<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPTICAL ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 95-4810674
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
</TABLE>
20415 NORDHOFF STREET
CHATSWORTH, CA 91311
(818) 407-1801
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHIEF EXECUTIVE OFFICER
GUY AVIDAN
20415 NORDHOFF STREET
CHATSWORTH, CA 91311
(818) 407-1801
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENTS FOR SERVICE)
------------------------
COPIES TO
<TABLE>
<S> <C>
THOMAS J. POLETTI, ESQ. JOHN F. DELLA GROTTA, ESQ.
MARK A. KLEIN, ESQ. STEPHEN D. COOKE, ESQ.
TED WEITZMAN, ESQ. KURT E. SCHEUERMAN, ESQ.
KIRKPATRICK & LOCKHART LLP PAUL, HASTINGS, JANOFSKY & WALKER LLP
9100 WILSHIRE BLVD., 8TH FLOOR EAST 695 TOWN CENTER DRIVE, 17TH FLOOR
BEVERLY HILLS, CALIFORNIA 90212 COSTA MESA, CALIFORNIA 92626
TELEPHONE (310) 273-1870 TELEPHONE (714) 668-6200
FACSIMILE (310) 274-8293 FACSIMILE (714) 979-1921
</TABLE>
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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>
<CAPTION>
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TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $.001 par value per share....... $108,000,000 $28,512
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</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.
------------------------
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.
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<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 6, 2000
PROSPECTUS
SHARES
[OPTICAL ACCESS, INC. LOGO]
COMMON STOCK
------------------------
This is an initial public offering of [ ] shares of common stock of
Optical Access, Inc. We are selling all of the shares of common stock offered
under this prospectus. We anticipate that the initial public offering price will
be between $ and $ per share.
There is currently no public market for our shares. We intend to apply to have
our common stock approved for listing on the Nasdaq National Market under the
symbol "OPXS."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
----- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
------------------------
We have granted the underwriters a 30-day option to purchase up to an additional
[ ] shares of common stock from us at the initial public offering price
less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on
[ ].
------------------------
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
U.S. BANCORP PIPER JAFFRAY
FIRST SECURITY VAN KASPER
The date of this prospectus is [ ], 2000.
<PAGE> 3
INSIDE FRONT COVER
[ARTWORK TO BE INSERTED]
Our artwork will consist of diagrams displaying our products. Descriptive
captions will be used to describe the diagrams. In addition, we plan to use our
corporate logo which contains the words "Optical Access."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 15
Our Relationship with MRV after the Offering................ 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 29
Management.................................................. 38
Certain Transactions........................................ 44
Arrangements between Optical Access and MRV................. 44
Principal Stockholders...................................... 51
Description of Capital Stock................................ 51
Shares Eligible for Future Sale............................. 53
Underwriters................................................ 56
Legal Matters............................................... 58
Experts..................................................... 58
Where You Can Find More Information about Optical Access.... 58
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information in this prospectus, but it may
not contain all of the information that is important to you. To better
understand this offering, and for a more complete description of the offering,
you should read this entire prospectus carefully, including the "Risk Factors"
section and the financial statements and the notes to those statements, which
are included elsewhere in this prospectus.
OPTICAL ACCESS
We design, manufacture and market an optical wireless solution that
delivers high-speed communications traffic to the portion of the communications
network commonly known as the last mile, which extends from the end user to the
service provider's central office. We believe our solution enables a fundamental
shift in the design of the last mile by allowing service providers to quickly
and cost-effectively bypass the incumbent carrier's copper-based network and
offer high speed communication services to business users. Our target customers
include existing and emerging competitive local exchange carriers seeking a
comprehensive last-mile solution. Our solution is designed to be deployed in a
switched mesh architecture, which means that the solution allows transmission of
data between any two points on the network and enables full re-routing of
traffic around a transmission link or equipment failure. The switched mesh
configuration of our solution increases the sustained connectivity of the
optical wireless transmission link in adverse weather conditions, including fog
and rain.
The volume of high-speed traffic across communications networks has grown
dramatically as the public Internet and private corporate intranets have become
essential for communication and e-commerce. According to Ryan, Hankin and Kent,
a market research firm, Internet and other data traffic will increase over 4000%
between 1999 and 2003. Although service providers are rapidly upgrading their
fiber optic network infrastructure from the long-haul network to their central
offices, upgrades to the last mile have not occurred and remain cost
prohibitive, resulting in a bottleneck for the transmission of data traffic. To
date, attempts to address this last mile bottleneck have included copper-based
alternatives and wireless radio frequency alternatives which have proved only
partially successful due to inherent deficiencies of these technologies. We
believe optical wireless technology is the only alternative capable of meeting
the growing demand for bandwidth, or transmission capacity, in a timely and
cost-effective manner to address the last mile bottleneck.
Through our solution, service providers are able to offer numerous
value-added services, including the ability to immediately alter bandwidth
allocations and to prioritize certain streams of delay-sensitive data
communication, such as the transmissions of streaming video. Our wireless
devices can be installed within a few hours since installation is not dependent
on obtaining rights-of-way, government licenses and other permits. In addition,
our products are scalable, which permits service providers to install new
equipment as new subscribers are added on a pay-as-you-grow basis without
sacrificing their initial investment. We currently have over 2,500 installations
of our TereScope system.
Since beginning operations, we have incurred significant expenses as we
have developed our products and strategy. We had net losses of $3.2 million for
the period from April 1, 1998, the date of our inception, through December 31,
1998, $2.3 million for the year ended December 31, 1999 and $6.9 million for the
six months ended June 30, 2000. We expect to incur increasing manufacturing,
research and development, sales and marketing, administrative and other
expenses. As a result, we expect to operate at a loss for the foreseeable
future. Furthermore, we face intense competition from a number of competitors,
including TeraBeam Networks, AirFiber and Netro with respect to our TereScope
products and Cisco Systems, Extreme Networks and Foundry Networks with respect
to our OptiSwitch(TM) products.
OUR RELATIONSHIP WITH MRV
We are currently a wholly-owned subsidiary of MRV Communications, Inc.
After the completion of this offering, MRV will own approximately % of the
outstanding shares of our common stock or approximately % if the
underwriters exercise their over-allotment option in full.
1
<PAGE> 6
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. The parties believe that the
terms of these agreements are consistent with market-based terms. 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 two acquisitions by MRV. On May 1, 2000, MRV
acquired all of the outstanding capital stock of Jolt Limited, an Israeli
developer and manufacturer of optical wireless products, for approximately $57.7
million in MRV common stock and options to purchase MRV common stock. On July
12, 2000, MRV acquired all of the outstanding capital stock of AstroTerra
Corporation, a San Diego-based developer and manufacturer of optical wireless
products, for approximately $160.3 million in MRV common stock and options to
purchase MRV common stock. MRV is contributing the capital stock of each of
these acquired corporations and all of the assets of the optical access division
of MRV to us as part of one overall plan to effect our separation from MRV. For
further information on these acquisitions and the contribution of the acquired
stock and assets to us, please see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and "Arrangements
between Optical Access and MRV" later in this prospectus.
CORPORATE INFORMATION
We were incorporated in Delaware in December 1999. Our principal executive
offices are located at 20415 Nordhoff Street, Chatsworth, California 91311 and
our telephone number is (818) 407-1801. Our worldwide web site address is
www.opticalaccess.com. The information in the web site is not incorporated by
reference into this prospectus.
OptiSwitch(TM) is our trademark. All other names or trademarks appearing
herein are the property of their holders.
2
<PAGE> 7
THE OFFERING
Common stock offered.......... shares
Common stock to be outstanding
after the offering............ shares
Use of proceeds............... Product development, working capital and
general corporate purposes. See "Use of
Proceeds" on page 17.
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
June 30, 2000. The number of shares that will be outstanding after this offering
excludes:
- shares of common stock issuable upon exercise of stock options
outstanding as of June 30, 2000 at a weighted average price of $ per
share;
- shares of common stock available as of June 30, 2000 for future
issuance under our 2000 Stock Plan;
- shares of common stock to be reserved for issuance under our
employee stock purchase plan, which will become effective upon the
completion of this offering; and
- shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
All share and per share information in this prospectus gives effect to:
- a -for-one stock split effective as of , 2000; and
- the contribution by MRV to us of the capital stock of Jolt and AstroTerra
and all of the assets of MRV's optical access division to effect our
separation from MRV.
Except where the context indicates otherwise, 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.
ADDITIONAL INFORMATION
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares.
In this prospectus, the terms "company," "Optical Access," "we," "us" and
"our" refer to Optical Access, Inc., a Delaware corporation, "AstroTerra" refers
to AstroTerra Corporation, a California corporation, "Jolt" refers to Jolt
Limited, an Israeli corporation, "iTouch" refers to iTouch Communications, Inc.,
a Massachusetts corporation, "MRV" refers to MRV Communications, Inc. a Delaware
Corporation and, unless the context otherwise requires, "common stock" refers to
the common stock, par value $.001 per share, of Optical Access, Inc.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary financial data for Optical Access.
This information should be read in conjunction with the financial statements and
the notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
(DATE OF
INCEPTION) YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
THROUGH -------------------------- ---------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1998 1999 1999(1) 1999 2000 2000(1)
------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales..................... $ -- $ 8,473 $ 14,596 $ 1,735 $ 7,918 $ 10,886
Cost of sales(2).............. -- 4,555 15,607 989 4,887 10,914
------- ------- -------- ------- ------- --------
Gross profit.................. -- 3,918 (1,011) 746 3,031 (28)
Operating costs and expenses:
Selling, general and
administrative(2)......... -- 1,688 18,229 349 3,122 13,486
Research and
development(2)............ 3,213 4,543 27,759 2,524 5,735 18,164
Amortization of goodwill.... -- -- 28,241 -- 1,091 14,121
------- ------- -------- ------- ------- --------
Total operating costs......... 3,213 6,231 74,229 2,873 9,948 45,771
------- ------- -------- ------- ------- --------
Operating loss................ (3,213) (2,313) (75,240) (2,127) (6,917) (45,799)
------- ------- -------- ------- ------- --------
Net loss...................... $(3,213) $(2,313) $(75,405) $(2,127) $(6,932) $(45,978)
======= ======= ======== ======= ======= ========
Loss per share:(3)
Basic and diluted loss per
share..................... $ $ $ $ $ $
Basic and diluted weighted
average shares............
======= ======= ======== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(4)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 316 $ 429 $
Working capital........................................ 1,859 3,177
Total assets........................................... 39,694 151,132
Long-term debt, net of current portion................. 756 756
Parent company investment/Stockholders' equity......... 34,237 144,523
</TABLE>
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(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 financial statements of Optical
Access, Jolt and AstroTerra included later in this prospectus. The Unaudited
Pro Forma Condensed Consolidated Balance Sheet assumes that the AstroTerra
acquisition took place on June 30, 2000 and consolidates our June 30, 2000
consolidated balance sheet with the balance sheet of AstroTerra. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations assumes
that the Jolt and AstroTerra acquisitions occurred on January 1, 1999 and
2000 and 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 Jolt and AstroTerra. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements" included
herein.
(2) Includes amounts of deferred stock compensation relating to the acquisitions
of Jolt and AstroTerra of: $6.4 million, $553,000 and $4.0 million presented
in cost of sales; $13.8 million, $594,000 and $8.6
4
<PAGE> 9
million presented in selling, general and administrative; $22.9 million,
$3.0 million and $14.3 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.
(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 $ per
share, less estimated underwriting discounts and commissions, estimated
offering expenses and the application of the proceeds to working capital.
5
<PAGE> 10
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should consider carefully the risks described below, which are the
most significant risks we face based on our business and the industry in which
we operate, before you decide to buy our common stock. If any of the following
risks were to occur, our business, financial condition or results of operations
would likely suffer. In that event, the trading price of our common stock could
decline, and you could lose all or part of your investment.
RISKS RELATED TO OUR FINANCIAL RESULTS
OUR FUTURE REVENUES ARE UNPREDICTABLE, OUR OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF WE FAIL TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, OUR STOCK PRICE COULD DECLINE SIGNIFICANTLY.
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a variety of factors,
some of which are outside of our control. Accordingly, we believe that
period-to-period comparisons of our results of operations are not meaningful and
should not be relied upon as indications of future performance. Some of the
factors that could cause our quarterly or annual operating results to fluctuate
include market acceptance of our products, product development and production,
competitive pressures and customer retention.
We may experience a delay in generating or recognizing revenues for a
number of reasons. Orders at the beginning of each quarter typically do not
equal expected revenues for that quarter and are generally cancelable at any
time. Failure to ship these products by the end of a quarter may adversely
affect our operating results. Furthermore, our customer agreements typically
provide that the customer may delay scheduled delivery dates and cancel orders
within specified time frames without significant penalty. Because we base our
operating expenses on anticipated revenue trends and a high percentage of our
expenses are fixed in the short term, any delay in generating or recognizing
forecasted revenues could significantly harm our business.
It is likely that in some future quarters our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock would significantly decline.
DUE TO THE LONG SALES CYCLE FOR OUR PRODUCTS, THE TIMING OF REVENUE IS
DIFFICULT TO PREDICT AND MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE
UNEXPECTEDLY.
The sales and deployment cycle for our products is lengthy and may extend
for six months or more. The length of our sales cycle may cause our revenue and
operating results to vary unexpectedly from quarter to quarter. A customer's
decision to purchase our products involves a significant commitment of its
resources and a lengthy evaluation and product qualification process.
Consequently, we may incur substantial expenses and devote senior management
attention to potential relationships that never materialize, in which event our
investments will largely be lost and we may miss other opportunities. In
addition, our lengthy sales cycle makes it difficult to predict the quarter in
which we may recognize revenue from any sale.
WE HAVE INCURRED A NET LOSS IN THE SIX MONTHS ENDED JUNE 30, 2000 AND FOR
1999 AND 1998. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE
FUTURE.
We reported a net loss of $3.2 million for the period from April 1, 1998,
the date of our inception, through December 31, 1998, a net loss of $2.3 million
for the year ended December 31, 1999 and a net loss of $6.9 million for the six
months ended June 30, 2000. The net loss for the six months ended June 30, 2000
was primarily due to amortization of goodwill and deferred stock compensation
related to our acquisition of Jolt effective May 1, 2000. In addition, we will
record amortization of goodwill and deferred stock compensation relating to our
acquisition of AstroTerra effective July 12, 2000. As a consequence of these
goodwill amortization charges and compensation expenses, we do not expect to
report net income in the foreseeable future.
6
<PAGE> 11
In connection with the acquisitions of Jolt and AstroTerra, we have
recorded 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 elsewhere in this prospectus, we expect goodwill to equal approximately
$141.2 million, which will be amortized over a five-year period. To the extent
that we cannot 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.
RISKS RELATED TO OUR BUSINESS
OUR SUCCESS IS DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE OPTICAL
NETWORK MARKETS.
Widespread adoption of optical wireless networks and the adoption of
optical wireless technology for network applications is critical to our future
success. The markets for optical networks have only recently begun to develop
and are rapidly evolving. Our optical wireless solution competes with other high
speed broadband technologies such as digital subscriber lines, coaxial cable,
fiber optic cable and satellite links. Many of these alternative technologies
can take advantage of existing installed infrastructure and have achieved
significantly greater market acceptance and penetration than optical wireless
technologies, including our technology. By comparison, we must undertake
substantial marketing efforts to make prospective customers aware of our
products and to persuade their engineering organizations to accept a new
technological approach. As the demand for broadband access continues to grow, we
expect high speed broadband technologies, including optical wireless networks
and optical wireless technology for network applications, to face increasing
competitive pressures from both current and future alternative technologies. In
light of these factors, many service providers may be reluctant to invest
heavily in optical wireless solutions and, accordingly, the market for these
solutions may fail to develop or may develop more slowly than we expect. Either
outcome would limit sales opportunities, and if our optical wireless products do
not achieve widespread market acceptance in these markets, our business would be
significantly harmed.
THE BENEFITS OF OUR OPTICAL WIRELESS SOLUTION ARE LIMITED BY ADVERSE
WEATHER CONDITIONS AND LINE-OF-SIGHT LIMITATIONS.
Current high speed broadband optical wireless technology, including ours,
has inherent technical limitations that may inhibit its widespread adoption in
many areas, including reduced communication distance in adverse weather
conditions such as fog and heavy rain and the need for line-of-sight
installation. In certain installations, line-of-sight restrictions may require
our customers to install our TereScope products either on the rooftop or the
side of a building or other tall structure. These customers must generally
secure roof rights from the owners of each building or other structure on which
they install our TereScope products.
OUR PROFITABILITY DEPENDS IN PART ON OUR ABILITY TO SUCCESSFULLY INTEGRATE
THE OPERATIONS OF JOLT AND ASTROTERRA.
Our business has grown primarily because of MRV's acquisitions of Jolt in
May 2000 and AstroTerra in July 2000 and its contribution of the capital stock
of these companies to us. The acquisitions of Jolt and AstroTerra have brought
new research and development and manufacturing facilities, and we face
significant challenges in integrating these facilities before we can realize
benefits from these acquisitions. Also, a substantial portion of our line of
optical products was established through these acquisitions and successful
integration of these product lines is essential to our business. We cannot
assure you that we will be able to successfully integrate the businesses,
products, technologies or personnel of Jolt or AstroTerra, or those of companies
that we might acquire in the future, and our failure to successfully integrate
these operations would harm our business.
7
<PAGE> 12
BECAUSE WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS, OUR
CUSTOMERS MAY CEASE PURCHASING OUR PRODUCTS AT ANY TIME IF WE FAIL TO MEET OUR
CUSTOMERS' NEEDS.
We do not have long-term contracts with our customers. As a result, our
agreements with our customers do not provide any assurance of future sales.
Accordingly:
- our customers can stop purchasing our products at any time without
penalty;
- our customers are free to purchase products from our competitors; and
- our customers are not required to make minimum purchases.
Sales are typically made pursuant to individual purchase orders, often with
extremely short lead times. If we are unable to fulfill these orders in a timely
manner, we will lose sales and customers.
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective bandwidth increases.
Our future performance will depend on the successful development, introduction
and market acceptance of new and enhanced products that address these changes as
well as current and potential customer requirements. The introduction of new and
enhanced products may cause our customers to defer or cancel orders for existing
products. We have in the past experienced delays in product development and such
delays may occur in the future. Therefore, to the extent customers defer or
cancel orders in the expectation of a new product release or there is any delay
in development or introduction of our new products or enhancements of our
products, our operating results would suffer. We also may not be able to develop
the underlying core technologies necessary to create new products and
enhancements, or to license these technologies from third parties. Product
development delays may result from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical personnel;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to deliver
a working solution to a provider that is highly reliable, operate with their
existing equipment, lower the provider's costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological change would significantly harm our business.
CONTINUED COMPETITION IN OUR MARKETS MAY LEAD TO A REDUCTION IN OUR PRICES,
REVENUES AND MARKET SHARE.
Our current competitors include a number of domestic and international
companies, including traditional network vendors and other optical and wireless
companies, many of which have substantially greater financial, technical,
marketing, distribution resources and brand name recognition than we have.
Direct competitors for our optical wireless technology include AirFiber, Canon
and TeraBeam. Indirect competitors include companies that provide radio
frequency wireless solutions, such as Netro, Ceragon Networks and Adaptive
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Broadband. In addition, we believe companies in emerging industries attempting
to address the last mile bottleneck, such as those in the passive optical
networking industry, could be future competitors. Direct competitors for our
switching products include Cisco Systems, Extreme Networks, Foundry Networks and
Nortel Networks. We expect that more companies, including some of our customers,
will enter the market for optical subsystems and network performance test
systems. We may not be able to compete successfully against either current or
future competitors. Increased competition could result in significant price
erosion, reduced revenue, lower margins or loss of market share, any of which
would significantly harm our business. Furthermore, larger companies in other
related industries, such as the telecommunications industry, may develop or
acquire technologies and apply their significant resources, including their
distribution channels and brand name recognition, to capture significant market
share.
WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR ASSEMBLY
REQUIREMENTS, AND IF THESE MANUFACTURERS FAIL TO PROVIDE US WITH ADEQUATE
SUPPLIES OF HIGH-QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION AND
BUSINESS COULD BE HARMED.
We currently rely on a limited number of contract manufacturers for
substantially all of our assembly requirements, and approximately 60% of our
assembly requirements were provided by one contract manufacturer for the first
six months of 2000. We do not have long-term contracts with any of these
manufacturers. We have experienced delays in product shipments from contract
manufacturers in the past, which in turn delayed product shipments to our
customers. We may in the future experience similar delays or other problems,
such as inferior quality and insufficient quantity of product, any of which
could significantly harm our business. We cannot assure you that we will be able
to effectively manage our contract manufacturers or that these or other
manufacturers will meet our future requirements for timely delivery of products
of sufficient quality and quantity. Qualifying contract manufacturers is a long
process and will consume the time of technical professional personnel that may
disrupt our business for a period of time. We intend to regularly introduce new
products and product enhancements, which will require that we rapidly achieve
volume production by coordinating our efforts with those of our suppliers and
contract manufacturers. The inability of our contract manufacturers to provide
us with adequate supplies of high-quality products or the loss of any of our
contract manufacturers would cause a delay in our ability to fulfill orders
while we obtain a replacement manufacturer and would significantly harm our
business.
WE DEPEND ON OUR OWN MANUFACTURING FACILITIES FOR CERTAIN ASSEMBLY AND
TESTING REQUIREMENTS, AND IF WE ARE UNABLE TO EXPAND OUR MANUFACTURING CAPACITY
IN A TIMELY MANNER, WE MAY HAVE INSUFFICIENT CAPACITY AND OUR COMPETITIVE
POSITION, REPUTATION AND NET SALES COULD BE HARMED.
We currently depend on our own manufacturing facilities located in San
Diego and Jerusalem for certain assembly and testing requirements, and we have
devoted significant resources to expanding our manufacturing capacity at these
facilities. We do not plan to rely on contract manufacturers for these assembly
and testing requirements due to concerns regarding quality control. We could
experience difficulties and disruptions in the assembly and testing of our
products, which could prevent us from achieving timely delivery of products and
could result in lost net 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 assembly and testing 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 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 are unable to expand our manufacturing capacity
in a timely manner, or if we do not accurately project demand, we will have
insufficient capacity, which could seriously harm our results of operations.
WE MAY LOSE SALES IF OUR SUPPLIERS FAIL TO MEET OUR NEEDS.
We currently purchase several key components used in the manufacture of our
products from single or limited sources including networking components from
Intel, Galileo and MMC. In addition, we rely on optical component suppliers
including active and passive components from Luminent, a company substantially
owned by MRV. We depend on these sources to meet our needs. Moreover, we depend
on the quality of the products supplied to us over which we have limited
control. We have encountered shortages and delays in
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obtaining components in the past and expect to encounter shortages and delays in
the future. If we cannot supply products due to a lack of components, or are
unable to redesign products with other components in a timely manner, our
business will be significantly harmed. We have no long-term or short-term
contracts for any of our components. As a result, a supplier can discontinue
supplying components to us without penalty. If a supplier discontinued supplying
a component, our business may be harmed by the resulting product manufacturing
and delivery delays.
RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE US TO INCUR COSTS TO
UPGRADE OUR INFRASTRUCTURE.
We plan to continue to expand our operations significantly. This
anticipated growth will place a significant strain on our management and
operational resources. For example, as orders for our products grow, we may
experience delays in the installation and configuration of our products in a
provider's network. These interruptions would lengthen the sales cycle, causing
anticipated revenue to be recognized at a later period than anticipated or could
cause customers to cancel existing orders. In order to manage our growth
effectively, we must implement and improve our operational systems, procedures
and controls on a timely basis. If we cannot manage growth effectively, our
business could be significantly harmed.
IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES OPERATION AND RESELLER
DISTRIBUTION CHANNELS OR SUCCESSFULLY MANAGE OUR EXPANDED SALES ORGANIZATION,
OUR ABILITY TO INCREASE OUR REVENUES WILL BE HARMED.
Historically, we have relied primarily on a limited direct sales
organization, supported by third party manufacturers' representatives and
distributors, including iTouch, a subsidiary of MRV, to sell our products. Our
distribution strategy focuses in part on developing and expanding our direct
sales organization. We may not be able to successfully expand our direct sales
organization and the cost of any expansion may exceed the revenue generated. To
the extent that we are successful in expanding our direct and indirect sales
organization, we cannot assure you that we will be able to compete successfully
against the significantly larger and well-funded sales and marketing operations
of many of our current or potential competitors. In addition, if we fail to
develop relationships with significant resellers, distributors or manufacturers'
representatives, of if these resellers, distributors or representatives are not
successful in their sales or marketing efforts, sales of our products may
decrease and our business would be significantly harmed. Our resellers,
distributors and representatives may not market our products effectively or
continue to devote the resources necessary to provide us with effective sales,
marketing and technical support. Our inability to effectively manage the
expansion of our domestic sales and support staff or maintain existing or
establish new relationships with manufacturer representatives, distributors and
resellers would harm our business.
FUTURE ACQUISITIONS MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL RESULTS
SIMILAR TO THE EFFECTS OF THE ACQUISITIONS OF JOLT AND ASTROTERRA.
We may acquire complementary technology businesses. Future acquisitions
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 charges;
- 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 acquisition
organizations.
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 4,317,337 million shares of its common
stock, on a fully converted basis, in connection with the acquisitions of
Jolt and AstroTerra;
- incur debt such as the $1.1 million of consolidated debt incurred in
connection with the acquisitions of Jolt and AstroTerra;
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- incur additional liabilities such as the $3.8 million of additional
consolidated liabilities incurred in connection with the acquisitions of
Jolt and AstroTerra; 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 $141.2 million and
deferred compensation charges aggregating $75.0 million incurred in
connection with the acquisitions of Jolt and AstroTerra.
WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE.
