<PAGE> 1
As filed with the Securities and Exchange Commission on December 10, 1996
Registration No. 333- _________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MRV COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its charter)
<TABLE>
<S> <C> <C>
Delaware 3577/3674 06-1340090
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
8917 Fullbright Avenue
Chatsworth, California 91311
(818) 773-9044
(818) 773-0906 (Fax)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
___________________________________
NOAM LOTAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
8917 FULLBRIGHT AVENUE
CHATSWORTH, CALIFORNIA 91311
(818) 773-9044
(818) 773-0906 (FAX)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
___________________________________
Copies to:
Mark A. Klein, Esq.
Freshman, Marantz, Orlanski,
Cooper & Klein
9100 Wilshire Boulevard, 8-East
Beverly Hills, CA 90212-3480
Telephone: (310) 273-1870
Facsimile: (310) 274-8357
Approximate date of commencement of proposed sale to public: From time
to time 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. [X ]
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 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 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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Proposed Maximum
Proposed Aggregate Amount of
Title of Each Class of Amount to Be Maximum Price Offering Price Registration
Securities to Be Registered Registered per Unit (1) (1) Fee (2)
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<S> <C> <C> <C> <C>
Common Stock, $0.0034 par value ... 5,160,999 shares(2)(3) $22.00 $113,541,978 $34,406.66
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</TABLE>
(Footnotes to table on next page)
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 thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus
contained herein constitutes a combined Prospectus relating to this Registration
Statement and Registration Statement No. 333-00210.
<PAGE> 2
Footnotes to table on outside front cover page of registration
statement:
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c).
(2) A filing fee of $4,172.52 was previously paid in connection with
Registration Statement (File no. 333-00210) registering a total of
3,332,782 shares of Common Stock (1,666,391 before giving effect to a
2-for-1 forward stock split effected July 29, 1996). 2,725,708 shares
of Common Stock are being carried forward from such earlier
Registration Statement (the "Earlier Registration Statement").
(3) As in the case of the shares being carried forward from the Earlier
Registration Statement, all of the shares being registered
by this Registration Statement are being registered for resale and
include: (i) 2,283,304 shares of Common Stock that were outstanding
at December 5, 1996; (ii) 3,021,280 shares that are issuable upon
exercise of warrants outstanding at December 5, 1996, including the
maximum number of shares of Common Stock issuable in connection with
warrants (the "Debenture Warrants") issued in conjunction with the
issuance of the Company's $30,000,000 principal amount of 5%
convertible subordinated debentures due August 6, 1999 (the
"Debentures"); and (iii) the maximum number of shares of Common Stock
required to be issued upon conversion of the Debentures and the
exercise of the Debenture Warrants. Also registered hereunder are an
indeterminate number of shares that may be issuable upon exercise of
warrants and/or conversion of the Debentures by reason of adjustments
in the exercise or conversion prices, respectively. In connection
with Debenture Warrants and Debentures, the number of shares of
registrant's Common Stock issued and issuable shall not exceed
3,182,123, of which 600,000 shares are reserved, first, for issuance
upon the exercise of the Debenture Warrants and second for issuance
upon conversion of the Debentures, if and to the extent the Warrants
expire without exercise.
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law.
Subject to Completion, dated December 10, 1996
PROSPECTUS
7,886,707 SHARES
MRV COMMUNICATIONS, INC.
COMMON STOCK
All shares of common stock, $0.0034 par value (the "Common Stock") of
MRV Communications, Inc. ("MRV" or the "Company") offered hereby (the "Shares")
are being offered by certain stockholders and other security holders of the
Company named herein (the "Selling Security Holders"). Of the 7,886,707 Shares
being offered for resale: (i) 2,283,304 shares were outstanding at December 5,
1996 and are being offered for the accounts of the holders (the "Selling
Stockholders"); (ii) 3,021,280 shares (the "Warrant Shares") are issuable upon
exercise of certain warrants outstanding at December 5, 1996 (the "Warrants")
and are being offered for the accounts of the holders of the Warrants (the
"Sellers of Warrant Shares"); (iii) and up to 2,582,123 shares (the "Debenture
Shares") are issuable upon conversion of the outstanding balance of $30,000,000
principal amount of 5% convertible subordinated debentures due August 6, 1999
(the "Debentures") and are being offered for the accounts of holders of the
Debentures (the "Sellers of Debenture Shares"). Included in the Warrant Shares
are 146,910 shares of Common Stock (the "Representative's Warrant Shares") being
offered by Hampshire Securities Corporation ("Hampshire Securities") and certain
of its principals. Hampshire Securities was the representative of the
underwriters in the Company's public offering in January 1995 and the Company
issued Hampshire Securities warrants (the "Representative's Warrants") to
purchase the Representative's Warrant Shares at $5.60 per share. Information
concerning the Selling Security Holders may change from time to time and will be
set forth in Supplements to this Prospectus. The Company will not receive any
proceeds from the sale of Shares offered by the Selling Security Holders.
At December 5, 1996, there were $17,825,000 principal amount of
Debentures outstanding. Through December 5, 1996, $12,175,000 principal amount
of Debentures had been converted into 785,385 shares of Common Stock at an
average conversion rate of $15.50 per share. The Debentures bear interest at 5%
per annum payable semi-annually on February 7 and August 7. The Debentures are
convertible into Common Stock at any time at the option of the holders (and will
automatically convert into Common Stock at maturity if not earlier converted or
redeemed at a conversion rate (the "Conversion Rate") equal to the quotient
determined by dividing the principal plus accrued but unpaid interest at the
conversion date by the "Conversion Date Market Price," as defined in the
Debenture. The Conversion Date Market Price is a specified percentage of the
prevailing market price of the Company's Common Stock on the conversion date,
which is defined in the Debentures as the average of the closing bid price of a
share of the Company's Stock on the Nasdaq National Market for the five trading
days immediately preceding the conversion date. The Conversion Date Market Price
is 85.5% of the applicable market price if the Debentures are converted during
the 30 days beginning December 6, 1996. The Conversion Date Market Price
decreases by an additional 1% each 30 days after January 4, 1997 until it
reaches a floor of 77.5%. Provided that the Registration Statement of which this
Prospectus is a part (the "Registration Statement") remains effective, the
Company can force conversion of $8,050,000 principal amount of Debentures (the
"First Series of Debentures") at the applicable Conversion Rate from and after
60 business days of the effective date of the Registration Statement (the
"Effective Date") upon at least 30 business days' prior notice and the Company
can force conversion of the remaining $9,775,000 principal amount of Debentures
at the applicable Conversion Rate from and after the business day following the
conversion of the First Series of Debentures in their entirety upon at least 30
business days' prior notice. In conjunction with the issuance of the Debentures,
the Company issued warrants (the "Debenture Warrants"), exercisable until August
6, 1999 at a weighted average exercise price of $26.67 per share, to purchase an
aggregate of 600,000 shares of Common Stock. The shares underlying the Debenture
Warrants are also included in the Warrant Shares covered by this Prospectus.
The distribution of the Shares by the Selling Security Holders may be
effected from time to time in one or more transactions for their own accounts
(which may include block transactions) on the Nasdaq National Market or any
exchange on which the Common Stock may then be listed, in negotiated
transactions, through the writing of options on shares (whether such options
are listed on an options exchange or otherwise), or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Security Holders may effect such
transactions by selling Shares to or through broker-dealers, including
broker-dealers who may act as underwriters, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
(Cover page of Prospectus continued on next page)
<PAGE> 4
(Cover page of Prospectus continued)
Selling Security Holders and/or the purchasers of Shares for whom such
broker-dealers may act as agent or to whom they sell as principal or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Security Holders may also sell Common Stock
pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") or pledge Shares as collateral for margin accounts, and
such Shares could be resold pursuant to the terms of such accounts.
The aggregate proceeds to the Selling Security Holders from the sale of
the Shares will be the purchase price of such shares less discounts,
concessions or commissions, if any. The Company will pay all other expenses of
this offering which are estimated at $125,000.
The Selling Security Holders and any brokers, dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act, in which event any discounts, concessions or
commissions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Shares may be deemed to be underwriting
compensation under the Securities Act.
The Company intends that the Registration Statement will remain
effective until August 6, 1999 or such earlier date as of which such
Registration Statement is no longer required for the transfer of the subject
securities.
The Common Stock is quoted on the Nasdaq National Market under the
symbol "MRVC." On December __, 1996, the closing sale price for the Common
Stock was $____ per share. See "Price Range of Common Stock."
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 5 OF THIS PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER __, 1996.
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AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith, filed
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at the offices of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N. W., Washington, D.C. 20549, and at the
Commission's regional offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New
York, New York 10048. Copies of such materials can also be obtained by written
request to the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N. W., Washington, D.C. 20549, at prescribed rates. The
Company's Common Stock is quoted on The Nasdaq National Market. Reports and
other information concerning the Company may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N. W., Washington,
D.C. 20006.
The Company has filed a Registration Statement under the Securities
Act with the Commission with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, omits certain
of the information contained in the Registration Statement and the exhibits
thereto on file with the Commission pursuant to the Securities Act and the
rules and regulations of the Commission. Statements contained in this
Prospectus such as the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement, including the exhibits
thereto, may be inspected without charge at the Commission's principal office
at 450 Fifth Street, N. W., Judiciary Plaza, Washington, D. C. 20549, and
copies of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission. The Commission also
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are hereby incorporated herein by reference:
1. The Company's Annual Report on Form 10-K the year ended December
31, 1995 filed with the Commission on April 1, 1996, as amended by its Annual
Report on Form 10-K/A filed on June 18, 1996 ;
2. The Company's Reports on Form 10-Q filed with the Commission on May
16, 1996, August 14, 1996 and November 14, 1996, and the Company's Reports on
Form 8-K and 8-K/A filed with the Commission on October 10, 1996 and
December 9, 1996, respectively.
3. The description of the Company's Common Stock offered for resale
hereby contained in the Company's Registration Statement on Form 8-A filed with
the Commission on June 8, 1992, as amended by its Form 8-A/A filed with the
Commission on February 24, 1994, including any amendment or report filed for
the purpose of updating such description.
