECREASE) IN CASH............................. (1,651) 217
CASH AT BEGINNING OF PERIOD................................. 6,510 1,841
------- -------
CASH AT END OF PERIOD....................................... $ 4,859 $ 2,058
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for income tax.................................... $ 15 $ 62
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-56
<PAGE> 142
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSAND U.S. DOLLARS, EXCEPT SHARE AMOUNTS)
1. GENERAL
Business
Optronics International Corp. (the "Company") was incorporated under the
Company Law of the Republic of China on November 21, 1996 and started its
operations in February 1997. The Company is primarily engaged in research,
development, production, manufacture and sale of visible laser diode and module,
communication laser diode and module and high power laser diode and module.
2. ACCOUNTING POLICIES
A. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
B. Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, marketable securities and accounts
receivable. Cash and marketable securities are deposited or placed with high
credit quality financial institutions to the extent of the amount recorded on
the balance sheet. As far as the accounts receivable, the Company performs
ongoing credit evaluations of its customers' financial condition and the Company
maintains an allowance for doubtful accounts receivable based upon review of the
expected collectibility of individual accounts receivable.
E. Fair Value of Financial Instruments
The Company's financial instruments, including cash, restricted cash,
marketable securities, notes and accounts receivable, refundable deposits, and
notes and accounts payable are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
Fair value of long-term debts is estimated based on current interest rates
available to the Company with similar terms, degrees of risks and remaining
maturities. The carrying values of long-term debts approximate their respective
fair value.
F. Restricted Cash
Restricted cash is composed of time deposits that the Company maintains as
collateral for obtaining letters of credits.
E. Marketable Securities
Marketable securities are open-end bond funds that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings.
The costs of investment sold are determined by the weighted average method.
F-57
<PAGE> 143
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
F. Inventories
Inventories are stated at cost using the weighted average method and are
valued at the lower of cost or market value at balance sheet date. The market
value of raw materials is determined based on current replacement cost, while
work-in-process and finished goods are determined by net realizable value.
G. Properties
Properties are stated at cost less accumulated depreciation. Major
additions, renewals and betterment are capitalized, while maintenance and
repairs are expensed currently.
Depreciation is provided on the straight-line method over the estimated
useful lives that range as follows: machinery and equipment -- 3 to 8 years;
computer equipment -- 3 years; office equipment -- 5 years; leasehold
improvements -- 5 years; transportation equipment -- 5 years; other
equipment -- 5 to 20 years.
Upon sale or disposal of properties, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or
charged to income.
H. Asset Impairment
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
("SFAS No. 121") requires recognition of impairment of long-lived assets in the
event the net book value of these assets exceeds the future undiscounted cash
flows attributable in use to these assets. SFAS No. 121 has not had an impact on
the financial statements of the Company.
I. Deferred Charges
Deferred charges are stated at cost and amortized on straight-line basis
over the following years: tools -- 3 years.
J. Recognition of Revenue, Cost and Expenses
Product sales are recognized upon the transfer of title and risk of
ownership to customers, which occurs upon shipment of the product. Cost charged
against revenue and expenses are recognized as incurred.
K. Research and Development
Research and development costs consist of expenditures incurred during the
course of planned search and investigation aimed at the discovery of new
knowledge that will be useful in developing new products or processes, or at
significantly enhancing existing products or production processes. And the
implementation of such is through design, testing of product alternatives or
construction of prototypes. The Company expenses all research and development
costs as they are incurred.
L. Pension Costs
The Company has non-contributory and funded defined benefit retirement
plans covering all its regular employees. The contribution to an independent
fund is deposited with the Central Trust of China, as the custodian. Net pension
cost, with includes service cost, interest cost, expected return on plan assets
and amortization of net asset or obligation at transition, is recognized based
on an actuarial valuation.
F-58
<PAGE> 144
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a defined benefit pension plan for all regular employees,
which provides benefits base on length of service and average monthly salary for
the last six month prior to retirement.
The Company makes monthly contributions, equal to 2% of salaries and wages,
to a pension fund which is administered by a pension fund monitoring committee
and deposited as the committee's name in the Central Trust of China which acts
as trustee.
M. Income Tax
The Company adopted the provisions of SFAS No. 109 "Accounting for Income
Tax"; the provision for income tax represents income tax paid and payable for
the current year plus the changes in the deferred income tax assets and
liabilities during the years. Deferred income taxes are recognized for the tax
effects of temporary differences, unused tax credit and operating loss
carryforwards. Valuation allowance is provided for deferred tax assets that are
not certain to be realized. A deferred tax asset or liability should, according
to the classification of its related asset or liability, be classified as
current or noncurrent. However, if a deferred asset or liability cannot be
identified to an asset or a liability in the financial statements, then it
should be classified as current or noncurrent based on the expected reversal
date of temporary difference.
N. Foreign-currency Transactions
The functional currency of the Company is New Taiwan dollars. The
foreign-currency transactions of the Company are recorded using their respective
functional currencies at the rates of exchange in effect when the transactions
occur. Gains or losses, resulting from the application of different foreign
exchange rates when cash in foreign currency is converted into New Taiwan
dollars, or when foreign-currency receivables and payables are settled, are
credited or charged to income in the year of conversion or settlement. At the
balance sheet dates, the balances of foreign-currency assets and liabilities are
restated into the respective functional currencies based on prevailing exchange
rates and any resulting gains or losses are credited or charged to income.
O. Translation of Foreign-currency Financial Statements
The financial statements are translated into U.S. dollars at the following
exchange rates: assets and liabilities -- current rate; income and
expenses -- weighted average rate during the year. The resulting translation
adjustment is recorded as separate component of shareholders' equity.
Q. Comprehensive Income
The Company adopted the provisions of SFAS No. 130 "Reporting Comprehensive
Income"; SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income, as defined,
includes all changes in equity during a period from non-owner sources. To date,
the Company has only translation adjustment that are required to be reported in
comprehensive income.
R. Earnings (Loss) Per Share
SFAS No. 128 "Earnings Per Share", establishes standards for computing and
presenting earnings per share. Basic earnings per share is calculated using the
average shares of common share outstanding. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using either as if converted
method for convertible preferred share or the treasury stock method for options
and warrants. Since the Company's capital structure is simple, therefore, its
basic earnings per share is the same as diluted earnings per share.
F-59
<PAGE> 145
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
S. Interim Financial Statements
The interim financial information contained herein is unaudited but, in the
opinion of management, reflects all adjustments which are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. All adjustments are of a normal, recurring nature.
Results of operations for interim periods presented herein are not necessarily
indicative of results of operations for the entire year.
3. NOTES AND ACCOUNTS RECEIVABLE -- NET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
<S> <C> <C>
Receivable from related parties (Note 9).................... $ 46 $ 331
Notes receivable............................................ 46 12
Accounts receivable -- third parties........................ 861 1,474
----- ------
953 1,817
Allowance for doubtful accounts............................. (477) (487)
----- ------
$ 476 $1,330
===== ======
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
<S> <C> <C>
Finished goods.............................................. $ 233 $ 323
Work in process............................................. 320 626
Raw materials............................................... 493 791
------ ------
$1,046 $1,740
====== ======
</TABLE>
F-60
<PAGE> 146
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTIES -- NET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
<S> <C> <C>
Cost
Machinery and equipment................................... $5,018 $5,381
Computer equipment........................................ 60 85
Office equipment.......................................... 36 69
Leasehold improvements.................................... 81 176
Transportation equipment.................................. 58 59
Other equipment........................................... 1,230 1,291
Prepayments............................................... 33 292
------ ------
6,516 7,353
------ ------
Accumulated depreciation
Machinery and equipment................................... $1,076 $1,407
Computer equipment........................................ 32 42
Office equipment.......................................... 13 18
Leasehold improvements.................................... 29 32
Transportation equipment.................................. 21 27
Other equipment........................................... 148 209
------ ------
1,319 1,735
------ ------
$5,197 $5,618
====== ======
</TABLE>
6. LONG-TERM DEBTS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
<S> <C> <C>
Industrial Bureau -- Innovation Products Matching Fund to be
repaid in installment with final payment due in October
2001 (Note 12)............................................ $ 506 $ 388
Current portion............................................. (253) (259)
----- -----
$ 253 $ 129
===== =====
</TABLE>
As of June 30, 2000, long-term debts mature as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000
--------
<S> <C>
During the year 2000...................................... $259
During the year 2001...................................... 129
</TABLE>
7. SHAREHOLDERS' EQUITY
The Company's Articles of Incorporation provide that the following shall be
appropriated from the annual net income after deducting any previously
accumulated deficit and 10% legal reserve:
(d) 5% - 10% special bonus to employees;
(e) 1% - 3% compensation to directors and supervisors; and
F-61
<PAGE> 147
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(f) Special retained earnings reserve and unappropriated earnings can
be set aside when necessary, and the remaining amount shall be
appropriated as common shareholders' bonus.
The appropriations and the disposition of the remaining net income shall be
resolved by the shareholders in the following year and given effect to in the
financial statements of that year.
The aforementioned appropriation for legal reserve shall be made until the
reserve equals the Company's capital. Such reserve can only be used to offset a
deficit; or, when it has reached 50% of the paid-in capital, up to 50% thereof
can be transferred to capital.
8. INCOME TAX
A. Income tax benefit: The Company expects no income tax benefits and
income tax payable for the six months ended June 30, 2000. Income tax expense of
$2 for the six months ended June 30, 1999 represents the prior year's income tax
adjustment.