We rely on a combination of patents, trademarks, copyrights, trade secrets,
and contractual provisions to protect our intellectual property rights in the
United States and internationally. We currently are acquiring ownership of seven
issued United States patents, five issued foreign patents, and fourteen patents
pending in the United States on our technological systems and methods. The
strength of this protection, however, is uncertain. The process of seeking
patent protection and trademark registrations can be long and expensive, and we
cannot assure you that our current patents are or any new patents that may be
issued will be of sufficient scope or strength to provide any meaningful
protection or any competitive advantage to us. In particular, it is uncertain
that:
- our patents and pending patent applications disclose technology that we
invented first;
- we were the first to file patent applications for our inventions;
- others will not independently develop similar or alternative technologies
or duplicate our technologies;
- any of our pending patent applications will result in issued patents;
- our already-granted patents may be reexamined, reissued or invalidated;
and
- any patents issued to us will provide a basis for commercially viable
products, will provide us with any competitive advantages or will not
face third party challenges or be the subject of further proceedings
limiting their scope.
We may become involved in interference proceedings in the U.S. Patent and
Trademark Office to determine the priority of our inventions. In addition,
costly litigation could be necessary to protect our patent, trade secret and
trademark position. We may not prevail in any lawsuit or, if we do prevail, we
may not receive commercially valuable remedies. Similarly, disputes may arise
concerning the ownership of intellectual property. There is no guarantee that
such disputes will be resolved in our favor. Failure to protect our intellectual
property rights could harm us.
Intellectual property law and practice differs in foreign jurisdictions,
and it may prove difficult or impossible for us to protect our rights in certain
foreign countries. We could become involved in opposition proceedings in foreign
countries challenging the validity of our patents. If we are unable to protect
our intellectual property adequately in foreign jurisdictions, we could face
increased competition in the market for our products and technologies, which
could harm our business and commercial prospects.
OUR PRODUCTS COULD INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS,
WHICH MAY CAUSE US TO ENGAGE IN COSTLY LITIGATION AND, IF WE ARE NOT SUCCESSFUL,
COULD CAUSE US TO PAY SUBSTANTIAL DAMAGES AND PROHIBIT US FROM SELLING OUR
PRODUCTS.
Third parties may assert patent, trademark or copyright infringement or
other intellectual property claims against us based on their patents or other
intellectual property. We may be required to pay substantial damages, including
but not limited to treble damages, for past infringement if it is ultimately
determined that our products infringe a third party's intellectual property
rights. We face the risk that a failure to obtain rights to intellectual
property of third parties or potential intellectual property litigation could
force us to:
- stop selling, making, using and offering to sell our products that use
the disputed intellectual property;
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- obtain a license from the intellectual property owner to continue
selling, making, using and offering to sell our products, which license
may not be available on reasonable terms, or at all;
- redesign our products or services; and
- subject us to significant liabilities to third parties.
We are aware of entities that may offer services that compete with ours
using the name "Optical Access," some of which may have begun using that name as
a mark in commerce prior to our first use of Optical Access. Any of these
parties could challenge our continuing right to use Optical Access in their
market or require us to obtain a license to use it in their market.
Even if infringement claims against us are without merit, defending a
lawsuit takes significant time, may be expensive and may divert management
attention from other business concerns.
IF WE PROVIDE CUSTOMER FINANCING FOR OUR PRODUCTS, WE WILL BE EXPOSED TO
THE CREDIT RISKS OF SOME OF OUR CUSTOMERS AND TO CREDIT EXPOSURES IN WEAKENED
MARKETS, BOTH OF WHICH COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
We plan to offer product purchase financing to our target customers, many
of which are competitive local exchange carriers that typically finance
significant networking infrastructure deployments through alternative forms of
financing. If we provide such financing, we will face credit risks including
slow payments or nonpayment from our customers. In addition, to the extent that
certain of our customers are located in emerging market regions, our credit risk
may increase because of the weakened financial conditions in such regions and
the impact that such conditions may have on the worldwide economy. Although we
plan to have programs in place to monitor these risks, there is no assurance
that such programs will alleviate all of the credit risk and that we will not
incur losses which could have an adverse effect on our financial condition.
BECAUSE SOME OF OUR TARGET CUSTOMERS ARE NEW COMPANIES WITH LIMITED
FINANCIAL RESOURCES, WE ARE EXPOSED TO THE RISKS RELATED TO SUCH CUSTOMERS'
UNCERTAIN PROSPECTS FOR PROFITABILITY AND THE RISK THAT THESE COMPANIES WILL
SUCCEED IN AN EVOLVING DEREGULATED TELECOMMUNICATION MARKET.
Many of our target customers are new service providers known as competitive
local exchange carriers who generally have access to limited financial
resources, do not have sustained operating histories and are conducting their
businesses in a rapidly changing and competitive telecommunications market which
is experiencing worldwide deregulation. Our prospects for growth will be due, in
part, to the successful implementation of the business models of these
companies. To the extent that these businesses do not achieve their financial
goals, our future revenues may be adversely affected or may unpredictably
fluctuate because of the financial downturns or difficulties which these new
businesses experience.
WE ARE SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH OUR INTERNATIONAL
OPERATIONS.
Some of our offices and manufacturing and research and development
facilities are located in Israel. We could be adversely affected by any major
hostilities involving Israel, the interruption or curtailment of trade between
Israel and its trading partners, a significant increase in inflation, or a
significant downturn in the economic or financial condition of Israel.
Restrictive laws or policies directed towards Israel or Israeli businesses could
adversely affect us.
Our international operations are subject to additional risks including:
- Foreign currency fluctuations which could result in increased operating
expenses and reduced revenue;
- Difficulty in collecting accounts receivables;
- Difficulty in enforcing or adequately protecting our intellectual
property; and
- Foreign taxes and regulations.
We cannot assure you that the additional risks associated with our
international operations will not materially affect our business, financial
condition and our operations.
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RISKS RELATED TO OUR RELATIONSHIP WITH MRV
WE WILL BE CONTROLLED BY MRV SO 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 % of
our outstanding common stock. 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, and control the outcome of any stockholder vote. As a result,
MRV will control all matters affecting us, including:
- The composition or 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;
- A determination 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 has advised us that it may apply for a private letter ruling from the
IRS and permission from the Israeli tax authority in connection with a proposed
distribution to its stockholders of all of our common stock held by it. One
condition to the proposed distribution is the receipt of favorable rulings from
these agencies to treat the distribution as a tax-free transaction. We cannot
assure you as to whether or when it will occur. Until this distribution occurs,
if ever, the risks discussed above 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 MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH MRV WITH RESPECT
TO 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 divisions and subsidiaries of MRV purchase substantial
quantities of our products. These customers accounted for sales of $3.8 million
for the year ended December 31, 1999 and $3.8 million during the six months
ended June 30, 2000. 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
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believe terms of such agreements would be consistent with market-based terms.
Nothing restricts MRV from competing with us.
The terms of any arrangement or agreement outside of the ordinary course of
business between us and MRV or any of its affiliates requires the approval of a
committee consisting of our outside independent board members. However, 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.
WE WILL NOT BE ABLE TO RELY ON MRV TO FUND OUR FUTURE CAPITAL REQUIREMENTS.
In the past, our capital needs have been satisfied by MRV and will continue
to be satisfied by MRV for a minimum of the next 12 months or until this
offering is completed, if earlier. However, following this offering, MRV does
not intend to continue to 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, or otherwise. 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 DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE
OF THEIR OWNERSHIP OF MRV COMMON STOCK.
Some of our directors, officers and other employees 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.
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 does not
reflect what our financial position, results of operations and cash flows might
have been had we been a separate, 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 establish a new brand identity and increased costs
associated with being a public, stand-alone company.
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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 in 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 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.
SUBSTANTIAL NUMBERS OF SHARES OF OUR COMMON STOCK WILL BECOME AVAILABLE FOR
SALE IN THE PUBLIC MARKET SIMULTANEOUSLY, WHICH COULD CAUSE THE MARKET PRICE OF
OUR STOCK TO DECLINE.
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could cause the market price of our common stock to decline.
The number of shares of common stock available for sale in the public market
will be limited by lock-up agreements under which MRV and all of our stock
option holders will agree not to sell or otherwise dispose of any of their
approximately shares for 180 days after the date of this
prospectus without the prior written consent of Bear, Stearns & Co. Inc. After
the 180-day period, however, MRV is not prohibited from selling a controlling
interest in us to a third party. 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. If MRV effectuates the proposed distribution of all of our
common stock held by it to its stockholders, substantially all of these shares
would be eligible for immediate resale in the public market.
Bear, Stearns & Co. Inc. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements. In addition to the adverse effect a price decline could have on
holders of common stock, that decline would likely impede our ability to raise
capital through the issuance of additional shares of common stock or other
equity securities.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY BE UNABLE TO RESELL YOUR SHARES
AT OR ABOVE THE OFFERING PRICE.
The stock market in general, and the Nasdaq National Market and stocks of
technology companies in particular, have experienced extreme price and volume
fluctuations. This volatility is often unrelated or disproportionate to the
operating performance of these companies. Broad market and industry factors may
adversely affect the market price of our common stock, regardless of our actual
operating performance. In the past, following periods of volatility in the
market price of a company's securities, securities class-action litigation has
often been initiated against these companies. This litigation, if initiated,
could result in substantial costs and a diversion of management's attention and
resources, which would significantly harm our business.
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 by other
comparable terminology.
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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.
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 % of our outstanding common stock
or approximately % 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.
ANTICIPATED BENEFITS OF THE SEPARATION
We believe that we will realize certain benefits from our anticipated
separation from MRV, including the following:
Greater Strategic Focus. We expect to have a sharper focus on Optical
Access' business and strategic opportunities as a result of our Board of
Directors and management team focusing only on our businesses. We will also
have greater ability to modify business processes to better fit the needs
of our customers, business units and employees.
Direct Access to Capital Markets. As a separate company, we will be
able to directly access the capital markets to issue debt or equity
securities, and we will be able to more readily grow through acquisitions.
Increased Speed and Responsiveness. As a separate company, we expect
to be able to make decisions more quickly, deploy resources more rapidly
and efficiently and operate with more agility than when we were a part of
MRV. In addition, we expect to enhance our responsiveness to customers and
partners.
Facilitate Customer Relationships and Future Partnerships. MRV
competes with several of our customers in supplying optical networking
products. 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
arrangements with us as a separate company.
Better Incentives for Employees and Greater Accountability. 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 Optical
Access' business, which we expect to enhance our ability to attract and
retain qualified personnel.
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.
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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. We believe the terms of these
arrangements are consistent with market-based terms. However, the terms of these
agreements may be more or less favorable to us than if they had been negotiated
with unaffiliated third parties.
POTENTIAL DISTRIBUTION BY MRV OF OUR COMMON STOCK
MRV has advised us that it may apply for a private letter filing from the
IRS and permission from the Israeli tax authority in connection with a proposed
distribution to its stockholders of all of our common stock held by it. One
condition to the proposed distribution is the receipt of favorable rulings from
these agencies to treat the distribution as a tax-free transaction. We cannot
assure you as to whether or when it will occur.
AFFILIATE COMMITTEE
A committee of our Board of Directors, consisting of outside independent
board members, shall approve the terms of any arrangement or agreement outside
of the ordinary course of business (as defined by such independent committee)
between us and MRV or any of its affiliates.
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of common
stock we are offering will be approximately $ million, or $ million if
the underwriters exercise their over-allotment option in full, based on an
assumed initial public offering price of $ per share and after deducting
underwriting discounts and commissions and 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 this offering for product
development, working capital and general corporate purposes. We have no capital
commitments and have not determined the amount of net proceeds that we will use
for each of these purposes. Accordingly, we will have 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, we have
no current plans to do so. Pending their use, we plan to invest the net proceeds
of the offering in interest-bearing, 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.
17
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis (after giving effect to the acquisition of Jolt on May
1, 2000, the amendment of our Certificate of Incorporation to split the
outstanding shares and increase our authorized capital stock prior to
this offering and the transfer of the net assets to Optical Access from
MRV);
- on a pro forma basis assuming the acquisition of AstroTerra occurred on
June 30, 2000; and
- on a pro forma as adjusted basis to reflect 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 $ 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," "Description of Capital Stock"
and the financial statements and the related notes.
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion.................... $ 756 $ 756 $
-------- -------- ---
Stockholder's equity:
Preferred stock, $0.001 par value, ( shares
authorized, none issued actual, pro forma and pro
forma as adjusted)...................................
Common stock, $0.001 par value, ( shares
authorized, issued actual and pro forma,
issued pro forma as adjusted)........................
Additional paid-in capital..............................
Deferred stock compensation.............................
-------- -------- ---
Total stockholder's equity................................ 34,237 144,523
-------- -------- ---
Total capitalization...................................... $ 34,993 $145,279 $
======== ======== ===
</TABLE>
The total number of outstanding shares of our common stock as of June 30,
2000 was , excluding
- shares of common stock issuable upon exercise of stock options
outstanding as of , 2000 at a price of $ per share.
- shares of common stock available as of June 30, 2000 for future
issuance under our 2000 Stock Plan;
- shares of common stock to be reserved for issuance under our
employee stock purchase plan, which will become effective upon the
completion of this offering; and
- shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
18
<PAGE> 23
DILUTION
Our pro forma net tangible book value at June 30, 2000, was $ million,
or $ per share, based on shares of our common stock outstanding,
assuming the acquisition of AstroTerra occurred on June 30, 2000.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of our common stock in this offering and the
pro forma net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale of the shares of
common stock by us at the assumed initial public offering price of $ 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 $ million, or $ per share. This represents an immediate increase in
the pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $
per share to new investors purchasing shares at the assumed initial public
offering price of $ per share. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at June 30,
2000......................................................
Increase per share attributable to new investors............ $
--------
Pro forma net tangible book value per share after this
offering.................................................. $
--------
Dilution per share to new investors in this offering........
========
</TABLE>
The following table sets forth, at June 30, 2000 on a pro forma basis, the
differences between the number of shares of common stock purchased from us, the
total price paid and average price per share paid by our existing stockholders
and by the new investors in this offering.
The table also shows the number of shares of common stock purchased from
us, the total consideration paid to us and the average price paid per share by
the existing stockholder and by new investors purchasing common stock in this
offering:
<TABLE>
<CAPTION>
SHARES ISSUED TOTAL CONSIDERATION
---------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
-------- ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder.............. % $ % $
New investors.....................
-------- --------
Total............................. 100.0% 100.0%
======== ===== ======== =====
</TABLE>
The above information is based on pro forma shares outstanding as of June
30, 2000. It excludes shares of common stock reserved for issuance
upon exercise of outstanding options at June 30, 2000 with a weighted average
exercise price of $ per share. It also excludes an aggregate of shares
available for issuance under our 2000 Stock Plan. Assuming the exercise of all
options outstanding as of June 30, 2000, our pro forma net tangible book value
at June 30, 2000 would be $ million, or $ per share, which would
represent an immediate increase in the pro forma net tangible book value of
$ per share to existing stockholders and an immediate dilution of $ per
share to new investors.
Our sale of additional shares of common stock upon exercise in full of the
underwriters' over-allotment option would reduce the percentage of common stock
held by all assumed existing stockholders to % of the total number of
shares of common stock to be outstanding upon completion of this offering and
will increase the number of shares of common stock held by new investors to
shares or % of the total number of shares of common tock to be
outstanding upon completion of this offering.
19
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from
April 1, 1998, the date of our inception, through December 31, 1998 and the year
ended December 31, 1999 and the balance sheet data as of December 31, 1998 and
1999 were 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 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
Optical Access, 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
Optical Access, including the related footnotes.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998
(DATE OF YEAR ENDED
INCEPTION) DECEMBER 31, SIX MONTHS ENDED JUNE 30,
THROUGH -------------------- -------------------------------------
DECEMBER 31, PRO FORMA PRO FORMA
1998 1999 1999(1) 1999 2000 2000(1)
------------- -------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATE)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $ -- $ 8,473 $ 14,596 $ 1,735 $ 7,918 $ 10,886
Cost of sales(2)............................ -- 4,555 15,607 989 4,887 10,914
-------- -------- -------- -------- -------- --------
Gross profit................................ -- 3,918 (1,011) 746 3,031 (28)
Operating costs and expenses:
Selling, general and administrative(2).... -- 1,688 18,229 349 3,122 13,486
Research and development(2)............... 3,213 4,543 27,759 2,524 5,735 18,164
Amortization of goodwill.................. -- -- 28,241 -- 1,091 14,121
-------- -------- -------- -------- -------- --------
Total operating costs....................... 3,213 6,231 74,229 2,873 9,948 45,771
-------- -------- -------- -------- -------- --------
Operating loss.............................. (3,213) (2,313) (75,240) (2,127) (6,917) (45,799)
Other expense, net........................ -- -- (134) -- (15) (179)
-------- -------- -------- -------- -------- --------
Loss before taxes........................... (3,213) (2,313) (75,374) (2,127) (6,932) (45,978)
-------- -------- -------- -------- -------- --------
Provision for income taxes.................. -- -- 31 -- -- --
-------- -------- -------- -------- -------- --------
Net loss.................................... $ (3,213) $ (2,313) $(75,405) $ (2,127) $ (6,932) $(45,978)
======== ======== ======== ======== ======== ========
Loss per share:(3)
Basic and diluted loss per share..........
Basic and diluted weighted average
shares..................................
======== ======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 25
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------
ACTUAL PRO FORMA(1)
------ ------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 316 $ 429
Working capital............................................. 1,859 3,177
Total assets................................................ 39,694 151,132
Long-term debt, net of current portion...................... 756 756
Parent company investment................................... 34,237 144,523
</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 financial statements of Optical
Access, Jolt and AstroTerra included later in this prospectus. The unaudited
pro forma condensed consolidated balance sheet assumes that the AstroTerra
acquisition took place on June 30, 2000 and consolidates our June 30, 2000
consolidated balance sheet with the balance sheet of AstroTerra. The
unaudited pro forma condensed consolidated statements of operations assume
that the Jolt and AstroTerra acquisitions occurred on January 1, 1999 and
2000 and 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 Jolt and AstroTerra. See
"Unaudited Pro Forma Condensed Consolidated Financial Statements" included
herein.
(2) Includes amounts of deferred stock compensation relating to the acquisitions
of Jolt and AstroTerra of: $6.4 million, $553,000 and $4.0 million presented
in cost of sales; $13.8 million, $594,000 and $8.6 million presented in
selling, general and administrative; $22.9 million, $3.0 million and $14.3
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.
21
<PAGE> 26
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 6 and elsewhere in this prospectus.
OVERVIEW
We design, manufacture and market optical wireless solutions. From
inception in April 1998 until our separation in 2000, we have
operated as part of a wholly-owned subsidiary of MRV and have conducted business
using MRV's trade names. In July 2000, we began doing business under the Optical
Access trade name. After the completion of this offering, MRV will own
approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option in
full. The effective date of MRV's contribution and transfer to us of our
business was , 2000.
On May 1, 2000, MRV acquired all of the outstanding capital stock of Jolt,
an Israeli developer and manufacturer of wireless optics solutions. The purchase
price paid was approximately $57.7 million in common stock of MRV and options to
purchase common stock of MRV. The acquisition was accounted for using the
purchase method. The outstanding capital stock of Jolt purchased by MRV has been
contributed to us as of the date of acquisition. Therefore, the results of
operations of Jolt have been included in our consolidated financial statements
from May 1, 2000. On July 12, 2000, MRV acquired all of the outstanding capital
stock of AstroTerra, a San Diego, California developer and manufacturer of
optical wireless communication systems. The purchase price paid was
approximately $160.3 million in common stock of MRV and options to purchase
common stock of MRV. The acquisition of AstroTerra was also contributed to us by
MRV effective as of the date of its acquisition and it will be accounted for
using the purchase method. The results of operations of AstroTerra will be
included in our consolidated financial statements from July 12, 2000. As this
acquisition was completed subsequent to June 30, 2000, the date of the most
recent historical results of operations presented in this prospectus, AstroTerra
has not been included in any historical financial data of the Company presented
in this prospectus. Both of the acquisitions were made to expand our product
offerings and enhance our technology expertise.
In connection with the acquisitions of Jolt and AstroTerra, a portion of
the purchase prices paid represented deferred stock compensation relating to
options to purchase the common stock of MRV. These options had fair values of
approximately $25.0 million and $50.0 million for Jolt and AstroTerra,
respectively. Deferred stock compensation amortization expense for the six
months ended June 30, 2000 relating to these stock options was approximately
$4.1 million. In connection with these acquisitions, we expect to incur
additional compensation totaling approximately $70.9 million, which will be
fully amortized by 2004. Deferred stock compensation is being amortized using
the graded method over a four-year period.
Goodwill resulting from the Jolt and AstroTerra acquisitions totaled $32.7
million and $108.3 million, respectively. For the six months ended June 30,
2000, we recorded amortization of goodwill of $1.1 million relating to the
acquisition of Jolt. We expect to record amortization of goodwill charges of
approximately $7.1 million per quarter until they are fully amortized in 2005.
We reported a net loss of $3.2 million, $2.3 million and $6.9 million for
the period from April 1, 1998, the date of our inception, through December 31,
1998, the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. In addition, as discussed above, we will record amortization of
goodwill and deferred stock compensation relating to our acquisitions of Jolt
and AstroTerra 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.
22
<PAGE> 27
We have entered into various agreements related to interim and ongoing
relationships with MRV. These agreements provide for reciprocal transitional
services and support in the areas of data processing and telecommunications
services (such as voice telecommunications and data transmission, information
technology support services, and sales and marketing 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 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.
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
business 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 -to-one stock split to our stockholder of record on
. 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 and the offering.
23
<PAGE> 28
RESULTS OF OPERATIONS
The following tables reflect selected consolidated historical and pro forma
financial data for the periods presented. The first table presents actual and
pro forma results, which include the amortization of goodwill and deferred stock
compensation related to the acquisitions of Jolt in May 2000 and AstroTerra in
July 2000. During the six months ended June 30, 2000, we incurred amortization
of goodwill and deferred stock compensation of $1.1 million and $4.1 million,
relating to the acquisition of Jolt. We expect to incur amortization of goodwill
from the Jolt acquisition of approximately $1.6 million each quarter through
2005. We expect to report additional deferred stock compensation totaling
approximately $20.9 million through 2004 for Jolt. The acquisition of
AstroTerra, which occurred in July of 2000, will provide additional amortization
of goodwill each quarter of approximately $5.4 million. Deferred stock
compensation charges for AstroTerra will generate approximately $50.0 million in
total expense through 2004. Deferred stock compensation is amortized using the
graded method over the related expected employee service period, in this case
four years.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
APRIL 1, 1998 DECEMBER 31, SIX MONTHS ENDED JUNE 30,
(DATE OF INCEPTION) -------------------------- ---------------------------------------
THROUGH DECEMBER 31, PRO FORMA PRO FORMA
1998 1999 1999 1999 2000 2000
-------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales..................... -- 100% 100% 100% 100% 100%
Cost of sales................. -- 54 107 57 62 100
----------- ------------ ----------- ----------- ----------- -----------
Gross profit.................. -- 46 (7) 43 38 --
----------- ------------ ----------- ----------- ----------- -----------
Operating costs and expenses
Selling, general and
administrative............ -- 20 125 20 39 124
Research and development.... -- 54 190 145 72 167
Amortization of goodwill.... -- -- 193 -- 14 130
----------- ------------ ----------- ----------- ----------- -----------
Total operating costs......... -- 74 509 166 126 420
----------- ------------ ----------- ----------- ----------- -----------
Operating loss................ -- (27) (515) (123) (87) (421)
----------- ------------ ----------- ----------- ----------- -----------
Net loss...................... -- (27)% (517)% (123)% (88)% (422)%
----------- ------------ ----------- ----------- ----------- -----------
</TABLE>
The following table presents our results of operations on an actual and pro
forma basis prior to amortization of goodwill and deferred stock compensation
that was incurred as a result of our acquisitions of Jolt and AstroTerra.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
APRIL 1, 1998 DECEMBER 31, SIX MONTHS ENDED JUNE 30,
(DATE OF INCEPTION) -------------------------- ---------------------------------------
THROUGH DECEMBER 31, PRO FORMA PRO FORMA
1998 1999 1999 1999 2000 2000
-------------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales..................... -- 100% 100% 100% 100% 100%
Cost of sales................. -- 54 63 57 55 64
---------------- ------------ ----------- ----------- ----------- -----------
Gross profit.................. -- 46 37 43 45 36
---------------- ------------ ----------- ----------- ----------- -----------
Operating costs and expenses
Selling, general and
administrative............ -- 20 30 20 32 45
Research and development.... -- 54 33 145 35 35
Amortization of goodwill.... -- -- -- -- -- --
---------------- ------------ ----------- ----------- ----------- -----------
Total operating costs......... -- 74 64 166 66 80
---------------- ------------ ----------- ----------- ----------- -----------
Operating loss................ -- (27) (27) (123) (21) (44)
---------------- ------------ ----------- ----------- ----------- -----------
Net loss...................... -- (27)% (28)% (123)% (21)% (46)%
---------------- ------------ ----------- ----------- ----------- -----------
</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 356%, to $7.9 million
from $1.7 million for the six months ended June 30,
24
<PAGE> 29
1999. Our growth is a result of increased penetration within the network carrier
market and improved product offerings. Approximately $244,000 of this increase
was due to the contribution of Jolt's net sales from the period of May 1, 2000
through June 30, 2000. When we consolidate the operations of AstroTerra, we
expect to realize continued growth and expansion in our strategic markets.
GROSS PROFIT. Gross profit is equal to our net sales less our cost of
sales. Our cost of sales includes materials, direct labor, overhead and deferred
stock compensation associated with acquisitions. Cost of inventory is determined
by the first in first out method. Gross profit for the six months ended June 30,
2000 increased 306%, to $3.0 million from $746,000 for the six months ended June
30, 1999. Our gross margins, defined as gross profit as a percentage of net
sales, are generally affected by product mix and competitive factors. Prices for
existing products are generally expected to continue to decrease over their
respective life cycles.