All reports and other documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of this offering shall be deemed
to be incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement incorporated herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. The Company hereby undertakes to provide without charge
to each person, including any beneficial owner, to whom a copy of this
Prospectus has been delivered, upon written or oral request of such person, a
copy of any or all of the foregoing documents incorporated herein by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be submitted in writing to the Chief Financial Officer of the Company,
at the Company's principal executive offices at 8917 Fullbright Avenue,
Chatsworth, California 91311 or by fax at (818) 773-0906 or by telephone at
(818) 773-9044.
2
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This Prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors discussed in "Risk
Factors" and elsewhere in this Prospectus.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this Prospectus.
THE COMPANY
MRV is a leading manufacturer and marketer of high speed network
switching and fiber optic transmission systems which enhance the performance of
existing data- and telecommunications networks. The Company designs,
manufactures and sells two groups of products: computer networking products,
primarily Ethernet LAN switches, hubs and related equipment and fiber optic
components for the transmission of voice, video and data across enterprise,
telecommunications and cable TV networks. The Company's advanced networking
solutions greatly enhance the functionality of LANs by reducing network
congestion while allowing end users to preserve their legacy investments in
pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company's fiber optic
components incorporate proprietary technology which delivers high performance
under demanding environmental conditions.
The market for LAN switches is expected to grow rapidly from $1.6
billion in 1995 to $6.9 billion by 1999, a compound annual growth rate of 44%,
according to estimates by Dataquest, a market research firm. The worldwide
fiber optics market, including cables, connectors and transceivers, was $6.1
billion in 1995 and is estimated to grow to $12.3 billion in 1999, a compound
annual growth rate of 19%, according to KMI Corporation, a market research
firm. MRV has focused on developing technologies in the most rapidly growing
segments of these markets: Ethernet switches and the access networks and PCS
infrastructure segment of the fiber optic market. The rapid growth of these
segments is mainly due to increased usage and higher bandwidth needs whose
growth is stimulated by: (i) an increased number of users connected to
networks, (ii) the expansion of the Internet, (iii) higher bandwidth
applications such as multimedia, (iv) lower costs as a result of advances in
technology and (v) the expansion and upgrade of access networks to provide
advanced communication services such as video conferencing, high- speed
Internet access and interactive TV.
MRV has experienced positive sequential growth over the past 26
quarters with double digit growth in fourteen of the past fifteen quarters.
The Company has positioned itself in an effort to take advantage of continuing
growth opportunities by: (i) targeting high potential growth markets in the
communications arena, (ii) bringing state of the art technology early to
market, (iii) capitalizing on its manufacturing expertise and proprietary
technologies, (iv) facilitating growth by expanding its worldwide distribution
system and (v) selectively targeting acquisitions of complementary businesses.
The Company's ability to bring state of the art technology early to
market has been a critical component of its success. MRV was among the first
companies to introduce a Fast Ethernet switch which increased the transmission
speed of traditional Ethernet LANs from 10 Mbps to 100 Mbps. In June 1996, MRV
introduced MegaSwitch II which the Company believes was the first dual speed
auto-select Ethernet switch with planned uplinks to ATM and Gigabit Ethernet.
In November 1996, MRV's proposal to the IEEE Gigabit Ethernet task force for a
new Gigabit technology which maximizes bandwidth utilization, doubles achievable
transmission distances and enables delay sensitive applications such as video
conferencing was accepted. MRV also recently started volume shipments of a new
bidirectional optical transmission and reception module for Fiber-to-the-Curb
applications.
MRV is rapidly expanding its marketing efforts in order to leverage
its research and development and production capabilities. The Company's world
wide sales and marketing strategy is focused on four channels of distribution:
(i) OEM sales and partnerships with major manufacturers such as Intel, Fujitsu
and UB Networks, (ii) VARs and systems integrators used to target vertical
niches, (iii) commission based manufacturers representatives and (iv) domestic
and international distributors.
3
<PAGE> 7
Recently, MRV has made a series of acquisitions that have: (i)
expanded its worldwide distribution capabilities, (ii) enhanced its research
and development efforts and (iii) broadened its product lines. In 1995, the
Company acquired the assets of Galcom Networking, Ltd. and Ace 400
Communications, Ltd. for a total of approximately $7 million. In September
1996, MRV acquired the assets of Elbit Ltd.'s Fibronics business for
approximately $23.5 million which has added strong, complementary, established
product lines, a research and development and manufacturing facility and
European, U.S. and Asian sales offices and personnel.
The Company's principal executive offices are located at 8917
Fullbright Avenue, Chatsworth, California 91311 and its telephone and fax
numbers are (818) 773-9044 and (818) 773-0906, respectively. The Company
maintains Web sites at "http://www.mrv.com" and "http://www.nbase.com."
Information contained in the Company's Web sites shall not be deemed part of
this Prospectus.
Except as otherwise noted, all share and per share data in this
Prospectus has been adjusted to reflect a 1.5-for-1 and 2-for-1 forward stock
splits of the Company's Common Stock effected on March 20, 1996 and July 29,
1996, respectively.
As used in this Prospectus, "MRV" or the "Company" refers to MRV
Communications, Inc., its predecessor and its wholly-owned consolidated
subsidiaries, except where the context otherwise indicates. Any Speed to Any
Speed Ethernet, GigaFrame GigaHub, JavaMan, NBase, MegaStack, MegaSwitch,
MegaSwitch II, MegaVision, MRV Communications and West Hills LAN System are
trademarks or trade names of the Company. Trademarks of other companies are
also used in this Prospectus and are the property of their respective owners.
4
<PAGE> 8
RISK FACTORS
An investment in the Shares involves a high degree of risk. This
Prospectus contains forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth below and elsewhere in this
Prospectus. In addition to the other information in this Prospectus, the
following factors should be carefully considered in evaluating the Company and
its business before purchasing the shares of Common Stock offered hereby.
Risks of Technological Change, Development Delays and Product Defects.
The Company is engaged in the design and development of devices for the fiber
optic communication, computer networking and telecommunications industries. As
with any new technologies, there is a substantial risk that the marketplace may
not accept the Company's new products. Market acceptance of the Company's
products will depend, in large part, upon the ability of the Company to
demonstrate performance and cost advantages and cost-effectiveness of its
products over competing products and the success of the sales efforts of the
Company and its customers. There can be no assurance that the Company will be
able to continue to market its technology successfully or that any of the
Company's current or future products will be accepted in the marketplace.
Moreover, the fiber optic communication, computer networking and
telecommunications industries are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions, any of
which could render the Company's existing products obsolete. The Company's
success will depend upon its ability to enhance existing products and to
introduce new products to meet changing customer requirements and emerging
industry standards. The Company will be required to devote continued efforts
and financial resources to develop and enhance its existing products and
conduct research to develop new products. The development of new,
technologically advanced products is a complex and uncertain process requiring
high levels of innovation, as well as the accurate anticipation of
technological and market trends. There can be no assurance that the Company
will be able to identify, develop, manufacture, market or support new or
enhanced products successfully or on a timely basis, that new Company products
will gain market acceptance or that the Company will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Furthermore, from time to time, the Company may
announce new products or product enhancements, capabilities or technologies
that have the potential to replace or shorten the life cycle of the Company's
existing product offerings and that may cause customers to defer purchasing
existing Company products or cause customers to return products to the Company.
Complex products, such as those offered by the Company, may contain
undetected software or hardware errors when first introduced or when new
versions are released. While the Company has not experienced such errors in the
past, the occurrence of such errors in the future could, and the inability to
correct such errors would, result in the delay or loss of market acceptance of
the Company's products, material warranty expense, diversion of engineering and
other resources from the Company's product development efforts and the loss of
credibility with the Company's customers, system integrators and end users, any
of which would have a material adverse effect on the Company's business,
operating results and financial condition.
Competition. The markets for fiber optic components and network
switching products are intensely competitive and subject to frequent product
introductions with improved price/performance characteristics, rapid
technological change and the continual emergence of new industry standards.
The Company competes and will compete with numerous types of competitors,
including companies which have been established for many years and have
considerably greater financial, marketing, technical, human and other
resources, as well as greater name recognition and a larger installed customer
base, than the Company. This may give such competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to the Company. In addition, many of the Company's large
competitors offer customers broader product lines which provide more
comprehensive solutions than the Company currently offers. The Company expects
that other companies will also enter markets in which the Company competes.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share. There can be no assurance that the
Company will be able to compete successfully with existing or future
competitors or that competitive pressures faced by the Company will not
materially and adversely affect the business, operating results and financial
condition of the Company.
5
<PAGE> 9
Management of Growth. The Company has grown rapidly in recent years,
with revenues increasing from $2,400,000 for the year ended December 31, 1991,
to approximately $7,400,000, $17,500,000 and $39,200,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, and $57,800,000 for the nine
months ended September 30, 1996. The Company's recent growth, both internally
and through the acquisitions it has made since January 1, 1995 (see "The
Company"), has placed a significant strain on the Company's financial and
management personnel and information systems and controls, and the Company
must implement new and enhance existing financial and management information
systems and controls and must add and train personnel to operate such systems
effectively. While the strain placed on the Company's personnel and systems
has not had a material adverse effect on the Company to date, there can be no
assurance that a delay or failure to implement new and enhance existing
systems and controls will not have such an effect in the future. The Company's
recent growth through the acquisition of the Fibronics Business discussed in
"Risks Associated with Recent Acquisition and Potential Future Acquisitions"
below and its intention to continue to pursue its growth strategy through
efforts to increase sales of existing and new products can be expected to
place even greater pressure on the Company's existing personnel and compound
the need for increased personnel, expanded information systems, and additional
financial and administrative control procedures. There can be no assurance
that the Company will be able to successfully manage expanding operations.