B. As of December 31, 1999 and June 30, 2000, deferred income tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
<S> <C> <C>
Current:
Taxable temporary differences............................. $ 119 $ 105
Investment tax credits.................................... 5 --
Operating loss carryforwards.............................. 338 284
------- -------
Total..................................................... 462 389
Valuation allowance....................................... (462) (389)
------- -------
-- --
------- -------
Noncurrent:
Taxable temporary differences............................. 31 5
Investment tax credits.................................... 1,279 1,214
Operating loss carryforwards.............................. 51 59
------- -------
Total..................................................... 1,361 1,278
Valuation allowance....................................... (1,361) (1,278)
------- -------
-- --
------- -------
$ -- $ --
======= =======
</TABLE>
C. The Company's income tax returns through taxable year ended December 31,
1996 have been examined by the tax authorities.
D. As of June 30, 2000, the Company's unused investment tax credits and the
tax effect of loss carryforwards amounted to approximately $1,214 and $343,
respectively, and are available for future use through 2003 and 2004,
respectively.
F-62
<PAGE> 148
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
A. Name and Relationship of Related Parties
<TABLE>
<CAPTION>
NAME AND RELATIONSHIP OF RELATED PARTIES RELATIONSHIP WITH THE COMPANY
---------------------------------------- -----------------------------
<S> <C>
Wah Lee Industrial Corp. (WAH LEE)........... Its chairman is the supervisor of the Company
Delta Electronics Int. Ltd. (DELTA LTD.)..... Same chairman
Delta Electronics Inc. (DELTA INC.).......... Same chairman
</TABLE>
B. Significant Related Party Transactions
For the period
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 2000
--------------- ---------------
AMOUNT % AMOUNT %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Sales
DELTA INC. .............................................. $ 86 3 $314 5
WAH LEE.................................................. 86 3 176 10
---- --- ---- ---
$172 6 $490 15
==== === ==== ===
Purchases.................................................. $160 8 $ 8 --
DELTA LTD. .............................................. 2 -- -- --
---- --- ---- ---
DELTA INC. .............................................. $162 8 $ 8 --
==== === ==== ===
</TABLE>
At end of period
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------- -------------
AMOUNT % AMOUNT %
------ --- ------ ---
<S> <C> <C> <C> <C>
Receivable
DELTA INC. .............................................. $ 25 5 $272 20
WAH LEE.................................................. 21 4 59 5
---- --- ---- ---
$ 46 9 $331 25
==== === ==== ===
Accounts payable -- DELTA LTD. ............................ $ 52 10 $ 1 --
==== === ==== ===
</TABLE>
d. Sales to related parties are based on normal selling prices. The collection
period is 30-75 days after shipment for related parties and 15-60 days for
other companies.
e. The payment terms for purchases from related parties are the same as those
from other suppliers.
c. As of June 30, 1999, the Company sold certain machinery and equipment to
DELTA INC. for $38 and generated a gain of $4.
F-63
<PAGE> 149
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. FINANCIAL INSTRUMENTS
The Company's financial instruments are carried at cost, which approximates
their fair value and are listed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 JUNE 30, 2000
------------------ ------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Assets
Cash......................................... $1,841 $1,841 $2,058 $2,058
Restricted cash.............................. 967 967 1,163 1,163
Marketable securities........................ 2,307 2,307 -- --
Notes and accounts receivable -- net......... 476 476 1,330 1,330
Prepaid long-term investment................. -- -- -- --
Refundable deposits.......................... 41 41 51 51
Liabilities
Notes and accounts payable................... 537 537 1,306 1,306
Long-term debts (including current
portion).................................. 506 506 388 388
</TABLE>
11. COMMITMENTS AND CONTINGENT LIABILITIES
A. In 1997 and 1999, the Company entered into loan agreements with
Industrial Development Bureau, Ministry of Economic Affairs and Administration
of Hsin-chu Science-based Industrial Park, respectively, for developing new
products. Under the agreements, the loans are paid in installments starting one
year after the prototypes are completed. In addition, the Company shall make
quarterly payment for a period of three years equivalent to 2% of net sales as
feedback fund starting when sales are generated from the new products begin.
However, the total feedback fund should not be more than 30% of the loan.
B. As of June 30, 2000, unused letters of credit aggregate about US$129
thousand and JPY 32,683 thousand.
12. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." FSAS 131 requires companies to disclose
certain information about operating segments. Based on the criteria within SFAS
131, the Company has determined that it has one reportable segment, laser diode
products.
A. Foreign markets:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
------------------
AREA 1999 2000
---- ------- -------
<S> <C> <C>
Asia........................................................ $1,234 $ 907
America..................................................... 94 762
Europe...................................................... 16 234
Other....................................................... -- 7
------ ------
$1,344 $1,910
====== ======
</TABLE>
F-64
<PAGE> 150
OPTRONICS INTERNATIONAL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
B. Major customers
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------
1999 2000
--------------- ---------------
CUSTOMERS AMOUNT % AMOUNT %
--------- ------- ---- ------- ----
<S> <C> <C> <C> <C>
A...................................................... $410 14 $ -- --
B...................................................... 400 13 -- --
C...................................................... -- -- 380 12
D...................................................... -- -- 314 10
</TABLE>
C. Geographic information. The Company's operations are entirely in the
Republic of China.
F-65
<PAGE> 151
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Quantum Optech Incorporation
We have audited the accompanying consolidated balance sheets of Quantum
Optech Incorporation and subsidiary as of December 31, 1998 and 1999 and the
related consolidated statements of operations and comprehensive income (loss),
stockholders' equity, and cash flows for the period from May 27, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Quantum
Optech Incorporation and subsidiary as of December 31, 1998 and 1999 and the
results of their operations and their cash flows for the period from May 27,
1997 (inception) to December 31, 1997 and for the years ended December 31, 1998
and 1999, in conformity with accounting principles generally accepted in the
United States of America.
KPMG Certified Public Accountants
Hsin Chu, Taiwan
May 25, 2000
F-66
<PAGE> 152
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,978,930 $ 1,521,481
Marketable securities..................................... -- 581,423
Accounts receivable, net of allowance for doubtful
accounts of $6,713 and $6,878 as of December 31, 1998
and 1999, respectively................................. 705,854 1,070,429
Inventories............................................... 1,094,718 1,506,436
Prepaid expenses.......................................... 26,190 16,616
Other current assets...................................... 37,860 121,683
---------- -----------
Total current assets.............................. 3,843,552 4,818,068
Property, plant and equipment, net.......................... 2,766,572 4,316,607
---------- -----------
Total assets...................................... $6,610,124 $ 9,134,675
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 178,581 $ 428,634
Current portion of long-term debt......................... 155,231 353,546
Due to related parties.................................... 129,143 13,898
Accounts payable.......................................... 417,037 1,075,277
Advance from customers.................................... 263 795,877
Accrued expenses and other current liabilities............ 185,196 321,170
---------- -----------
Total current liabilities......................... 1,065,451 2,988,402
Long-term debt.............................................. 956,225 1,094,609
Accrued pension............................................. 39,863 95,070
---------- -----------
Total liabilities................................. 2,061,539 4,178,081
---------- -----------
Stockholders' equity:
Common stock, par value of 10 New Taiwan dollars,
authorized shares of 15,000,000 and 30,000,000; issued
and outstanding shares of 15,000,000 and 19,000,000, as
of December 31, 1998 and 1999, respectively............ 4,815,382 6,076,019
Additional paid-in capital................................ 565,789 943,980
Accumulated deficit....................................... (677,173) (1,983,792)
Accumulated other comprehensive loss...................... (155,413) (79,613)
---------- -----------
Total stockholders' equity........................ 4,548,585 4,956,594
Commitments
Total liabilities and stockholders' equity........ $6,610,124 $ 9,134,675
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-67
<PAGE> 153
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
PERIOD FROM MAY 27, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------- ---------- -----------
<S> <C> <C> <C>
Net sales............................................. $ -- $2,116,317 $ 3,433,449
Cost of goods sold.................................... -- 2,016,479 3,555,303
--------- ---------- -----------
Gross profit (loss)................................... -- 99,838 (121,854)
Selling, general and administrative expense........... 43,075 508,384 853,904
Research and development expense...................... -- 73,519 281,076
--------- ---------- -----------
Operating loss................................... (43,075) (482,065) (1,256,834)
Interest expense...................................... (5,416) (165,125) (100,451)
Interest income....................................... 1,333 7,086 15,095
Foreign exchange gain (loss), net..................... -- 8,876 (8,259)
Other gain (loss), net................................ (993) 2,206 43,830
--------- ---------- -----------
Net loss......................................... $ (48,151) $ (629,022) $(1,306,619)
========= ========== ===========
Other comprehensive income (loss):
Foreign currency translation adjustment............. $(136,108) $ (19,305) $ 86,292
Unrealized holding loss on marketable securities.... -- -- (10,492)
--------- ---------- -----------
Comprehensive loss.................................... $(184,259) $ (648,327) $(1,230,819)
========= ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-68
<PAGE> 154
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FOR MAY 27, 1997 (INCEPTION) TO DECEMBER 31, 1997 AND
YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
---------------------------
FOREIGN UNREALIZED
COMMON SHARES ADDITIONAL CURRENCY HOLDING LOSS TOTAL
----------------------- PAID-IN ACCUMULATED TRANSLATION ON MARKETABLE STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SECURITIES EQUITY
---------- ---------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock upon
inception on May 27, 1997.... 1,500,000 $ 538,406 -- -- -- -- 538,406
Net loss....................... -- -- -- (48,151) -- -- (48,151)
Foreign currency translation
adjustment................... -- -- -- -- (136,108) -- (136,108)
---------- ---------- ------- ---------- -------- ------- ----------