Our gross margin decreased to 38% for the six months ended June 30, 2000
from 43% for the six months ended June 30, 1999. Excluding deferred stock
compensation, gross margin for the six months ended June 30, 2000 would have
been 45%. In the short-term, we expect margins to be adversely affected as a
result of amortization of deferred stock compensation expense presented in costs
of sales and as we fully integrate the operations of AstroTerra.
OPERATING COSTS AND EXPENSES. Operating costs and expenses generally
consist of selling, general and administrative expenses, research and
development costs, costs associated with acquisitions, and other operating
related charges. Operating costs and expenses were $9.9 million, or 126% of net
sales, for the six months ended June 30, 2000, as compared to $2.9 million, or
166% of net sales, for the six months ended June 30, 1999. The decrease in
operating costs and expenses as a percentage of net sales was due to certain
operating costs remaining fixed as revenues substantially increased. Operating
costs and expenses in total dollars increased due to the amortization of
goodwill and deferred stock compensation, the inclusion of Jolt, greater focus
on direct selling and marketing efforts and an increase in spending on research
and development. Jolt accounted for $202,000 of operating costs and expenses for
the six months ended June 30, 2000. We expect operating expenses to increase in
total dollars but to decrease as a percentage of net sales as we increase sales
of our products and due to amortization of deferred stock compensation expense.
Selling, general and administrative expenses increased to $3.1 million, or
39% of net sales, during the six months ended June 30, 2000, from $349,000, or
20% of net sales, for the six months ended June 30, 1999. Excluding deferred
stock compensation, selling, general and administrative expenses for the six
months ended June 30, 2000 would have been $2.5 million, or 32% of net sales.
This increase reflects the investment we made in hiring additional sales and
administrative personnel to support a larger sales volume and costs to support
the overall growth of our business. In response to the growth of our markets, we
expanded our selling efforts. We expect selling, general and administrative
expenses to continue to increase as we expand our sales function and from costs
associated with becoming a public company and amortization of deferred stock
compensation expense.
Research and development expenses increased to $5.7 million, or 72% of net
sales, during the six months ended June 30, 2000, from $2.5 million, or 145% of
net sales, for the six months ended June 30, 1999. Excluding deferred stock
compensation, research and development expenses for the six months ended June
30, 2000 would have been $2.7 million, or 35% of net sales. Research and
development expenses, as a percentage of net sales, decreased primarily due to
the significantly increased level of sales. During the six months ended June 30,
2000, we began development of our next generation products designed to enable
our higher margin mesh architectural solutions. We continue to invest heavily in
areas targeted at broadening our customer base and product lines and therefore
we expect research and development expenses to continue to increase due to
hiring additional technical personnel, expanding our current product lines,
developing new product offerings and amortization of deferred stock compensation
expense.
During the six months ended June 30, 2000, we incurred amortization of
goodwill and deferred stock compensation of $1.1 million and $4.1 million,
relating to the acquisition of Jolt. We expect to incur amortization of goodwill
from the Jolt acquisition of approximately $1.6 million each quarter through
2005.
25
<PAGE> 30
PROVISION FOR INCOME TAXES. We have generated losses since our inception in
1998. Our losses were generated primarily by subsidiaries located outside the
United States. No provision for income taxes has been provided due to such
losses for the six months ended June 30, 1999 and 2000.
YEAR ENDED DECEMBER 31, 1999 AND PERIOD FROM APRIL 1, 1998 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1998
NET SALES. Net sales for 1999 were $8.5 million compared to zero in 1998.
We commenced selling our OptiSwitch(TM) line of products in 1999.
GROSS PROFIT. Gross profit for 1999 was $3.9 million, or 46% of net sales.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for 1999
increased to $6.2 million, or 74% of net sales, from $3.2 million in 1998. This
was primarily due to the costs associated with increased sales and higher
research and development expenditures.
Selling, general and administrative expenses grew to $1.7 million, or 20%
of net sales, in 1999 compared to zero in 1998. The increase in selling, general
and administrative expenses in 1999 was due to hiring additional sales and
marketing personnel and higher commissions paid.
In 1999 we spent approximately $4.5 million, or 54% of net sales, on
research and development compared to $3.2 million in 1998. The increase reflects
an increase in the number of personnel and an increase in engineering expenses
related to design, development and testing facilities.
PROVISION FOR INCOME TAXES. We have generated losses since our inception
in 1998. Our losses were generated primarily by subsidiaries located outside the
United States. No provision for income taxes has been provided due to such
losses for the period from April 1, 1998, the date of inception through December
31, 1998 and the year ended December 31, 1999.
26
<PAGE> 31
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. 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 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, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales................................. $ 284 $1,451 $2,783 $3,955 $3,313 $ 4,605
Cost of sales(1).......................... 153 835 1,595 1,972 1,674 3,213
------- ------ ------ ------ ------ -------
Gross profit.............................. 131 616 1,188 1,983 1,639 1,392
Operating costs and expenses:
Selling, general and
administrative(1).................... 38 312 553 785 1,127 1,995
Research and development(1)............. 1,520 1,003 862 1,158 1,327 4,408
Amortization of goodwill................ -- -- -- -- -- 1,091
------- ------ ------ ------ ------ -------
Total operating costs..................... 1,558 1,315 1,415 1,943 2,454 7,494
------- ------ ------ ------ ------ -------
Operating loss............................ $(1,427) $ (699) $ (227) $ 40 $ (815) $(6,102)
======= ====== ====== ====== ====== =======
</TABLE>
---------------
(1) Includes amounts relating to deferred stock compensation of $553,000,
$594,000 and $3.0 million presented in cost of sales, selling, general and
administrative and research and development, respectively, for the three
months ended June 30, 2000.
Our net sales increased quarter over quarter in all periods presented above
except for the three months ended March 31, 2000. During the quarter ended
December 31, 1999 we received a large order from a single customer that
accounted for the majority of the increase in the net sales from the quarter
ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since we commenced operations, our operating cash needs have been provided
by the contribution of equity capital by MRV. We will continue to rely on MRV
for our operating cash needs until the completion of this offering.
On June 30, 2000, we had working capital of $1.9 million, compared with
$3.3 million at December 31, 1999. The ratio of current assets to current
liabilities at June 30, 2000 was 1.4 to 1, compared to 3.0 to 1 at December 31,
1999. This decrease was primarily due to the inclusion of the operations of Jolt
at June 30, 2000.
Cash provided by operating activities was $266,000 for the six months ended
June 30, 2000, compared to cash used in operating activities of $3.2 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 inventories of
$636,000 and an increase in accounts payable of $1.4 million. The decrease in
inventories was due to higher than expected shipment levels and accounts payable
increased due to an increase in purchases due to greater product demand. Results
of operations for the first six months of 2000 were reduced by non-cash charges
for the amortization of goodwill of $1.1 million and deferred stock compensation
of $4.1 million and an increase in accounts payable of $1.4 million.
Cash used in operating activities was $4.5 million in 1999, and $4.0
million in 1998. We experienced a decrease in operating cash flows from 1999
over 1998 despite a decrease in net loss year over year, due
27
<PAGE> 32
primarily to net accounts receivable of $1.9 million in 1999 compared to nil in
1998. The increase in accounts receivable is due to sales generated in 1999.
This increase in accounts receivable was partially offset by an increase in
accounts payable. Inventory levels increased in anticipation of increased sales.
Capital expenditures for property and equipment represent all of our cash
used in investing activities in 1999 and 1998 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. 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 with substantially all revenues
produced in US dollars. The US dollar is the functional currency of the
company's operations. We incur expenses for personnel and various purchases
incurred in those countries other than the United States, in the currency of
those countries, with the most significant one being the New Israeli Shekel.
Exchange rate fluctuations of the New Israeli Shekel in relation to the US
dollar have not been significant in recent years. We cannot predict the effect
of exchange rate fluctuations upon future operating results due to the number of
currencies involved. Historically we have not experienced significant variations
in financial results due to currency fluctuations. Also, we have not experienced
any material gains or losses on foreign currency transactions. 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 since we began operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Investments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The Company 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 its current revenue recognition policy is consistent with the
guidance of SAB No. 101.
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<PAGE> 33
BUSINESS
OVERVIEW
We design, manufacture and market a comprehensive next-generation optical
wireless solution that enables service providers to offer high speed broadband
access within the last mile of the communications network at a substantially
reduced cost compared to other existing solutions. We believe our complete
solution features products that create a fundamental shift in the design of the
access network by allowing service providers to bypass the incumbent carrier's
copper access network. Our products can be deployed quickly and cost effectively
and enable service providers to offer high speed broadband access as well as
other value-added services to business users. Our products can be deployed in a
switched mesh architecture that provides redundancy and availability in nearly
all weather conditions.
INDUSTRY BACKGROUND
INCREASE IN DATA TRAFFIC ON THE EXISTING NETWORK
The volume of high-speed traffic across communications networks has grown
dramatically as the public Internet and private corporate intranets have become
an essential communications medium. According to Ryan, Hankin and Kent, a market
research firm, Internet traffic will increase from 350,000 terabytes, or
trillions of bytes, per month at the end of 1999, to over 15 million terabytes
per month in 2003. Much of this growth is expected to occur from increasing
demand by Internet and corporate users for data intensive applications such as
electronic commerce, streaming audio and video and other new applications.
EXISTING LAST MILE NETWORK INFRASTRUCTURE: A BOTTLENECK
In an effort to meet this expected growth in data traffic, many service
providers have made significant investments in the deployment of fiber optic
cable and wavelength division multiplexing equipment to dramatically improve
bandwidth. Although service providers are rapidly upgrading their existing
copper infrastructure to fiber optic cable from the long-haul network to their
central offices, upgrades to the portion of the network from the central offices
to the customer's premises, also referred to as the last mile, have not occurred
and remain cost prohibitive. Unlike in the long-haul segment, which services a
large number of users, the high cost of deploying fiber and associated
technologies in the last mile cannot be spread over a sufficiently large number
of users to justify such upgrades. Without these upgrades, the performance of
the entire communications network is compromised and service providers are
unable to extend high speed broadband services to the end-user. As an
alternative, service providers are attempting to extend the capacity of the
existing copper-based last mile infrastructure by introducing new services, such
as digital subscriber lines, or DSL, that provide greater bandwidth than
previous services.
EMERGENCE OF NEW SERVICE PROVIDERS
Over the last several years, worldwide deregulation in the
telecommunications market has fostered the development of a new generation of
service providers, known as competitive local exchange carriers, or CLECs. CLECs
historically have offered communication services by leasing portions of the
incumbent carrier's infrastructure and, as a result, their services are limited
to the bandwidth constraints of the existing last mile network. As customer
demand for bandwidth has increased, many CLECs have discovered the need to
provide communication services through alternative means other than existing
copper-based networks. Some CLECs, known as Greenfield providers, have
recognized the customer need for broadband access and are designing and
implementing their own high speed networks to eliminate the need to rely on any
portion of the incumbent carrier's infrastructure. Since Greenfield providers
own and manage their own networks, they are also able to offer other value added
services as well as multi-megabit and gigabit internet protocol services.
Another emerging type of service providers is building local exchange carriers,
or BLECs. BLECs are typically formed by building owners and developers that seek
to enhance the value of their property and generate additional revenues.
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<PAGE> 34
SOLUTIONS FOR THE LAST MILE BOTTLENECK
Currently, technologies employed to provide communications services over
the last mile include those based on copper, fiber, and fixed wireless
technologies. Despite partially addressing the increasing demand for bandwidth,
each of these is subject to inherent deficiencies that limit the effectiveness
of their respective technology.
Copper alternatives. Most service providers currently use copper-based
wireline solutions, including T-1, digital subscriber lines and cable modems, to
address the last mile bottleneck. Copper, however, cannot adequately address the
need for high speed connections required by most business users. While T-1 has
historically been adequate, the increasing demand for high speed access has made
the relatively low bandwidth it provides impractical as a last mile solution.
Digital subscriber lines and cable modems are consumer-oriented solutions that
are relatively slow and insufficiently secure to be adequate for use by most
businesses. In addition, digital subscriber lines and cable modems are
characterized by transmission speeds that tend to be inconsistent and that vary
depending on the distance and quality of the copper cabling.
Fiber optic cable. A smaller number of service providers are offering
communications services over the last mile through fiber optic cable. Fiber
optic cable allows virtually unlimited bandwidth and can eliminate the last mile
bottleneck. However, deploying fiber in the last mile is expensive and
time-consuming, since it requires permits, rights-of-way, and the physical
installation of the cable. Deployment of fiber optic cable also involves a large
up-front investment since the cables have to be installed before services can be
offered. For these reasons, fiber connections are provided only to address the
bandwidth requirements of the largest buildings, where installation costs can be
spread over many users.
Wireless radio frequency alternatives. Another type of communication
technology deployed in the last mile is wireless radio frequency devices that
transmit information on licensed and unlicensed bands of the radio frequency
spectrum. Use of licensed bands requires approval from federal and local
jurisdictions, which can be time consuming and expensive. Although radio
frequency solutions eliminate the process associated with deploying fiber optic
cable, the bandwidth capabilities of radio frequency solutions that operate in
the licensed bands is usually limited to 155 megabits per second, which reduces
the effectiveness of wireless radio frequency devices as bandwidth needs
continue to rise. Radio frequency devices that use unlicensed bands do not
require approval from governmental agencies but the bandwidth is typically
restricted to 25 megabits per second. Wireless radio frequency solutions also
suffer from a relative lack of security, a requirement for line-of-sight between
each link and transmission deterioration that occurs in heavy rain, known as
rain fade.
Optical wireless. Optical wireless technology, also known as free space
optics, is essentially fiber optics without the glass. Rather than using fiber
optic cable as the transmission medium, optical wireless technology transmits
data through the atmosphere. Although wireless optical transmissions also
requires line-of-sight between each link and experiences atmospheric fade
resulting from severe weather conditions such as dense fog, it contains the
potential for virtually unlimited bandwidth since transmission occurs in the
optical domain. Optical wireless technology also provides the benefit of
increased security and, unlike licensed radio frequency bands, does not require
service providers to obtain or pay for governmental licenses. Historically,
these benefits of optical wireless technology have led to its use in local area
networks, or LANs, since bandwidth needs for communications within the corporate
environment were far higher than for communications speeds outside of the
corporation. Businesses are now seeking to extend these communications speeds
outside their internal network environments. We believe optical wireless
technology is currently the only commercially available solution that can extend
these speeds over the last mile in a quick and cost effective manner.
OUR SOLUTION FOR THE LAST MILE
We design, manufacture and market a comprehensive optical wireless solution
that enables service providers to offer high speed broadband access within the
last mile of the communications network in a cost effective and timely manner
utilizing our suite of reliable, scalable products. Our solution is designed to
be deployed in a switched mesh architecture that provides redundancy in the
event a particular line-of-sight link is interrupted and features a backup
wireless radio frequency option, which eliminates problems associated
30
<PAGE> 35
with adverse weather conditions. Components of our solution include our
TereScope products, which provide optical wireless links, and our OptiSwitch(TM)
products, which enable intelligent switching, provisioning and aggregation. All
of these products can be remotely managed through our MegaVision network
management system.
Key benefits of our solution include the following:
Low cost bypass of last mile copper infrastructure. Our optical wireless
solution enables service providers to dramatically lower the cost of providing
high speed broadband access to end-users compared to other commercially
available last mile solutions. Service providers can utilize our products to
provide bandwidth comparable to fiber optic cable and in excess of wireless
radio frequency alternatives. Our solution can be deployed at lower costs
because our solution does not involve the expensive process of obtaining rights-
of-way, licenses, or permits from governments, digging into the ground to lay
cable, or charges for radio frequency spectrum rights.
Rapid deployment and service provisioning. Service providers, including
Greenfield providers and BLECs, can rapidly deploy our optical wireless
solution. Competing technologies such as fiber optic cable and certain radio
frequency and copper-based alternatives take much longer to deploy than our
solution because these technologies require the labor-intensive installation of
equipment, rights-of-way, or governmental licenses or other permits. The design
of our TereScope products enables service providers to avoid many of these
time-consuming processes. Additionally, the optional back-up feature on our
TereScope products utilizes an unlicensed portion of the radio frequency band,
thereby eliminating the time-consuming process of obtaining a license from the
government. Using our MegaVision network management system, service providers
can perform provisioning efficiently and cost-effectively from a central
location through a point-and-click graphical user interface, thus eliminating
time-consuming truckrolls.
Leverage our comprehensive optical wireless solution. With our TereScope
products providing the connectivity, our OptiSwitch(TM) products providing the
intelligent switching, provisioning and aggregation and our MegaVision products
providing network management capabilities, service providers can obtain from one
source every network element necessary to establish an end-to-end access
network. Moreover, the interoperability of our products enables service
providers to efficiently and conveniently deploy our products without the need
to maintain an engineering staff dedicated to resolving compatibility issues and
provides a significant advantage over our competitors' commercially available
products that are not readily compatible.
Improved availability and reliability. Our products are designed to be
implemented in an optical mesh architecture that permits transmission of data
through multiple pathways. If any particular link is unavailable, communication
traffic can be immediately re-routed to preserve the connection. Our TereScope
products can be deployed with our optical communication link with an automatic
radio-frequency backup to provide complete wireless availability. This
combination of optical and radio frequency wireless technologies enables the
data link to remain connected whenever the line of sight between points in a
wireless link is temporarily blocked.
Improved scalability. Our TereScope and OptiSwitch(TM) products allow
service providers to efficiently expand and upgrade their networks as demand for
bandwidth and new services grows. Service providers can deploy our products on
an as needed basis without sacrificing their existing network investment,
allowing a pay-as-you-grow network buildout. The modular design of our products
enables service providers to change and upgrade their network infrastructure
without significant hardware changes or additions.
Creation of new revenue opportunities for service providers. We offer a
variety of software and systems-based features that can be added on to our core
products. These features allow service providers to offer new services including
service level agreements, quality of service enhancements, dedicated wavelengths
to the end-user and bandwidth-on-demand. These added features provide new and
enhanced revenue opportunities for our customers while enabling them to
differentiate their network services from those of other service providers.
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<PAGE> 36
OUR STRATEGY
Our objective is to be the leading provider of optical wireless products
designed to eliminate the last mile bottleneck. Key elements of our strategy
include the following:
Maintain and extend technology leadership. We intend to leverage our
expertise in developing optical wireless technology and supplying optical
wireless solutions. We hold patents and have additional patents pending on new
wireless optical technology and applications. We intend to maintain and extend
our technological position by continuing to define next-generation optical
wireless networks. We also believe our expertise in the design of intelligent
switching and wavelength division multiplexing products are key elements of our
technology focus. We will continue to invest in research and development that
focuses on innovative optical wireless and optical networking technology and to
aggressively recruit and retain talented engineers.
Leverage existing customer base. We intend to leverage our relationships
with existing customers to rapidly expand our customer base and increase sales
of our products. To date, we have deployed more than 2,500 optical wireless
links. Due to the emerging nature of the optical wireless industry and given the
importance of network integrity, availability and reliability, we believe
service providers will focus on proven optical wireless vendors when making
purchasing decisions. Accordingly, we believe our existing customer base
provides us with an advantage when competing for new customers. Moreover, we
intend to increase sales of our switching products to existing customers,
enabling them to deploy our comprehensive solution to improve the efficiency of
their networks.
Enable our customers to offer new revenue-generating services to their
end-users. We intend to continue to develop and provide solutions that enable
our customers to deliver new revenue-generating services to end-users. We intend
to ensure that our hardware and software architectures continue to offer the
performance and flexibility to allow rapid introduction of new services. We
intend to work closely with our customers to help them identify new services
that they can deliver using our products.
Expand sales, marketing and support network. We believe that the highly
technical nature of our solution and the needs of our existing and potential
customers requires us to maintain a knowledgeable, proactive and capable sales,
marketing and support organization. We are adding to our direct sales and
support staffs in order to support CLECs, including Greenfield providers, and
BLECs and other service providers who need a reliable, low cost, high bandwidth
last mile solution. We also intend to complement our sales and marketing efforts
by investing in customer support functions, to ensure that our close customer
relationships continue after products are deployed, to sustain our relationships
and to identify new areas for technical improvement and development.
Pursue acquisitions and establish strategic alliances. We intend to pursue
acquisitions that will enable us to broaden our technology offering and gain
access to additional skilled employees. For example, with AstroTerra, we
acquired technologies which increased the distance our optical signal can
travel, added a backup radio-frequency option to our TereScope products and
substantially increased our engineering staff. In addition, we intend to
establish strategic alliances with complementary technology suppliers.
TECHNOLOGY AND PRODUCTS
PRODUCT ARCHITECTURE
Our TereScope products utilize high-powered optics which allow for high
speed, long distance optical wireless transmission of data. By installing our
TereScope products in a mesh configuration with a minimum of two connections
into each building and utilizing our OptiSwitch(TM) intelligent switching
technology, our solution enables full re-routing of traffic around a link or
equipment failure. Additional redundancy is available through the use of our
TereScope Fusion series, which offers optical wireless communication with a
wireless radio-frequency backup.
Our TereScope products can be quickly installed either on a building's
rooftop, on the side of a building or in an office behind a window. A complete
TereScope system requires little space, eliminating large,
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<PAGE> 37
unsightly components and avoiding zoning issues. Additional benefits include
substantial savings from reduced installation, power and monthly space rental
costs.
The following diagram illustrates the process of transmitting data across a
typical mesh architecture utilizing our TereScope and OptiSwitch(TM) products in
concert with our MegaVision network management system:
[TABLE]
OPTICAL WIRELESS PRODUCTS
The TereScope consists of an eye-safe optical laser transmitter and
receiver allowing protocol-independent data links at distances up to 3.75
kilometers. Our TereScope products feature a number of recently developed
technologies to account for issues that have historically limited the use of
optical wireless systems. These patented technologies include our alignment
system designed to address the problems associated with building sway and our
multiple transmit beam systems that enable our TereScope products to maintain
connectivity despite high winds, beam interference caused by flying objects and
atmospheric scintillation caused by heated air currents. In addition, TereScope
products feature high-powered laser transmitters and large optical receivers to
permit connectivity over longer distances.
The TereScope wireless link offers bandwidth from 1.5 megabits per second
to 2.5 gigabits per second before application of dense wavelength division
multiplexing, or DWDM, technology. We also offer our TereScope Fusion products
that provide backup connectivity in the radio-frequency spectrum. The backup
facility on the TereScope Fusion products utilizes unlicensed radio-frequency
bands and provides speeds of 10 megabits per second.
Our family of TereScope products features a variety of wireless
transmission ranges and speeds that can be tailored to the needs of our
customers. We are also in the process of developing TereScope products that can
support 16 channel dense wavelength division multiplexing technology, which will
enable us to provide speeds of 40 gigabits per second, and
micro-electro-mechanical systems, or MEMS, that are designed to enable tracking
for our high speed TereScope products. Both of these products are anticipated to
be commercially available during the second half of 2001.
The following chart describes major products in our family of TereScope
products:
<TABLE>
<CAPTION>
MAXIMUM
PRODUCT DATA RATE SUGGESTED RANGE
-------------------------- -------------------------- --------------------------
<S> <C> <C>
TereScope 40000 10 gigabits per second 1.6 kilometers
TereScope 10000 2.5 gigabits per second 1.6 kilometers
TereScope 3000 10 - 155 megabits per 3.75 kilometers
second
TereScope 10 1 - 25 megabits per second 2.0 kilometers
TereScope Fusion 10 megabits per second 3.75 kilometers
through radio-frequency
backup
</TABLE>
SWITCHING AND BANDWIDTH MANAGEMENT
Our family of OptiSwitch(TM) products enables bandwidth distribution and
provisioning for all-internet protocol networks both at the central office and
the customer premises. Our switched circuit multiplexer technology enables the
direct connection of an internal Internet Protocol network over the last mile
directly to the service provider's equipment, thereby providing a simple access
and provisioning interface. Our OptiSwitch(TM) products also allow a provider to
scale a user's bandwidth in 128 kilobits per second increments on demand,
allowing a centrally managed internet protocol network at a fraction of the cost
of other commercially available technologies. New internet protocol termination
features in our OptiSwitch(TM) support user authentication, authorization and
access to the provider's billing systems to allow for customized services for
each user.
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<PAGE> 38
Our family of OptiSwitch(TM) products offers a modular design supporting
between 1 and 24 slots. Each unit can support any combination of modules that
allows up to 192 ports of 100 megabits per second connection or 24 ports of
gigabit ethernet connections. Direct connection of the OptiSwitch(TM) ports to
our TereScope products allow the provider to offer a complete cost-effective
metropolitan solution.
The OptiSwitch(TM) 2400 series offers capacities up to 24 gigabits per
second, and can be installed by a provider for its metropolitan backbone link.
Our OptiSwitch(TM) products can easily be installed in each building or user's
location, allowing for an internet protocol network with the security,
scalability and reliability of a synchronous optical network, or SONET, at
substantially reduced costs.
The following chart describes our switching and bandwidth management
products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
--------------------------------------------- ---------------------------------------------
<S> <C>
OPTISWITCH(TM)
OptiSwitch(TM) 2400 Series................... Modular multi-gigabit internet protocol
backbone, intelligent provisioning internet
intrusion control and security
24 gigabit capacity
OptiSwitch(TM) 1200 Series................... Modular multi-gigabit internet protocol
backbone, intelligent provisioning and
aggregationing, 12 gigabit capacity.