Risks Associated with Recent Acquisition and Potential Future
Acquisitions. On September 26, 1996, the Company completed an acquisition (the
"Fibronics Acquisition") from Elbit Ltd. ("Elbit") of certain of the assets and
selected liabilities of Elbit's wholly-owned subsidiary, Fibronics Ltd. and its
subsidiaries (collectively "Fibronics") related to Fibronics' computer
networking and telecommunications businesses (the "Fibronics Business") in
Germany, the United States, the United Kingdom, the Netherlands and Israel. The
assets acquired include Fibronics' technology in progress and existing
technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,800,000 approximately $10,500,000 of which was paid by the
delivery of Common Stock and the balance in cash. See "The Company." During the
years ended December 31, 1994 and 1995 and the nine months ended September 30,
1996, the Fibronics Business reported net revenues of $33,355,000, $35,003,000
and $19,481,000, respectively, and net income (losses) of ($11,557,000),
$79,000 and ($6,143,000), respectively. Assuming the acquisition of the
Fibronics Business had occurred on January 1, 1995, pro forma combined results
of the Company and the Fibronics Business for the year ended December 31, 1995
and the nine months ended September 30, 1996 reflect net revenues of
$82,008,000 and $77,260,000, respectively, and net income (losses) of
$1,538,000 and $(3,860,000), respectively. In connection with the Fibronics
Acquisition, the Company incurred charges of $17,795,000 and $6,974,000 for
purchased technology and restructuring, which caused the Company to incur a
net loss of $13,268,000 for the nine months ended September 30, 1996 and is
expected to result in a net loss for the year ending December 31, 1996. The
Company's ability to operate the Fibronics Business profitably will depend
upon its ability to integrate this business successfully, including (i)
integration of the products, technologies and personnel of the Fibronics
Business into the Company, (ii) management's ability to reduce operating costs
of the Fibronics Business and (iii) the continued market acceptance of the
products and technology acquired from Fibronics.
An important element of management's strategy is to review acquisition
prospects that would complement the Company's existing products, augment its
market coverage and distribution ability or enhance its technological
capabilities. While the Company has no current agreements or negotiations
underway with respect to any new acquisitions, the Company may acquire
additional businesses, products or technologies in the future. Future
acquisitions by the Company could result in charges similar to those incurred
in connection with the Fibronics Acquisition, potentially dilutive issuance of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, financial
condition and results of operations and/or the price of the Company's Common
Stock. Acquisitions entail numerous risks, including the assimilation of the
acquired operations, technologies and products, diversion of management's
attention to other business concerns, risks of entering markets in which the
Company has no or limited prior experience and potential loss of key employees
of acquired organizations. Prior to the Fibronics Acquisition, management had
only limited experience in assimilating acquired organizations. There can be no
assurance as to the ability of the Company to successfully integrate the
products, technologies or personnel of any business that might be acquired in
the future, and the failure of the Company to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
6
<PAGE> 10
International Operations. International sales have become an
increasingly important segment of the Company's operations, with the
acquisitions of Galcom and Ace in 1995 and the Fibronics Business in 1996.
Approximately 18%, 19% and 45% of the Company's net revenues for the years
ended December 1993, 1994 and 1995, respectively, and approximately 50% of the
Company's net revenues for the nine months ended September 30, 1996 were from
sales to customers in foreign countries. On a pro forma basis, including
Fibronics sales, approximately 56% of the Company's net revenues for the nine
months ended September 30, 1996 reflected sales to customers in foreign
countries. The Company has offices in, and conducts a significant portion of
its operations in and from, Israel. MRV is, therefore, directly influenced by
the political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on the Company's
operations.
Sales to foreign customers are subject to government controls and
other risks associated with international sales, including difficulties in
obtaining export licenses, fluctuations in currency exchange rates, political
instability, trade restrictions and changes in duty rates. Although the Company
has not experienced any material difficulties in this regard to date, there can
be no assurance that it will not experience any such material difficulties in
the future. The Company's sales are currently denominated in U.S. dollars and
to date its business has not been significantly affected by currency
fluctuations or inflation. However, the Company conducts business in several
different countries and thus fluctuations in currency exchange rates could
cause the Company's products to become relatively more expensive in particular
countries, leading to a reduction in sales in that country. In addition,
inflation in such countries could increase the Company's expenses. To date, the
Company has not hedged against currency exchange risks. In the future, the
Company may engage in foreign currency denominated sales or pay material
amounts of expenses in foreign currencies and, in such event, may experience
gains and losses due to currency fluctuations. The Company's operating results
could be adversely affected by such fluctuations or as a result of inflation in
particular countries where material expenses are incurred. Moreover, the
Company's operating results could also be adversely affected by seasonality of
international sales, which are typically lower in Asia in the first calendar
quarter and in Europe in the third calendar quarter. These international
factors could have a material adverse effect on future sales of the Company's
products to international end-users and, consequently, the Company's business,
operating results and financial condition.
Manufacturing and Dependence on Suppliers and Third Party
Manufacturers . The Company uses internally developed Application Specific
Integrated Circuits ("ASICs"), which provide the functionality of multiple
integrated circuits in one chip, in the manufacture of its Local Area Network
("LAN") switching products. To develop ASICs successfully, the Company must
transfer a code of instructions to a single mask from which low cost duplicates
can be made. Each iteration of a mask involves a substantial up-front cost,
which costs can adversely affect the Company's result of operations and
financial condition if errors or "bugs" occur following multiple duplication of
the masks. While the Company has not experienced material expenses to date as a
result of errors discovered in ASIC masks, because of the complexity of the
duplication process and the difficulty in detecting errors, the Company could
suffer a material adverse effect to its operating results and financial
condition if errors in developing ASICs were to occur in the future. Moreover,
the Company currently relies on a single foundry to fabricate its ASICs and
does not have a long-term supply contract with this supplier, any other ASIC
vendor or any other of its limited source vendors, purchasing all of such
components on a purchase order basis. While the Company believes it would be
able to obtain alternative sources of supply for the ASICs or other key
components, a change in ASIC or other suppliers of key components could require
a significant lead time and, therefore, could result in a delay in product
shipments. While the Company has not experienced delays in the receipt of
ASICs or other key components, any future difficulty in obtaining any of these
key components could result in delays or reductions in product shipments which,
in turn, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company outsources the assembly, test and quality control of
material, components, subassemblies and systems relative to its networking
products to third party contract manufacturers. Though there are a large number
of contract manufacturers which the Company can use for its outsourcing, it has
elected to use one vendor for a significant portion of board assembly
requirements in order to foster consistency in quality of the products. This
independent third party manufacturer also provides these services to other
companies. Risks associated with the use of independent manufacturers include
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. If the
Company's contract manufacturer fails to deliver products in the future on a
timely basis, or at all, it would be extremely difficult for the Company to
obtain adequate supplies of products from other sources in the near term.
There can be no assurance that the Company's third party manufacturer
7
<PAGE> 11
will provide adequate supplies of quality products on a timely basis, or at
all. While the Company could outsource with other vendors, a change in vendors
may require significant lead time any may result in shipment delays and
expenses. The inability to obtain such products on a timely basis, the loss of
such vendor or a change in the terms and conditions of the outsourcing would
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company relies exclusively on its own production capability for
critical semiconductor lasers and light emitting diodes ("LEDs") used in its
products. Because the Company manufactures these and other key components of
its products at its own facility and such components are not readily available
from other sources, any interruption of the Company's manufacturing process
could have a material adverse effect on the Company's operations.
Furthermore, the Company has a limited number of employees dedicated to the
operation and maintenance of its wafer fabrication equipment, the loss of any
of whom could result in the Company's inability to effectively operate and
service such equipment. Wafer fabrication is sensitive to many factors,
including variations and impurities in the raw materials, the fabrication
process, performance of the manufacturing equipment, defects in the masks used
to print circuits on the wafer and the level of contaminants in the
manufacturing environment. There can be no assurance that the Company will be
able to maintain acceptable production yields and avoid product shipment
delays. In the event adequate production yields are not achieved, resulting in
product shipment delays, the Company's business, operating results and
financial condition could be materially adversely affected.
Potential Fluctuations in Operating Results. The Company's revenue and
operating results could fluctuate substantially from quarter to quarter and
from year to year. This could result from any one or a combination of factors
such as the timing and amount of significant orders from the Company's largest
customers, the Company's success in developing, introducing and shipping
product enhancements and new products for the Company's products, the product
mix sold by the Company, adverse effects to the Company's financial statements
resulting from, or necessitated by, possible future acquisitions, new product
introductions by the Company's competitors, pricing actions by the Company or
its competitors, the timing of delivery and availability of components from
suppliers, changes in material costs and general economic conditions. Although
the Company has not had adverse fluctuations in results from continuing
operations in the past, there can be no assurance that these factors or others,
such as those discussed in "International Operations," would not cause such
fluctuations in the future. The Company's expense levels during any particular
period are based, in part, on expectations of future sales. If sales in a
particular quarter do not meet expectations, operating results could be
materially adversely affected. Further, there can be no assurance that the
Company will be able to sustain its recent rate of growth or continue
profitable operations.
Present Lack of Patent Protection; Dependence on Proprietary
Technology. The Company holds no patents and only recently has filed a patent
application with respect to certain aspects of its technology. The Company
currently relies on unpatented proprietary know-how, which may be duplicated,
and employs various methods, including confidentiality agreements with
employees, to protect its proprietary know-how. Such methods may not afford
complete protection, however, and there can be no assurance that others will
not independently develop such know-how or obtain access to it or independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In the event that protective measures are not successful,
the Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that any patents
will be issued as a result of the pending application or any future patent
applications, or, if issued, would provide the Company with meaningful
protection from competition. In addition, there can be no assurance that any
patents issued to the Company will not be challenged, invalidated or
circumvented. Since United States patent applications are maintained in secrecy
until patents issue and since the publication of inventions in technical or
patent literature tends to lag behind such inventions by several months, the
Company cannot be certain that it was the first creator of inventions covered
by pending patent applications, that it was the first to file patent
applications for such inventions or that the Company is not infringing on the
patents of others. Litigation may be necessary to enforce the Company's
patents, if issued, or other intellectual property rights, to protect the
Company's trade secrets, to determine the validity and scope of the proprietary
rights of others or to defend against claims of infringement. Such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations regardless of the final outcome of such litigation. In
the event that any of the Company's products are found to infringe on the
intellectual property rights of third parties, the Company would be required to
seek a license with respect to such patented technology, or incur substantial
costs to redesign the
8
<PAGE> 12
infringing products. There can be no assurance that any such license would be
available on terms acceptable to the Company or at all, that any of the
Company's products could be redesigned on an economical basis or at all, or
that any such redesigned products would be competitive with the products of the
Company's competitors.
Dependence on Key Personnel. The Company is substantially dependent
upon a number of key employees, including Dr. Shlomo Margalit, its Chairman of
the Board of Directors and Chief Technical Officer, Dr. Zeev Rav-Noy, its Chief
Operating Officer, and Noam Lotan, its President and Chief Executive Officer.