Balance at December 31, 1997... 1,500,000 538,406 -- (48,151) (136,108) -- 354,147
Issuance of common stock....... 13,500,000 4,276,976 565,789 -- -- -- 4,842,765
Net loss....................... -- -- -- (629,022) -- -- (629,022)
Foreign currency translation
adjustment................... -- -- -- -- (19,305) -- (19,305)
---------- ---------- ------- ---------- -------- ------- ----------
Balance at December 31, 1998... 15,000,000 4,815,382 565,789 (677,173) (155,413) -- 4,548,585
Issuance of common stock....... 4,000,000 1,260,637 378,191 -- -- -- 1,638,828
Net loss....................... -- -- -- (1,306,619) -- -- (1,306,619)
Foreign currency translation
adjustment................... -- -- -- -- 86,292 -- 86,292
Unrealized holding loss on
marketable securities........ -- -- -- -- -- (10,492) (10,492)
---------- ---------- ------- ---------- -------- ------- ----------
Balance at December 31, 1999... 19,000,000 $6,076,019 943,980 (1,983,792) (69,121) (10,492) 4,956,594
========== ========== ======= ========== ======== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-69
<PAGE> 155
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM MAY 27, 1997 (INCEPTION) TO DECEMBER 31, 1997
AND YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $ (48,151) $ (629,022) $(1,306,619)
Adjustments to reconcile net loss to cash used in
operating activities:
Bad debt expense.................................. -- 6,472 --
Provision for inventory obsolescence.............. -- 13,891 140,256
Depreciation and amortization..................... 2,233 206,551 375,748
Gain on disposal of marketable securities......... -- -- (27,674)
Changes in operating assets and liabilities:
Accounts receivable............................... -- (686,974) (337,622)
Inventories....................................... (109,052) (974,763) (514,451)
Prepaid expenses and other current assets......... (14,351) (49,312) (70,659)
Accounts payable.................................. 70,540 340,914 629,992
Due to related parties............................ 4,104 120,947 (115,113)
Accrued expenses and other current liabilities.... 7,183 172,573 901,289
Accrued pension................................... -- 38,432 52,721
----------- ----------- -----------
Cash used in operating activities.............. (87,494) (1,440,291) (272,132)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities................... -- -- (1,303,750)
Purchase of property, plant and equipment........... (1,078,411) (1,940,915) (1,816,066)
Proceeds from the sale of marketable securities..... -- -- 755,982
----------- ----------- -----------
Cash used in investing activities.............. (1,078,411) (1,940,915) (2,363,834)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in short-term borrowings............... -- 172,167 238,842
Net increase in long-term debt...................... 310,773 802,155 300,866
Issuance of common stock............................ 538,406 4,403,067 1,638,828
Advance payments from stockholders.................. 439,698 -- --
----------- ----------- -----------
Cash provided by financing activities.......... 1,288,877 5,377,389 2,178,536
----------- ----------- -----------
Effect of exchange rate changes on cash............. (37,152) (103,073) (19)
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents....................................... 85,820 1,893,110 (457,449)
Cash and cash equivalents at beginning of period.... -- 85,820 1,978,930
----------- ----------- -----------
Cash and cash equivalents at end of period.......... $ 85,820 $ 1,978,930 $ 1,521,481
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.......................................... $ 3,965 $ 160,695 $ 106,290
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-70
<PAGE> 156
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS EXPRESSED IN U.S. DOLLARS UNLESS OTHERWISE STATED.)
(1) ORGANIZATION AND PRINCIPAL ACTIVITIES
Quantum Optech Incorporation (the "Company") was incorporated on May 27,
1997 under the Company Law of the Republic of China ("Taiwan"). Prior to January
31, 1998, the Company was in a developmental stage.
During the developmental stage, the Company's activities primarily
consisted of financial planning, raising capital, recruiting and training
employees, research and development and preparing its facility for production.
Subsequent to the developmental stage, the Company's business activities
primarily consists of the manufacture, sales and development of quartz crystal,
optical equipment components, electro-optical materials, optical crystal
products, telecommunication products, optical and opto-electronic instruments,
crystal cutting machines, lapping machines, and super-hard thin film coating
machines.
In 1998, the Company incorporated Quantum Optech (Singapore) Pte Ltd. as a
wholly owned subsidiary of the Company. Quantum Optech (Singapore) Pte Ltd.,
acts as a intermediary for the Company's operations in the Peoples' Republic of
China.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The accompanying consolidated financial statements have been prepared on a
historical cost basis to reflect the financial position and results of
operations of the Company in accordance with accounting principles generally
accepted in the United States of America ("US GAAP"). The consolidated financial
statements are stated in US dollars, the reporting currency of the Company.
Use of Estimates
The preparation of the consolidated financial statements in accordance with
US GAAP 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
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary, Quantum Optech (Singapore) Pte Ltd.
All significant intercompany balances and transactions are eliminated in
consolidation.
Foreign Currency Transactions and Translation
The functional currency of the Company's operations in Singapore and the
People's Republic of China is the US dollar. The functional currency of the
Company's operations in Taiwan is the New Taiwan dollar. The translation of the
Company's operations in Taiwan from New Taiwan dollars to US dollars is
performed for balance sheet accounts using exchange rates in effect at the
balance sheet date, and for revenue and expense accounts using a weighted
average exchange rate during the period. Gains and losses, net of applicable
income taxes, resulting from such translation are reported as a separate
component of other comprehensive income (loss). Foreign currency transaction
gains or losses are included in results of operations.
F-71
<PAGE> 157
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Revenues are recognized upon shipment of product. The Company does not have
any obligations beyond the shipment of the product nor does the Company offer
its customers a product warranty. Management establishes an allowance for
doubtful accounts against the related accounts receivable balance when factors
indicate that collectibility is not reasonably assured.
Research and Development Expenses
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
The Company considers time deposits with an original maturity of less than
three months to be cash equivalents.
Start-Up Activities
The Company adopted SOP 98-5, "Reporting on the Costs of Start-Up
Activities" for all periods presented. SOP 98-5 requires costs of start-up
activities and organization costs to be expensed as incurred. These costs are
included in "selling, general and administrative" expenses in the accompanying
consolidated statements of operations and comprehensive income (loss).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of the Company's net loss, foreign
currency translation adjustments and unrealized holding gains (losses) on
marketable securities and is presented in the consolidated statements of
operations and comprehensive income (loss).
Concentration of Credit Risk
Financial instruments, which subject the Company to concentrations of
credit risk, primarily consist of cash, cash equivalents, and accounts
receivable. The Company maintains its cash and cash equivalents deposits in
financial institutions of high-credit standing.
Less than ten customers represented a majority of total accounts receivable
as of December 31, 1998 and 1999. The Company does not require collateral from
its customers related to their accounts receivable balance. Management performs
ongoing credit evaluations of its customers and believes that the Company has
adequately provided for any exposure to potential credit losses.
Marketable Securities
The Company accounts for its investment in marketable securities in
accordance Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Marketable
securities held by the Company include common stock and mutual funds publicly
listed in Taiwan. The Company has classified the securities as available for
sale. Management intends to sell the securities in fiscal year 2000 and has
classified the asset as a current asset in the accompanying consolidated balance
sheet as of December 31, 1999. The unrealized holding loss related to the
securities as of December 31, 1999 amounted to $10,492. Realized gains from the
sales of marketable securities amounted to $32,000 for the year ended December
31, 1999. There were no sales of marketable securities for the period from May
27, 1997 (inception) to December 31, 1997 or for the year ended December 31,
1998.
F-72
<PAGE> 158
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market on a weighted average
basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
for financial reporting purposes using the straight-line method, less salvage
value, over the following estimated useful lives:
<TABLE>
<S> <C>
Building................................................ 25 years
Machinery and equipment................................. 5 years
Furniture and fixtures.................................. 3 to 5 years
Leasehold improvements.................................. 3 years
Computer software....................................... 3 years
</TABLE>
Impairment of Long-Lived Assets
The Company reviews long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities in the financial statements and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred income tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded for deferred
income tax assets where it is more likely than not that such assets will not be
realized.
Retirement Benefits
Pursuant to the ROC Labor Standards Law (the "Law"), the Company has
established a defined benefit retirement plan for all full-time employees in
Taiwan. This plan provides for lump-sum retirement benefits to retiring
employees based on length of service, age and certain other factors. In
addition, the Law requires that the Company fund the plan annually at a rate of
2% to 15% of total employee salaries. The plan is funded through deposits with
the Central Trust of China, a governmental institution that administrates
pension investments for all entities in Taiwan. The Company records and
discloses pension expense and the related liability in accordance with SFAS No.
87, "Employers' Accounting for Pensions" and SFAS No. 132, "Employers'
Disclosure About Pensions and Other Postretirement Benefits" in the accompanying
consolidated financial statements.
Recent Accounting Pronouncements
SFAS No. 133, "Accounting for Derivatives and Hedging Activities," was
issued in June 1998. SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
F-73
<PAGE> 159
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
activities. SFAS No. 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. As the Company does not currently
engage in derivatives or hedging transactions, there will be no current impact
on the Company's results of operations or financial position upon adoption of
SFAS No. 133. In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101
provides additional guidance on the recognition, presentation and disclosure of
revenue in financial statements. The Company has reviewed this bulletin and
believes that its current revenue recognition policy is consistent with the
guidance of SAB No. 101.