OptiSwitch(TM) 400/800 Series................ Internet protocol aggregation modular
switched circuit multiplexer, 8 gigabit
capacity
OptiSwitch(TM) 100 Series.................... Premises access internet protocol switched
circuit multiplexer
OPTISWITCH(TM) MASTER
OptiSwitch(TM) Master 10..................... Internet intrusion control and security
authentication, authorization
OptiSwitch(TM) Master 400/800 Series......... Accounting, quality of service and bandwidth
management
</TABLE>
NETWORK MANAGEMENT
Our MegaVision management system provides software based graphical network
management and monitoring that is fully integrated with our optical transmission
and switching products. Our MegaVision network management system allows service
providers to provision their networks from a centralized location. With our
graphical interface, the provider receives a comprehensive view of the network
as well as fault isolation, configuration, performance and security management
of the network.
SALES, MARKETING AND CUSTOMER SUPPORT
SALES AND MARKETING
We utilize a direct sales staff comprised of sales representatives and
system engineers that target customers in the United States, Europe and Asia. As
of September 30, 2000, we employed eight sales representatives and five system
engineers. We anticipate increasing the size of our sales staff serving the
United States market. Our sales representatives are responsible for soliciting
new customers, identifying customer needs and recommending solutions for the
effective use of our products. Systems engineers work closely with our sales
representatives to provide strategic consultation, network design, product
training and installation support. We supplement our direct sales activity
through a network of over 50 system integration companies located throughout the
world that are approved resellers of our products. We also have a non-exclusive
distribution agreement with iTouch, a subsidiary of MRV. For 1999, 25% of our
products were sold through iTouch compared to 22% for the six months ended June
30, 2000.
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<PAGE> 39
Our sales organization is supported by a marketing effort intended to
increase our visibility as a leader in providing wireless optical solutions for
the last mile. Our marketing strategy includes the following:
- Advertising in industry trade publications;
- Focused seminars to target customers;
- Participation in industry trade shows and technical conferences;
- Communication with market research and analyst firms;
- Publication of articles in the industry trade press covering both
technical and application issues; and
- Strong web-based communication.
CUSTOMER SERVICE AND SUPPORT
We believe that a strong support organization is a key element in customer
acceptance of our products and for our long-term relationship with our
customers. We are committed to providing our customers with a superior level of
service and support. Our customer services include post-sales technical
services, problem solving and resolution, product maintenance support and
expedited equipment replacement. Customers can choose additional customer
support services through a variety of fee-based programs. We provide customer
support 24 hours a day and seven days a week. As of September 30, 2000, we
employed six people in our customer service organization.
RESEARCH AND DEVELOPMENT
Our future success depends on the ability to constantly increase the
performance of our products, to develop and introduce new products in order to
meet the changing needs of our customers and maintain technological
competitiveness. Our development decisions and plans are influenced from our
customers' input, market needs and industry trends.
We have assembled a team of skilled engineers with extensive experience in
the fields of optical, mechanical, electrical and network management design. Our
research and development organization includes 77 scientists and engineers who
are located at our design centers in California and Israel. We are pursuing
several research and development projects, including:
- Focusing on micro-electro-mechanical systems, or MEMS, technology and the
development of an all-optical network;
- Developing advanced wavelength division multiplexing technology for
deployment in devices that will enable us to provide additional bandwidth
to our customers;
- Focusing on custom application specific integrated chip, or ASIC, design
and the development of software that will enable us to provide enhanced
services to our customers;
- Designing next-generation optical wireless platforms to extend the reach
and increase the bandwidth of our current solution; and
- Designing additional features to complement our existing optical wireless
products.
Research and development expenses were $3.2 million for the period from
April 1, 1998 (date of inception) through December 31, 1998, $4.5 million for
the year ended December 31, 1999 and $5.8 million for the six months ended June
30, 2000. As of September 30, 2000, we employed 77 people in our research and
development department.
MANUFACTURING AND SUPPLY
We focus our manufacturing efforts to produce uniformly high quality
products that perform according to their design specifications. Although we are
expanding our internal manufacturing capabilities through the addition of new
manufacturing personnel, facilities and equipment, we are seeking to outsource
manufacturing where it is cost-effective to do so and there is minimal risk of
compromising our proprietary technologies and processes. Our strategy is to
outsource all mass production including full turn-key manufacturing. As we
refine
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<PAGE> 40
and outsource our manufacturing process, we will be able to focus our efforts on
research and new product development.
All complex electronic and optical assembly and testing is performed in our
own facilities in San Diego, California, Jersualem, Israel and Yokneam, Israel.
We utilize outside facilities from Flextronics for manufacturing both in
California and Israel, and we have back-up contract manufacturing agreements
with A to Z and PCB.
We maintain in-house capabilities for final assembly and testing, quality
control, material purchasing and act as a backup for our outside manufacturing
suppliers. Prior to shipping to a customer, all of our products undergo a
thorough and comprehensive testing process designed to verify their conformance
with our design specifications and operational characteristics.
Most of our key components are available from multiple sources, although we
are dependent on sole source for several key components. We do not anticipate
any material disruption in our ability to manufacture in the event that one of
our suppliers experiences an inability to deliver a component. We continually
re-evaluate our process and suppliers seeking to lower our costs to manufacture
our products. As of September 30, 2000, we employed 33 people in our
manufacturing department.
COMPETITION
We compete in a rapidly evolving and highly competitive market. Although we
believe that we are currently the only provider of comprehensive wireless
optical solutions, new competitors are likely to emerge. There are many
companies that compete directly with the individual products that comprise our
comprehensive solution. Direct competitors for our optical wireless technology
include AirFiber, Canon and TeraBeam. Indirect competitors include companies
that provide radio frequency wireless solutions, such as Netro, Ceragon Networks
and Adaptive Broadband. In addition, we believe companies in emerging industries
attempting to address the last mile bottleneck, such as those in the passive
optical networking industry, could be future competitors. Direct competitors for
our switching products include Cisco Systems, Extreme Networks, Foundry Networks
and Nortel Networks.
We expect to compete favorably with these as well as new entrants in the
market. We believe that the principal competitive factors in our market include:
- Product performance and features;
- Ability to provide a comprehensive, integrated solution;
- Speed and cost of deployment and service provision;
- Ability to increase network capacity; and
- Ongoing support and service.
Many of our competitors have longer operating histories, better name
recognition, larger customer bases, and greater sales, technical marketing and
financial resources than we do, and may be able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and provide more
services than we can. To remain competitive, we must continue to enhance our
customer support abilities and intensify our manufacturing efforts.
EMPLOYEES
As of September 30, 2000, we employed 173 persons, of whom 77 were engaged
in research and development, 33 in manufacturing, 15 in operations and 48
persons in sales, marketing, customer support and administrative activities.
None of our employees are represented by a labor union. We consider our
relations with our employees to be good.
INTELLECTUAL PROPERTY
Our strategy is to actively pursue and acquire patent protection in the
United States and foreign jurisdictions for technology that we believe to be
proprietary and that offers a potential competitive advantage for our inventions
and technology. We are acquiring ownership of seven issued U.S. patents, five
issued foreign
36
<PAGE> 41
patents, fourteen patents pending in the United States, and two Patent
Cooperation Treaty patent applications on various aspects of optical laser
network and wireless network technologies. We intend to continue to acquire
rights to and to file patent applications for various aspects of our technology
in the United States and abroad. We also use copyright and trademark law to
protect our proprietary information.
In addition to patents, copyrights and trademarks, we rely on trade secrets
and proprietary know-how. We seek protection of these trade secrets and
proprietary know-how, in part, through confidentiality and proprietary
information agreements. We require our employees, directors, consultants and
advisors, any outside scientific collaborators, any outside sponsored
researchers, and other individuals and entities to execute confidentiality
agreements upon the start of employment, consulting, or other contractual
relationships with us. These agreements provide that all confidential
information developed or made known to the individual or entity during the
course of the relationship is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees and some
other parties, the agreements provide that all inventions conceived by the
individual will be our exclusive property.
FACILITIES
We maintain our main manufacturing, development and office facilities in
San Diego, California and Jerusalem, Israel and Yokneam, Israel. The table below
lists the locations, square footage, annual rent and expiration dates of our
leased facilities for our major operations.
<TABLE>
<CAPTION>
SQUARE FOOTAGE
LOCATION LEASED ANNUAL RENT LEASE EXPIRATION DATE
-------- -------------- ----------- ----------------------
<S> <C> <C> <C>
San Diego, California................. 16,166 $112,992 4/30/02(1)
San Diego, California................. 28,930 $138,168 12/31/01
Jerusalem, Israel..................... 19,526 $174,144 1/25/03
Jerusalem, Israel..................... 12,917 $129,600 9/30/03
Yokneam, Israel....................... 6,609 $ 87,324 8/16/03
Yokneam, Israel....................... 4,962 $ 61,032 7/30/03
Yokneam, Israel....................... 2,433 $ 44,748 8/28/03
</TABLE>
---------------
(1) We have the option to extend the lease term for one additional two year
period, with an annual rent increase of 10%, by providing 60 days prior
written notice. We may terminate the lease at any time, without penalty, by
providing 120 days prior written notice.
LEGAL PROCEEDINGS
On August 16, 2000, a complaint captioned Walden v. Jolt, Ltd. was filed
against Jolt, various of its directors and shareholders, and MRV in the Tel
Aviv-Jaffa District Court in Israel. The complaint alleges various causes of
action, including breach of contract, frustration of performance of contract and
acting in bad faith with respect to an investment contract entered into by and
among the plaintiffs, additional investors and Jolt, pursuant to which the
plaintiffs were to have acquired a 38.36% interest in Jolt. The plaintiffs
allege that as a result of defendants' actions, they were forced by Jolt to give
notice of rescission of the investment contract, and Jolt subsequently entered
into an agreement with MRV to sell all of its shares in exchange for shares and
stock options of MRV. The plaintiffs are seeking actual damages in the amount of
636,776 shares of MRV (accounting for a subsequent 2-for-1 stock split of MRV's
shares) and $17.9 million plus interest, which represents a 38.36% interest in
the shares of MRV that the plaintiffs would have received as shareholders of
Jolt on the date of sale to MRV had the investment contract not been rescinded.
MRV has agreed to indemnify us for any liabilities we may incur in connection
with this matter. The Company believes that Jolt and the other defendants have
meritorious defenses to such claims and they intend to defend these claims
vigorously. Nevertheless, litigation is uncertain, and Jolt and the other
defendants may not prevail in this suit.
37
<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth the names, ages and positions of our
executive officers, key employees and directors as of the date hereof. The
background of each person listed in the table is described below.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- ---------------------------------------------------
<S> <C> <C>
Dr. Shlomo Margalit............ 58 Chairman of the Board
Guy Avidan..................... 38 Chief Executive Officer and Director
Dr. Eric Korevaar.............. 41 President of North American Operations and Chief
Technology Officer
Shay Gonen..................... 35 Vice President of Finance, Chief Financial Officer
and Secretary
Edna Ganon..................... 38 Vice President of Engineering
Allen Brandt................... 45 Vice President of Business Development
Noam Lotan..................... 48 Director
Lior Bregman................... 42 Director
Michael McDonough.............. 50 Director
</TABLE>
Dr. Shlomo Margalit has been Chairman of the Board since September 2000.
Dr. Margalit is a co-founder of MRV and has been its Chairman of the Board of
Directors and Chief Technology 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, the Israel Institute of Technology.
Guy Avidan has served as our Chief Executive Officer and as a member of our
Board of Directors since September 2000. From January 1999 to September 2000,
Mr. Avidan served as President of NBase-Xyplex International a subsidiary of
MRV. From 1995 to January 1999, Mr. Avidan served as Managing Director of NBase
Communications, a subsidiary of MRV. Mr. Avidan holds a B.A. in business
management, economics and accounting from Haifa University and also is licensed
as a certified public accountant.
Dr. Eric Korevaar has served as our President of North American Operations
and Chief Technology Officer since September 2000. Dr. Korevaar has served as
Director, President and Treasurer of AstroTerra Corporation since 1992. Dr.
Korevaar holds a B.S. in physics from the California Institute of Technology,
and an M.A. and Ph.D. both in mechanical and aerospace engineering from
Princeton University.
Shay Gonen has served as our Vice President of Finance, Chief Financial
Officer and Secretary since September 2000. From January 1999 to September 2000,
Mr. Gonen served as General Manager of European Activity for NBase-Xyplex a
subsidiary of MRV. From September 1996 to December 1998, Mr. Gonen served as
Chief Operating Officer of NBase Communications a subsidiary of MRV. From April
1994 to September 1996, Mr. Gonen served as Vice President of Operations and
Finance for Silver Arrow, L.P. Mr. Gonen holds a B.S. in industrial engineering
from Technion, the Israel Institute of Technology and an M.B.A. from Bar-Ilan
University in Tel Aviv.
Edna Ganon has served as our Vice President of Engineering since September
2000. From 1996 to September 2000, Ms. Ganon has served as Vice President of
Research and Development at NBase Communications, a subsidiary of MRV. From 1995
to 1996, Ms. Ganon served as Director of Software Engineering at Fibronics Ltd.
Ms. Ganon holds a B.S. in computer and software engineering from the Haifa
Technion, Institute of Technology.
Allen Brandt has served as our Vice President of Business Development since
September 2000. From 1999 to September 2000, Mr. Brandt served as Vice President
of Strategic Accounts of NBase-Xyplex, a subsidiary of MRV. From 1995 to 1998,
Mr. Brandt served as Vice President of Sales of NBase Communications, a
subsidiary of MRV. Mr. Brandt holds a B.S. from Western State University and a
J.D. from Western State University College of Law.
38
<PAGE> 43
Noam Lotan has served as a member of our Board of Directors since our
incorporation in December 1999. Mr. Lotan served as our President, Secretary,
and Chief Financial Officer from our inception in December 1999 to September
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.B.A.
in business administration from the European Institute of Business
Administration.
Lior Bregman has served as a member of our Board of Directors since
September 2000. Mr. Bregman is currently a managing director at CIBC World
Markets. Mr. Bregman has been employed by CIBC World Markets and its
predecessor, Oppenheimer & Co., since 1988. Mr. Bregman holds a B.A. in business
economics from Hebrew University and an M.B.A. from Stanford University.
Michael McDonough has served as a member of our Board of Directors since
September 2000. Mr. McDonough has served as President of GTE Wireless from
February 2000 to August 2000 and Senior Vice President of Marketing and Sales of
GTE Wireless from June 1997 to February 2000. Mr. McDonough served as Senior
Vice President of GTE Corporation from April 1996 to June 1997 and as President
of GTE Telops from 1994 to 1996. Mr. McDonough holds a B.A. in economics from
the University of Montana and a Ph.D. in economics from Texas A&M University.
BOARD OF DIRECTORS
Our Board of Directors currently consists of five members, and we expect to
elect two additional members to our Board of Directors prior to the effective
date of this offering. 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 shares of common stock with an exercise price
equal to the initial public offering price under our 2000 Stock Plan. We plan to
establish a policy that outside directors will receive grants of options to
purchase shares of our common stock annually for their services as directors.
BOARD COMMITTEES
Our Board of Directors established the Compensation Committee, the Audit
Committee and an Affiliate 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 Lior
Bregman, Noam Lotan and Michael McDonough. 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 Michael
McDonough and Lior Bregman. The Affiliate Committee approves agreements and
arrangements between us and MRV and any of its affiliates which such committee
determines to be outside the ordinary course of business. The Affiliate
Committee consists of Michael McDonough and Lior Bregman. The members of the
Audit and Affiliate Committees are each independent directors.
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<PAGE> 44
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors serving on the Compensation Committee has ever been
an officer or employee of Optical Access. Prior to establishing the Compensation
Committee in September 2000, the Board of Directors as a whole performed the
functions delegated to the Compensation Committee. None of our executive
officers has served 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.
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 director, each of the executive
officers named in the Summary Compensation Table in the "-- Executive
Compensation" section below and all of our directors and executive 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
72,292,085.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED(1)
----------------------
NAME NUMBER PERCENT
---- ---------- --------
<S> <C> <C>
Shlomo Margalit............................................. 3,337,060 4.7%
Guy Avidan(2)............................................... 45,000 *
Eric Korevaar............................................... 341,468 *
Shay Gonen(3)............................................... 12,500 *
Edna Ganon.................................................. -- --
Allen Brandt(4)............................................. 14,003 *
Noam Lotan(5)............................................... 1,526,874 2.2%
Lior Bregman................................................ -- --
Michael McDonough........................................... -- --
All directors and executive officers as a group (9
persons).................................................. 5,219,405 7.2%
</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 45,000 shares issuable pursuant to stock options currently
exercisable.
(3) Includes 12,500 shares issuable pursuant to stock options currently
exercisable.
(4) Includes 14,003 shares issuable pursuant to stock options currently
exercisable.
(5) Includes 60,000 shares issuable pursuant to stock options exercisable within
60 days from September 30, 2000.
40
<PAGE> 45
LIMITATION ON DIRECTOR'S 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.
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.
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<PAGE> 46
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 fiscal year ended December 31, 1999 exceeded $100,000
based on compensation earned as an employee at the entity indicated for the
fiscal year ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- -------- --------
<S> <C> <C>
Noam Lotan(1)............................................... $100,000 --
Guy Avidan(2)............................................... $102,000 $ 39,000
Chief Executive Officer
Shay Gonen(3)............................................... $102,000 --
Vice President of Finance, Chief Financial Officer and
Secretary
Allen Brandt(4)............................................. $ 80,000 $ 88,000
Vice President of Business Development
</TABLE>
------------------------
(1) Noam Lotan resigned as our President, Secretary and Chief Financial Officer
in September, 2000. Mr. Lotan served as President and Chief Executive
Officer of MRV for the fiscal year ended December 31, 1999.
(2) Guy Avidan served as President of NBase-Xyplex International, a subsidiary
of MRV, for the fiscal year ended December 31, 1999. Mr. Avidan joined us
subsequent to December 31, 1999 and earns compensation at an annual rate of
$ .
(3) Shay Gonen served as General Manager of NBase Communications, a subsidiary
of MRV, for the fiscal year ended December 31, 1999. Mr. Gonen joined us
subsequent to December 31, 1999 and earns compensation at an annual rate of
$ .
(4) Allen Brandt served as Vice President of Strategic Accounts of NBase-Xyplex,
a subsidiary of MRV, for the fiscal year ended December 31, 1999. Mr. Brandt
joined us subsequent to December 31, 1999 and earns compensation at an
annual rate of $ .
OPTION GRANTS IN LAST FISCAL YEAR, 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. No shares of common stock of MRV represented by outstanding MRV stock
options are held by our executive officers named in the Summary Compensation
Table as of December 31, 1999.
STOCK PLANS
2000 STOCK PLAN
Our 2000 Stock Option, Deferred Stock and Restricted Stock Plan provides
for the grant of qualified incentive stock options that meet the requirements of
Section 422 of the Internal Revenue Code, stock options qualified, deferred
stock and restricted stock awards. Our Board of Directors adopted our 2000 Stock
Plan in June 2000 and our stockholders approved it in June 2000. We have
reserved a total of shares of our common stock for issuance under
our 2000 Stock Plan, which is subject to anti-dilution provisions for stock
splits, stock dividends, recapitalization and similar events.
Our 2000 Stock Plan may be administered by our Board of Directors or a
committee appointed by our Board of Directors. The Board of Directors currently
administers our 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. Under current law, incentive stock options may be
granted to any individual who is an officer or employee of Optical Access or any
of its subsidiaries or any future subsidiaries.
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<PAGE> 47
The exercise price of any option granted under our 2000 Stock Plan is
payable in full in cash, or if approved by the administrator prior to exercise,
by surrender of shares of common stock already owned, cancellation of
indebtedness, a full recourse promissory note, withholding whole shares of
common stock then issuable upon exercise of an option, or any combination of the
foregoing.
Under our 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 our 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
our 2000 Stock Plan.
In the event of a change of control, unless otherwise determined by the
administrator or our Board of Directors, all stock options, restricted stock and
deferred stock will fully vest and any indebtedness will be forgiven. Pursuant
to our 2000 Stock Plan, a change of control is deemed to have occurred if any
person obtains beneficial ownership of 50% or more of the combined voting power
of outstanding securities, there is a change in our Board of Directors, there is
a merger or consolidation of the company or our stockholders approve a
liquidation of Optical Access or an agreement to sell substantially all of our
assets.
Options and awards granted under our 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. Our Board of Directors may
from time to time revise or amend our 2000 Stock Plan, unless shareholder
approval is required, and may suspend or discontinue it at any time. Unless
terminated earlier, our 2000 Stock Plan will terminate automatically in
, 2010.
As of September 30, 2000, options to purchase shares were
outstanding under our 2000 Stock Plan, at an average exercise price of
$ per share, none of which had been exercised.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our Employee Stock Purchase Plan was adopted by the Board of Directors and
the stockholders in 2000. Our 2000 Purchase Plan, which is intended to
qualify under Section 423 of the Code, contains consecutive, overlapping, twelve
month offering periods. Each offering period includes two six-month purchase
periods. The offering periods generally start on the first trading day on or
after January 1 and July 1 of each year. The initial offering period will
commence on , 2000. A total of shares of Common Stock
have been reserved for issuance under the 2000 Purchase Plan, plus annual
increases equal to the lesser of (i) 1,000,000 shares, (ii) 1% of the
outstanding shares of common stock on such date, and (iii) such lesser amount as
may be determined by our Board of Directors.
Employees are eligible to participate if they are customarily employed by
us or any designated subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who (i) immediately
after grant owns stock possessing 5.0% or more of the total combined voting
power or value of all classes of our capital stock or (ii) whose rights to
purchase stock under all our employee stock purchase plans accrue at a rate
which exceeds $25,000 worth of stock for each calendar year may not be granted
an option to purchase stock under our 2000 Purchase Plan.
Our 2000 Purchase Plan permits participants to purchase common stock
through payroll deductions of up to 15.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings,
including commissions, payments for overtime, incentive bonuses and performance
bonuses. Amounts deducted and accumulated by the participant are used to
purchase shares of common stock at the end of each purchase period. The price of
stock purchased under our 2000 Purchase Plan is 85.0% of the lower of the fair
market value of the common stock at the beginning of the offering period or at
the end of the purchase period. The maximum number of shares a participant may
purchase during a single offering period is determined by dividing $25,000 by
the fair market value of a share of our common stock on the first day of the
offering period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period.
Participants may end their
43
<PAGE> 48
participation at any time during the offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
Rights granted under our 2000 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under our 2000 Purchase Plan. Our 2000 Purchase Plan provides
that, in the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, each outstanding option may be assumed
or substituted for by the successor corporation. If the successor corporation
refuses to assume or substitute for the outstanding options, the offering period
then in progress will be shortened and a new purchase date will be set so that
shares of common stock are purchased with the participant's accumulated payroll
deductions prior to the effective date of such transaction.
The Board of Directors has the authority to amend or terminate our 2000
Purchase Plan, except that no such action may adversely affect any outstanding
rights to purchase stock under our 2000 Purchase Plan, provided that the Board
of Directors may terminate an offering period on any exercise date if the Board
determines that the termination of our 2000 Purchase Plan is in our best
interests and that of our stockholders. Notwithstanding anything to the
contrary, the Board of Directors may in its sole discretion amend our 2000
Purchase Plan to the extent necessary and desirable to avoid unfavorable
financial accounting consequences by altering the purchase price for any
offering period, shortening any offering period or allocating remaining shares
among the participants. Unless sooner terminated by the Board of Directors, our
2000 Purchase Plan will terminate in 2010.
CERTAIN TRANSACTIONS
Divisions and subsidiaries of MRV are our customers and purchase
substantial quantities of our products. These customers accounted for sales of
$3.8 million for the year ended December 31, 1999 and $3.8 million during the
six months ended June 30, 2000. There were no sales of this nature to these
customers for the period from April 1, 1998, the date of our inception, through
December 31, 1998. 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.
ARRANGEMENTS BETWEEN OPTICAL ACCESS AND MRV
We have provided below a summary description of the executed master
separation 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 as regarding the terms of our
agreements with MRV. We have established a committee of our Board of Directors,
consisting of independent directors, to approve the terms of any arrangement or
agreement which they believe to be outside the ordinary course of business to
minimize the potential for these conflicts of interest. Notwithstanding the
operations of that committee, 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.
Optical Access has been advised by MRV that MRV has approved Optical
Access' 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 Optical Access with an alternative
source of funding for Optical Access' operations and capital resources.
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<PAGE> 49
MASTER SEPARATION AGREEMENT
The master separation agreement contains the key provisions relating to our
separation from MRV and this offering.
The Separation. The separation will occur 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 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;
- 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.
Covenants Between MRV and Optical Access. 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.
- 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
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<PAGE> 50
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 separation 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 will be allocated between
MRV and us. It is anticipated that we will bear the costs and expenses
associated with this offering. 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 at any time prior to the
closing of this offering.
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
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<PAGE> 51
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 Jolt; and
- all of the capital stock of AstroTerra;
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.
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.
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<PAGE> 52
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.
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 are
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.
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
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<PAGE> 53
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 have entered into an employee matters agreement with MRV to allocate
assets, liabilities, and responsibilities relating to current and former
employees of Optical Access and their participation in the benefits plans,
including stock plans, that MRV currently sponsors and maintains.
All eligible Optical Access employees will continue to participate in the
MRV benefits plans on comparable terms and conditions to those for MRV employees
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 in the future.
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 Optical
Access benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan. Each Optical Access benefit plan will provide
that all service, compensation and other benefit determinations that were
recognized under the corresponding MRV benefits plan will be taken into account
under that Optical Access benefit plan.
Assets relating to the employee liabilities will be transferred to Optical
Access or the related Optical Access plans and trusts from trusts and other
funding vehicles associated with MRV's benefits plans.
TAX SHARING AGREEMENT
MRV and we will enter into a tax sharing and indemnification agreement,
which will allocate tax liabilities between MRV and us and address several other
tax matters such as responsibility for filing tax returns, and control of and
cooperation in tax litigation. Generally, MRV will be responsible for taxes that
are allocable to periods prior to the contribution date, and each of MRV and
Optical Access 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 periods after the contribution date.