The loss of the services of any one or more of these officers could have a
material adverse effect on the Company. The Company has entered into
employment agreements with each officer and owns and is the beneficiary of key
man life insurance policies in the amounts of $1,000,000 each on the lives of
Drs. Margalit and Rav-Noy and Mr. Lotan. There can be no assurance that the
proceeds from these policies will be sufficient to compensate the Company in
the event of the death of any of these individuals, and the policies do not
cover the Company in the event that any of them becomes disabled or is
otherwise unable to render services to the Company.
Attraction and Retention of Qualified Personnel. The Company's ability
to develop, manufacture and market its products and its ability to compete with
its current and future competitors depends, and will depend, in large part, on
its ability to attract and retain qualified personnel. Competition for
qualified personnel in the networking and fiber optics industries is intense,
and the Company will be required to compete for such personnel with companies
having substantially greater financial and other resources than the Company. If
the Company should be unable to attract and retain qualified personnel, the
business of the Company could be materially adversely affected. There can be no
assurance that the Company will be able to attract and retain qualified
personnel.
Share Prices Have Been and May Continue to Be Highly Volatile. Over
the last several months, the market price of the Company's Common Stock has
been extremely volatile. See "Price Range of Common Stock." The market price
of the Common Stock is likely to continue to be highly volatile and could be
significantly affected by factors such as actual or anticipated fluctuations in
the Company's operating results, announcement of technological innovations or
new product introductions by the Company or its competitors, changes of
estimates of the Company's future operating results by securities analysts,
developments with respect to patents, copyrights or proprietary rights, general
market conditions and other factors. In addition, the stock market has from
time to time experienced significant price and volume fluctuations that have
particularly affected the market prices for the common stocks of technology
companies. These broad market fluctuations may adversely affect the market
price of the Company's Common Stock. In addition, it is possible that in a
future fiscal quarter, the Company's results of operations will fail to meet
the expectations of securities analysts or investors and, in such event, the
market price of the Company's Common Stock would be materially adversely
affected.
Possible Issuance of Preferred Stock; Anti-takeover Provisions. The
Company is authorized to issue up to 1,000,000 shares of Preferred Stock, par
value $.01 per share. The Preferred Stock may be issued in one or more series,
the terms of which may be determined at the time of issuance by the Board of
Directors without further action by stockholders. The terms of any such series
of preferred stock may include voting rights (including the right to vote as a
series on particular matters), preferences as to dividend, liquidation,
conversion and redemption rights and sinking fund provisions. No preferred
stock is currently outstanding, and the Company has no present plans for the
issuance thereof. The Company has agreed not to issue any shares of preferred
stock until December 7, 1997, without the prior written consent of H. J. Meyers
& Co., Inc. (the successor to Thomas James Associates, Inc. the Company's
underwriter in its initial public stock offering). The issuance of any such
preferred stock could materially adversely affect the rights of the holders of
Common Stock, and therefore, reduce the value of the Common Stock. In
particular, specific rights granted to future holders of preferred stock could
be used to restrict the Company's ability to merge with, or sell its assets to,
a third party, thereby preserving control of the Company by the present owners.
Forward-looking Statements. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements may be deemed to
include the Company's plans to develop and offer new and enhanced networking
and optical transmission products and its efforts to expand its customer base.
Such forward-looking statements may also be deemed to include the Company's
expectations concerning factors affecting the markets for its products and the
growth in those markets in general. Such forward-looking statements also may
include the Company's expectations of benefits from the acquisition of the
Fibronics Business. Actual results could differ from those projected in any
forward-looking statements
9
<PAGE> 13
for, among other things, the reasons detailed in the other sections of this
"Risk Factors" portion of the Prospectus. The forward-looking statements are
made as of the date of this Prospectus and the Company assumes no obligation to
update the forward-looking statements or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
THE COMPANY
MRV is a leading supplier of high-speed network switching systems and
fiber optic transmission components. The Company combines its expertise in
these advanced technologies to provide flexible and efficient network solutions
to customers in the computer LAN/WAN, telecommunications and cable TV markets.
As a result of the expanding usage of networked computing applications, there
is a growing need for networking equipment that improves the efficiency of
networks and increases network capacity. The Company designs and sells two
groups of products: (i) computer networking systems, including LAN switches,
and (ii) fiber optic transmission solutions for digital applications, such as
SONET, ATM, FDDI and Fast Ethernet, and analog applications, such as cable TV
and PCS.
The Company was organized in July 1988 as MRV Technologies, Inc., a
California corporation and reincorporated in Delaware in April 1992, at which
time it changed its name to MRV Communications, Inc.
On May 1, 1995, the Company acquired certain assets and the
distribution business of Galcom Networking, Ltd. ("Galcom"), a network
equipment company located in Israel. The purchase price paid by the Company was
approximately $900,000 in cash and the assumption of approximately $1,800,000
in liabilities and debt. In connection with the acquisition of assets from
Galcom, the Company issued to Galcom and certain of its employees five-year
warrants to purchase an aggregate of 300,000 shares at prices ranging from
$4.25 to $7.38 per share.
On June 29, 1995, the Company acquired certain assets and the
distribution business of Ace 400 Communications Ltd. ("Ace"), a network
equipment company also located in Israel. The purchase price paid by the
Company was approximately $4,316,000 comprised of $100,000 in cash, the
assumption of approximately $466,000 in liabilities and debt, the issuance of
approximately 570,000 shares of Common Stock valued at approximately
$3,910,000 and extended a right to Ace to sell to the Company up to $400,000 of
Ace's inventory. In connection with the acquisition of assets from Ace, the
Company issued to the trustee and an employee of Ace five-year warrants to
purchase an aggregate of 330,000 shares of Common Stock at prices ranging from
$4.57 to $4.67 per share.
The Galcom and Ace acquisitions provided the Company with experienced
personnel and technology for the Token Ring LAN, IBM Connectivity and
Multi-Platform Network Management, IBM NetView and HP OpenView markets.
Following the acquisitions, the Company consolidated these operations in Israel
with its networking operations in the U.S.
On September 26, 1996, the Company completed the Fibronics Acquisition
from Elbit, acquiring certain of the assets and selected liabilities related to
Fibronics' computer networking and telecommunications businesses in Germany,
the United States, the United Kingdom, the Netherlands and Israel. The assets
acquired include Fibronics' technology in progress and existing technology, its
marketing channels, its GigaHub family of computer networking products and
other rights. The purchase price for the Fibronics Business was approximately
$22,800,000, approximately $10,500,000 of which was paid by the delivery of
458,991 shares of Common Stock and the balance in cash. In connection with the
Common Stock delivered to Elbit as partial payment of the purchase price, the
Company has made certain guarantees to Elbit regarding the minimum proceeds
Elbit will receive upon resale of the shares. First, with respect to 184,381
shares (the "LC Shares"), the Company has guaranteed that the LC Shares can be
resold by Elbit for at least $4,230,000, plus interest at 0.67% per month from
January 1, 1997 through the date of Elbit's resale. To secure any shortfall,
the Company has delivered to Elbit pending resale of the LC Shares a letter of
credit from a major bank, expiring on March 15, 1997, in the amount of
approximately $4,300,000. Second, with respect to 274,610 shares (the
"Additional Shares"), the Company has guaranteed that the Additional Shares
can be resold by Elbit for at least $6,300,000, plus interest thereon at 0.67%
per month from January 1, 1997 through the date of Elbit's resale. To secure
any shortfall, the Company has delivered to a trustee pending resale of the
Additional Shares an additional 137,305 shares of its Common Stock. After
January 14, 1997, Elbit can, under certain circumstances, elect to cause the
Company to repurchase the Additional Shares for
10
<PAGE> 14
$6,300,000, plus interest thereon at 0.67% per month from January 1, 1997
through the date of the purchase of the shares by the Company, less any amounts
realized by Elbit from any prior resales of the Additional Shares. Elbit may
retain amounts received upon its resale of the LC Shares in excess of
$4,230,000, but must pay to the Company any difference between the amount
received upon resale of the Additional Shares and $6,300,000 (plus the accrued
interest). The Company used a portion of the proceeds it received from a
private placement of $30,000,000 principal amount of Debentures completed in
September 1996 to fund the cash portion of the purchase price of the Fibronics
Acquisition.
With the integration of the Fibronics Business, MRV believes it will
be able to enhance the development of Fast Ethernet and Gigabit Ethernet
functions through the Fibronics GigaHub family of products, to offer a broader
range of networking products and to benefit from combined distribution channels
and sales in both the United States and Europe and greater product development
capability.
USE OF PROCEEDS
The Company will not receive any proceeds from the sales of shares of
Common Stock by the Selling Security Holders. Net proceeds, if any, received
from the exercise of the Warrants will be added to working capital and used for
general corporate purposes. There can be no assurance as to whether any, or the
number of, Warrants may be exercised.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common
Stock since its inception. The Company currently intends to retain all of its
earnings, if any, for use in the operation and expansion of its business and
does not intend to pay any cash dividends to its stockholders in the
foreseeable future.
11
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Common Stock is traded in the over-the-counter market and has been
included in the Nasdaq National Market since February 28, 1994 under the symbol
"MRVC." The following table sets forth the high and low closing bid prices
quoted with respect to the Common Stock for the period from January 1, 1994 to
February 27, 1994, as reported by the Nasdaq SmallCap Market (as adjusted for
the 3-for-2 stock split effected May 20, 1996 and the 2-for-1 stock split
effected July 29, 1996) and the high and low closing prices of the Common
Stock for the periods after February 28, 1994 as reported by The Nasdaq
National Market (as adjusted for the 3-for-2 stock split effected May 20, 1996
and the 2-for-1 stock split effected July 29, 1996).
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994:
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.73 $1.42
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.21 $1.54
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.46 $2.13
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.04 $3.21
1995:
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.92 $3.59
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.46 $3.63
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.13 $4.25
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.46 $5.50
1996:
----
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.67 $8.42
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37.13 $15.63
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27.94 $15.00
Fourth Quarter (through December 5, 1996) . . . . . . . . . . . . . . . . . . $24.88 $17.00
</TABLE>
On December 5, 1996, the last sale price of the Common Stock as
reported on the Nasdaq National Market was $23.25 per share. At November 11,
1996, the Company had 219 stockholders of record, as indicated on the records
of the Company's transfer agent, who held, management believes, for
approximately 13,350 beneficial holders.