(3) TRANSACTION WITH RELATED PARTIES
The Company entered into transactions with the following related parties in
1998 and 1999:
<TABLE>
<CAPTION>
NAME OF RELATED PARTY RELATIONSHIP WITH THE COMPANY
--------------------- -----------------------------
<S> <C>
Chu, Chen-Chung ("CC Chiu")................ Director and general manager of the Company and
owns 3.25% of the Company's shares as of
December 31, 1999
Liou, Keh-Shium ("KS Liou")................ Director of the Company, and owns 2.41% of the
Company's shares
Chiu, Shuan-Sou ("SS Chiu")................ CC Chiu's father
Q-Lin Technology Co., Ltd. ("Q-Lin")....... CC Chiu is the general manager and stockholder
of this company
Quantum Crystal Inc. ("Crystal")........... SS Chiu is the president of this company
TAI Mow Machinery Co., Ltd. ("TAI Mow").... Its president is CC Chiu's brother
ADI Corporation. ("ADI")................... Director of the Company, and owns 26.45% of the
Company's shares
Peace light Investments Ltd. ("Peace A wholly owned subsidiary of ADI
light")..................................
</TABLE>
The Company had sales of $108,671 to Crystal in 1998 and sales of $5,489 to
ADI in 1999. These amounts were fully paid to the Company as of December 31,
1998 and 1999.
The Company purchased inventory from Q-Lin, TAI Mow and Crystal for
$848,418, $13,261 and $141,440, respectively in 1998. In 1999, the Company
purchased $12,284 of inventory from TAI Mow. Amounts due to these related
parties totaled $129,143 and $7,351 as of December 31, 1998 and 1999,
respectively.
The Company purchased equipment aggregating $78,300 from Q-Lin, TAI Mow and
Crystal in 1998.
The Company entered into lease agreements for office and packing lot space
with Q-Lin and SS Chiu. Total rental expense related to those leases amounted to
$13,828 and $18,429 for the years ended December 31, 1998 and 1999,
respectively. The amount due to SS Chiu was $945 as of December 31, 1999. The
lease agreements expire in fiscal year 2000.
The Company paid Crystal $42,579 in 1998 and Peace light $9,078 in 1999 for
miscellaneous expenditures. The amount due to Peace light was $5,602 at December
31, 1999.
F-74
<PAGE> 160
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company borrowed funds for working capital purposes from the following
related parties in 1998:
<TABLE>
<CAPTION>
WEIGHTED
MAXIMUM AVERAGE INTEREST
BALANCE INTEREST RATE EXPENSE
---------- ------------- --------
<S> <C> <C> <C>
Q-Lin............................................ $1,131,089 9.75% $85,242
Crystal.......................................... 68,503 9.75% 5,777
KS Liou.......................................... 485,334 8.9% 850
CC Chiu.......................................... 85,304 8.9% 3,052
-------
$94,921
=======
</TABLE>
These balances were fully paid as of December 31, 1998. There were no
transactions with related parties during the period from May 27, 1997
(inception) to December 31, 1997.
(4) INVENTORIES
Inventories at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Finished goods.............................................. $ 352,213 $ 428,850
Work in process............................................. 606,445 811,356
Raw material................................................ 150,469 401,928
Merchandise................................................. -- 23,335
---------- ----------
1,109,127 1,665,469
Less: provision for inventory obsolescence.................. (14,409) (159,033)
---------- ----------
$1,094,718 $1,506,436
========== ==========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following as of December 31,
1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Land........................................................ $ 541,358 $ 554,616
Building.................................................... 878,432 1,182,220
Machinery and equipment..................................... 1,330,302 1,906,044
Miscellaneous equipment..................................... 156,810 480,748
Furniture and fixtures...................................... 58,172 76,408
Computer software........................................... 17,100 39,758
Construction in progress, including advance payments for
equipment................................................. -- 683,602
---------- ----------
2,982,174 4,923,396
Less: accumulated depreciation and amortization............. (215,602) (606,789)
---------- ----------
$2,766,572 $4,316,607
========== ==========
</TABLE>
The unamortized computer software amounted to $15,027 and $23,192, as of
December 31, 1998 and 1999, respectively. The amortization expense of computer
software amounted to $1,999 and $14,761, for the years ended December 31, 1998
and 1999, respectively.
F-75
<PAGE> 161
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following as of December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Unsecured loan.............................................. $ -- $159,033
Letter of credit............................................ 178,581 147,941
Notes payable............................................... -- 121,660
-------- --------
$178,581 $428,634
======== ========
</TABLE>
The Company has several lines of credit with banks which provide for
maximum borrowings of approximately $1,611,456 and $4,505,089 as of December 31,
1998 and 1999, respectively. The unsecured loan and letter of credit balances
stated above were outstanding against these lines of credit at December 31, 1998
and 1999. There are no commitment fees associated with these lines of credit.
The lines of credit bear various interest rates. The weighted interest rates of
the borrowings were 8.45% and 8.75% as of December 31, 1998 and 1999,
respectively. The weighted average interest rate of the notes payable was 6.18%
at December 31, 1999.
These short-term borrowings are guaranteed by the Company's four major
stockholders.
(7) LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
BANK REPAYMENT TERMS 1998 1999
---- --------------- ---------- ----------
<S> <C> <C> <C>
Taiwan Medium Payable in 49 quarterly
Bank.............. installments beginning in October
2000 $ 279,416 $ 286,260
Taiwan Medium Payable in 16 quarterly
Bank.............. installments beginning in March
1999 620,925 477,099
Taiwan Medium Payable in 32 quarterly
Bank.............. installments beginning in June 2000 211,115 216,285
Taiwan Medium Payable in 36 monthly installments
Bank.............. beginning in July 1999 -- 396,946
Taiwan Medium Payable in 17 quarterly
Bank.............. installments beginning in September
2000 -- 37,214
Taiwan Medium Payable in 17 monthly installments
Bank.............. beginning in September 2000 -- 34,351
---------- ----------
1,111,456 1,448,155
Less: current portion.................................... (155,231) (353,546)
---------- ----------
Total long-term debt excluding current position.......... $ 956,225 $1,094,609
========== ==========
</TABLE>
All of the above debt bears interest at variable rates. The weighted
average interest rate of the above debt was 6.76% and 6.93% as of December 31,
1998 and 1999, respectively.
F-76
<PAGE> 162
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long-term debt were as follows as of December 31, 1999:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000..................................................... $ 353,546
2001..................................................... 384,924
2002..................................................... 305,534
2003..................................................... 67,112
2004..................................................... 62,914
Thereafter............................................... 274,125
----------
$1,448,155
==========
</TABLE>
The agreements for the above debt require the Company to pledge property,
plant and equipment with the following book values as of December 31, 1998 and
1999:
<TABLE>
<CAPTION>
ASSETS 1998 1999
------ ---------- ----------
<S> <C> <C>
Land................................................ $ 541,358 $ 554,616
Building............................................ 822,282 737,128
Machinery and equipment............................. 724,773 711,157
---------- ----------
$2,088,413 $2,002,901
========== ==========
</TABLE>
(8) INCOME TAXES
The Company's operations in Taiwan are subject to income tax at a rate of
25%. The Company's operations outside Taiwan are subject to income tax rates
applicable to the related foreign jurisdiction.
For the period from May 27, 1997 (inception) to December 31,1997 and the
years ended December 31, 1998 and 1999, pre-tax losses were recorded in the
following tax jurisdictions:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- -----------
<S> <C> <C> <C>
Taiwan.......................................... $(48,151) $(629,022) $ (886,494)
Singapore....................................... -- -- (420,125)
-------- --------- -----------
$(48,151) $(629,022) $(1,306,619)
======== ========= ===========
</TABLE>
A reconciliation of the expected income tax benefit at the Taiwan statutory
rate of 25% to the actual income tax benefit for the period from May 27, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Income taxes benefit computed at the Taiwan
statutory rate of 25%.......................... $(12,038) $(157,256) $(326,655)
Expenses disallowed for tax purposes............. 1,409 3 2,915
Income not recognized for tax purposes........... (195) (8,574)
Investment tax credits earned.................... -- (94,861) (18,907)
Change in valuation allowance.................... 9,451 259,133 367,458
Foreign currency translation adjustment.......... 1,178 (6,002) (16,274)
Other............................................ -- (822) 37
-------- --------- ---------
Actual income tax benefit........................ $ -- $ -- $ --
======== ========= =========
</TABLE>
F-77
<PAGE> 163
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of deferred income tax assets and liabilities consisted of
the following as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Provision for inventory obsolescence...................... $ 68,899 $ 39,758
Unrealized investment loss................................ -- 108,027
Net operating loss carryforwards.......................... 94,365 336,800
Investment tax credits.................................... 94,861 113,768
Property, plant and equipment............................. 7,019 23,159
Other..................................................... 3,440 14,530
--------- ---------
268,584 636,042
Less: valuation allowance................................... (268,584) (636,042)
--------- ---------
Net deferred income tax assets......................... $ -- $ --
========= =========
</TABLE>
A full valuation allowance was recorded against the deferred income tax
asset balance primarily due to the Company's history of losses.