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 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. 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.
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<PAGE> 54
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 us 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.
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 and this offering.
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 Optical Access business;
- any liabilities we may incur in connection with the complaint captioned
Walden v. Jolt, Ltd.; and
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<PAGE> 55
- any breach by MRV of the separation agreement or any ancillary agreement.
These indemnification provisions do not apply to amounts collected from
insurance. The agreement also contains provisions governing notice and
indemnification procedures.
Insurance Matters. The agreement also contains provisions governing our
insurance coverage following the contribution date. In general, we agree to
reimburse MRV for premium expenses related to insurance coverage during this
period. 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.
PRINCIPAL STOCKHOLDERS
Prior to this offering, all of the outstanding shares of our common stock
are owned by MRV. After this offering MRV will own approximately %, or
% if the underwriters fully exercise their option to purchase additional
shares of our outstanding common stock. Except for MRV, we are not aware of any
person or group that will beneficially own more than 5% of the outstanding
shares of our common stock following this offering. None of our executive
officers or directors currently owns any shares of our common stock. Beneficial
ownership of of our shares by and
of our shares by ,
resulting from their right to exercise options to purchase our shares within 60
days of September 30, 2000, each amounted to less than one percent of our
outstanding shares both before and after giving effect to this offering.
Beneficial ownership of of our shares by all officers and
directors as a group (9 persons) resulting from their right to exercise options
to purchase our shares within 60 days of September 30, 2000 also amounted to one
percent of our outstanding shares before and less than one percent of our
outstanding shares after giving effect to 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.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue shares of common stock, $.001 par
value per share, and shares of undesignated preferred stock, $.001 par
value per share. The following is a summary of certain provisions of our capital
stock, certificate of incorporation and bylaws.
COMMON STOCK
As of September 30, 2000, there were shares of common stock
outstanding, which were held of record by one stockholder. In addition, as of
September 30, 2000, there were shares of common stock subject to
outstanding options. Upon completion of this offering, there will be
shares of
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<PAGE> 56
common stock outstanding, assuming no exercise of the underwriter's
over-allotment option nor any exercise of outstanding warrants and 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 Optical Access,
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.
PREFERRED STOCK
Thereafter, our Board of Directors has the authority, without action by our
stockholders, to issue up to 30,000,000 shares of preferred stock in one or more
series and to designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of the common stock. The
effect of the issuance of any shares of preferred stock upon the rights of
holders of the common stock might include, among other things, restricting
dividends on the common stock, diluting the voting power of the common stock,
impairing the liquidation rights of the common stock and delaying or preventing
a change in control of Optical Access without further action by the
stockholders. We have no plans to issue any shares of preferred stock upon
completion of this offering.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CHARTER AND DELAWARE LAW
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make it more difficult to acquire us by means of a tender offer, a
proxy contest or otherwise and the removal of incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our potential ability to negotiate
with the proponent if an unfriendly or unsolicited proposal to acquire or
restructure us outweigh the disadvantages of discouraging takeover or
acquisition proposals because, among other things, negotiation of these
proposals could result in an improvement of their terms.
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 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.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the Board of Directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of this offering, our Board of Directors will be divided into three
classes, with each class serving staggered three-year terms, and that certain
amendments of the certificate of incorporation and of
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the bylaws require the approval of holders of at least 66.7% of the voting power
of all outstanding stock. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of Optical
Access.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our restated certificate of incorporation provides that we will indemnify
our directors and officers to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with the service for us or on our
behalf. The restated certificate of incorporation further provides that our
directors will not be personally liable for monetary damages to Optical Access
for breaches of their fiduciary duty as directors, unless they acted in bad
faith or knowingly or intentionally violated the law. In addition, Optical
Access plans to enter into indemnification agreements with its directors
containing provisions which may require Optical Access, among other things, to
indemnify its directors against liabilities that may arise by virtue of their
status or service as directors, and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer and Trust Company, New York, New York.
LISTING
We intend to apply for quotation of our common stock on the Nasdaq National
Market under the symbol of "OPXS."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding shares
of common stock, which assumes
- the issuance of shares of common stock offered by us; and
- no exercise of the underwriters' over-allotment option.
All of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act. If shares are
purchased by our "affiliates" as that term is defined in Rule 144 under the
Securities Act, their sales of shares would be subject to the limitations and
restrictions that are described below.
As of September 30, 2000, all of the remaining shares of common stock were
held by MRV and were issued and sold by us in reliance on an exemption from the
registration requirements of the Securities Act. All these shares will be
subject to a lock-up agreement, described below, on the date of this prospectus.
In
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addition, holders of stock options could exercise such options and sell certain
of the shares issued upon exercise as described below.
<TABLE>
<CAPTION>
APPROXIMATE SHARES
RELEVANT DATES ELIGIBLE FOR FUTURE SALE COMMENT
-------------- ------------------------ -------
<S> <C> <C>
On the date of this
prospectus................... Freely tradable shares sold in
this Offering
180 days after the date of this
prospectus................... Initial public offering lock-up
expires; shares salable under
Rule 144 or 701
</TABLE>
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 shares immediately after this offering; or
- 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.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements or other restrictions contained in
Rule 701.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act, along with the shares
acquired upon exercise of such options, including exercises after the date of
this prospectus. Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by persons
other than "affiliates," as defined in Rule 144, subject only to the manner of
sale provisions of Rule 144 and by "affiliates" under Rule 144 without
compliance with its one-year minimum holding period requirement.
STOCK OPTIONS
As of September 30, 2000, there were a total of shares of common
stock subject to outstanding options under our 2000 Stock Plan, of
which were vested, and all of which are subject to lock-up agreements.
Immediately after the completion of the offering, we intend to file registration
statements on Form S-8 under the Securities Act to register all of the shares of
common stock issued or reserved for future
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issuance under our 2000 Stock Plan. On the date 180 days after the effective
date of the offering, a total of shares of common stock subject to
outstanding options will be vested. After the effective dates of these
registration statements, shares purchased upon exercise of options granted under
our 2000 Stock Plan would be available for resale in the public market.
LOCK-UP AGREEMENTS
Each of MRV and our officers, directors and stock option holders, who
beneficially own an aggregate of approximately shares of our
common stock, on an as-converted basis, have agreed not to offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of our
common stock or enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
any shares of our common stock or any securities convertible into or exercisable
or exchangeable for shares of our common stock, for a period of 180 days after
the date of this prospectus, without the prior written consent of Bear, Stearns
& Co. Inc., on behalf of the underwriters.
Bear, Stearns & Co. Inc., on behalf of the underwriters, may in its sole
discretion choose to release any or all of these shares from these restrictions
prior to the expiration of either the 180-day period.
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<PAGE> 60
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Bear, Stearns & Co. Inc., CIBC World Markets Corp., U.S. Bancorp Piper
Jaffray Inc. and First Security Van Kasper, Inc. are acting as representatives,
have severally agreed to purchase, and we have agreed to sell to them,
severally, the number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
CIBC World Markets Corp. ...................................
U.S. Bancorp Piper Jaffray Inc..............................
First Security Van Kasper, Inc. ............................
--------
Total.............................................
========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered by this prospectus, if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the initial public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the initial
public offering price. Any underwriter may allow, and such dealers may re-allow,
a concession not in excess of $ a share to other underwriters or to
certain dealers. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives of the underwriters.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of additional shares
of common stock at the initial public offering price listed on the cover page of
this prospectus, less underwriting discounts and commissions. The underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of common stock offered
by this prospectus. To the extent this option is exercised, each underwriter
will become obligated, subject to limited conditions, to purchase approximately
the same percentage of additional shares of common stock as the number listed
next to the underwriter's name in the preceding table bears to the total number
of shares of common stock listed next to the names of all underwriters in the
preceding table. If the underwriters' option is exercised in full, the total
price to the public would be $
million, the total underwriters' discounts and commissions would be $
million and total proceeds to us would be $ million.
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent (5%) of the total number of shares
of common stock offered by them.
We intend to apply for quotation of our common stock on the Nasdaq National
Market under the symbol "OPXS."
56
<PAGE> 61
We, along with our directors, executive officers, stock option holders and
MRV, have agreed that, without the prior written consent of Bear, Stearns & Co.
Inc. on behalf of the underwriters, we will not, during the period ending 180
days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, whether
these shares or any such securities are then owned by the person or are
thereafter acquired, directly from us; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock, whether any transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters; or
- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own accounts. To cover over-allotments or to stabilize the price of the
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering if the syndicate repurchases previously distributed shares
of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to approximately shares of common stock
offered by this prospectus to our directors, officers, employees, customers and
other business associates. There can be no assurance that any of the reserved
shares will be purchased. The number of shares of common stock available for
sale to the general public will be reduced to the extent these parties purchase
the reserved shares. Any reserved shares that are not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered by this prospectus.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was determined by negotiations between us and the
representatives of the underwriters. Among the factors considered in determining
the initial public offering price were:
- our record of operations, our current financial position and future
prospects;
- the experience of our management;
- sales, earnings and certain of our other financial and operating
information in recent periods; and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
57
<PAGE> 62
The estimated initial public offering price range set forth on the cover
page of this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Kirkpatrick & Lockhart LLP, Los Angeles, California. Certain
legal matters will be passed upon for the underwriters by Paul, Hastings,
Janofsky & Walker LLP, Costa Mesa, California.
EXPERTS
The consolidated financial statements of Optical Access, Inc. included in
this prospectus to the extent and for the periods indicated in their report,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of AstroTerra Corporation as of December 31, 1998
and 1999 and for each of the three years in the period ended December 31, 1999
included in this registration statement 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 form as
experts in giving said report.
The financial statements of Jolt, Ltd. as of December 31, 1998 and December
31, 1999 and for the years ended December 31, 1997, 1998 and 1999 have been
included herein in reliance upon the report of Somekh Chaikin, a member firm of
KPMG International, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT OPTICAL ACCESS
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.
58
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Optical Access, Inc.:
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1999
(audited) and at June 30, 2000 (unaudited)............. F-3
Consolidated Statements of Operations for the period from
April 1, 1998 (date of inception) through December 31,
1998 and for the year ended December 31, 1999 (audited)
and for the six months ended June 30, 1999 and 2000
(unaudited)............................................ F-4
Statements of Parent Company Investment for the period
from April 1, 1998 (date of inception) through December
31, 1998 and for the year ended December 31, 1999
(audited) and for the six months ended June 30, 2000
(unaudited)............................................ F-5
Consolidated Statements of Cash Flows for the period from
April 1, 1998 (date of inception) through December 31,
1998 and for the year ended December 31, 1999 (audited)
and for the six months ended June 30, 1999 and 2000
(unaudited)............................................ F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statements of Jolt Limited:
Auditors' Report to the Shareholders of Jolt Limited...... F-17
Balance Sheets as at December 31, 1999, 1998 and 1997..... F-18
Statements of Income for the years ended December 31,
1999, 1998 and 1997.................................... F-19
Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999........... F-20
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.................................... F-21
Notes to Financial Statements............................. F-23
Financial Statements of AstroTerra Corporation:
Report of Independent Public Accountants.................. F-33
Balance Sheets at December 31, 1998 and 1999 (audited) and
June 30, 2000 (unaudited).............................. F-34
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-35
Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 (audited) and for the
six months ended June 30, 2000 (unaudited)............. F-36
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-37
Notes to Financial Statements............................. F-38
Unaudited Pro Forma Condensed Consolidated Financial
Statements:
Unaudited Pro Forma Condensed Consolidated Financial
Information............................................ F-46
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of June 30, 2000.................................... F-47
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended June 30, 2000...... F-48
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 1999........ F-49
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information.................................. F-50
</TABLE>
F-1
<PAGE> 64
After the events discussed in Notes 1, 3, 9 and 11 to Optical Access, Inc.'s
consolidated financial statements are effective, we expect to be in a position
to render the following audit report.
/s/ Arthur Andersen LLP
Los Angeles, California
October 4, 2000
"REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Optical Access, Inc.:
We have audited the accompanying consolidated balance sheets of Optical
Access, 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 the period from April 1, 1998 (date of inception) through
December 31, 1998 and for the year 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 Optical Access, Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the period from April 1, 1998 (date of
inception) through December 31, 1998 and for the year ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
Los Angeles, California
October , 2000"
F-2
<PAGE> 65
OPTICAL ACCESS, 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................................. $ -- $ 141 $ 316
Accounts receivable, net of allowance of nil in 1998 and
1999 and $15 in 2000................................... -- 1,937 2,031
Inventories............................................... 1,092 1,942 1,672
Due from related parties.................................. -- 499 1,681
Prepaids and other current assets......................... 350 405 594
------ ------ -------
Total current assets.............................. 1,442 4,924 6,294
------ ------ -------
Property and Equipment, net:
Machinery and equipment................................... 405 633 915
Furniture and fixtures.................................... -- -- 68
Computer hardware and software............................ 162 324 419
Leasehold improvements.................................... -- 534 669
------ ------ -------
567 1,491 2,071
Less -- Accumulated depreciation.......................... (20) (180) (324)
------ ------ -------
547 1,311 1,747
Goodwill, net............................................... -- -- 31,653
------ ------ -------
Total assets...................................... $1,989 $6,235 $39,694
====== ====== =======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current Liabilities:
Current portion of long-term debt......................... $ -- $ -- $ 135
Accounts payable.......................................... 433 1,393 3,080
Accrued payroll and related............................... 177 230 1,220
------ ------ -------
Total current liabilities......................... 610 1,623 4,435
Long-term debt, net of current portion...................... -- -- 756
Other long-term liabilities................................. -- -- 266
Commitments and contingencies
Parent company investment................................... 1,379 4,612 34,237
------ ------ -------
Total liabilities and parent company investment... $1,989 $6,235 $39,694
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 66
OPTICAL ACCESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998 SIX MONTHS ENDED
(DATE OF INCEPTION) JUNE 30,
THROUGH YEAR ENDED -------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
------------------- ----------------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................. $ -- $ 8,473 $ 1,735 $ 7,918
Cost of sales(1).......................... -- 4,555 989 4,887
-------- -------- -------- --------
Gross profit......................... -- 3,918 746 3,031
Operating costs and expenses:
Selling, general and
administrative(1).................... -- 1,688 349 3,122
Research and development(1)............. 3,213 4,543 2,524 5,735
Amortization of goodwill................ -- -- -- 1,091
-------- -------- -------- --------
3,213 6,231 2,873 9,948
-------- -------- -------- --------
Operating loss............................ (3,213) (2,313) (2,127) (6,917)
Other expense, net...................... -- -- -- 15
-------- -------- -------- --------
Loss before provision for income taxes.... (3,213) (2,313) (2,127) (6,932)
Provision for income taxes................ -- -- -- --
-------- -------- -------- --------
Net loss............................. $ (3,213) $ (2,313) $ (2,127) $ (6,932)
======== ======== ======== ========
Basic and diluted net loss per share...... $ $ $ $
======== ======== ======== ========
Basic and diluted weighted average
shares..................................
======== ======== ======== ========
</TABLE>
---------------
(1) Includes amounts relating to deferred stock compensation of approximately
$553,000, $594,000 and $3.0 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-4
<PAGE> 67
OPTICAL ACCESS, INC.
STATEMENTS OF PARENT COMPANY INVESTMENT
<TABLE>
<CAPTION>
PARENT DEFERRED
COMPANY STOCK
INVESTMENT COMPENSATION TOTAL
---------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at April 1, 1998 (date of inception)................ $ -- $ -- $ --
Net loss.................................................. (3,213) -- (3,213)
Net investment from MRV Communications, Inc............... 4,592 -- 4,592
------- -------- -------
Balance at December 31, 1998................................ 1,379 -- 1,379
Net loss.................................................. (2,313) -- (2,313)
Net investment from MRV Communications, Inc............... 5,546 -- 5,546
------- -------- -------
Balance at December 31, 1999................................ 4,612 -- 4,612
Net loss (unaudited)...................................... (6,932) -- (6,932)
Net investment from MRV Communications, Inc.
(unaudited)............................................ 32,433 -- 32,433
Deferred stock compensation (unaudited)................... 25,000 (25,000) --
Amortization of deferred stock compensation (unaudited)... -- 4,124 4,124
------- -------- -------
Balance at June 30, 2000 (unaudited)........................ $55,113 $(20,876) $34,237
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 68
OPTICAL ACCESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998 SIX MONTHS ENDED
(DATE OF INCEPTION) JUNE 30,
THROUGH YEAR ENDED ------------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
------------------- ----------------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(3,213) $(2,313) $(2,127) $(6,932)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization.... 20 160 37 144
Amortization of goodwill......... -- -- -- 1,091
Amortization of deferred stock
compensation expense........... -- -- -- 4,124
Changes in assets and liabilities,
net of effects from acquisition:
Accounts receivable.............. -- (1,937) (1,388) 24
Inventories...................... (1,092) (850) (1,189) 636
Due from related parties......... -- (499) -- (155)
Prepaid and other current
assets......................... (350) (55) (200) 15
Accounts payable................. 433 960 1,410 1,379
Accrued payroll and related...... 177 53 243 (60)
------- ------- ------- -------
Net cash provided by (used
in) operating
activities................ (4,025) (4,481) (3,214) 266
------- ------- ------- -------
Cash flows from investing activities:
Purchases of property and
equipment........................ (567) (924) (353) (300)
Net cash received in connection with
Jolt acquisition................. -- -- -- 96
------- ------- ------- -------
Net cash used in investing
activities................ (567) (924) (353) (204)
------- ------- ------- -------
Cash flows from financing activities:
Payments on long-term debt.......... -- -- -- (510)
Net change in other liabilities..... -- -- -- (5)
Net cash advances from MRV
Communications................... 4,592 5,546 3,674 628
------- ------- ------- -------
Net cash provided by
financing activities...... 4,592 5,546 3,674 113
Net increase in cash and cash
equivalents......................... -- 141 107 175
Cash and cash equivalents, beginning
of period........................... -- -- -- 141
------- ------- ------- -------
Cash and cash equivalents, end of
period.............................. $ -- $ 141 $ 107 $ 316
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 69
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS AND BASIS OF PRESENTATION
On April 29, 2000, MRV Communications, Inc. (MRV or Parent) announced a
plan to create a separate company, subsequently named Optical Access, Inc.
(Optical Access or the Company), comprised of MRV's optical wireless business.
Optical Access designs, manufactures and sells an optical wireless solution that
delivers high-speed communications traffic to the portion of the communications
network commonly known as the last mile. Its solution provides higher
transmission capacity, or bandwidth, at a lower cost compared to other
commercially available last mile solutions. After completion of Optical Access'
planned initial public offering, MRV will own at least 80.1% of Optical Access'
outstanding common stock.
Optical Access 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 2000, Optical Access authorized shares of $.001 par
value preferred stock and shares of $.001 par value common stock and
effected a -for-one stock split of outstanding common stock (see Note
11). There are no shares of preferred stock issued and outstanding.
On , 2000, MRV and Optical Access entered into a Master
Separation Agreement (the Separation Agreement) to be effective on ,
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 Optical Access, on or
about the separation date, substantially all of the assets and liabilities
associated with Optical Access' business.
The accompanying consolidated financial statements include the assets,
liabilities, operating results and cash flows of Optical Access and have been
prepared using MRV's historical bases in the assets and liabilities and the
historical results of operations that are transferred to Optical Access.
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 Optical Access considered
to be a reasonable reflection of the utilization of services provided for the
benefit received by Optical Access. 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 Optical Access
in the future or what they would have been had Optical Access 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. There can be no
assurance that the Company will be successful in raising the needed capital.
Additionally, should the Company be successful in obtaining capital, there can
be no assurance that profitable operations can be achieved.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PARENT COMPANY INVESTMENT
The parent company investment account represents the book value of net
assets transferred to Optical Access.
F-7
<PAGE> 70
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Optical Access 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
Optical Access 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. Optical Access
generally warrants its products against defects in materials and workmanship for
one year. The estimated cost of warranty obligations, which have been
insignificant, is recognized at the time of revenue recognition.
CASH AND CASH EQUIVALENTS
Optical Access considers all highly liquid investments with original
maturity of three months or less to be cash equivalents.
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
Property 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..... 7 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
Optical Access 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
F-8
<PAGE> 71
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
future net cash flows (undiscounted and without interest charges) expected to be
generated by the asset. If these assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are carried at cost,
which approximates their fair market value.
INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period. For purposes of these financial
statements, income taxes have been calculated as if Optical Access 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.
LOSS PER SHARE
Basic and diluted loss per common share are computed using the weighted
average number of common shares (adjusted for the effect of the stock split
discussed in Note 1 and 11) outstanding. The weighted average number of shares
used for computation of basic and diluted loss per shares used for all periods
presented were .
COMPREHENSIVE INCOME
Effective January 1, 1998, 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 (net assets)
during a period from non-owner sources. To date, the Company has not had any
transactions that are required to be reported in comprehensive income/(loss),
other than net loss.
STATEMENTS OF CASH FLOWS (UNAUDITED)
The "push down" of the assets and liabilities of Jolt Limited (Jolt) in
May, 2000 (see Note 3), is a non-cash transaction, except for the effect of the
net cash received of $96,000, and has been excluded from the accompanying
Unaudited Consolidated Statement of Cash Flows for the six months ended June 30,
2000.
FOREIGN CURRENCY
Management determined that the functional currency of its foreign
subsidiaries is the U.S. dollar.
Transactions and balances originally denominated in U.S. dollars are
presented at their original amounts. Transactions and balances in other
currencies are remeasured into U.S. dollars in accordance with SFAS No. 52
"Foreign Currency Translation." Gains and losses from remeasurement are
reflected in the accompanying Consolidated Statement of Operations and are
immaterial in all periods presented.
F-9
<PAGE> 72
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
translated at average rates during the year except for depreciation and
amortization, which are translated at historical rates.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Investments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. The Company 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 its 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 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
On May 1, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Jolt, an Israeli corporation. Jolt designs, manufactures and
sells multi-port wireless optics communications equipment. Under the terms of
the purchase agreement, shareholders received approximately 1.1 million shares
of MRV common stock and options to purchase approximately 849,000 shares of
common stock of MRV. The purchase price aggregated approximately $57.7 million.
The issuance price of the common stock was approximately $31 per share, which
was determined based on the average market price five days before and after the
terms of the acquisition were agreed upon. The options to purchase common stock
are exercisable at $6 per share, have an aggregate intrinsic value of $25.0
million, and vest over 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 Optical Access. The excess purchase
price paid over the fair value of the net identifiable assets acquired of $32.7
million has been recorded as goodwill and is being amortized on a straight-line
basis over 5 years. The deferred compensation of approximately $25.0 million is
being amortized using the graded vesting method over four years.
The outstanding capital stock of Jolt, purchased by MRV, has been
contributed to Optical Access. The results of operations of Jolt have also been
included in Optical Access' consolidated financial statements from May 2, 2000.
The following unaudited pro forma financial information presents the combined
results of operations of Optical Access and Jolt as if the acquisition had
occurred as of January 1, 1999 and 2000, giving
F-10
<PAGE> 73
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.............................................. $ 2,567 $ 8,334
Net loss............................................... (14,509) (14,356)
Basic and diluted net loss per share...................
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................. $1,000 $1,099 $ 975
Work in process............................... 89 326 286
Finished goods................................ 3 517 411
------ ------ ------
Total inventories........................ $1,092 $1,942 $1,672
====== ====== ======
</TABLE>
5. RELATED PARTY TRANSACTIONS
Included in "Due from related parties" in the accompanying consolidated
balance sheet as of June 30, 2000 are amounts of approximately $527,000 due from
a former stockholder of Jolt. Amounts are expected to be collected in full
during 2000.
6. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Optical Access operates under one reportable segment: wireless optical
communications. Wireless optical communications include optical laser wireless
transmitters and receivers, switched circuit multiplexers and graphical network
management. These products are sold primarily to original-equipment
manufacturers and through distributors.
For the period from April 1, 1998 (date of inception) through December 31,
1998 the Company had no customer accounting for more than 10% of net sales or
accounts receivable. As of and for the year ended December 31, 1999, one
customer accounted for approximately 17%, of accounts receivable. As of and for
the six months ended June 30, 2000 (unaudited), three customers accounted for
approximately 51% of accounts receivable. For the year ended December 31, 1999
and the six months ended June 30, 2000 (unaudited), one customer represented
greater than 10% of net sales. Certain geographical area information follows (in
thousands).
F-11
<PAGE> 74
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Geographical Area Net Sales:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1998 SIX MONTHS
(DATE OF INCEPTION) ENDED JUNE 30,
THROUGH YEAR ENDED ---------------
DECEMBER 31, 1998 DECEMBER 31, 1999 1999 2000
-------------------- ----------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
United States................. $ -- $2,421 $ 570 $2,296
Asia-Pacific.................. -- 765 88 713
European...................... -- 5,116 1,069 4,751
Other......................... -- 171 8 158
---- ------ ------ ------
Total net sales..... $ -- $8,473 $1,735 $7,918
==== ====== ====== ======
</TABLE>
7. INCOME TAXES
Optical Access has generated operating losses since inception. These
operating losses were generated by subsidiaries located outside of the United
States. Optical Access expects that during the periods in which these tax losses
can be utilized, its income would be substantially exempt. Accordingly, there
will be no tax benefit from such operating losses and no deferred tax assets
have been provided in the accompanying consolidated financial statements.
Deferred taxes with respect to other temporary differences are insignificant.
Optical Access has not provided for U.S. federal income and foreign
withholding taxes on non-U.S. subsidiaries' undistributed earnings because these
earnings are intended to be reinvested indefinitely.