12
<PAGE> 16
SELECTED FINANCIAL DATA
The following selected statement of operations data for the three years
in the period ended December 31, 1995 and the balance sheet data as of December
31, 1994 and 1995 are derived from the financial statements and notes thereto
incorporated by reference herein audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report also incorporated by reference
herein. The selected statement of operations data for the two years in the
period ended December 31, 1992 and the balance sheet data as of December 31,
1991, 1992 and 1993 were derived from audited financial statements not included
or incorporated herein. The pro forma selected statement of operations data for
the year ended December 31, 1995 were derived from audited financial statements
of the Company, Ace, Galcom and Fibronics. The selected financial data at
September 30, 1996 and for the nine months ended September 30, 1995 and 1996
were derived from the Company's unaudited consolidated financial statements
incorporated by reference herein and, in the opinion of management, contain all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of such information. The pro forma selected data for the nine
months ended September 30, 1996 were derived from the unaudited consolidated
financial statements of the Company and Fibronics. The Company's results of
operations for the nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected in any future period or the year
ending December 31, 1996. The following data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, including
the notes thereto, incorporated by reference into this Prospectus.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Year ended December 31, Nine months ended September 30,
----------------------------------------------------------- -------------------------------
Pro forma Pro forma
1991(1) 1992 1993 1994 1995(2) 1995(3) 1995 1996 1996(3)
------ ------ ------ ------ ------- --------- ------ ------ ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net . . . . . . . . . . $2,401 $4,422 $7,426 $17,526 $39,202 $82,008 $26,162 $57,779 $77,260
Cost of goods sold . . . . . . . 1,434 2,280 3,936 10,328 22,608 46,627 15,404 33,682 44,505
Research and develop-
ment expenses . . . . . . . . . 336 589 1,103 2,144 4,044 5,146 2,662 5,787 7,666
Selling, general and
administrative expenses . . . . 397 631 1,259 2,615 6,799 26,271 4,392 8,808 20,297
------ ------ ------ ------ ------- ------- ------- ------- -------
Operating income before
non-recurring charges . . . . . 234 922 1,128 2,439 5,751 3,964 3,704 9,502 4,792
Purchased technology
in progress(2) . . . . . . . . - - - - 6,211 - 6,211 17,795 -
Restructuring costs(2) . . . . . - - - - 1,465 1,465 1,465 6,974 6,974
------ ------ ------ ------ ------- ------- ------- ------- -------
Operating income (loss) . . . . . 234 922 1,128 2,439 (1,925) 2,499 (3,952) (15,267) (2,182)
Other income (expense) . . . . . (25) (122) 198 162 654 (1,023) 526 296 1,137
------ ------ ------ ------ ------- ------- ------- ------- -------
Income (loss) before
provision for income taxes,
minority interests and
extraordinary items . . . . . . 209 800 1,326 2,601 (1,271) 1,476 (3,426) (14,971) (3,319)
Provision (credit) for
income taxes(1) 20 282 487 983 2 2,238 (579) (5,982) 424
Minority interests . . . . . . . - - - - - - - 117 117
Extraordinary item
-debt restructuring . . . . . . - 42 - - - 2,300 - - -
------ ------ ------ ------ ------- ------- ------- ------- -------
Net income (loss)(1) . . . . . . $189 $560 $839 $1,618 ($1,273) 1,538 $(2,847) $(9,106) $(3,860)
====== ====== ====== ====== ======= ======= ======= ======= =========
Net income (loss) per
share(1) . . . . . . . . . . . $0.03 $0.08 $0.07 $0.13 ($0.07) $0.08 $(0.15) $(0.47) $ (0.20)
Weighted average common
and common equivalent
shares outstanding (4) . . . . 7,256 7,636 12,050 12,568 18,378 18,378 18,716 19,312 19,312
</TABLE>
13
<PAGE> 17
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
At December 31, At
-------------------------------------------------- September 30,
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) . . . . . . . . $(160) $3,773 $3,514 $11,303 $22,019 $44,598
Total assets . . . . . . . . . . . . . . 946 6,389 7,328 16,667 33,307 85,273
Total liabilities . . . . . . . . . . . . 1,125 1,437 1,537 3,761 8,049 54,001
Long-term debt, net of
current portion . . . . . . . . . . . . 161 34 - - 271 30,306
Stockholders' equity (deficit) . . . . . (179) 4,952 5,791 12,906 25,258 30,467
</TABLE>
- -----------
(1) In 1991, the Company converted from a S to a C corporation. Net income
and net income per share during the year ended December 31, 1991
is pro forma, reflecting the income tax effects of the Company's
change from a nontaxable entity (S corporation) to a taxable entity (C
corporation) which are presented only for the year ended December 31,
1991. All other periods are presented on a historical basis.
(2) Purchased technology in progress and restructuring charges were
incurred as a result of acquisitions and were non-recurring. See Note
(3) below. Excluding the non-recurring charges, net of their tax
effects, net income would have been $4,345,000 ($0.22 per share) for
the year ended December 31, 1995 and $6,746,000 ($0.31 per share) for
the nine months ended September 30, 1996.
(3) In 1995, the Company acquired certain assets from Ace and Galcom, and
in 1996, the Company acquired the Fibronics Business. See "The
Company." The "Pro forma 1995" column shows the pro forma effect for
the year ended December 31, 1995 of such acquisitions, each accounted
for as a purchase, as though they had all occurred on January 1,
1995. The "Pro forma 1996" column shows the pro forma effect for the
nine months ended September 30, 1996 of the Fibronics Acquisition as
though it had occurred on January 1, 1995.
(4) Fully diluted earnings per share information differs from primary
earnings per share information for the year ended December 31, 1994.
The number of shares included 147,480 common share equivalents
resulting from outstanding warrants.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This Prospectus contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following and elsewhere in this
Prospectus. The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
GENERAL
Since its inception in 1988, the Company has manufactured and marketed
semiconductor optical transmission products for the fiber optics communications
industry. In 1993, the Company expanded its product line to include products
incorporating Ethernet switching technology that improved network throughput
and enhanced efficiency of LANs and introduced its first switch marketed under
the NBase trademark in the fourth quarter of 1993. During 1994, the Company
expanded commercial shipments of its LAN switching products. In 1995, the
Company augmented its networking products with the acquisitions of certain
assets of Galcom and Ace, which resulted in charges of $6,211,000 and
$1,465,000 for purchased technology in progress and restructuring,
respectively.
In September 1996, the Company completed the Fibronics Acquisition,
acquiring assets related to Fibronics' computer networking and
telecommunications businesses in Germany, the United States, the United
Kingdom, the Netherlands and Israel. The assets acquired include Fibronics'
technology in progress and existing technology, its marketing channels, its
GigaHub family of computer networking products and other rights. This
acquisition also resulted in charges in the amount $17,795,000 and $6,974,000
for purchased technology in progress and restructuring, respectively. Prior to
the Fibronics Acquisition, Elbit had curtailed Fibronics operations due to
significant losses incurred by Fibronics. As a result, Fibronics reported only
nominal net income of $72,000 during the year ended December 31, 1995 and
reported a net loss of $4,710,000 for the period from January 1, 1996 until
September 25, 1996 (the day preceding its acquisition by MRV). Due to these
factors and the significant charges and other restructuring costs incurred in
connection with the integration of the Fibronics Business with the Company's
operations, the Company believes that the pro forma results are not necessarily
indicative of consolidated results that may expected for any future period.
Net revenues from sales of networking products and semiconductor
optical transmission products were approximately 60% and 40%, respectively,
during the year ended December 31, 1995 and approximately 67% and 33%,
respectively, during the nine months ended September 30,1996.
The Company's international sales are not concentrated in any specific
country. The estimated operating profit, before non-recurring charges, from
international sales for the nine months ended September 30, 1996 and the years
ended December 31, 1995, 1994 and 1993 were $3,300,000, $2,646,000, $466,000
and $201,000, respectively. The amounts for nine months ended September 30,
1996 and the year ended December 31, 1995 are before non-recurring charges.
Other than 16% of the Company's assets in the Middle East at December 31, 1995
and 12% of the Company's assets in the European Community at September 30, 1996,
there were no significant assets located in geographic regions outside of the
U.S. for 1995 or the nine months ended September 30, 1996. In years prior to
1995, substantially all the assets were located in the U.S.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement
of operations data of the Company expressed as a percentage of revenues (except
for revenue growth rates).
15
<PAGE> 19
<TABLE>
<CAPTION>
Nine months ended
Year ended December 31, September 30,
-------------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues, net . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Revenue growth rate from prior period . 67.9 136.0 124.0 - 121.0
Cost of goods sold . . . . . . . . . . 53.0 58.9 57.7 58.8 58.3
----- ----- ----- ----- -----
Gross profit . . . . . . . . . . . . . 47.0 41.1 42.3 41.2 41.7
Operating expenses:
Research and development expenses . . 14.9 12.2 10.3 10.2 10.0
Selling, general and administrative
expenses . . . . . . . . . . . . . 17.0 14.9 17.3 16.8 15.2
----- ----- ----- ----- -----
Operating income before non-recurring
charges . . . . . . . . . . . . . . . 15.2 13.9 14.7 14.2 16.4
Purchased technology in progress . . - - 15.8 23.7 30.8
Restructuring costs . . . . . . . . . - - 3.7 5.6 12.1
----- ----- ----- ----- -----
Operating income . . . . . . . . . . . 15.2 13.9 (4.9) (15.1) 26.4
Other income (expense), net . . . . . . 2.7 0.9 1.7 2.0 0.5
----- ----- ----- ----- -----
Income (loss) before taxes . . . . . . 17.9 14.8 (3.2) 13.1 25.9
===== ===== ===== ===== =====
Pro forma financial data: (excluding
non-recurring charges):
Operating income . . . . . . . . . . - - 14.6 - 16.5
Income (loss) before taxes . . . . . - - 16.3 - 17.0
</TABLE>
Nine months ended September 30, 1996 and 1995
Revenues. Revenues for the nine months ended September 30, 1996 were
$57,779,000 compared to $26,182,000 for the nine months ended September 30,
1995, an increase of 121%. Revenues from sales of networking products and
optical transmission products were 67% and 33%, respectively, of total revenues
during the nine months ended September 30, 1996 as compared to 59% and 41%,
respectively, of total revenues during the nine months ended September 30,1995.