The Company earns investment tax credits in Taiwan related to certain
research and development expenditures. Credits are based on a percentage of the
total cost of research and development expenditures and can be used to offset
either current income taxes or be carried forward for four years. The expiration
dates of the Company's investment tax credits as of December 31, 1999 are shown
below:
<TABLE>
<CAPTION>
EXPIRATION YEAR AMOUNT
--------------- --------
<S> <C>
2002.................................................... $ 97,184
2003.................................................... 16,584
--------
$113,768
========
</TABLE>
As of December 31, 1999, the Company had net operating losses available for
carryforward in Taiwan of approximately $1.3 million which will expire from
fiscal year 2002 to 2004.
(9) RETIREMENT BENEFITS
The following table sets forth a reconciliation of the benefit obligation
and accrued pension balance related to the Company's defined benefit retirement
plan for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Projected benefit obligation at beginning of period......... $ -- $ 39,863
Service cost................................................ 39,863 62,771
Interest cost............................................... -- 2,566
Foreign currency translation adjustment..................... -- 2,847
------- --------
Benefit obligation at end of period......................... 39,863 108,047
Fair value of plan assets................................... -- (12,977)
------- --------
Accrued pension at end of period............................ $39,863 $ 95,070
======= ========
</TABLE>
F-78
<PAGE> 164
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
There is no pension cost for the period from May 27 (inception) to December
31, 1997. The components of net pension cost for the years ended December 31,
1998 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Service cost................................................ $39,863 $62,771
Interest cost............................................... -- 2,566
Expected return on plan assets.............................. -- (216)
------- -------
Net pension cost............................................ $39,863 $65,553
======= =======
</TABLE>
The discount rate and rate of compensation increase used by the Company to
calculate its net pension expense for the years ended December 31, 1998 and 1999
were as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Discount rate............................................... 6.5% 6.5%
Rate of compensation increase............................... 5.0% 5.0%
</TABLE>
The Company's contribution to the fund deposited in the Central Trust of
China amounted to $12,413 for the year ended December 31, 1999.
(10) ADVANCE PAYMENT FROM CUSTOMER
The Company has entered into an agreement with a customer for the future
sale of DWDM filters. In accordance with the agreement, the customer has made an
advance payment of $795,165 for the filters. This payment will be applied
against the future shipment of the product. Consistent with the Company's
revenue recognition policy, the advance payment will be recognized as revenue
upon shipment. As of December 31, 1999, the Company was in the process of
developing the filters and the related manufacturing process. Management expects
to begin the manufacturing and shipment of the filters in the second half of
fiscal year 2000. As of December 31, 1999, the advance payment has been included
in current liabilities in the accompanying consolidated balance sheet.
(11) STOCKHOLDERS' EQUITY
On September 1, 1997, the Company's stockholders approved the issuance of
4,040,000 new shares through cash subscription at 10 New Taiwan dollars per
share. As of December 31, 1997, the stockholders made advance payments
aggregating to $439,698 to the Company. The common stock was issued in 1998 upon
completion of the final stock agreement between the Company and stockholders.
(12) COMMITMENTS
As of December 31, 1999, the Company had commitments to purchase equipment
with a total estimated cost of $1,234,097.
F-79
<PAGE> 165
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets:
Marketable securities................. $ -- $ -- $ 581,423 $ 581,423
Accounts receivable................... 705,854 705,854 1,070,429 1,070,429
Liabilities:
Short-term borrowings................. 178,581 178,581 428,634 428,634
Due to related parties................ 129,143 129,143 13,898 13,898
Accounts payable...................... 417,037 417,037 1,075,277 1,075,277
Long-term debt (including current
portion)........................... $1,111,456 $1,111,456 $1,448,155 $1,448,155
</TABLE>
The carrying amount of accounts receivable, short-term borrowings, due to
related parties and accounts payable approximate fair value due to the
short-term nature of these instruments.
The carrying amount of the Company's marketable securities is stated at the
fair value based on the publicly quoted market prices of the securities.
The carrying amount of long-term debt approximates fair value since the
variable interest rates on the debt approximate market interest rates.
(14) SEGMENT INFORMATION AND MAJOR CUSTOMERS
The Company principally operated in one segment, optical crystal products.
The following table presents net sales based on the customer's country of
domicile for the years ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Taiwan...................................................... $1,691,440 $2,667,761
Peoples' Republic of China.................................. 239,206 703,217
Other countries in Asia..................................... 185,671 58,982
United States............................................... -- 3,489
---------- ----------
$2,116,317 $3,433,449
========== ==========
</TABLE>
Net sales to one customer exceeded 10% of total net sales for the year
ended December 31, 1998. Total net sales to this customer amounted to $268,567
and $223,265 for the years ended December 31, 1998 and 1999, respectively.
Property, plant and equipment were located in the following countries as of
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Taiwan...................................................... $2,741,141 $3,361,467
Peoples' of Republic of China............................... -- 1,000,096
---------- ----------
$2,741,141 $4,361,563
========== ==========
</TABLE>
F-80
<PAGE> 166
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
2000
-----------
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 1,014,183
Marketable securities..................................... 437,880
Accounts receivable, net of allowance for doubtful
accounts of $5,767 as of June 30, 2000................. 1,519,313
Inventories............................................... 2,516,904
Prepaid expenses and other current assets................. 107,061
-----------
Total current assets.............................. 5,595,341
Property, plant and equipment, net.......................... 5,322,200
-----------
Total assets...................................... $10,917,541
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 1,356,118
Current portion of long-term debt......................... 575,755
Accounts payable.......................................... 1,077,525
Advance from customers.................................... 817,577
Accrued expenses and other current liabilities............ 497,208
-----------
Total current liabilities......................... 4,324,183
-----------
Long-term debt.............................................. 1,835,925
Accrued pension............................................. 139,092
-----------
Total liabilities................................. 6,299,200
-----------
Stockholders' equity:
Common stock, par value of 10 New Taiwan dollars,
authorized shares of 30,000,000; issued and outstanding
shares of 19,000,000, as of June 30, 2000.............. 6,076,019
Additional paid-in capital................................ 943,980
Accumulated deficit....................................... (2,353,871)
Accumulated other comprehensive loss...................... (47,787)
-----------
Total stockholders' equity........................ 4,618,341
Commitments
Total liabilities and stockholders' equity........ $10,917,541
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-81
<PAGE> 167
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Net sales................................................... $1,532,760 $2,858,881
Cost of good sold........................................... 1,443,155 2,335,930
---------- ----------
Gross profit................................................ 89,605 522,951
Selling, general and administrative expense................. 263,833 261,912
Research and development expense............................ 120,715 455,060
---------- ----------
Operating loss......................................... (294,943) (194,021)
Interest expense............................................ (44,201) (99,825)
Interest income............................................. 6,899 4,092
Foreign exchange gain (loss), net........................... 76,555 (108,391)
Other gain, net............................................. 36,074 28,066
---------- ----------
Net loss............................................... $ (219,616) $ (370,079)
========== ==========
Other comprehensive income (loss):
Foreign currency translation adjustment................... $ (30,565) 101,098
Unrealized holding loss on marketable securities.......... -- (69,272)
---------- ----------
Comprehensive loss.......................................... $ (250,181) $ (338,253)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-82
<PAGE> 168
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (219,616) $ (370,079)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 175,357 324,619
Gain on disposal of marketable securities.............. (6,069) (58,345)
Changes in operating assets and liabilities:
Accounts receivable.................................... (486,730) (429,086)
Inventories............................................ (431,484) (984,458)
Prepaid expenses and other current assets.............. (113,224) 75,704
Accounts payable....................................... 770,131 (34,086)
Due to related parties................................. (127,247) --
Accrued expenses and other current liabilities......... 463,816 173,026
Accrued pension........................................ 11,001 42,284
----------- -----------
Cash provided by (used in) operating activities...... 35,935 (1,260,421)
----------- -----------
Cash flows from investing activities:
Purchase of marketable securities......................... (782,097) (815,395)
Purchase of property, plant and equipment................. (1,251,111) (1,190,187)
Proceeds from the sale of marketable securities........... 115,940 913,242
----------- -----------
Cash used in investing activities.................... (1,917,268) (1,092,340)
----------- -----------
Cash flows from financing activities:
Net increase in short-term borrowings..................... 495,289 923,215
Net increase (decrease) in long-term debt................. (76,476) 938,482
----------- -----------
Cash provided by financing activities................ 418,813 1,861,697
----------- -----------
Effect of exchange rate changes on cash..................... (25,154) (16,234)
----------- -----------
Net decrease in cash and cash equivalents................... (1,487,674) (507,298)
Cash and cash equivalents at beginning of period............ 1,978,930 1,521,481
----------- -----------
Cash and cash equivalents at end of period.................. $ 491,256 $ 1,014,183
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest............................................... $ 57,660 $ 102,523
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 169
QUANTUM OPTECH INCORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in applicable to interim financial information and do not include
all the notes required by accounting principles generally accepted in the United
States of America. In the opinion of management, the unaudited interim
consolidated financial statements include all adjustment, consisting primarily
of recurring accruals, considered necessary for a fair presentation of the
financial position and the results of operations.