8. LONG-TERM DEBT (UNAUDITED)
Long-term debt consisted of the following as of June 30, 2000:
<TABLE>
<S> <C>
Notes payable to financial institutions bearing interest at
approximately 18 percent, payable in monthly installments
of principal and interest through July 2004............... 891
Less -- Current portion................................... (135)
-----
$ 756
=====
</TABLE>
The following summarizes the required principal long-term debt payments as
of June 30, 2000:
<TABLE>
<S> <C>
Period ending June 30:
2000................................................ $135
2001................................................ 311
2002................................................ 421
2003................................................ 12
2004................................................ 12
----
$891
====
</TABLE>
9. TRANSACTIONS WITH MRV COMMUNICATIONS, INC.
Optical Access' sales of products to MRV and its affiliates were $3.8
million in 1999, $921,000 (unaudited) for the six months ended June 30, 1999 and
$3.8 million for the six months ended June 30, 2000 (unaudited). Optical Access
recorded receivables from affiliates of MRV of approximately $499,000 and $1.2
million for the year ended December 31, 1999 and the six months ended June 30,
2000 (unaudited),
F-12
<PAGE> 75
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective, for product sales in the ordinary course of business. These amounts
have been included in "Due from related parties" in the accompanying
consolidated balance sheets.
For the periods presented, intercompany transactions and balances between
Optical Access and MRV consisted of the following (in thousands):
Optical Access' 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 Optical Access considered to be a reasonable reflection of the utilization
of services provided for the benefit received by Optical Access. The allocation
methods are based on relative revenues, headcount or square footage.
For purposes of governing the ongoing relationships between Optical Access
and MRV at and after the separation and to provide for an orderly transition,
Optical Access and MRV have entered or will enter into various agreements. A
brief description of each of the agreements follows.
Master Separation Agreement. MRV and Optical Access have entered into a
master separation agreement, which contains key provisions relating to the
separation, Optical Access' initial funding, and initial public offering. 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 Optical Access,
effective on the separation date. The agreement also contains conditions that
must occur prior to the initial public offering. 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 Optical
Access and the liabilities that Optical Access 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 sheets.
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 Optical Access owns or will transfer to Optical Access its
rights in specified patents, patent applications, invention disclosures,
specified trademarks and other intellectual property related to Optical Access'
current business and research and development efforts.
Employee Matters Agreement. The Employee Matters Agreement outlines how
MRV and Optical Access plan to allocate assets, liabilities and responsibilities
relating to current and former employees of Optical Access and their
participation in the benefits plans, including stock plans, that MRV currently
sponsors and maintains. The agreement also contains provisions describing some
of Optical Access' employee benefit and employee stock plans.
All eligible Optical Access employees will continue to participate in the
MRV benefits plans on comparable terms and conditions to those for MRV employees
until Optical Access establishes benefit plans for its employees, or elects not
to establish comparable plans if it is not legally or financially practical.
Once Optical Access establishes its own benefits plans, it may modify or
terminate each plan in accordance with the terms of that plan and its policies.
No Optical Access benefit plan will provide benefits that overlap benefits under
the corresponding MRV benefit plan. Each Optical Access benefit plan will
provide that all service, compensation and other benefit determinations that, as
of the separation, were recognized under the corresponding MRV benefits plan
will be taken into account under that Optical Access benefit plan.
F-13
<PAGE> 76
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Tax Sharing Agreement. The Tax Sharing Agreement allocates MRV's and
Optical Access' responsibilities for certain tax matters. The agreement requires
Optical Access to pay MRV for the incremental tax costs of Optical Access'
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 Optical Access' taxable income, and the incremental use
of tax credits of affiliates to offset the tax on Optical Access' income. The
agreement also provides for compensation or reimbursement as appropriate to
reflect redeterminations of Optical Access' tax liability for periods during
which Optical Access joined in filing consolidated, combined or unitary tax
returns.
The tax sharing agreement also requires Optical Access to indemnify MRV for
certain taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by MRV from Optical Access before , (b)
customs duties or harbor maintenance fees on products exported or imported by
MRV on behalf of Optical Access, and (c) any taxes resulting from transactions
undertaken in preparation for the distribution.
Optical Access' indemnity obligations include any interest and penalties on
taxes, duties or fees for which Optical Access 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, Optical Access could be required to pay a deficiency in the group's
federal income tax liability for a period during which Optical Access was a
member of the group even if the Tax Sharing Agreement allocates that liability
to MRV or another member.
Transitional Services Agreement. The Transitional Services Agreement
governs the provision of information technology services by MRV and Optical
Access 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 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 Transitional Services Agreement will provide for the
replication of some computer systems, including hardware, software, data storage
or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
Real Estate Matters Agreement. The Real Estate Matters Agreement addresses
real estate matters relating to the MRV leased and owned properties that MRV
will transfer to or share with Optical Access. The agreement describes the
manner in which MRV will transfer to or share with Optical Access various leased
and owned properties. The Real Estate Matters Agreement provides that Optical
Access will be required to accept the transfer of all sites allocated to Optical
Access, 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.
F-14
<PAGE> 77
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Master Confidential Disclosure Agreement. The master confidential
disclosure agreement provides that both Optical Access and MRV agree not to
disclose confidential information of the other party in specific circumstances.
They also agree not to use this information in violation of any use restrictions
in any of the other written agreements.
Indemnification and Insurance Matters Agreement. Effective as of the
separation date, subject to specified exceptions, Optical Access 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, Optical Access 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 Optical Access will each indemnify the other
against liability for specified environmental conditions. Optical Access will
reimburse MRV for the cost of any insurance coverage from the separation date to
.
10. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases facilities and certain equipment under lease
arrangements expiring in various years through September 2003. 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............................................... $257
2001............................................... 267
2002............................................... 272
2003............................................... 100
----
$896
====
</TABLE>
Rental expense under lease agreements for the period from April 1, 1998
(date of inception) through December 31, 1998 and the year ended December 31,
1999 was $39,000 and $106,000, respectively. Rental expense under lease
agreements for the six month periods ended June 30, 1999 and 2000 was $46,000
and $78,000, respectively.
Through subsidiaries in Israel, Optical Access is obligated to the Office
of the Chief Scientist of the Government of Israel (Chief Scientist) with
respect to the government's participation in research and development expenses
for the OptiSwitch(TM) Master product line. Accordingly, Optical Access' royalty
to the Chief Scientist is calculated at a rate of 3% -- 5% of sales of the
OptiSwitch(TM) Master product line developed with the participation up to the
dollar amount of such participation. Optical Access received participation of
$350,000, $500,000 and $200,000 for the period from April 1, 1998 (data of
inception) through December 31, 1998, the year ended December 31, 1999 and the
six months ended June 30, 1999, respectively. No participation was received
during the six months ended June 30, 2000. The remaining future obligation at
June 30, 2000 is approximately $850,000 which is contingent on generating
sufficient sales of this selected product line.
LITIGATION
On August 16, 2000, a notice of action against Jolt, various of its
directors, shareholders and MRV was received from third parties alleging, among
other things, breach of contract, frustration of performance of contract and
acting in bad faith with respect to investment contracts entered into by Jolt.
Management, in
F-15
<PAGE> 78
OPTICAL ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consultation with its legal counsel, is evaluating these claims and presently
does not believe that any of the defendants violated any of the allegations
asserted by these parties. MRV has agreed to indemnify the Company for any
liability it may incur in connection with this matter. Management, in
consultation with its legal counsel, intends to vigorously defend its position,
however, it is not possible, at this stage, to assess the ultimate outcome of
this matter.
From time to time, the Company is a defendant in lawsuits involving matters
which are routine to the nature of its business. Management is of the opinion
that the ultimate resolution of all such matters will not have a material
adverse effect on the Company's results of operations or financial position.
11. SUBSEQUENT EVENTS
On July 12, 2000, MRV completed the acquisition of AstroTerra Corporation
(AstroTerra), a California corporation that develops and manufactures free-space
optical wireless communication systems to connect data and telecommunications
networks. MRV exchanged approximately 1.6 million shares of its common stock and
approximately 783,000 stock options to purchase its common stock for all of the
outstanding capital stock of AstroTerra. The issuance price of the common stock
was approximately $69 per share, which was determined based on the average
market price five days before and after the terms of the agreement were agreed
upon. The options to purchase common stock are exercisable at approximately $6
per share, have an aggregate intrinsic value of approximately $50.0 million and
vest over a four-year period. The deferred compensation is being amortized using
the graded vesting method over four years. The excess purchase price paid over
the fair value of the net identifiable assets acquired of $108.3 million has
been recorded as goodwill and is being amortized on a straight-line basis over 5
years. This acquisition has been accounted for using the purchase method, and
has been contributed and "pushed down" to Optical Access as part of the Master
Separation Agreement.
Effective , 2000, Optical Access' Board of Directors declared a
-for-one stock split. All periods presented have been restated to give
effect to the stock split.
On , 2000, the Board of Directors adopted, and the stockholder
approved the 2000 Stock Option Plan (2000 Stock Option Plan), providing for
grants of qualified incentive stock options, non-qualified stock options,
deferred stock and restricted stock awards, to officers, employees, directors,
consultants and advisors of the Company. shares of common stock
are reserved for issuance under the 2000 Stock Option Plan. No options have been
issued under the plan as of . In the event of a change of
control, as defined, all stock options will fully vest, unless otherwise
determined by the administrator or the Board of Directors.
In , 2000, the Board of Directors adopted, and the stockholder
approved the 2000 Employee Stock Purchase Plan (2000 Stock Purchase Plan). The
2000 Stock Purchase Plan allows qualified employees to purchase common stock at
85% of the lower of the fair market value of the common stock at the beginning
of the purchase period or at the end of the purchase period. A total of
shares have been reserved for issuance under this plan. No shares
of common stock have been purchased under the plan as of .
F-16
<PAGE> 79
AUDITORS' REPORT TO THE SHAREHOLDERS OF JOLT LIMITED
We have audited the accompanying balance sheets of Jolt Limited (the
Company) as at December 31, 1999, 1998 and 1997, and the related statements of
income, changes in shareholders' equity and cash flows for the three years, the
last of which ended December 31, 1999. These financial statements are the
responsibility of the Company's Board of Directors and of its Management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards, including standards prescribed by the Auditors Regulations (Manner of
Auditor's Performance) 1973. Such auditing standards are substantially identical
to generally accepted audit standards in the United States. Such standards
require that we plan and perform the audit to obtain reasonable assurance that
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 the Board of Directors and by
Management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a fair basis for our opinion.
The Company's investment in its wholly-owned subsidiary, AirOptics Inc.,
for the year 1997 is included on the equity basis of accounting and no
consolidated financial statements have been prepared as required by opinion No.
57 of the Institute of Certified Public Accountants in Israel.
In our opinion, except for the omission of the information referred to in
the preceding paragraph, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company as at
December 31, 1999, 1998 and 1997 and the results of operations, the changes in
shareholders' equity, and the cash flows for the three years, the last of which
ended December 31, 1999, in conformity with generally accepted accounting
principles in Israel (Israeli GAAP). As applied to these financial statements,
Israeli GAAP are not materially different from US GAAP.
Without qualifying our opinion we draw to your attention the uncertainty of
the outcome of a legal claim filed against the Company as described in note 24D.
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Jerusalem, Israel
July 15, 2000, except for Note 24D and 26
as to which date is October 2, 2000
F-17
<PAGE> 80
JOLT LIMITED
BALANCE SHEETS
AS AT DECEMBER 31
<TABLE>
<CAPTION>
NOTE 1999 1998 1997
---- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents...................... 3 $ 50,318 $ 761 $ 40,907
Trade receivables, net......................... 4 160,980 186,223 162,802
Other receivables.............................. 5 18,220 6,103 14,055
Inventory...................................... 6 369,111 309,175 332,407
---------- ---------- ----------
598,629 502,262 550,171
---------- ---------- ----------
FIXED ASSETS, NET.............................. 7 138,536 205,344 232,585
---------- ---------- ----------
$ 737,165 $ 707,606 $ 782,756
========== ========== ==========
CURRENT LIABILITIES
Short-term bank borrowings..................... $ -- $ 111,650 $ 16,992
Trade payables................................. 8 188,794 287,325 199,313
Other payables................................. 9 781,700 462,044 598,228
Current portion of long-term loans............. 10 522,082 937,426 680,956
---------- ---------- ----------
1,492,576 1,798,445 1,495,489
---------- ---------- ----------
OTHER LIABILITIES
Long-term loans................................ 10 704,023 98,014 310,768
Liability in respect of severance pay.......... 12 282,694 190,176 204,193
Long-term loans from shareholders.............. 13 225,000 221,698 175,298
Provision for losses of subsidiary company..... 11 -- -- --
Convertible liability to shareholder........... 14 227,645 100,325 63,415
Liability to shareholder....................... 14 -- 66,883 42,276
---------- ---------- ----------
1,439,362 677,096 795,950
---------- ---------- ----------
CONVERTIBLE LONG-TERM LIABILITY TO
SHAREHOLDERS................................. 15 -- 216,587 391,992
---------- ---------- ----------
NET DEFICIT.................................... 16 (2,194,773) (1,984,522) (1,900,675)
---------- ---------- ----------
$ 737,165 $ 707,606 $ 782,756
========== ========== ==========
</TABLE>
The notes to the financial statements form an integral part thereof.
F-18
<PAGE> 81
JOLT LIMITED
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
NOTE 1999 1998 1997
---- ---------- ---------- -----------
<S> <C> <C> <C> <C>
INCOME
Sales, net.................................... 17 $1,472,110 $1,282,418 $ 1,126,242
COST OF SALES................................. 18 498,107 578,696 726,457
---------- ---------- -----------
GROSS PROFIT.................................. 974,003 703,722 399,785
---------- ---------- -----------
OPERATING EXPENSES
Research and development costs................ 19 176,604 172,408 167,868
Marketing..................................... 20 272,472 375,758 327,315
General and administrative expenses........... 21 794,490 596,664 828,277
---------- ---------- -----------
1,243,566 1,144,830 1,323,460
---------- ---------- -----------
OPERATING LOSS................................ (269,563) (441,108) (923,675)
Financing (expenses) income, net.............. 22 (265,688) 47,833 (121,639)
Other income (expenses)....................... 125,000 (15,572) --
---------- ---------- -----------
NET LOSS BEFORE COMPANY'S SHARE IN NET LOSS OF
SUBSIDIARY COMPANY.......................... (410,251) (408,847) (1,045,314)
Company's share in net loss of subsidiary
company..................................... -- -- (215,860)
---------- ---------- -----------
NET LOSS FOR THE YEAR......................... $ (410,251) $ (408,847) $(1,261,174)
========== ========== ===========
</TABLE>
The notes to the financial statements form an integral part thereof.
F-19
<PAGE> 82
JOLT LIMITED
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RECEIPTS ON
SHARE SHARE ACCOUNT OF ACCUMULATED TOTAL
CAPITAL PREMIUM SHARES DEFICIT NET DEFICIT
------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997... 16,088 $2,223,958 $ 259,530 $(4,174,577) $(1,675,001)
Issuance of shares........... 919 499,081 -- -- 500,000
Receipts on account of
shares..................... -- -- 535,500 -- 535,500
Loss for the year............ -- -- -- (1,261,174) (1,261,174)
------- ---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31,
1997....................... 17,007 2,723,039 795,030 (5,435,751) (1,900,675)
Receipts on account of
shares..................... -- -- 325,000 -- 325,000
Loss for the year............ -- -- -- (408,847) (408,847)
------- ---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31,
1998....................... 17,007 2,723,039 1,120,030 (5,844,598) (1,984,522)
Receipts on account of
shares..................... -- -- 200,000 -- 200,000
Loss for the year............ -- -- -- (410,251) (410,251)
------- ---------- ---------- ----------- -----------
BALANCE AT DECEMBER 31,
1999....................... 17,007 $2,723,039 $1,320,030 $(6,254,849) $(2,194,773)
======= ========== ========== =========== ===========
</TABLE>
The notes to the financial statements form an integral part thereof.
F-20
<PAGE> 83
JOLT LIMITED
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before for the year........................... $(410,251) $(408,847) $(1,261,174)
Adjustment to reconcile net loss to net cash used for
operating activities (see Annex)..................... 574,878 137,601 943,463
--------- --------- -----------
Net cash provided by (used in) for operating
activities........................................... 164,627 (271,246) (317,711)
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets.............................. (3,420) (64,509) (2,246)
Investment in subsidiary company....................... -- -- (244,860)
--------- --------- -----------
Net cash used in investing activities.................. (3,420) (64,509) (247,106)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term bank borrowings,
net.................................................. (111,650) 94,658 (183,152)
Issuance of shares..................................... -- -- 150,000
Receipts on account of shares.......................... -- -- 535,500
Receipt of loans from shareholders..................... -- 106,939 165,000
Repayments of loans from shareholders.................. -- (25,000) (84,800)
Receipt of long-term loans............................. -- 18,871 --
Repayments of long-term loans.......................... -- (5,765) --
Receipt of convertible long-term liabilities from
shareholders......................................... -- 150,000 50,000
Repayment of convertible long-term liabilities from
shareholders......................................... -- (44,094) (41,960)
--------- --------- -----------
Net cash provided by (used in) by financing
activities........................................... (111,650) 295,609 590,588
--------- --------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 49,557 (40,146) 25,771
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......... 761 40,907 15,136
--------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............... $ 50,318 $ 761 $ 40,907
========= ========= ===========
</TABLE>
The notes to the financial statements form an internal part thereof.
F-21
<PAGE> 84
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
ANNEX A
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED BY
OPERATING ACTIVITIES
ITEMS NOT AFFECTING CASH FLOWS:
Depreciation of fixed assets.............................. $ 70,228 $ 76,178 $ 76,272
Capital loss in respect of fixed assets................... -- 15,572 --
Company's share in net loss of subsidiary company......... -- -- 215,860
Increase (decrease) in provision for severance pay........ 92,518 (14,017) 132,484
Exchange rate differences and interest on:
Loans from shareholders................................. 3,302 14,461 12,298
Long-term loans......................................... 190,665 30,610 79,574
Convertible long-term liability......................... (870) (6,311) 1,418
-------- --------- --------
355,843 116,493 517,906
-------- --------- --------
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in trade receivables.................. 25,243 (23,421) (28,886)
Decrease (increase) in other receivables.................. (12,117) 7,952 18,211
Decrease (increase) in inventory.......................... (59,936) 23,232 126,424
Increase (decrease) in trade payable...................... (98,531) 88,012 (70,358)
Increase (decrease) in other payable...................... 303,939 (136,184) 250,815
Decrease (increase) in amounts due from subsidiary
company................................................. -- -- 23,660
Increase in liabilities to shareholder.................... 60,437 61,517 105,691
-------- --------- --------
219,035 21,108 425,557
-------- --------- --------
Net adjustment............................................ 574,878 137,601 943,463
======== ========= ========
ANNEX B
NON-CASH ITEMS
Conversion of capital note to share capital............... 200,000 325,000 350,000
======== ========= ========
</TABLE>
The notes to the financial statements form an internal part thereof.
F-22
<PAGE> 85
JOLT LIMITED
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
NOTE 1 -- GENERAL
a. The Company was incorporated as a private limited company under the
Companies' Ordinance on May 28, 1991.
b. The Company's activities consist of developing, manufacturing and
marketing high speed infrared wireless communication products.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
A. DEFINITIONS
In these financial statements:
Related party -- as defined in opinion No. 29 of the Institute of Certified
Public Accountants in Israel.
CPI -- The Consumer Price Index published by the Central Bureau of
statistics.
B. FINANCIAL STATEMENTS IN NOMINAL ISRAELI CURRENCY
The primary financial statements were prepared on the historical cost basis
in nominal New Israeli Shekels ("NIS"). Accordingly, they do not take into
account the changes in the general purchasing power of the Israeli currency as
stated in opinions of the Institute of Certified Public Accountants in Israel.
These financial statements were prepared in US dollars at the request of
the Company's shareholders.
Translation into US dollars
In accordance with Israeli law, the Company maintains its books of accounts
in New Israeli Shekels. However, since the Company operates in a US dollar
environment, the financial statements have been translated into US dollars for
the request of the Company's shareholders. The representative exchange rate as
at the date of the financial statements has been used to translate monetary
assets and liabilities, and historical rates have been used to translate
non-monetary items.
Items in the statements of income have been translated at the average rates
of exchange prevailing in the respective years, except for items related to
non-monetary balance sheet items which were translated at historical rates.
Differences in respect of translation at daily rates of exchange are not
considered material.
Translation differences are included in financing expenses.
The abovementioned translation should not be construed as representing
actual amounts in or convertible into US dollars.
Exchange rates and indices
Balances in, or linked to, foreign currencies are stated on the basis of
the exchange rates prevailing at balance sheet date.
Balances linked to the Consumer Price Index ("CPI") are included on the
basis of the appropriate index.
F-23
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
Following are details of the CPI and US dollar exchange rates:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31 DECEMBER 31 % OF CHANGE % OF CHANGE % OF CHANGE
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
CPI -- in points......... 168.53 166.3 153.1 1.3 8.62 6.99
US dollar exchange rate
$1 in NIS.............. 4.153 4.16 3.536 (0.17) 17.65 8.76
</TABLE>
Cash and cash equivalents
For the purpose of these financial statements, all highly liquid
investments with an original maturity of three months or less are considered
cash equivalents.
Allowance for doubtful accounts
The allowance for doubtful accounts includes a specific provision based on
the aging of the accounts.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined by
the "first-in, first-out" method.
Fixed assets
Fixed assets are stated at cost. Depreciation is provided using the
straight-line method in accordance with the following rates:
<TABLE>
<CAPTION>
%
----
<S> <C>
Computers and office equipment........................ 6-33
Testing equipment..................................... 15
Motor vehicles........................................ 15
</TABLE>
Leasehold improvements are amortized over the minimum period of the lease.
Maintenance and repairs are charged to operations expenses as incurred.
Investment in subsidiary company
In 1997 the investment in the subsidiary company was recorded on the equity
basis and included the intercompany account. A full consolidation was not
presented in these financial statements. In August 1998, the subsidiary,
AirOptics Inc. ceased operations. In 1997 the Company provided fully for losses
up to the level of its investment. In the opinion of management the Company is
not liable for amounts greater than the Company's investment in the subsidiary.
Sales
Sales are recognized when the product is shipped to the customer. Provision
for returns in respect of sales is made as required.
Research and development costs
The Company expenses its research and development costs as incurred.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-24
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
liabilities and disclosure of contingent assets and liabilities as at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from such estimates.
Preparations of the computer systems for year 2000
The costs required to prepare and convert the existing programs of the
Company, to be able to differentiate between years belonging to the 20th century
and years belonging to the 21st century (year 2000 compliance), are recorded as
current expense when incurred.
NOTE 3 -- CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1999 1998 1997
------- ---- -------
<S> <C> <C> <C>
In foreign currency (principally the U.S.
dollars)....................................... $48,692 $ 23 $40,907
In Shekels....................................... 1,626 738 --
------- ---- -------
50,318 761 40,907
======= ==== =======
</TABLE>
NOTE 4 -- TRADE RECEIVABLES, NET
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
DOMESTIC
Open accounts (principally linked to the US dollar)........ $ 5,115 $ 76,957 $ 45,675
Checks receivable.......................................... 32,409 -- --
-------- -------- --------
37,524 76,957 45,675
FOREIGN (principally in US dollars)........................ 128,530 122,199 129,162
-------- -------- --------
166,054 199,156 174,837
Less -- allowance for doubtful accounts.................... (5,074) (12,933) (12,035)
-------- -------- --------
160,980 186,223 162,802
======== ======== ========
</TABLE>
NOTE 5 -- OTHER RECEIVABLES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Value added tax refundable................................. $ 14,838 $ 4,711 $ 12,369
Income Tax Authorities..................................... 2,064 405 --
Prepaid expenses........................................... 1,318 987 1,210
Others..................................................... -- -- 476
-------- -------- --------
18,220 6,103 14,055
======== ======== ========
</TABLE>
NOTE 6 -- INVENTORY
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Raw materials.............................................. $119,835 $104,608 $ 97,942
Work in process............................................ 69,121 50,843 65,320
Finished goods............................................. 180,155 153,724 169,145
-------- -------- --------
369,111 309,175 332,407
======== ======== ========
</TABLE>
F-25
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
NOTE 7 -- FIXED ASSETS, NET
<TABLE>
<CAPTION>
COMPUTERS
AND OFFICE LEASEHOLD TESTING MOTOR
EQUIPMENT IMPROVEMENTS EQUIPMENT VEHICLE TOTAL
---------- ------------ --------- ------- --------
<S> <C> <C> <C> <C> <C>
COST
As at January 1, 1999...................... $184,186 $31,129 $256,968 $22,484 $494,767
Additions.................................. 2,724 -- 696 -- 3,420
Disposals.................................. -- -- -- -- --
-------- ------- -------- ------- --------
As at December 31, 1999.................... 186,910 31,129 257,664 22,484 498,187
-------- ------- -------- ------- --------
ACCUMULATED DEPRECIATION
As at January 1, 1999...................... 115,393 2,479 168,178 3,373 289,423
Additions.................................. 21,548 6,225 37,958 4,497 70,228
Disposals.................................. -- -- -- -- --
-------- ------- -------- ------- --------
As at December 31, 1999.................... 136,941 8,704 206,136 7,870 359,651
-------- ------- -------- ------- --------
NET BOOK VALUE
As at December 31, 1999.................... 49,969 22,425 51,528 14,614 138,536
======== ======= ======== ======= ========
As at December 31, 1998.................... 68,793 28,650 88,790 19,111 205,344
======== ======= ======== ======= ========
As at December 31, 1997.................... 89,217 17,592 125,776 -- 232,585
======== ======= ======== ======= ========
</TABLE>
With regards to liens see note 23C
NOTE 8 -- TRADE PAYABLES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
DOMESTIC
Open accounts...................................... $129,559 $204,565 $199,313
Checks payable..................................... 28,322 35,869 --
-------- -------- --------
157,881 240,434 199,313
FOREIGN (principally in US dollars)................ 30,913 46,891 --
-------- -------- --------
188,794 287,325 199,313
======== ======== ========
</TABLE>
NOTE 9 -- OTHER PAYABLES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Accrued salaries and related expenses.............. $459,013 $279,485 $228,195
Advances from customers............................ 105,995 86,467 164,131
Accrued expenses................................... 216,692 96,092 205,902
Others............................................. -- -- --
-------- -------- --------
781,700 462,044 598,228
======== ======== ========
</TABLE>
F-26
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
NOTE 10 -- LONG-TERM LOANS
A.