The changes represented increases of $23,333,000 or 151% and $8,284,000 or 77%
in revenues from networking products and optical transmission products,
respectively, for the nine months ended September 30, 1996. Total revenues
increased as a result of strong demand for fiber optic products and LAN
connectivity. Revenues from networking products increased primarily due to
sales of the MegaSwitch II product line and revenues from optical transmission
products increased primarily as a result of volume shipments, beginning in the
third quarter of 1996, of a new bidirectional optical transmission and
reception module for Fiber-to-the-Curb ("FTTC") applications and sales to the
cable TV industry. International sales accounted for approximately 50% of
revenues for the nine months ended September 30, 1996 as compared to
approximately 40% of revenues for the nine months ended September 30, 1995.
International sales, as a percentage of total revenues, increased because of
increased concentration of sales and marketing efforts overseas. While the
Company has achieved significant revenue growth in previous periods, there can
be no assurance that the Company will sustain such growth.
Gross Profit. Gross profit for the nine months ended September 30,
1996 was $24,097,000 as compared to $10,778,000 for the nine months ended
September 30, 1995. The changes represented an increase of $13,319,000 or 124%
for the nine months ended September 30, 1996. Gross profit as a percentage of
revenues increased from 41.2% for the nine months ended September 30, 1995 to
41.7% for the nine months ended September 30, 1996.
Research and Development. For the nine months ended September 30, 1996
and 1995, research and development expenses ("R&D") expenses were $5,780,000
and $2,662,000 which represented approximately 10% for both periods. The
Company continue to devote significant resources to its R&D efforts. During
these periods the Company's R&D activities were focused on expanding its family
of networking switching products and extending its fiber optic expertise into
new product areas.
Selling, General and Administrative. For the nine months ended
September 30, 1996 and 1995, selling, general and administrative ("SG&A")
expenses increased to $8,808,000 from $4,392,000. As a percentage of sales,
SG&A expenses decreased from 16.8% to 15.2% for the nine months ended September
30, 1995 and September 30, 1996, respectively. The increase in SG&A expenses
is due primarily to increased marketing expenses, including those associated
with additions to personnel. SG&A expenses decreased as a percentage of sales
in the nine months ended
16
<PAGE> 20
September 30, 1996 because increases experienced in the nine months ended
September 30, 1995 resulting from the opening of additional offices were not
incurred in 1996.
Purchased Technology in Progress and Restructuring Costs. Purchased
technology in progress for the nine months ended September 30,1995 was
$6,211,000. The purchased technology is for R&D projects in progress at the
time of acquisition of assets from Galcom and Ace. Purchased technology in
progress for the nine months ended September 30,1996 was $17,795,000. The
purchased technology in the nine months ended September 30, 1996 was for R&D
projects of Fibronics in progress at the time of the Fibronics Acquisition on
September 26, 1996. Restructuring costs during the nine months ended September
30, 1995 were $1,465,000. Restructuring costs during the nine months ended
September 30, 1996 were $6,974,000. The restructuring in 1995 was associated
with a plan adopted by the Company on June 30, 1995 calling for the merger of
new subsidiaries acquired in the Ace and Galcom acquisitions in 1995 and the
Company's LAN products division. The plan also called for the closure of some
facilities, termination of redundant employees and cancellation of
representation agreements. The restructuring in 1996 was associated with a plan
adopted by the Company on September 30, 1996 calling for the reduction of
workforce, closing of certain facilities, retraining of certain employees and
elimination of particular product lines.
Net Loss. Net loss increased from a loss of $2,847,000 during the
nine months ended September 30, 1995 to a loss of $9,106,000 for the nine
months ended September 30, 1996. The increase in net loss in 1996 was due to
the Fibronics Acquisition, which included charges for purchased technology in
progress and restructuring costs. Net income for the nine months ended
September 30, 1996 would have been $6,746,000, excluding $15,852,000 of
charges, net of tax effects, associated with the Fibronics Acquisition. Net
income for the nine months ended September 30, 1995 would have been $2,771,000,
excluding $5,618,000 of charges, net of tax effects, associated with the
acquisitions of Galcom and Ace. Excluding, these non-recurring charges, net
income increased by $3,375,000 or 144% for the nine months ended September 30,
1996.
Years Ended December 31, 1995 and 1994
Revenues. Revenues for the year ended December 31, 1995 were
$39,202,000, as compared to $17,526,000 for the year ended December 31, 1994.
Revenues from sales of networking products and optical transmission products
were 60% and 40%, respectively, of total revenues during the year ended
December 31, 1995 as compared to 36% and 64%, respectively, of total revenues
during the year ended December 31, 1994. The changes represented an increase of
$21,676,000 or 124% of total revenues and $17,144,000 or 271% and $4,532,000 or
40% in revenues from networking products and optical transmission products,
respectively, for the year ended December 31, 1995. Total revenues increased
as a result of greater marketing efforts and greater market acceptance of the
Company's products, both domestically and internationally. The sales and
marketing resources obtained in the acquisition of assets from Ace and Galcom
during the year ended December 31, 1995 also contributed additional revenues.
Revenues from networking products increased primarily due to the introduction
of new products, additional marketing and sales efforts and expansion of the
networking industry and revenues from optical transmission products increased
primarily as a result of additional sales and marketing efforts. International
sales accounted for approximately 45% of revenues for the year ended December
31, 1995 as compared to 19% of revenues for the year ended December 31, 1994.
International sales, as a percentage of total revenues, increased because of
greater marketing efforts in overseas markets and a larger number of sales
personnel in those markets obtained in the acquisition of the Galcom assets .
Gross Profit. Gross profit for the year ended December 31, 1995 was
$16,594,000 as compared to $7,198,000 for the year ended December 31, 1994,
an increase of $9,396,000 or 131% for the year ended December 31, 1995. The
increase in gross profit was primarily due to increased sales. Gross profit as
a percentage of revenues for the years ended 1994 and 1995 was 41% and 42%
respectively.
Research and Development. R&D expenses for the years ended December
31, 1994 and 1995, were $2,144,000 and $4,044,000 which represented 12% and 10%
of revenues, respectively. The percentage decrease in R&D spending was
attributable to the increased revenues. The Company intends to continue
development of its networking and fiber optic products, and to invest in the
research and development of other new products. Management believes that the
ability of the Company to develop and commercialize new products is a key
competitive factor.
Selling, General and Administrative. SG&A expenses for the year ended
December 31, 1995 increased to $6,799,000 from $2,615,000. As a percentage of
revenues, SG&A increased from 15% to 17% for the year ended
17
<PAGE> 21
December 31, 1994 and December 31, 1995, respectively. The increase in SG&A
expenses was due primarily to additional personnel and overhead costs as a
result of the acquisitions of the Galcom and Ace assets and increased marketing
and personnel costs.
Purchased Technology in Progress and Restructuring Costs. In
connection with the Company's acquisition of certain assets of Galcom and Ace,
it acquired incomplete R&D projects that will be included in its ongoing R&D
activities. For those projects that will have no alternative future use to the
Company and where technological feasibility had not yet been established, the
Company allocated $6,211,000 of the purchase price to technology in progress
and recorded the expense during the year ended December 31, 1995.
In connection with the Company's integration of the acquired companies
during the year ended December 31, 1995 the Company recorded $1,465,000 as
restructuring costs, which primarily related to the closing of several Company
facilities, a reduction of its workforce and the settlement of distribution
agreements which were terminated early.
The total purchase price, including related costs, for the Ace and
Galcom assets were approximately $4,812,000 and $2,885,000, respectively. The
value of the ongoing operations with existing sales of Ace and Galcom that were
acquired by the Company were believed by management to be inconsequential
because their sales were in rapid decline. The decline was the result of the
increasing obsolescence of the older products which were being sold. Of the
combined total purchase price, including related costs, of $7,697,000
approximately $6,211,000 was allocated to the purchased technology in process.
Subsequent to the acquisition of the in development technologies, it was
determined by the Company that these technologies would not be commercially
viable because of the preemptive success of an alternative technology that was
also in process at the Company at the time of the acquisition. The effect on
operations of the acquisitions of Galcom and Ace was that they initially
necessitated a restructuring of the Company's operations so as to integrate all
LAN product activities throughout the organization. The restructuring, which
involved workforce reductions at all levels, as well as office and plant
closures, was essentially completed according to plan during the first part of
1996. During 1995, there were no adverse effects on the Company's liquidity or
capital resources as a result of the acquisitions and the Company does not
anticipate any such effects, as a result of the acquisitions, in future
periods.
Immediately after the acquisition of the businesses, the Company
initiated a restructuring plan that called for a merger of the two operations
into one subsidiary and an assumption by the surviving entity of certain
international and U.S. operations previously managed directly by the Company.
This included, for example, sales by the subsidiary of the Company's LAN
products into some of the sale channels developed by the Company prior to the
acquisitions. Since the operating plans of the Company did not distinguish
these operations from those of the businesses acquired, it is not practicable
to quantify their impact. The product lines of the businesses acquired are
aimed at computer connecting for the IBM AS400 and mainframe environment. The
Company's LAN products are aimed at the personal computer connectivity
environment.
Net Income. Net income decreased from $1,618,000 for the year ended
December 31, 1994 to a net loss of $1,273,000 for the year ended December 31,
1995. The decrease in net income is principally due to non-recurring charges
during the year ended December 31, 1995 of $7,676,000 for the cost of purchased
technology in progress acquired in the Ace and Galcom acquisitions and costs
associated with the adoption of a restructuring plan. Excluding the
non-recurring charges, net of their tax effects, net income would have
increased to $4,345,000 for the year ended December 31, 1995. The increase of
169% over the same period in 1994 is primarily due to substantially increased
sales.
Year Ended December 31, 1994 and 1993.
Revenues. Revenues for the year ended December 31, 1994 from products
sales were $17,526,000, as compared to $7,426,000 for the year ended December
31, 1993, an increase of 136%. International sales accounted for approximately
19% of revenues for the year ended December 31, 1994 as compared to 18% of
revenues for the year ended December 31, 1993. Revenues increased primarily as
a result of greater market acceptance of the Company's products, both
domestically and internationally. New product introductions in 1994 included
Synchronous Optical Network ("SONET") transmitters, Asynchronous Transfer Mode
("ATM") transmitters, return path isolator lasers, multimode/singlemode
converters for ATM and Fiber Distributed Data Interface ("FDDI") transmission
and LAN
18
<PAGE> 22
switch products. These products contributed to the increase in sales along with
increases in the sales of existing products.