(2) INVENTORIES
Inventories at June 30, 2000 consisted of the following:
<TABLE>
<CAPTION>
2000
----------
<S> <C>
Finished goods.............................................. $ 722,051
Work in process............................................. 1,485,391
Raw material................................................ 416,888
Merchandise................................................. 23,422
----------
2,647,752
Less: provision for inventory obsolescence.................. (130,848)
----------
$2,516,904
==========
</TABLE>
(3) SIGNIFICANT EVENT
Quantum Optech Incorporation (the "Company"), shareholders of the Company
and MRV communications, Inc. ("MRV") entered into a stock purchase agreement
relating to the sale and purchase of up to 100% of the Company's shares and the
sale and purchase of certain number of ordinary shares of MRV on April 26, 2000.
The Company's special shareholders meeting dated May 24, 2000, approved the
above agreement. In accordance with the agreement, MRV shall issue and sell to
the Company's shareholders, and the shareholders of the Company shall purchase
the MRV shares from MRV pro rata in accordance with their percentage
shareholdings in the Company at and for an aggregate purchase price of
US$36,000,000. The closing date of the transaction was July 12, 2000.
F-84
<PAGE> 170
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 24, 2000, MRV completed the acquisition of approximately 97% or
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation, in exchange for approximately 4.7 million shares of MRV's
common stock, options to purchase 300,000 shares of common stock and
approximately $48.6 million in cash. On July 12, 2000, MRV acquired all of the
outstanding capital stock of Quantum Optech Inc., a Republic of China
corporation, in exchange for approximately 1.1 million shares of MRV's common
stock and options to purchase common stock. On July 21, 2000, MRV acquired
approximately 99.9% of the outstanding capital stock of Optronics International
Corp., a Republic of China corporation, in exchange for approximately 4.2
million shares of MRV's common stock and options to purchase common stock. The
outstanding capital stock of Fiber Optic Communications, Quantum and Optronics,
purchased by MRV, has been or will be contributed to Luminent as of the date of
each acquisition as part of the Master Separation and Distribution Agreements.
As such, Luminent's management has prepared the following unaudited pro forma
condensed consolidated financial information to give effect to these
acquisition. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the years ended December 31, 1999 and for the six months ended
June 30, 2000 give effect to the Fiber Optic Communications, Quantum and
Optronics acquisitions as if they had taken place at the beginning of each
period. The Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June
30, 2000 gives effect to these acquisitions as if it had taken place on such
date.
The pro forma adjustments, which are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances, are applied to the historical financial statements of Luminent,
Fiber Optic Communications, Quantum and Optronics. The acquisition of Fiber
Optic Communications was accounted for using the purchase method. The
acquisitions of Quantum and Optronics will be accounted for using the purchase
method. Luminent's allocation of purchase price for each acquisition is based
upon management's current estimates of the fair value of assets acquired and
liabilities assumed in accordance with Accounting Principles Board No. 16. The
purchase price allocations reflected in the accompanying Unaudited Pro Forma
Condensed Consolidated Financial Statements may be different from the final
allocations of the purchase prices, however, management does not believe any
material differences will result. The Company expects to complete a final
valuation during the fourth quarter of 2000.
The accompanying unaudited pro forma condensed consolidated financial
information should be read in conjunction with the historical financial
statements and the notes thereto for Luminent, Fiber Optic Communications,
Quantum and Optronics. The unaudited pro forma condensed consolidated financial
information is provided for informational purposes only and does not purport to
represent what Luminent's financial position or results of operations would
actually have been had the these acquisitions occurred on such dates or to
project Luminent's results of operation or financial position for any future
period.
F-85
<PAGE> 171
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
LUMINENT, INC. OPTRONICS QUANTUM ADJUSTMENTS TOTAL
-------------- --------- ------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents............ $ 4,982 $ 2,058 $ 1,014 $ -- $ 8,054
Short-term investments............... -- 1,163 438 -- 1,601
Notes receivable..................... -- 12 -- -- 12
Accounts receivable.................. 19,540 1,318 1,519 -- 22,377
Inventories.......................... 21,620 1,740 2,517 -- 25,877
Deferred income taxes................ 2,540 -- -- -- 2,540
Other current assets................. 6,639 126 107 -- 6,872
-------- ------- ------- -------- --------
Total current assets......... 55,321 6,417 5,595 -- 67,333
-------- ------- ------- -------- --------
Property and Equipment, net............ 32,415 5,618 5,322 2,500(1) 45,855
Other Assets:
Goodwill............................. 253,184 -- -- 127,614(1) 380,798
Deferred income taxes................ -- 108 -- -- 108
Other assets......................... 1,007 51 -- -- 1,058
-------- ------- ------- -------- --------
Total assets................. 341,927 12,194 10,917 130,114 495,152
-------- ------- ------- -------- --------
Current Liabilities
Current maturities of long-term
debt.............................. 879 259 575 -- 1,713
Short-term borrowings................ 12,884 -- 1,356 -- 14,240
Accounts payable..................... 10,891 1,306 1,078 -- 13,275
Accrued liabilities.................. 4,495 753 497 -- 5,745
Income taxes payable................. 2,526 -- -- -- 2,526
Receivables in advance............... -- -- 818 -- 818
-------- ------- ------- -------- --------
Total current liabilities.... 31,675 2,318 4,324 -- 38,317
-------- ------- ------- -------- --------
Long-Term Debt, net of current
portion.............................. 7,007 129 1,836 -- 8,972
Other Long-Term Liabilities............ 410 141 139 -- 690
Minority Interests..................... 332 -- -- -- 332
Parent company investment/Stockholders'
equity............................... 302,503 9,606 4,618 (14,224)(1) 302,503
(16,080)(1) (16,080)
160,418(1) 160,418
-------- ------- ------- -------- --------
302,503 9,606 4,618 130,114 446,841
-------- ------- ------- -------- --------
Total liabilities and Parent Company
Investment........................... $341,927 $12,194 $10,917 $130,114 $495,152
-------- ------- ------- -------- --------
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
F-86
<PAGE> 172
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
FIBER OPTIC
COMMUNICATIONS
THROUGH PRO FORMA
LUMINENT, INC. APRIL 24, 2000 OPTRONICS QUANTUM ADJUSTMENTS TOTAL
-------------- -------------- --------- ------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales.............. $ 43,587 $7,058 $3,207 $2,859 $ -- $ 56,711
Cost of sales.......... 29,742 4,229 2,917 2,336 1,970(3) 41,194
-------- ------ ------ ------ -------- --------
Gross profit...... 13,845 2,829 290 523 (1,970) 15,517
-------- ------ ------ ------ -------- --------
Operating Costs and
Expenses:
Selling, general and
administrative
expenses.......... 6,215 1,520 497 262 3,387(4),(3) 11,881
Research and
development....... 6,558 527 599 455 3,073(3) 11,212
Parent company
allocation........ 388 -- -- -- -- 388
Amortization of
goodwill and other
intangibles....... 9,580 -- -- -- 28,925(2) 38,505
-------- ------ ------ ------ -------- --------
22,741 2,047 1,096 717 35,385 61,986
-------- ------ ------ ------ -------- --------
Operating (loss)....... (8,896) 782 (806) (194) (37,355) (46,466)
-------- ------ ------ ------ -------- --------
Other income (expense),
net.................. 103 (286) 224 (176) -- (135)
-------- ------ ------ ------ -------- --------
Income before provision
for income taxes..... (8,793) 496 (582) $ (370) (37,355) (46,604)
-------- ------ ------ ------ -------- --------
Provision (credit) for
income taxes......... 1,750 -- -- -- -- 1,750
Minority interest...... 318 (31) -- -- -- 287
-------- ------ ------ ------ -------- --------
Net (loss)............. $(10,861) $ 527 $ (582) $ (370) $(37,355) $(48,641)
-------- ------ ------ ------ -------- --------
Basic and diluted net
loss per share....... $ (0.08) $ (0.34)
-------- --------
Weighted average shares
outstanding used in
basic and diluted per
shares calculation... 144,000 --(8) 144,000
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
F-87
<PAGE> 173
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIBER OPTIC PRO FORMA
LUMINENT, INC. COMMUNICATIONS OPTRONICS QUANTUM ADJUSTMENTS TOTAL
-------------- -------------- --------- ------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $ 65,264 $19,758 $ 4,807 $ 3,433 $ -- $ 93,262
Cost of sales................. 43,078 13,407 4,684 3,555 4,327(6) 69,051
-------- ------- ------- ------- -------- --------
Gross profit............. 22,186 6,351 123 (122) (4,327) 24,211
-------- ------- ------- ------- -------- --------
Operating Costs and Expenses:
Selling, general and
administrative
expenses................. 5,675 5,013 771 854 7,330(7),(6) 19,643
Research and development.... 8,693 1,256 1,453 281 6,750(6) 18,433
Parent company allocation... 885 -- -- -- -- 885
Amortization of goodwill and
other intangibles........ -- -- -- -- 77,946(5) 77,946
-------- ------- ------- ------- -------- --------
15,253 6,269 2,224 1,135 92,026 116,907
-------- ------- ------- ------- -------- --------
Operating (loss).............. 6,933 82 (2,101) (1,257) (96,353) (92,696)
-------- ------- ------- ------- -------- --------
Other income (expense), net... 6 (711) 587 (49) -- (167)
-------- ------- ------- ------- -------- --------
Income before provision for
income taxes................ 6,939 (629) (1,514) (1,306) (96,353) (92,863)
-------- ------- ------- ------- -------- --------
Provision (credit) for income
taxes....................... 2,764 68 62 -- -- 2,894
Minority interest............. -- (36) -- -- -- (36)
-------- ------- ------- ------- -------- --------
Net (loss).................... $ 4,175 $ (661) $(1,576) $(1,306) $(96,353) $(95,721)
-------- ------- ------- ------- -------- --------
Basic and diluted net loss per
share....................... $ 0.03 $ (0.66)
======== ========
Weighted average shares
outstanding used in basic
and diluted per shares
calculation................. 144,000 --(8) 144,000
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information
F-88
<PAGE> 174
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to Luminent's historical financial
statements and those of Fiber Optic Communications, Optronics and Quantum to
arrive at the pro forma financial information:
(1) The purchase price of OIC and QOI and the estimated allocation of the
purchase prices are summarized as follows (in thousands):
<TABLE>
<CAPTION>
OPTRONICS QUANTUM TOTAL
--------- ------- --------
<S> <C> <C> <C>
Common stock................................ $103,198 $31,220 $134,418
Stock options............................... 20,000 4,000 24,000
Other costs................................. 1,000 1,000 2,000
-------- ------- --------
$124,198 $36,220 $160,418
======== ======= ========
Allocation of purchase price --
Net assets................................ $ 9,606 $ 4,618 $ 14,224
Property, Plant and equipment............. 1,500 1,000 2,500
Deferred Compensation..................... 13,400 2,680 16,080
Goodwill and other intangibles............ 99,692 27,922 127,614
-------- ------- --------
$124,198 $36,220 $160,418
======== ======= ========
</TABLE>
In connection with the acquisition of Optronics, MRV exchanged
approximately 3.4 million shares of common stock and approximately 800,000
options to purchase common stock for approximately 99.9% of the outstanding
capital stock of Optronics. The issuance price of the 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 common stock are exercisable at approximately $6 per share, have an
aggregate intrinsic value of approximately $20.0 million, of which $6.6 million
is vested and the remaining vests over a four-year period.