<TABLE>
<CAPTION>
INTEREST RATE % 1999 1998 1997
--------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Linked to U.S. dollar................... Libor +1.625 $ 30,804 $ 170,683 $ 277,316
Linked to the Israeli CPI............... 4.60-5.20 19,484 136,482 263,757
Unlinked................................ 18.50 1,167,280 713,356 450,651
Linked to the Israeli CPI............... 8.0 8,537 14,919 --
---------- ---------- ---------
1,226,105 1,035,440 991,724
Less: current maturities................ (522,082) (937,426) (680,956)
---------- ---------- ---------
704,023 98,014 310,768
========== ========== =========
</TABLE>
Loans in the amount of approximately $1.5 million were received from the
Industrial Development Bank of Israel Ltd. and were granted in connection with
the Company's approved enterprise program.
The loans are collateralized by fixed and floating charges (liens) over the
Company's assets (see Note 24).
In April 1998 the Company received a loan in the amount of $18,871 from H.
L. Finance Services Ltd. for the purchase of a motor vehicle. The payments of
principle interest are in 36 monthly installments. The loan is collateralized by
the motor vehicle purchased.
B. Future annual maturities
<TABLE>
<S> <C>
2000............................................. $ 522,082
2001............................................. 148,599
2002............................................. 294,287
2003............................................. 261,137
----------
1,226,105
==========
</TABLE>
NOTE 11 -- PROVISION FOR LOSSES OF SUBSIDIARY COMPANY
<TABLE>
<CAPTION>
AIROPTICS INC.
--------------
<S> <C>
Percentage of voting and equity rights...................... 100%
--------
</TABLE>
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net liabilities of subsidiary............................... $ 29,000
Intercompany account........................................ (23,660)
--------
5,340
========
</TABLE>
The intercompany account was linked to the US dollar and did not bear
interest. The subsidiary, AirOptics Inc., is incorporated in the State of
Delaware.
AirOptics Inc. ceased operations in August 1998. Accordingly the Company
has provided fully for the loss to the level of its investment.
F-27
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
NOTE 12 -- LIABILITY IN RESPECT OF SEVERANCE PAY
Under the Israeli law, the Company is required to make severance payments
to dismissed employees and employees leaving employment in certain other
circumstances, on the basis of the latest monthly salary for each year of
service.
This liability is partially funded by payments of premiums to insurance
companies under approved plans. The provision for severance pay in these
financial statements represents the Company's obligation not funded under these
approved plans.
NOTE 13 -- LONG-TERM LOANS FROM SHAREHOLDERS
<TABLE>
<CAPTION>
REPAYMENT INTEREST
DATE LINKAGE % 1999 1998 1997
--------- ----------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loan A............... -- US dollar Libor+1.75 $ 53,000 $ 53,000 $ 78,354
Loan B............... -- Israeli CPI 7 -- -- 53,186
Loan C............... -- US dollar 9 -- -- 43,758
Loan D............... -- US dollar -- -- 10,000 --
Loan E............... -- US dollar 12 172,000 158,698 --
-------- -------- --------
225,000 221,698 175,298
======== ======== ========
</TABLE>
Subsequent to balance sheet date, loans A and E were converted to share
capital.
NOTE 14 -- CONVERTIBLE DEFERRED LIABILITY AND DEFERRED LIABILITY
These amounts are in respect of deferred compensation due to an employee
who is a controlling shareholder.
In accordance with an agreement dated March 23, 1998 the aforementioned
employee agreed to waive 60% of all past monies due to him in respect of his
employment in respect of issuance of shares. Subsequent to the balance sheet
date the aforementioned employee was issued shares in respect of this liability.
NOTE 15 -- CONVERTIBLE LONG-TERM LIABILITY TO SHAREHOLDERS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Convertible long-term loan
(see A below)............................................ $ -- $ 43,094 $ --
Convertible long-term loan
(see B below)............................................ -- 150,000 50,000
Convertible capital notes
(see C below)............................................ -- 23,493 341,992
-------- -------- --------
-- 216,587 391,992
======== ======== ========
</TABLE>
A. The loan is linked to the Israeli Consumer Price Index, bears interest
at 7% and is due on June 30, 1999. The loan is convertible into share
capital of the Company. The loan is presented as a long-term convertible
liability as result of the decision to convert it to share capital. In
1997 the loan was presented as long-term loans from shareholders. See
Note 13.
Subsequent to the balance sheet date, the loan was converted to share
capital and shares were issued in respect thereof.
F-28
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
Subsequent to the balance sheet date, the loan was converted to share
capital and shares were issued in respect thereof.
B. The loan is linked to the US dollar and bears no interest. The loan is
convertible into share capital of the Company. In 1999, the shareholder
and the company signed an irrevocable agreement to convert the entire
loan to share capital.
C. The capital notes are linked to the US dollar and bear interest at
0% -- 7%. The notes were partially converted to share capital in 1998.
The balance was repaid during 1999.
D. On January 15, 1998, the shareholder and the Company signed an
irrevocable agreement to convert an amount of NIS 275,000 capital notes
to share capital.
Subsequent to the balance sheet date, the loan was converted to share
capital and shares were issued in respect thereof.
NOTE 16 -- SHARE CAPITAL
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
ISSUED AND ISSUED AND ISSUED AND
AUTHORIZED PAID PAID PAID
---------- ---------- ---------- ----------
NUMBER NUMBER NUMBER NUMBER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ordinary shares of NIS 1 each................... 50,000 41,075 41,075 41,075
Series A convertible preferred shares of NIS 1
each.......................................... 20,000 8,352 8,352 8,352
------ ------ ------ ------
70,000 49,427 49,427 49,427
====== ====== ====== ======
</TABLE>
The preferred shares have preference upon liquidation of the company and
they are convertible into ordinary shares at any time.
NOTE 17 -- SALES, NET
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
FOREIGN................................................ $1,260,191 $ 916,640 $ 974,526
DOMESTIC............................................... 211,919 365,778 151,716
---------- ---------- ----------
$1,472,110 $1,282,418 $1,126,242
========== ========== ==========
</TABLE>
NOTE 18 -- COST OF SALES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Materials and related expenses............................. $350,297 $337,039 $385,613
Payroll and related expenses, net.......................... 149,868 129,722 134,710
Royalties to the Chief Scientist........................... (3,531) 40,850 33,787
Depreciation............................................... 37,958 38,399 38,328
Other expenses............................................. 19,822 9,454 7,595
Subcontractors............................................. 3,629 -- --
Changes in inventories, net................................ (59,936) 23,232 126,424
-------- -------- --------
$498,107 $578,696 $726,457
======== ======== ========
</TABLE>
F-29
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
NOTE 19 -- RESEARCH AND DEVELOPMENT COSTS
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Payroll and related expenses, net.......................... $152,779 $132,789 $148,448
Research and development projects expenses................. 15,693 32,132 11,243
Chief Scientist's participation............................ -- -- --
Patents expenses........................................... 8,132 7,487 8,177
-------- -------- --------
176,604 172,408 167,868
======== ======== ========
</TABLE>
NOTE 20 -- MARKETING
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Payroll and related expenses, net.......................... $115,323 $167,636 $171,950
Advertising, exhibitions and related expenses.............. 43,207 19,067 44,344
Motor vehicle maintenance expenses......................... 4,061 9,964 14,720
Communications expenses.................................... 16,582 31,578 42,360
Foreign travels............................................ 13,623 31,542 40,245
Shipments abroad expenses.................................. 18,300 14,265 11,749
Commissions and other royalties expenses................... 13,743 58,958 --
Professional services...................................... 46,641 39,571 --
Other...................................................... 992 3,177 1,947
-------- -------- --------
272,472 375,758 327,315
======== ======== ========
</TABLE>
NOTE 21 -- GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Payroll and related expenses, net.......................... $497,104 $300,687 $484,385
Bad and doubtful debts..................................... (1,632) 2,951 14,190
Rent and maintenance expenses.............................. 93,002 84,943 105,093
Office expenses............................................ 18,474 21,895 19,852
Foreign travels expenses................................... 9,492 8,628 10,810
Communications expenses.................................... 7,516 10,452 11,601
Professional services...................................... 125,590 131,007 112,255
Motor vehicle maintenance expenses......................... -- -- --
Depreciation............................................... 32,270 37,779 37,944
Other...................................................... 12,674 (1,678) 32,147
-------- -------- --------
794,490 596,664 828,277
======== ======== ========
</TABLE>
NOTE 22 -- FINANCING (EXPENSES) INCOME, NET
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Translation differences.................................. $ (23,312) $117,436 $ (7,056)
Bank fees and interest expenses.......................... (13,130) (15,194) (13,949)
Expenses in respect of long-term liabilities............. (229,246) (54,409) (100,634)
--------- -------- ---------
(265,688) 47,833 (121,639)
========= ======== =========
</TABLE>
F-30
<PAGE> 93
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
NOTE 23 -- TAXES ON INCOME AND APPROVED ENTERPRISE BENEFITS
A. The Company has been granted "approved enterprise" status under the Law
for the Encouragement of Capital Investments -- 1959 and was entitled
to loans guaranteed by the State of Israel in respect of approved fixed
assets and other investments up to an amount of $1,500,000 linked to
various indices.
As an "approved enterprise" the Company is eligible for a ten year tax
holiday commencing in the first year the Company has taxable income
(after deduction of tax loss carry forwards) subject to certain time
restrictions. Entitlement to the benefits is dependent upon compliance
with the conditions of the letter of approval. The benefits period has
not yet commenced.
The approval was given in respect of investments totaling $2,141,000 to
be made over a period of three years.
The letter of approval is dated December 17, 1992, and relates to
investments commencing in January 1, 1992, the date on which the
Company submitted its application for approval.
The aforementioned investment is to be financed 30% by investment in
share capital and 70% by loans which 75% are guaranteed by the State
(See Note 10).
As at December 31, 1999, the Company has received government guaranteed
loans in the amount of approximately $1 million.
Loans received in respect of fixed asset purchases are repayable
quarterly over a five year period commencing two years after receipt of
the loan. Loans received in respect of other investments are repayable
quarterly over a two year period commencing three years after receipt
of the loan. The final letter of approval has not yet been received.
B. Future tax benefits have not been recorded as management considers
their realization uncertain in the foreseeable future.
C. The Company has accumulated tax losses of approximately $5 million.
D. The Company has final assessments until 1993.
E. The Income Tax Law (Adjustments for inflation) -- 5745-1985, effective
since 1985, provides for a method of measuring operating results for
tax purposes on a real (inflation adjusted) basis. The various
adjustments required by the said law are intended to bring about
taxation on the basis of real income. However, adjustment of the normal
historical profit in accordance with the terms of said law is not
always identical with the inflation adjustments prescribed for
financial reporting purposes by opinions of the Institute of ICPAI.
NOTE 24 -- LIENS, COMMITMENTS AND CONTINGENT LIABILITIES
A. In connection with the Government Chief Scientist's partial funding of
research and development, in prior years the Company is committed to pay
royalties to the Chief Scientist of 3% on sales of certain products, up
to the maximum of the amount funded (linked to CPI).
As of balance sheet date, the Company had received grants from the Chief
Scientist in the amount of approximately $250,000.
In respect of royalties payable an estimated provision in the amount of
approximately $67,432 has been made.
B. In March 1998 the Company entered into a contract to lease premises in
Har Hotzvim, Jerusalem for a period of 5 years with an option to extend
the contract for an additional two periods, each of
F-31
<PAGE> 94
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 (CONTINUED)
24 months. The rental charge in respect of the first 5 years amounts to
approximately $7,900 per month, for the first additional period $8,700
per month and for the second additional period $9,600 per month. If the
Company cancels the contract during the period from the commencement of
the fourth year of the contract compensation of $60,000 is due.
C. The Company registered a fixed and floating charge on all its machinery
and equipment, share capital and goodwill and a floating charge over all
its current assets in favor of the Industrial Development Bank of
Israel, Ltd., in connection with the Company's approved enterprise
program. In addition, the Company registered a fixed and floating charge
on its negotiable instruments, securities, notes and checks in favor of
the United Mizrahi Bank Ltd.
D. Subsequent to the balance sheet date, a claim in the amount of
approximately $19 million (NIS 75.6 million), was filed against the
Company and other parties by previous potential investors, "Walden and
Others", at the Tel Aviv District Court. According to the Company's
Legal Counsel, as of September 27, 2000, the details of the claim are
being studied and the Company is preparing its defense. In the opinion
of Company's Management, based on the opinion of its legal counsel, it
is not possible at this stage to assess the chances of the outcome of
the claim.
E. Subsequent to the balance sheet date the Chief Executive Officer of the
Company ceased employment. The Company reached an agreement with the
Officer in respect of amounts due to him. All amounts have been fully
provided for in the financial statements.
NOTE 25 -- RELATED PARTIES
Balances and transactions with related parties are as follows:
A. BALANCES WITH RELATED PARTIES
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Other payable.............................................. $105,909 $ 7,660 $ (3,346)
-------- -------- --------
Long-term loans from shareholders.......................... 53,000 63,000 78,353
-------- -------- --------
Convertible liability to shareholder....................... 227,645 100,325 63,415
-------- -------- --------
Liability to shareholder................................... -- 66,883 42,276
-------- -------- --------
Convertible long-term debt to shareholders................. -- 66,586 341,992
-------- -------- --------
</TABLE>
B. TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<S> <C> <C> <C>
Sales*..................................................... -- 41,519 26,098
-------- -------- --------
Purchases*................................................. -- 185,888 239,193
-------- -------- --------
Finance expenses........................................... 9,678 17,055 45,627
-------- -------- --------
General and administrative expenses........................ 359,377 271,665 407,202
-------- -------- --------
Marketing expenses......................................... 48,146 32,808 28,860
-------- -------- --------
</TABLE>
---------------
* The transactions were carried out in the normal course of business.
NOTE 26 -- SUBSEQUENT EVENTS
Subsequent to the balance sheet date the company was purchased in a stock
swap transaction by MRV Communication Inc, a public company, in the USA, traded
on the NASDAQ.
F-32
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AstroTerra Corporation:
We have audited the accompanying balance sheets of AstroTerra Corporation
(a California corporation) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AstroTerra Corporation as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
ARTHUR ANDERSEN LLP
San Diego, California
August 24, 2000
F-33
<PAGE> 96
ASTROTERRA CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------ -----------
1998 1999 2000
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 699,567 $ 1,192,250 $ 113,141
Accounts receivable.................................. 429,266 559,114 805,394
Inventories.......................................... 227,588 582,027 1,416,410
Prepaid expenses and other........................... 10,137 64,391 28,641
Refundable and deferred income taxes................. 37,048 85,567 107,067
---------- ----------- -----------
Total current assets......................... 1,403,606 2,483,349 2,470,653
Property and equipment, net............................ 57,000 300,994 453,875
Other assets........................................... 1,000 56,478 51,879
---------- ----------- -----------
Total assets................................. $1,461,606 $ 2,840,821 $ 2,976,407
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 21,012 $ 221,847 $ 234,266
Accrued expenses..................................... 286,000 323,287 300,909
Income taxes payable................................. 71,981 -- --
Deferred revenues.................................... 17,239 87,376 298,898
Line of credit -- -- 136,000
Non-revolving credit facility........................ -- -- 182,000
---------- ----------- -----------
Total current liabilities.................... 396,232 632,510 1,152,073
---------- ----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, 20,000,000 shares authorized;
10,000,000, 10,526,316 and 10,526,316 issued and
outstanding, respectively......................... 647,994 1,689,636 1,689,636
Additional paid-in capital........................... 318,948 3,387,986 10,851,535
Notes receivable from stockholders................... (30,000) (4,020) --
Deferred compensation................................ -- (1,602,517) (6,678,402)
Retained earnings (accumulated deficit).............. 128,432 (1,262,774) (4,038,435)
---------- ----------- -----------
Total stockholders' equity................... 1,065,374 2,208,311 1,824,334
---------- ----------- -----------
Total liabilities and stockholders' equity... $1,461,606 $ 2,840,821 $ 2,976,407
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-34
<PAGE> 97
ASTROTERRA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products...................... $ 410,481 $ 842,901 $ 1,684,825 $ 630,047 $ 1,733,257
Contracts..................... 2,441,665 3,284,976 2,966,051 1,331,444 818,737
---------- ---------- ----------- ----------- -----------
2,852,146 4,127,877 4,650,876 1,961,491 2,551,994
---------- ---------- ----------- ----------- -----------
Cost of Revenues:
Products...................... 375,749 562,913 1,100,516 423,342 1,317,680
Contracts..................... 1,905,020 2,758,922 3,053,468 1,281,209 1,075,924
---------- ---------- ----------- ----------- -----------
2,280,769 3,321,835 4,153,984 1,704,551 2,393,604
---------- ---------- ----------- ----------- -----------
Gross margin.......... 571,377 806,042 496,892 256,940 158,390
Operating Expenses:
Selling, general and
administrative............. 222,633 808,450 1,698,027 540,871 1,971,382
Research and development...... 246,884 108,429 164,566 17,876 968,524
---------- ---------- ----------- ----------- -----------
469,517 916,879 1,862,593 558,747 2,939,906
Income (loss) from
operations.......... 101,860 (110,837) (1,365,701) (301,807) (2,781,516)
Interest Income................. 534 430 5,835 8,246 12,766
Interest Expense................ (1,462) (3,247) (259) (152) (6,911)
---------- ---------- ----------- ----------- -----------
Income (loss) before
provision for income
taxes............... 100,932 (113,654) (1,360,125) (293,713) (2,775,661)
Provision for Income Taxes...... 36,000 98,056 31,081 89,590 --
---------- ---------- ----------- ----------- -----------
Net Income (loss)............... $ 64,932 $ (211,710) $(1,391,206) $ (383,303) $(2,775,661)
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 98
ASTROTERRA CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES RETAINED
COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS TOTAL
----------------------- PAID-IN FROM DEFERRED (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) EQUITY
---------- ---------- ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996... 7,500,000 $ 76,000 $ -- $ -- $ -- $ 275,210 $ 351,210
Net income................. -- -- -- -- -- 64,932 64,932
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1997... 7,500,000 76,000 -- -- -- 340,142 416,142
Repurchases of common stock
from employees........... (500,000) (5,000) -- -- -- -- (5,000)
Sales of common stock to
employees................ 2,300,000 76,994 -- (30,000) -- -- 46,994
Sale of common stock to
investor................. 700,000 500,000 -- -- -- -- 500,000
Deferred compensation
expense for stock issued
to employees............. -- -- 318,948 -- -- -- 318,948
Net loss................... -- -- -- -- -- (211,710) (211,710)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1998... 10,000,000 647,994 318,948 (30,000) -- 128,432 1,065,374
Repurchase of common stock
from employees........... (982,046) (76,205) -- 30,000 -- -- (46,205)
Sales of common stock to
employees................ 982,046 117,847 -- (4,020) -- -- 113,827
Sale of common stock to
investor................. 526,316 1,000,000 -- -- -- -- 1,000,000
Deferred compensation for
stock issued to
employees................ -- -- 3,069,038 -- (3,069,038) -- --
Amortization of deferred
compensation............. -- -- -- -- 1,466,521 -- 1,466,521
Net loss................... -- -- -- -- -- (1,391,206) (1,391,206)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, December 31, 1999... 10,526,316 1,689,636 3,387,986 (4,020) (1,602,517) (1,262,774) 2,208,311
The following information
is unaudited:
Repurchase of common stock
from employees........... -- -- -- 4,020 -- -- 4,020
Deferred compensation for
stock issued to
employees................ -- -- 7,463,549 -- (7,463,549) -- --
Amortization of deferred
compensation............. -- -- -- -- 2,387,664 -- 2,387,664
Net loss................... -- -- -- -- -- (2,775,661) (2,775,661)
---------- ---------- ----------- -------- ----------- ----------- -----------
Balance, June 30, 2000
(unaudited)................ 10,526,316 $1,689,636 $10,851,535 $ -- $(6,678,402) $(4,038,435) $ 1,824,334
========== ========== =========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE> 99
ASTROTERRA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1997 1998 1999 1999 2000
--------- --------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 64,932 $(211,710) $(1,391,206) $(383,303) $(2,775,661)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization..................... 47,825 45,929 83,284 42,619 129,506
Deferred income taxes............................. -- (3,925) (21,521) (22,245) --
Non-cash employee stock
compensation.................................... -- 318,948 1,466,521 463,725 2,387,664
Changes in assets and
liabilities:
Accounts receivable............................... 302,165 (301,519) (129,848) (400,872) (246,280)
Inventories....................................... (373,023) 145,435 (354,439) (255,393) (834,383)
Prepaid expenses and other........................ (519) (9,576) (54,254) 9,716 35,750
Refundable income taxes........................... -- -- (26,998) -- (21,500)
Other assets...................................... -- (1,000) (55,478) (17,115) (9,545)
Accounts payable.................................. 23,346 (48,478) 200,835 112,395 12,419
Accrued expenses.................................. 72,661 48,643 37,287 (124,477) (22,378)
Income taxes payable.............................. (16,601) 69,981 (71,981) 43,834 --
Deferred revenues................................. -- 17,239 70,137 (10,548) 211,521
--------- --------- ----------- --------- -----------
Net cash
provided by (used in)
operating activities........................ 120,786 69,967 (247,661) (541,664) (1,132,887)
--------- --------- ----------- --------- -----------
Net cash used in investing activities:
Purchases of property and equipment................. (79,269) (39,219) (327,278) (60,615) (268,242)
--------- --------- ----------- --------- -----------
Cash flows from financing activities:
Net (repayments) borrowings
on line of credit................................. 127,292 (127,292) -- -- 136,000
Borrowings on non-revolving credit
facility.......................................... -- -- -- -- 182,000
Proceeds from issuances of
common stock...................................... -- 546,994 1,113,827 -- --
Payments for repurchases of
common stock...................................... -- (5,000) (46,205) (46,205) 4,020
--------- --------- ----------- --------- -----------
Net cash provided by (used in)
financing activities........................ 127,292 414,702 1,067,622 (46,205) 322,020
--------- --------- ----------- --------- -----------
Net increase (decrease) in cash
and cash equivalents................................ 168,809 445,450 492,683 (648,484) (1,079,109)
Cash and cash equivalents,
beginning of year................................... 85,308 254,117 699,567 699,567 1,192,250
--------- --------- ----------- --------- -----------
Cash and cash equivalents, end
of year............................................. $ 254,117 $ 699,567 $ 1,192,250 $ 51,083 $ 113,141
========= ========= =========== ========= ===========
Non-cash activities:
Common stock issued for notes receivable from
stockholders...................................... $ -- $ 30,000 $ 4,020 $ -- $ --
========= ========= =========== ========= ===========
Repurchase of common stock from employee in exchange
for notes receivable.............................. $ -- $ -- $ 30,000 $ 30,000 $ --
========= ========= =========== ========= ===========
Deferred compensation for stock issued to
employees......................................... $ -- $ -- $ 3,069,038 $ -- $ 7,463,549
========= ========= =========== ========= ===========
Supplemental cash flow disclosures:
Cash paid during the year for:
Interest.......................................... $ 1,462 $ 3,247 $ 259 $ 152 $ 6,911
========= ========= =========== ========= ===========
Income taxes...................................... $ 35,298 $ 32,000 $ 83,525 $ 60,742 $ 16,000
========= ========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 100
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
1. LINE OF BUSINESS AND SALE OF COMPANY
AstroTerra Corporation (the Company) develops and manufactures free-space
optical laser communication systems to connect data and telecommunications
networks. The Company's optical communication systems are practical high-speed
wireless alternatives to fiber optic cable and microwave systems. The Company
also performs contract research and development for the U.S. government and
commercial customers.
During July 2000, the Company entered into a stock purchase agreement with
MRV Communications, Inc. (MRV), whereby MRV acquired the entire share capital of
the Company in an exchange for shares of MRV common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Interim Financial Statements
The accompanying consolidated financial statements for the interim periods
included herein are unaudited. Certain information and note disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. The results for the interim periods presented are not
necessarily indicative of results to be expected for a full year.
Revenue Recognition
Product revenues are recognized upon shipment and transfer of title and
risk of loss to the customer.
Research and development contract revenues are recognized using the
percentage-of-completion method on a cost-to-cost basis. Contract costs include
all direct material and labor costs, and those indirect costs related to
contract performance. If a loss is projected on a contract, the entire estimated
loss is charged to operations during the period that the loss becomes
determinable.
Payments received from customers in advance of shipment of products or
performance of contract services are deferred and recognized upon completion of
the related obligations.
Research and Development Costs
Research and development costs are expensed as incurred.
F-38
<PAGE> 101
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with
original maturities of three months or less and consist primarily of money
market accounts.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method and includes materials, direct labor
and manufacturing overhead.
Property and Equipment
Property and equipment are stated at cost and depreciated using an
accelerated method over the estimated useful lives of the assets, ranging from 3
to 5 years. Maintenance and repairs are charged to expense as incurred, and the
costs of additions and betterments that increase the useful lives of the related
assets are capitalized. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is reflected in operations.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the sum of future undiscounted cash flows expected to result
from the use of the asset and its eventual disposition is less than the carrying
amount of the asset, an impairment loss is recognized. In the opinion of
management, there have been no events or changes in circumstances that indicate
impairment of the Company's long-lived assets.