Gross Profit. Gross profit was $7,198,000 for the year ended December
31, 1994 as compared to $3,490,000 for 1993, due to increased revenues. Gross
profit as a percentage of revenues decreased from 47% in 1993 to 41% in 1994.
Gross profit as a percentage of revenues declined primarily as a result of a
change in the mix of products sold to include more items, primarily LAN
switching products, with lower gross margins.
Research and Development. R&D expenses were $2,144,000 and $1,103,000
and represented 12% and 15% respectively, of revenues for the years ended
December 31, 1994 and 1993, respectively. The 94% increase in R&D spending was
attributable to the continued development of the Company's fiber optic and
networking products, including new stand-alone LAN products as well as to costs
associated with the hiring of additional research and development personnel and
consultants.
Selling, General and Administrative. SG&A expenses increased to
$2,615,000 for the year ended December 31, 1994 from $1,259,000 for the year
ended December 31, 1993. As a percentage of revenue, SG&A decreased to 15% from
17% as the increases in sales grew at a rate faster than expenses.
Net Income. Net income increased to $1,618,000 for the year ended
December 31, 1994 compared to $839,000 for the year ended December 31, 1993.
The increase was primarily due to substantially increased revenues and
resulting operating efficiencies.
Selected Quarterly Financial Data
The following table sets forth certain selected operating data for the
quarters indicated. This information has been derived from the unaudited
consolidated financial statements of the Company which in the opinion of
management contain all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of such information. These operating results
are not necessarily indicative of results for any future period and results may
fluctuate significantly from quarter to quarter in the future.
<TABLE>
<CAPTION>
(Amounts in thousands)
1994
-------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues, net $2,759 $3,846 $4,731 $6,190
Gross profit 1,269 1,570 1,802 2,557
Operating income before
non-recurring charges 408 499 589 943
Operating income (loss) 408 499 589 943
Net income (loss) 292 349 402 575
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues, net $6,737 $8,310 $11,135 $13,020
Gross profit 2,477 3,475 4,826 5,816
Operating income before
non-recurring charges 858 1,221 1,645 2,027
Operating income (loss) 858 (6,455) 1,645 2,027
Net income (loss) 705 (4,707) 1,155 1,574
</TABLE>
19
<PAGE> 23
<TABLE>
<CAPTION>
1996
------------------------------------
1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- -----------
<S> <C> <C> <C>
Revenues, net $15,529 $19,586 $22,664
Gross profit 6,540 8,175 9,382
Operating income before
non-recurring charges 858 3,224 3,558
Operating income (loss) 858 3,224 (21,211)
Net income (loss) 1,879 2,346 (13,268)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In October 1994, the Company received proceeds of approximately
$5,497,000 from the issuance of 3,439,430 shares of Common Stock, upon exercise
of the same number of warrants that had been issued in the Company's initial
public offering of December 1992. In January 1995, MRV received net proceeds of
approximately $9,355,000 from the public offering of 2,700,000 shares of Common
Stock.
Net cash used in operating activities were $6,198,000 and $2,087,000
for the years ended December 31, 1995 and 1994, respectively. For the year
ended December 31, 1995, the funds were used for increased inventories and
receivables as a result of increased revenues. In 1995, the cash provided by
financing activities resulted primarily from the issuance of 2,700,000 shares
of Common Stock at $4.00 per share less offering costs and the issuance of
819,972 shares in connection with the purchase of assets from Ace-North Hills.
The majority of cash used in investing activities in 1995 was for the purchase
of investments and the majority of cash provided by investing activities in the
same period was from the redemption of short-term investments. For the year
ended December 31, 1994, the cash provided by financing activities were the
result of the exercise of IPO Warrants. Net cash used in investing activities
for the year ended December 31, 1995 was $5,565,000 which resulted primarily
from the restriction of the Company's cash as security against letters of
credit issued by a bank on behalf of the Company.
Net cash used in operating activities for the nine months ended
September 30, 1996 was $4,401,000 and $6,225,000 for same period in 1995. The
funds were used primarily for increased inventories and receivables as a result
of increased revenues. Net cash provided by financing activities for the nine
months ended September 30, 1995 and 1996 were $9,548,000 and $33,859,000,
respectively. Net cash used in investing activities for the nine months ended
September 30, 1995 was $4,785,000. Net cash used in investing activities for the
nine months ended September 30, 1996 was $25,274,000. Cash provided by financing
activities in 1996 was primarily from the private placement of $30,000,000
principal amount of Debentures and from proceeds from the issuance of Common
Stock. The majority of cash used for investing activities during 1996 was for
the purchase of the Fibronics Business and net purchases of investments.
Accounts receivable were $23,344,000 at September 30, 1996 as compared
to $10,780,000 at December 31, 1995. The increase in accounts receivable was
primarily attributable to the increase in international sales, which involve
longer payment terms from those that are typically applicable to domestic
sales. In addition, a significant portion of the international sales were
concentrated at the end of the third quarter due to vacation schedules in
Europe.
Inventories during the year ended December 31, 1995 and the nine
months ended September 30, 1996 have increased as a result of increased sales.
Inventories as a percentage of assets have increased because an increasing
portion of the Company's business has come from LAN products which have longer
production cycles than the Company's optical transmission products.
Royalties are payable by Galcom, Ace and Fibronics to the Office of
the Chief Scientist of Israel ("OCS") at rates of approximately 2% to 3% on
proceeds from the sale of products arising from the research and development
activities for which OCS has provided grants. The total amount of royalties may
not exceed the amount of the grants.
20
<PAGE> 24
The Company does not expect that revenues from royalty bearing products will
result in material royalty payment obligations in the future.
In September 1996, the Company completed a private placement of
$30,000,000 principal amount of Debentures. The Debentures are convertible into
Common Stock at a discount from the market price at the time of conversion. As
part of the private placement, the Company also issued to the investors
three-year warrants to purchase an aggregate of up to 600,000 shares of Common
Stock at an exercise price of $26.25 per share. See "Description of Capital
Stock - Debentures."
In September 1996, the Company completed the Fibronics Acquisition
from Elbit. The purchase price for the Fibronics Business was approximately
$22,800,000, approximately $10,500,000 of which was paid by the delivery of
458,991 shares of Common Stock and the balance in cash. The cash was provided
from a portion of the proceeds of the private placement of Debentures. The
Company has guaranteed Elbit that it will realize at least $10,500,000 plus
interest thereon at 0.67% per month from January 1, 1997 until such shares are
resold and has secured the guarantee with a letter of credit from a major bank
in the amount of $4,300,000 and by issuing to a trustee an additional 137,305
shares of Common Stock. After January 14, 1997, Elbit can, under certain
circumstances, elect to cause the Company to repurchase up to 274,610 shares
for $6,300,000, plus interest thereon at 0.67% per month from January 1, 1997
through the date of purchase. For further information concerning the terms of
the Fibronics Acquisition, see "The Company."
In November 1996, the Company completed a private placement of 200,000
shares of Common Stock to Intel Corporation ("Intel") for $4,000,000 ($20.00
per share). As part of the private placement, the Company issued to Intel
three-year warrants to purchase up to an additional 500,000 shares of Common
Stock at $20.00 per share. Of such warrants, warrants to purchase 200,000
shares of Common Stock are exercisable under certain circumstances.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation in
the United States over the past few years has not had a significant impact on
the Company's sales or operating results or on the prices of raw materials.
However, in view of the Company's recent expansion of operations in Israel
which has experienced substantial inflation, there can be no assurance that
inflation in Israel will not have a materially adverse effect on the Company's
operating results in the future.
POST-RETIREMENT BENEFITS
The Company does not provide post-retirement benefits affected by SFAS
106.
21
<PAGE> 25
BUSINESS
OVERVIEW
MRV is a leading manufacturer and marketer of high speed network
switching and fiber optic transmission systems which enhance the performance of
existing data- and telecommunications networks. The Company designs,
manufactures and sells two groups of products: computer networking products,
primarily Ethernet LAN switches, hubs and related equipment and fiber optic
components for the transmission of voice, video and data across enterprise,
telecommunications and cable TV networks. The Company's advanced networking
solutions greatly enhance the functionality of LANs by reducing network
congestion while allowing end users to preserve their legacy investments in
pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company's fiber optic
components incorporate proprietary technology which delivers high performance
under demanding environmental conditions.
The Company offers a family of network, switching and related products
that enhance LAN performance and facilitate the migration to next generation
technologies such as Fast Ethernet, Gigabit Ethernet and ATM. MRV's MegaSwitch
family of switching products range from complete switching systems to stackable
switches which upgrade performance of existing LANs by relieving congestion of
overloaded transmission speeds without requiring replacement of existing
technologies. In addition, the Company offers hubs which implement Ethernet or
Fast Ethernet segments of LANs, a network management system and a number of
other products that support network connectivity.
The Company complements its switching products with a family of
optical transmission components and modules designed for transmission over
fiber optic cable. These products enable the transmission of voice, data, and
video across fiber and are also used in optical fiber test equipment. The
Company's products include discrete components, such as laser diodes and LEDs,
and integrated components such as transmitters, receivers and transceivers.
The Company's components are used in data networks, telecommunication
transmission and access networks.
To position the Company for growth, management's strategy has been to
focus on rapidly developing markets in the communications arena, such as LAN
switching and access networks, and to concentrate on improving performance of
networks employing Ethernet protocols, thereby addressing the largest
installed base of network users. Management's strategy has also been to
emphasize development of innovative products that the Company may bring to
market early and to capitalize on MRV's manufacturing expertise and ability to
combine proprietary fiber optic transmission and advanced switching
technologies to create high-speed, cost-effective networking solutions.
INDUSTRY BACKGROUND
The global communications industry has undergone significant
transformation and growth since the mid-1980's as a result of increased demand
for communications services and applications, as well as changes in technology,
network architectures and public policy. Innovations in networking technology
have been driven by increasing base of users who rely on the computer networks
to enable multimedia software applications such as video conferencing, Internet
access, entertainment services and distributed software applications such as
E-mail. Since this expanding usage and these applications require significantly
higher network bandwidth, there is a growing need for networking equipment that
improves the efficiency and increases the capacity of networks through high
speed transmission technologies. Further, as a result of changes in
communications regulations and the adoption of common standards, enterprise
networks, such as LANs and WANs, and access networks, such as
telecommunications and cable TV, are expected to converge. The demand for high
bandwidth applications, as well as the convergence of data communications and
telecommunications, has significantly increased the requirement for networking
and fiber optic equipment.