In connection with the acquisition of Quantum, MRV exchanged approximately
1.0 million shares of common stock and approximately 160,000 options to purchase
common stock for all of the outstanding capital stock of Quantum. The issuance
price of the 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 common stock are exercisable at
approximately $6 per share, have an aggregate intrinsic value of approximately
$4.0 million, of which $1.3 million is vested, and the remaining vests over a
four-year period.
(2) The pro forma adjustment is to record the amortization of goodwill related
to the acquisitions of Fiber Optic Communications, Optronics and Quantum as
if the transactions occurred on January 1, 2000. Goodwill recorded in
relation to these acquisitions was approximately $127.6 million and is being
amortized on a straight-line basis over 5 years or approximately $28.9
million for the six month period ended June 30, 2000.
(3) The pro forma adjustment is to record deferred stock compensation related to
the acquisitions of Fiber Optic Communications, Optronics and Quantum as if
the transactions occurred on January 1, 2000. Deferred stock compensation
recorded in relation to theses acquisitions was approximately $16.1 million
and is being amortized using the graded method over 4 years or approximately
$10.8 million for the six month period ended June 30, 2000.
(4) The pro forma adjustment is to record additional depreciation expense on the
step-up of net assets related to the acquisitions of Fiber Optic
Communications, Optronics, and Quantum as if the transactions occurred on
January 1, 1999. Additional depreciation expense recorded in relation to
theses acquisitions is being amortized over 5 years or approximately
$550,000 for the six month period ended June 30, 2000.
F-89
<PAGE> 175
(5) The pro forma adjustment is to record the amortization of goodwill related
to the acquisitions of Fiber Optic Communications, Optronics, and Quantum as
if the transactions occurred on January 1, 1999. Goodwill recorded in
relation to these acquisitions was approximately $389.7 million and is being
amortized on a straight-line basis over 5 years or approximately $77.9
million for the year ended December 31, 1999.
(6) The pro forma adjustment is to record deferred stock compensation related to
the acquisitions of Fiber Optic Communications, Optronics and Quantum as if
the transactions occurred on January 1, 1999. Deferred stock compensation
recorded in relation to theses acquisitions was approximately $30.2 million
and is being amortized using the graded method over 4 years or approximately
$17.3 million for the year ended December 31, 1999.
(7) The pro forma adjustment is to record additional depreciation expense on the
step-up of net assets related to the acquisitions of Fiber Optic
Communications, Optronics, and Quantum as if the transactions occurred on
January 1, 1999. Additional depreciation expense recorded in relation to
theses acquisitions is being amortized over 5 years or approximately $1.1
million for the year ended December 31, 1999.
(8) Weighted average shares used to calculate pro forma basic and diluted net
loss per share for the periods presented is computed using the weighted
average number of common stock outstanding for the periods presented. In
connection with the "push down" of the assets and liabilities of Fiber Optic
Communications, Optronics and Quantum, no additional shares were exchanged
with MRV. Therefore, no dilutive effect has been provided for these
acquisitions.
F-90
<PAGE> 176
The inside back cover page of the prospectus contains photographs
depicting facilities and office space owned by Luminent and Luminent
employees at work.
The photographs are arranged in a circular montage. Moving clockwise from
the top of the page there are photographs of:
(i) the exterior of the Fiber Optics Communications, Inc. ("FOCI") office
building, located in Hsinchu, Taiwan, People's Republic of China;
(ii) Luminent employees in a laboratory located at Luminent's headquarters
in Chastworth, California;
(iii) the exterior of the Luminent headquarters in Chatsworth, California;
(iv) FOCI employees at work in one of the clean rooms located at the FOCI
facility; and
(v) a photograph of a Luminent employee taking notes.
<PAGE> 177
[LUMINENT LOGO]
<PAGE> 178
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 54,648
NASD filing fee............................................. 21,200
Nasdaq National Market listing fee.......................... 95,000
Printing and engraving costs................................ 300,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 300,000
Blue Sky fees and expenses.................................. 3,000
Directors and Officers Insurance............................ 150,000
Transfer Agent and Registrar fees........................... 10,000
Miscellaneous expenses...................................... 66,152
----------
Total.................................................. $1,400,000
==========
</TABLE>
---------------
* To be filed by amendment.
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article IX of our amended and restated certificate of incorporation
provides for the indemnification of directors and officers to the fullest extent
permissible under Delaware law.
Article VII of our bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of Luminent, Inc. if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to our best interest, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his or her conduct was unlawful.
We have entered into indemnification agreements with our directors and
executive officers, in addition to indemnification provided for in our bylaws,
and intend to enter into indemnification agreements with any new directors and
executive officers in the future. The indemnification agreements may require us,
among other things, to indemnify our directors and officers against certain
liability that may arise by reason of their status or service as directors and
officers (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors and
officers' insurance, if available on reasonable terms.
Reference is also made to Section of the form of Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of
Luminent, Inc. against certain liabilities.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, in March 2000, the
Registrant issued 1,000 shares of common stock to MRV Communications, Inc. for
an aggregate of $1,000. In July 2000, Registrant effected a 144,000 for one
stock split of its outstanding common stock. The Registrant believes that
initial issuances was exempt under Section 4(2) of the Securities Act as a
transaction not involving
II-1
<PAGE> 179
any public offering. Registrant believes that the stock split was either not a
"sale" of securities pursuant to the Securities or exempt under Section 3(a)(9)
of the Securities Act.
No underwriters were involved in connection with the sale of securities
referred to in this Item 15. MRV represented its intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued. MRV had adequate access, through its
relationships with registrant, to information about registrant.
(1) .