Income Taxes
Deferred income tax assets or liabilities are recognized based on the
temporary differences between financial statement and income tax bases of assets
and liabilities using enacted statutory tax rates in effect of the years in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Fair Value of Financial Instruments
The carrying value of certain of the Company's financial instruments,
including accounts receivable, accounts payable and accrued expenses
approximates fair value due to their short term nature.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." The Company has elected, as permitted under SFAS No.
123, to continue to account for stock-based employee compensation using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25 and to disclose pro forma net income (loss) as if stock-based employee
compensation were computed using the fair value method under SFAS No. 123.
Transactions with other than employees, in which goods or services are the
consideration received for the issuance of equity instruments, are accounted for
on a fair value basis under SFAS No. 123. For the years ended December 31, 1997,
1998 and 1999 and for the six months ended June 30, 1999, the differences
between pro forma net income (loss) in accordance with SFAS No. 123 and net
income
F-39
<PAGE> 102
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
(loss) as reported in the accompanying statements of operations was not
material. There were no additional shares issued to employees during the six
months ended June 30, 2000.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. SFAS No. 133 was amended by SFAS No. 137, which defers the effective
date to all fiscal quarters of fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial position or results of operations as the Company has not
been engaged in the use of derivative instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101, as amended, must be adopted no later than the fourth
quarter of the fiscal year beginning after December 15, 1999. The Company does
not anticipate the adoption of SAB No. 101 to have a material impact on the
Company's financial position or results of operations.
3. COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------------
1998 1999 2000
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Billed receivables................................... $366,730 $415,905 $652,193
Costs incurred in excess of billings on uncompleted
contracts.......................................... 62,536 143,209 153,201
-------- -------- --------
$429,266 $559,114 $805,394
======== ======== ========
</TABLE>
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -----------
1998 1999 2000
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... $ 27,774 $204,173 $ 438,275
Work in process..................................... 102,965 236,938 657,612
Finished goods...................................... 96,849 140,916 320,523
-------- -------- ----------
$227,588 $582,027 $1,416,410
======== ======== ==========
</TABLE>
F-40
<PAGE> 103
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment............................ $ 230,415 $ 384,964 $ 621,934
Computers and software............................. 21,780 121,169 121,169
Furniture and fixtures............................. 4,387 18,646 49,918
--------- --------- ---------
256,582 524,779 793,021
Less: accumulated depreciation..................... (199,582) (223,785) (339,146)
--------- --------- ---------
$ 57,000 $ 300,994 $ 453,875
========= ========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
totaled $47,825, $45,929 and $83,284 respectively. Depreciation expense for the
six months ended June 30, 1999 and 2000 totaled $42,619 and $115,361
respectively.
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1998 1999 2000
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Compensation and related taxes..................... $ 286,000 $ 253,012 $ 257,318
Warranty reserve................................... -- 33,500 33,500
Other.............................................. -- 36,775 10,091
--------- --------- ---------
$ 286,000 $ 323,287 $ 300,909
========= ========= =========
</TABLE>
4. INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $25,227 $ 79,341 $ 39,628
State................................................ 10,773 22,640 12,974
------- -------- --------
36,000 101,981 52,602
------- -------- --------
Deferred:
Federal................................................ -- (3,336) (18,293)
State................................................ -- (589) (3,228)
------- -------- --------
-- (3,925) (21,521)
------- -------- --------
Provision for income taxes............................. $36,000 $ 98,056 $ 31,081
======= ======== ========
</TABLE>
Realization of deferred income taxes is dependent on generating sufficient
taxable income during the periods in which temporary differences will reverse.
Although realization is not assured, management believes it is more likely than
not that the deferred income taxes will be realized. The amount of deferred
income taxes considered realizable, however, could be adjusted in the near term
if estimates of future taxable income during the reversal periods are revised.
F-41
<PAGE> 104
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
------- ---------
<S> <C> <C>
Accrued expenses............................................ $34,326 $ 58,569
Other....................................................... 2,722 --
------- ---------
Deferred income taxes....................................... $37,048 $ 58,569
======= =========
</TABLE>
Provision for income taxes reconciles to the expected provision (benefit)
for income taxes based on the federal statutory tax rate as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Expected federal income taxes......................... $36,987 $(41,313) $(462,443)
State income taxes, net of federal benefit............ 6,527 (7,291) (81,608)
Employee stock compensation........................... -- 127,579 586,608
Other................................................. (7,514) 19,081 (11,476)
------- -------- ---------
Provision for income taxes............................ $36,000 $ 98,056 $ 31,081
======= ======== =========
</TABLE>
5. CREDIT FACILITIES
In May 1998, the Company obtained a $300,000 revolving line of credit with
a bank, bearing interest at the bank's prime rate plus 1.5% (10.0% at December
31, 1999), collateralized by substantially all assets of the Company and
personally guaranteed by three majority stockholders of the Company. No amounts
were outstanding under the line of credit at December 31, 1999 and 1998. The
line of credit was terminated by the Company during February 2000.
In February 2000, the Company entered into a $1,300,000 credit agreement
with a bank, consisting of a $1,000,000 revolving line of credit and a $300,000
non-revolving credit facility for equipment purchases. The credit agreement
bears interest at variable rates based on either the banks' reference rate plus
0.5% or LIBOR plus 2.75%, as elected by borrower, is secured by substantially
all assets of the Company, and is subject to certain financial and non-financial
covenants. As of June 30, 2000, the Company had $136,000 outstanding under the
revolving line of credit and $182,000 outstanding under the non-revolving credit
facility for equipment purchases. The credit agreement is collateralized by the
assets of the Company. The credit agreement contains certain covenants, which
among other things requires the Company to maintain a minimum effective tangible
net worth, certain financial ratios and no consecutive losses. As of June 30,
2000, the Company was in default with certain financial covenants; therefore,
the components of the credit agreement are classified as short-term. The credit
agreement was terminated by the Company during August 2000 and all amounts
outstanding were repaid.
6. STOCKHOLDERS' EQUITY
Capital Structure
The Company is authorized to issue up to 20,000,000 shares of common stock,
no par value. Common shares are voting shares with equal dividend participation,
when and if declared, and equal rights in the event of liquidation.
F-42
<PAGE> 105
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Employee Stock Purchase Plans
In August 1997, the Company implemented a book value employee stock
purchase plan (the Plan) and determined that 2,000,000 shares would be made
available for purchases. The Plan allowed each full time employee with at least
one year of service to purchase up to 2,000 shares of common stock at book value
per share, as determined by the board of directors. Additionally, the board of
directors determined that an additional 500,000 shares of common stock would be
made available for purchases by key employees on a discretionary basis.
Under the Plan, the Company retains the option to repurchase shares sold to
employees upon their termination. If an employee leaves the Company within a
year after purchasing shares, the Company's repurchase price per share is the
original issuance price. If an employee leaves the Company more than one year
after purchasing shares, the Company's repurchase price per share is the greater
of the original issuance price or current book value.
Discretionary shares sold to key employees carry terms determined by the
board of directors, and generally allow for employee vesting (elimination of the
Company repurchase option) over a period of four years. Further, upon a
substantial change in control of the Company or employee termination without
cause, the Company repurchase option terminates.
Stock issued to employees under the above plans are accounted for using the
variable method of accounting in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," Emerging Issues Task
Force Release (EITF) No. 87-23, "Book Value Stock Purchase Plans" and EITF No.
88-6 "Book Value Stock Plans in an Initial Public Offering." Accordingly,
outstanding shares under the book value purchase plan are marked to book value
per share during each reporting period. Outstanding shares issued to employees
on a discretionary basis with vesting provisions (elimination of the Company's
repurchase option) are marked to fair value during each reporting period. At the
point when restrictions related to employee shares lapse, any unamortized
deferred compensation expenses are recognized in operations.
Compensation expense for shares issued to employees during fiscal 1998,
1999 and the six months ended June 30, 1999 and 2000 totaled $318,948,
$1,466,521, $463,725 and $2,387,664 respectively, and is included in the
accompanying statements of operations. As of December 31, 1999 and June 30,
2000, deferred compensation included as a component of stockholders' equity
totals $1,602,517 and $6,678,402, respectively, and is expected to be amortized
in full during fiscal year 2000 as a result of the acquisition of the Company by
MRV (see Note 1).
F-43
<PAGE> 106
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
Stock based compensation expense has been included in the accompanying
statement of operations as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -------------------------
1998 1999 1999 2000
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Allocation of compensation expense:
Cost of revenues:
Products................................... $ 3,844 $ 233,707 $ 73,900 $ 380,502
Contracts................................ 40,144 574,645 188,865 518,904
Operating expenses:
Selling, general and administrative........ 273,382 627,199 198,325 1,021,154
Research and development................... 1,578 30,970 2,635 467,104
-------- ---------- -------- ----------
Total stock-based compensation expense.......... $318,948 $1,466,521 $463,725 $2,387,664
======== ========== ======== ==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its facilities and certain equipment under operating
leases expiring at various dates through April 2002. The Company has the right
to terminate the lease with at least 120 days prior written notice and has an
option to renew the lease for an additional two years at a rate increase of ten
percent. Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$56,300, $81,089 and $127,746, respectively. Rent expense for the six months
ended June 30, 1999 and 2000 was $58,314 and $137,398, respectively.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31:
------------
<S> <C>
2000........................................................ $ 256,120
2001........................................................ 246,352
2002........................................................ 36,063
---------
$ 538,535
=========
</TABLE>
Legal Matters
In the ordinary course of business, the Company is subject to claims and,
from time to time, is named in various legal proceedings. In the opinion of
management, the amount of ultimate liability, if any, with respect to any of
these matters will not have a material adverse affect on the financial position
or results of operations of the Company.
8. RETIREMENT SAVINGS PLAN
The Company maintains a 401(k) retirement savings plan that covers
substantially all of its employees. Eligible employees may contribute to the
plan subject to certain Internal Revenue Service limitations. Company
contributions to the plan are discretionary. During fiscal 1997, 1998 and 1999,
the Company contributed $61,723, $82,823 and $77,907, respectively. For the six
months ended June 30, 1999 and 2000, the Company contributed $22,020 and $67,323
respectively.
F-44
<PAGE> 107
ASTROTERRA CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997 AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND
1999
9. CONCENTRATIONS OF RISK
During fiscal 1997, 1998 and 1999, the Company had 7, 7 and 6 contracts,
respectively, with government agencies that accounted for 98%, 99% and 69% of
contract revenues, respectively. Additionally, the Company had a contract with a
commercial customer that accounted for 31% of contract revenues in fiscal 1999.
During both of the six month periods ended June 30, 1999 and 2000, the Company
had 5 contracts with government agencies that accounted for 73% and 100% of
contract revenues, respectively. Additionally, the Company had a commercial
customer that accounted for 27% of contract revenues for the six months ended
June 30, 1999.
During fiscal 1997, 1998 and 1999, 1, 3 and 1 customers represented 37%,
34% and 10% of product revenues, respectively. During the six months ended June
30, 1999 and 2000, 3 and 1 customers represented 39% and 58% of product
revenues, respectively.
Government agency contracts accounted for 43% and 63% of accounts receivable at
December 31, 1998 and 1999, respectively, and 31% of accounts receivable at June
30, 2000. One commercial customer accounted for 15% of accounts receivable at
December 31, 1998, and another commercial customer accounted for 48% of accounts
receivable at June 30, 2000.
10. SEGMENT REPORTING
The Company operates in one industry segment, which includes developing,
manufacturing and selling free-space optical laser communications systems to
connect data and telecommunication networks. The Company derives revenues in
this segment from both product shipments and research and development contracts.
The accompanying statements of operations separately reflect the revenues and
cost of revenues for products and research and development contracts.
F-45
<PAGE> 108
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On May 1, 2000, MRV Communications, Inc. (MRV) completed the acquisition of
all the outstanding capital stock of Jolt Limited (Jolt), an Israel corporation,
in exchange for approximately 1.9 million shares of MRV's common stock and stock
options to purchase common stock. On July 12, 2000, MRV acquired all of the
outstanding capital stock of AstroTerra Corporation (AstroTerra), a California
corporation, in exchange for approximately 2.4 million shares of MRV's common
stock and options to purchase common stock. The outstanding capital stock of
Jolt and AstroTerra, purchased by MRV, has been or will be contributed to
Optical Access as of the date of each acquisition as part of the Master
Separation Agreements. As such, Optical Access' management has prepared the
following unaudited pro forma condensed consolidated financial information to
give effect to these acquisitions. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations for the years ended December 31, 1999 and
for the six months ended June 30, 2000 give effect to the Jolt and AstroTerra
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 the acquisition of AstroTerra 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 Optical
Access, Jolt and AstroTerra. The acquisition of Jolt and AstroTerra were
accounted for using the purchase method. Optical Access' 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 Optical Access, Jolt and AstroTerra. The
unaudited pro forma condensed consolidated financial information is provided for
informational purposes only and does not purport to represent what Optical
Access' financial position or results of operations would actually have been had
these acquisitions occurred on such dates or to project Optical Access' results
of operation or financial position for any future period.
F-46
<PAGE> 109
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
PRO FORMA
OPTICAL ACCESS ASTROTERRA ADJUSTMENTS TOTAL
-------------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 316 $ 113 $ -- $ 429
Accounts receivable, net.................. 2,031 805 -- 2,836
Inventories............................... 1,672 1,416 -- 3,088
Deferred income taxes..................... -- 107 -- 107
Due from related parties.................. 1,681 -- -- 1,681
Prepaids and other current assets......... 594 29 -- 623
------- ------ -------- --------
Total current assets.............. 6,294 2,470 -- 8,764
------- ------ -------- --------
Property and Equipment, net................. 1,747 454 -- 2,201
Other Assets:
Goodwill.................................. 31,653 -- 108,462(1) 140,115
Other assets.............................. -- 52 -- 52
------- ------ -------- --------
Total assets...................... $39,694 $2,976 $108,462 $151,132
======= ====== ======== ========
Current liabilities:
Current portion of long-term debt......... $ 135 $ 318 $ -- $ 453
Accounts payable.......................... 3,080 234 -- 3,314
Accrued liabilities....................... 1,220 301 -- 1,521
Deferred revenue.......................... -- 299 -- 299
------- ------ -------- --------
Total current liabilities......... 4,435 1,152 -- 5,587
------- ------ -------- --------
Long-term debt, net of current portion...... 756 -- -- 756
Other long-term liabilities................. 266 -- -- 266
Parent company investment/Stockholders'
equity.................................... 34,237 1,824 (1,824)(1)
160,286(1)
(50,000)(1) 144,523
------- ------ -------- --------
34,237 1,824 108,462 144,523
------- ------ -------- --------
Total liabilities and parent
company
investment...................... $39,694 $2,976 $108,462 $151,132
======= ====== ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information
F-47
<PAGE> 110
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
JOLT THROUGH PRO FORMA
OPTICAL ACCESS MAY 1, 2000 ASTROTERRA ADJUSTMENTS TOTAL
-------------- ------------ ---------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................. $ 7,918 $ 416 $ 2,552 $ -- $ 10,886
Cost of sales......................... 4,887 172 2,394 3,461(3) 10,914
----------- ----- ------- -------- --------
Gross profit........................ 3,031 244 158 (3,461) (28)
----------- ----- ------- -------- --------
Operating costs and expenses:
Selling, general and administrative
expenses......................... 3,122 347 1,971 8,046(3) 13,486
Research and development............ 5,735 91 969 11,369(3) 18,164
Amortization of goodwill and other
intangibles...................... 1,091 -- -- 13,030(2) 14,121
----------- ----- ------- -------- --------
9,948 438 2,940 32,445 45,771
----------- ----- ------- -------- --------
Operating loss........................ (6,917) (194) (2,782) (35,906) (45,799)
----------- ----- ------- -------- --------
Other income (expense), net........... (15) (170) 6 -- (179)
----------- ----- ------- -------- --------
Loss before provision for income
taxes............................... (6,932) (364) (2,776) (35,906) (45,978)
----------- ----- ------- -------- --------
Provision for income taxes............ -- -- -- -- --
----------- ----- ------- -------- --------
Net loss.............................. $ (6,932) $(364) $(2,776) $(35,906) $(45,978)
=========== ===== ======= ======== ========
Basic and diluted net loss per
share............................... $ $
=========== ========
Weighted average shares outstanding
used in basic and diluted per shares
calculation......................... --(6)
=========== ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
F-48
<PAGE> 111
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
OPTICAL PRO FORMA
ACCESS JOLT ASTROTERRA ADJUSTMENTS TOTAL
-------- ------ ---------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 8,473 $1,472 $ 4,651 $ -- $ 14,596
Cost of sales............................. 4,555 498 4,154 6,400(5) 15,607
-------- ------ ------- -------- --------
Gross profit......................... 3,918 974 497 (6,400) (1,011)
-------- ------ ------- -------- --------
Operating costs and expenses:
Selling, general and administrative
expenses............................. 1,688 1,067 1,698 13,776(5) 18,229
Research and development................ 4,543 177 165 22,874(5) 27,759
Amortization of goodwill and other
intangibles.......................... -- -- -- 28,241(4) 28,241
-------- ------ ------- -------- --------
6,231 1,244 1,863 64,891 74,229
-------- ------ ------- -------- --------
Operating loss............................ (2,313) (270) (1,366) (71,291) (75,240)
-------- ------ ------- -------- --------
Other income (expense), net............... -- (140) 6 -- (134)
-------- ------ ------- -------- --------
Loss before provision for income taxes.... (2,313) (410) (1,360) (71,291) (75,374)
-------- ------ ------- -------- --------
Provision for income taxes................ -- -- 31 -- 31
-------- ------ ------- -------- --------
Net loss.................................. $ (2,313) $ (410) $(1,391) $(71,291) $(75,405)
======== ====== ======= ======== ========
Basic and diluted net loss per share...... $ $
======== ========
Weighted average shares outstanding used
in basic and diluted per shares
calculation............................. --(6)
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial information.
F-49
<PAGE> 112
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to Optical Access' historical
financial statements and those of Jolt and AstroTerra to arrive at the pro forma
financial information:
(1) The purchase price of AstroTerra and the estimated allocation of the
purchase price is summarized as follows (in thousands):
<TABLE>
<S> <C>
Common stock...................................... $109,286
Stock options..................................... 50,000
Other costs....................................... 1,000
--------
$160,286
========
Allocation of purchase price --
Net assets........................................ $ 1,824
Deferred stock compensation....................... 50,000
Goodwill and other intangibles.................... 108,462
--------
$160,286
========
</TABLE>
In connection with the acquisition of AstroTerra, MRV exchanged
approximately 1.6 million shares of common stock and approximately 783,000
options to purchase common stock for approximately all of the outstanding
capital stock of AstroTerra. The issuance price of the common stock was
approximately $69 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 $50.0 million, and vest over a
four-year period.
(2) The pro forma adjustment is to record the amortization of goodwill related
to the acquisitions of Jolt and AstroTerra as if these transactions occurred
on January 1, 2000. Goodwill recorded in relation to these acquisitions was
approximately $141.2 million and is being amortizated on a straight-line
basis over 5 years or approximately $14.1 million for the six month period
ended June 30, 2000. As the acquisition of Jolt occurred on May 1, 2000,
$1.1 million of goodwill relating to this acquisition has been previously
included in the consolidated statements of operations of Optical Access for
the six months ended June 30, 2000.
(3) The pro forma adjustment is to record deferred stock compensation related to
the acquisitions of Jolt and AstroTerra as if the transactions occurred on
January 1, 2000. Deferred stock compensation recorded in relation to these
acquisitions was approximately $75.0 million and is being amortized over 4
years or approximately $27.0 million for the six month period ended June 30,
2000. As the acquisition of Jolt occurred on May 1, 2000, $4.1 million of
deferred compensation relating to this acquisition has been previously
included in the consolidated statements of operations of Optical Access for
the six months ended June 30, 2000.
(4) The pro forma adjustment is to record the amortization of goodwill related
to the acquisitions of Jolt and AstroTerra as if the transactions occurred
on January 1, 1999. Goodwill recorded in relation to these acquisitions was
approximately $141.2 million and is being amortizated on a straight-line
basis over 5 years or approximately $28.2 million for the year ended
December 31, 1999.
(5) The pro forma adjustment is to record deferred stock compensation related to
the acquisitions of Jolt and AstroTerra as if the transactions occurred on
January 1, 1999. Deferred stock compensation recorded in relation to these
acquisitions was approximately $75.0 million and is being amortized over 4
years or approximately $43.1 million for the year ended December 31, 1999.
(6) 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 Jolt and
AstroTerra, no additional shares were exchanged with MRV. Therefore, no
dilutive effect has been provided for these acquisitions.
F-50
<PAGE> 113
[INSIDE BACK COVER]
[ARTWORK TO BE INSERTED]
[LOGO]
<PAGE> 114
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........................................ 28,512
NASD filing fee............................................. 11,300
Nasdaq National Market listing fee.......................... *
Printing and engraving costs................................ *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Directors and Officers Insurance............................ *
Transfer Agent and Registrar fees........................... *
Miscellaneous expenses...................................... *
--------
Total............................................. *
========
</TABLE>
---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The General Corporation Law of Delaware provides for indemnification by a
corporation of its directors and officers. Our certificate of incorporation
provides for the indemnification of directors and officers to the fullest extent
permissible under Delaware law. Our bylaws provide for the indemnification of
officers, directors and third parties acting on behalf of Optical Access, Inc.,
if, as required under Delaware law, 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 such person
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 Optical
Access, Inc. against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with its incorporation and organization, in 2000,
the Registrant issued 1,000 shares of common stock to MRV Communications, Inc.
for an aggregate of $1,000. In 2000, Registrant effected a
-for-one stock split of its outstanding common stock. The Registrant
believes that the initial issuances was exempt under Section 4(2) of the
Securities Act as a transaction not involving any public offering. Registrant
believes that the stock split was either not a "sale" of securities pursuant to
the Securities Act or exempt under Section 3(a)(9) of the Securities Act.
II-1
<PAGE> 115
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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Master Separation 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 Optical Access 2000 Stock Option Plan.*
10.2 Form of Optical Access Employee Stock Purchase Plan.*
10.3 Form of Indemnification Agreement.*
10.4 Stock Purchase Agreement by and between MRV Communications,
Inc. ("MRV") and the shareholders of Jolt, Ltd., dated April
4, 2000.*
10.5 Stock Purchase Agreement by and between MRV and the
shareholders of AstroTerra Corporation dated July 7, 2000
(incorporated by reference to Exhibit 2.1(a) of the Form 8-K
of MRV filed with the SEC on July 27, 2000).
21.1 List of Registrant's Subsidiaries.*
23.1 Consent of Arthur Andersen LLP, Los Angeles.
23.2 Consent of Arthur Andersen LLP, San Diego.
23.3 Consent of Somekh Chaikin.
23.4 Consent of Kirkpatrick & Lockhart LLP (contained in Exhibit
5).
24.1 Power of attorney (included on signature page of
Registration Statement).
</TABLE>
---------------
* To be filed by Amendment.
(b) FINANCIAL STATEMENT SCHEDULES
All such schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.
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.
II-2
<PAGE> 116
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-3
<PAGE> 117
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 the City of Chatsworth, State of
California, on the 6th day of October, 2000.
OPTICAL ACCESS, INC.
By: /s/ SHLOMO MARGALIT
------------------------------------
Chairman of the Board
POWER OF ATTORNEY
We, the undersigned officers and directors of Optical Access, Inc. do
hereby constitute and appoint Guy Avidan, or Shlomo Margalit, or either of them,
our true and lawful attorneys and agents, to do any and all acts and things in
our names in the capacities indicated below, which said attorneys and agents, or
either of them, may deem necessary or advisable to enable said corporation to
comply with the Securities Act of 1933, as amended, and any rules, regulations,
and requirements of the Securities and Exchange Commission, in connection with
this Registration Statement, including specifically, but without limitation,
power and authority to sign for us or any of us in our names and in the
capacities indicated below, any and all amendments (including any post-effective
amendment) to this Registration Statement, or any related registration statement
that is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended; and we do hereby ratify and confirm all that the said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
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
--------- ----- ----
<S> <C> <C>
/s/ SHLOMO MARGALIT Chairman of the Board
------------------------------------------ October 6, 2000
/s/ GUY AVIDAN Chief Executive Officer and Director
------------------------------------------ (Principal Executive Officer)
October 6, 2000
/s/ SHAY GONEN Chief Financial Officer
------------------------------------------ (Principal Financial and Accounting
Officer)
October 6, 2000
/s/ NOAM LOTAN Director
------------------------------------------ October 6, 2000
/s/ LIOR BREGMAN Director
------------------------------------------ October 6, 2000
/s/ MICHAEL MCDONOUGH Director
------------------------------------------ October 6, 2000
</TABLE>
II-4
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.*
2.1 Master Separation 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 Optical Access 2000 Stock Option Plan.*
10.2 Form of Optical Access Employee Stock Purchase Plan.*
10.3 Form of Indemnification Agreement.*
10.4 Stock Purchase Agreement by and between MRV Communications,
Inc. ("MRV") and the shareholders of Jolt, Ltd., dated April
14, 2000.*
10.5 Stock Purchase Agreement by and between MRV and the
shareholders of AstroTerra Corporation dated July 7, 2000
(incorporated by reference to Exhibit 2.1(a) of the Form 8-K
of MRV filed with the SEC on July 27, 2000).
21.1 List of Registrant's Subsidiaries.*
23.1 Consent of Arthur Andersen LLP, Los Angeles.
23.2 Consent of Arthur Andersen LLP, San Diego.
23.3 Consent of Somekh Chaikin.
23.4 Consent of Kirkpatrick & Lockhart LLP (contained in Exhibit
5).
24.1 Power of attorney (included on signature page of
Registration Statement).
</TABLE>
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* To be filed by Amendment.