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Master Separation and Distribution Agreement.**
2.2 Form of General Assignment and Assumption Agreement.**
2.3 Form of Master Technology Ownership and License Agreement.**
2.4 Form of Employee Matters Agreement.**
2.5 Form of Real Estate Matters Agreement.**
2.6 Form of Master Transitional Services Agreement.**
2.7 Form of Master Trademark Ownership and License Agreement.**
2.8 Form of Master Patent Ownership and License Agreement.**
2.9 Form of Indemnification and Insurance Matters Agreement.**
2.10 Form of Master Confidential Disclosure Agreement.**
2.11 Form of Tax Sharing Agreement.**
3.1 Form of Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws of the Registrant.**
4.1 Specimen Common Stock Certificate.**
5 Opinion of Kirkpatrick & Lockhart LLP.*
10.1 Form of Amended and Restated Luminent 2000 Stock Option
Plan.**
10.2 Employment Agreement dated as of July 11, 2000 between
William R. Spivey and the Registrant.**
10.3 Stock Option Agreement dated July 11, 2000 between William
R. Spivey and the Registrant.**
10.4 Stock Option Agreement dated July 11, 2000 between William
R. Spivey and MRV Communications, Inc. ("MRV").**
10.5 Employment Agreement dated as of July 12, 2000 between Eric
Blachno and the Registrant.**
10.6 Stock Option Agreement dated July 12, 2000 between Eric
Blachno and the Registrant.**
10.7 Stock Option Agreement dated July 12, 2000 between Eric
Blachno and MRV.**
10.8 Real Property Lease for Registrant's headquarters at 20550
Nordhoff in Chatsworth, CA dated July 13, 1999 and expiring
July 13, 2004.**
10.9 Real Property Lease for Registrant's foundry at 8917
Fullbright in Chatsworth, CA dated November 14, 1997 and
expiring December 31, 2002.**
10.10 First Amendment to Employment Agreement dated as of July 11,
2000 between William R. Spivey and the Registrant.**
10.11 Form of Indemnification Agreement.**
</TABLE>
II-2
<PAGE> 180
<TABLE>
<C> <S>
10.12 Stock Purchase Agreement by and between MRV Communications,
Inc. ("MRV") and the shareholders of Fiber Optic
Communications, Inc. ("FOCI"), dated February 21, 2000
(incorporated by reference to Exhibit 2.1(a) of the Form 8-K
of MRV filed with the SEC on May 9, 2000).**
10.13 Escrow Agreement dated as of the 21st day of February 2000,
by and among MRV, 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 MRV filed
with the SEC on May 9, 2000).**
10.14 Addendum to Stock Purchase 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(c) of the Form 8-K of MRV filed with the SEC on May 9,
2000).**
10.15 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 MRV filed with the SEC on May 9, 2000).**
10.16 Addendum No. 2 to Escrow Agreement dated as of June 26, 2000
by and among FOCI, MRV and the selling shareholders of FOCI
(incorporated by reference to Exhibit 2.1(d) of the Form
8-K/A of MRV filed with the SEC on July 7, 2000).**
10.17 Addendum No. 2 to Stock Purchase Agreement dated as of June
26, 2000 by and among FOCI, MRV and the selling shareholders
of FOCI (incorporated by reference to Exhibit 2.1(e) of the
Form 8-K/A of MRV filed with the SEC on July 7, 2000).**
10.18 Memorandum of Understanding dated as of June 26, 2000
between MRV and the remaining shareholders of FOCI
(incorporated by reference to Exhibit 2.1(f) of the Form
8-K/A of MRV filed with the SEC on July 7, 2000).**
10.19 Stock Purchase Agreement by and between MRV and the
shareholders of Optronics International Corp. ("OIC") dated
April 23, 2000.**
10.20 Escrow Agreement, dated as of the 23rd day of April 2000, by
and among MRV, the selling shareholders of OIC and the law
firm of Baker & McKenzie, Taipei Office.**
10.21 Stock Purchase Agreement by and between MRV and the
shareholders of Quantum Optech Inc. ("QOI") dated April 26,
2000.**
10.22 Escrow and Stock Pledge Agreement dated as of April 26,
2000, by and between MRV and certain shareholders of QOI.**
10.23 Addendum to Stock Purchase Agreement made as of June 16th,
2000 by and among MRV, QOI and shareholders of QOI.**
10.24 Addendum to Escrow and Stock Pledge Agreement dated as of
June 16, 2000 by and between MRV and certain shareholders of
QOI.**
21.1 List of Registrant's Subsidiaries.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of T N Soong & Co.
23.3 Consent of KPMG Certified Public Accountants.
23.4 Consent of Kirkpatrick & Lockhart LLP (contained in Exhibit
5).
24.1 Power of attorney (included on signature page of
Registration Statement).**
27 Financial Data Schedules.**
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedules are included as part of this
registration statement:
Report of Independent Public Accountants
II-3
<PAGE> 181
Schedule II -- Valuation and Qualifying Accounts
ITEM 17 UNDERTAKINGS
We hereby undertake to provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was
declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Chatsworth, State of California, on
the 4th day of October, 2000.
LUMINENT, INC.
By: /s/ ERIC BLACHNO
------------------------------------
Eric Blachno
Vice President of Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM R. SPIVEY* President and Chief Executive October 4, 2000
--------------------------------------------------- Officer and Director
William R. Spivey (Principal Executive Officer)
/s/ ERIC BLACHNO Chief Financial Officer October 4, 2000
--------------------------------------------------- (Principal Financial and
Eric Blachno Accounting Officer)
/s/ NOAM LOTAN* Chairman of the Board October 4, 2000
---------------------------------------------------
Noam Lotan
/s/ SHLOMO MARGALIT* Director October 4, 2000
---------------------------------------------------
Shlomo Margalit
/s/ RICHARD S. HILL* Director October 4, 2000
---------------------------------------------------
Richard S. Hill
/s/ AMOS WILNAI* Director October 4, 2000
---------------------------------------------------
Amos Wilnai
/s/ DAN AVIDA* Director October 4, 2000
---------------------------------------------------
Dan Avida
By: /s/ ERIC BLACHNO Attorney In Fact
----------------------------------------------
Eric Blachno
</TABLE>
II-5
<PAGE> 183
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Luminent, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Luminent, Inc. and
subsidiaries included in this Form S-1, and have issued our report thereon dated
July 25, 2000. Our audit was made for the purpose of forming an opinion on the
basic consolidated financial statements takes 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 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
Los Angeles, California
July 25, 2000
II-6
<PAGE> 184
LUMINENT, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING AT END
OF PERIOD PROVISION WRITE-OFF OF PERIOD
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1997.................. $ 350 $219 $ -- $ 569
Year ended December 31, 1998.................. $ 569 $778 $ -- $1,347
Year ended December 31, 1999.................. $1,347 $500 $(123) $1,724
</TABLE>
II-7
<PAGE> 185
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Master Separation and Distribution Agreement.**
2.2 Form of General Assignment and Assumption Agreement.**
2.3 Form of Master Technology Ownership and License Agreement.**
2.4 Form of Employee Matters Agreement.**
2.5 Form of Real Estate Matters Agreement.**
2.6 Form of Master Transitional Services Agreement.**
2.7 Form of Master Trademark Ownership and License Agreement.**
2.8 Form of Master Patent Ownership and License Agreement.**
2.9 Form of Indemnification and Insurance Matters Agreement.**
2.10 Form of Master Confidential Disclosure Agreement.**
2.11 Form of Tax Sharing Agreement.**
3.1 Form of Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws of the Registrant.**
4.1 Specimen Common Stock Certificate.**
5 Opinion of Kirkpatrick & Lockhart LLP.*
10.1 Form of Amended and Restated Luminent 2000 Stock Option
Plan.**
10.2 Employment Agreement dated as of July 11, 2000 between
William R. Spivey and the Registrant.**
10.3 Stock Option Agreement dated July 11, 2000 between William
R. Spivey and the Registrant.**
10.4 Stock Option Agreement dated July 11, 2000 between William
R. Spivey and MRV Communications, Inc. ("MRV").**
10.5 Employment Agreement dated as of July 12, 2000 between Eric
Blachno and the Registrant.**
10.6 Stock Option Agreement dated July 12, 2000 between Eric
Blachno and the Registrant.**
10.7 Stock Option Agreement dated July 12, 2000 between Eric
Blachno and MRV.**
10.8 Real Property Lease for Registrant's headquarters at 20550
Nordhoff in Chatsworth, CA dated July 13, 1999 and expiring
July 13, 2004.**
10.9 Real Property Lease for Registrant's foundry at 8917
Fullbright in Chatsworth, CA dated November 14, 1997 and
expiring December 31, 2002.**
10.10 First Amendment to Employment Agreement dated as of July 11,
2000 between William R. Spivey and the Registrant.**
10.11 Form of Indemnification Agreement.**
10.12 Stock Purchase Agreement by and between MRV Communications,
Inc. ("MRV") and the shareholders of Fiber Optic
Communications, Inc. ("FOCI"), dated February 21, 2000
(incorporated by reference to Exhibit 2.1(a) of the Form 8-K
of MRV filed with the SEC on May 9, 2000).**
10.13 Escrow Agreement dated as of the 21st day of February 2000,
by and among MRV, 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 MRV filed
with the SEC on May 9, 2000).**
10.14 Addendum to Stock Purchase 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(c) of the Form 8-K of MRV filed with the SEC on May 9,
2000).**
</TABLE>
<PAGE> 186
<TABLE>
<S> <C>
10.15 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 MRV filed with the
SEC on May 9, 2000).**
10.16 Addendum No. 2 to Escrow Agreement dated as of June 26, 2000 by and among FOCI, MRV and the selling
shareholders of FOCI (incorporated by reference to Exhibit 2.1(d) of the Form 8-K/A of MRV filed with the
SEC on July 7, 2000).**
10.17 Addendum No. 2 to Stock Purchase Agreement dated as of June 26, 2000 by and among FOCI, MRV and the
selling shareholders of FOCI (incorporated by reference to Exhibit 2.1(e) of the Form 8-K/A of MRV filed
with the SEC on July 7, 2000).**
10.18 Memorandum of Understanding dated as of June 26, 2000 between MRV and the remaining shareholders of FOCI
(incorporated by reference to Exhibit 2.1(f) of the Form 8-K/A of MRV filed with the SEC on July 7,
2000).**
10.19 Stock Purchase Agreement by and between MRV and the shareholders of Optronics International Corp. ("OIC")
dated April 23, 2000.**
10.20 Escrow Agreement, dated as of the 23rd day of April 2000, by and among MRV, the selling shareholders of
OIC and the law firm of Baker & McKenzie, Taipei Office.**
10.21 Stock Purchase Agreement by and between MRV and the shareholders of Quantum Optech Inc. ("QOI") dated
April 26, 2000.**
10.22 Escrow and Stock Pledge Agreement dated as of April 26, 2000, by and between MRV and certain shareholders
of QOI.**
10.23 Addendum to Stock Purchase Agreement made as of June 16th, 2000 by and among MRV, QOI and shareholders of
QOI.**
10.24 Addendum to Escrow and Stock Pledge Agreement dated as of June 16, 2000 by and between MRV and certain
shareholders of QOI.**
21.1 List of Registrant's Subsidiaries.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of T N Soong & Co.
23.3 Consent of KPMG Certified Public Accountants.
23.4 Consent of Kirkpatrick & Lockhart LLP (contained in Exhibit 5).
24.1 Power of attorney (included on signature page of Registration Statement).**
27 Financial Data Schedules.**
</TABLE>
---------------
* To be filed by amendment.
** Previously filed.