High-speed switching systems enhance the bandwidth of LANs so that a
greater number of users can utilize more complex applications without
experiencing network congestion. Fiber optic transmission components also
enhance the functionality of enterprise and access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Market research firms forecast strong growth in both of these sectors. In
December 1995, Dataquest estimated that the market for LAN switches was
approximately $362 million in 1994 and that it will grow from $1.6 billion in
1995 to $6.9 billion in 1999, a compounded annual growth rate of 44%. In
February 1996, KMI Corporation estimated that the worldwide fiber optics
market, including cables, connectors and transceivers, was $6.1 billion in 1995
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and that it will grow to $12.3 billion by 1999, a compounded annual growth
rate of 19%. The Company believes that the growth of fiber optic components
will outpace that of the overall fiber optics industry.
LAN ENVIRONMENT
The most common LAN architecture, "shared-media" networking, cannot
effectively accommodate the market's requirements for high-speed networking.
Shared-media networks require computers to alternate communication over a
single LAN, thereby allowing a computer to send information only when other
computers are not doing so. As more computers are added to a single LAN, demand
for access to the network increases and, as a result, individual users
experience slower network response times. Most of these networks operate with
the Ethernet protocol, which is significantly less expensive than the closest
competing technology, Token Ring.
There are two fundamentally different but complementary approaches to
alleviating network congestion. The first approach, referred to as
"segmentation," reduces the number of desktops connected to a single LAN
segment, which increases the available bandwidth per user. The segmentation of
users into smaller LANs alleviates network congestion by allowing fewer users
to share a given amount of capacity. The second approach is to increase the
capacity of networks through new high-speed transmission technologies and high
bandwidth fiber optic applications. LAN switching technology is an innovation
that enables both of these solutions. A switch is a device that partitions a
network into multiple segments which enables several simultaneous
"conversations," thereby reducing the traffic on each segment while allowing
access to the entire network. A switch also allows connection with different
speeds, thereby facilitating faster backbones and migration to faster
technologies.
Enhanced LAN Performance through Segmentation and Switching. LAN
switching systems have emerged as the preferred method for segmenting networks
because these systems are implemented more easily, efficiently and
cost-effectively than hub architectures which once dominated the networking
equipment industry. In contrast to hubs, which indiscriminately forward data
to all ports, Ethernet switches only forward network traffic to the designated
receiving port or ports. Ethernet switches can also support different data
rates on different ports with some ports operating at 10 Mbps and others at
substantially higher speeds, thus enabling "Any Speed to Any Speed" Ethernet
transmission. Since a major driver to the growth in Ethernet switching is the
large installed base -- between 60% to 70% of all LANs are currently based on
Ethernet standards. Ethernet switching offers fast and cost-effective upgrades
without impacting network performance or requiring infrastructure changes to
existing cabling and network adapters. Switching also allows LANs based on
different architectures, such as Ethernet and Token Ring, to be connected
efficiently and allows these systems to access servers and backbones which use
a variety of high-speed technologies, such as Fast Ethernet, Gigabit Ethernet,
FDDI and ATM.
Another important benefit of switches is their ability to combine
groups of computers into virtual LANs ("VLANs"). As a result, workgroups can
be set up according to business relationships rather than physical proximity.
Unlike hub and router systems, which require segment users to be physically
grouped together, VLANs simplify network administration as users relocate.
VLANs can also be used for controlling bandwidth and directing excess capacity
to workgroups and users as needed. Moreover, by confining traffic to desired
workgroups, VLANs improve network security.
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TYPICAL SWITCHED NETWORK ARCHITECTURE
[CHART]
Enhanced LAN Performance Through High-speed Transmission Technologies
and Switching. While Ethernet switching is being used to increase the
efficiency of existing capacity, switching technology also incorporates
high-speed transmission technologies that increase a system's capacity.
High-speed technologies such as Fast Ethernet, Gigabit Ethernet, FDDI and ATM
increase transmission speeds from 10 Mbps to 100 Mbps and from 100 Mbps to
1,000 Mbps (1 Gbp). Higher transmission speeds have helped to increase the
demand for LAN switches in two important ways. First, LAN switches create
uplinks between slow desktops and high-speed fiber backbones, which are
necessary if data transfer is to occur between devices that operate at
different speeds. Second, as high-speed file servers or fiber backbones are
upgraded, the system's switches must be upgraded as well.
Two alternative high-speed networking technologies, FDDI and ATM, are
used in networking backbones, but because of their high cost for end-users
(more than $500 per NIC connection) they are rarely used to connect desktop
computers within a LAN. Both FDDI and ATM transmit data in unique formats
which also make them difficult to incorporate into pre-existing Ethernet LANs.
Accordingly, FDDI and ATM's incompatibility with existing protocol software and
lack of fully defined standards for interoperability and network management
have limited their widespread application and usage.
Fast Ethernet has emerged as a cost-effective, interoperable
technology that enables the integration of ATM and FDDI backbones with Ethernet
switches and provides a non-disruptive, tenfold increase in speed from 10 Mbps
to 100 Mbps. Furthermore, unlike FDDI and ATM, Fast Ethernet is based on fully
defined standards which use the same data format and core communication
protocol as Ethernet. This similarity permits easy integration with existing
Ethernet networks and allows organizations to retain the benefit of network
administrators who have been trained in the management of Ethernet networks.
Thus, migration from Ethernet to Fast Ethernet involves a simple change of
adapter cards and an upgrade of hubs and switches. In addition, implementation
of Fast Ethernet costs end users approximately $150, which is significantly
less expensive than FDDI or ATM implementation that generally costs more than
$500 per NIC connection. As a result of these factors, in January 1996 an
industry analysis reported market estimates that Fast Ethernet revenues
increased from $7 million in 1994 to $45 million in 1995 and that the market is
expected to approach $300 million during 1996.
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Many industry experts believe that similar benefits will be offered by
the next generation of Ethernet technology, Gigabit Ethernet, which is expected
to provide raw data bandwidth of 1,000 Mbps while maintaining full
compatibility with the installed base of Ethernet nodes. Management believes
that demand for Gigabit Ethernet is likely to grow as more LANs move to Fast
Ethernet, generating substantial traffic loads on backbone networks. Dataquest
has recently forecasted that the Gigabit Ethernet market will reach $2.9
billion by 2000, at which time will become the dominant communications backbone
technology.
To promote the implementation of Gigabit Ethernet, the Gigabit
Ethernet Alliance ("GEA") was formed in May 1996. The Company is a member of
the GEA which includes Advanced Micro Devices, Inc., Bay Networks, Inc.,
Cabletron Systems, Inc., Cisco Systems, Inc., Compaq Computer Corporation,
Digital Equipment Corporation, Hewlett-Packard Company, Intel Corporation,
Lucent Technologies Inc., Sun Microsystems, Incorporated, U B Networks and 3Com
Corporation.
FIBER OPTIC ENVIRONMENT
Fiber optic transmission can generally carry more information at less
expense and with greater signal quality than copper wire. The higher the speed
of transmission and the greater the capacity and the larger the span of the
network, the more essential is fiber optic transmission. Fiber has long
replaced copper as the preferred technology for long distance communications
and major backbone telephony and data transmissions. Due to its advantages,
fiber optic technology is also increasingly used to enhance performance and
capacity within enterprise networks and access networks. As a result, the
market for fiber optic products continues to grow both domestically and
internationally.
Demand for fiber optic transmission components is driven by four
factors: (i) fiber applications have expanded beyond traditional telephony
applications and are being deployed in enterprise network backbones to support
high-speed data communications; (ii) within access networks, fiber is rapidly
expanding downstream toward end-users as access networks deploy
Fiber-in-the-Loop and FTTC architectures to support services such as fast
Internet access and interactive video; (iii) the growth of cellular
communications and personal communications systems ("PCS") requires fiber to be
deployed both within and between cells; and (iv) the usage of fiber in short
distances increases the demand for components as more are used per mile of
fiber. As the size, number and complexity of these fiber networks increases,
management expects that the demand for fiber optic components will grow
significantly.
Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission
becomes an essential element in computer networks. From transmission speeds of
100 Mbps and higher, and transmission distances of 100 meters and longer, fiber
optic transmission must be deployed. Virtually all high-speed transmission
standards, such as FDDI, ATM, Fast Ethernet and Gigabit Ethernet, specify fiber
optic media as the most practical technology for transmission. The steady rise
in high-speed connections and the growth in the span of networks, including the
need to connect remote workgroups, are driving the deployment of fiber optic
cable throughout enterprise networks.
Fiber Optic Transmission in Access Networks. To meet end user's
increased demand for content, software and services, network operators must
acquire additional bandwidth by either enhancing their existing networks or
constructing new ones. Cable TV operators are increasingly seeking to provide
general telecommunication services, high-speed Internet access and
video-on-demand. As a result, they are now faced with the need to transmit
"upstream," from customer premises to the cable TV operator and to send
different signals to individual end-users. Similarly, local enterprise
carriers ("LECs") are implementing new technological standards, such as SONET
and fiber-intensive architectures such as FTTC to enable High-speed Internet
Access and the delivery of cable TV and ATM services to the home. Management
believes that deployment of and upgrades to these systems will increase the
demand for the Company's fiber optic components which typically are better able
to endure environmental factors such as rain, snow, heat and wind
cost-effectively. In addition, cellular and PCS communications represent a fast
emerging market for fiber optic networks, including their usage in the backbone
and landline portion of wireless networks.
Fiber Optic Test and Measurement Equipment. Fiber optic test and
measurement equipment consists primarily of hand-held optical power and "loss"
meters, sophisticated fault locators and Optical Time Domain Reflectometers
("OTDRs"). This equipment is required to install, operate and maintain fiber
optic networks. OTDRs are field portable instruments that transmit pulses of
light into an optical fiber and recapture the reflection of pulses generated by
a laser
25
<PAGE> 29
diode. By analyzing these reflections, the OTDR identifies faulty connectors
and splices and cable breaks. Fiber optic testing and measurement equipment is
sold primarily in the telecommunication and data communication markets. Growth
in this market segment is derived from the general demand for optical fiber
installation in these sectors.
STRATEGY
MRV's objective is to be the leading suppler of high-speed network
equipment and fiber optic transmission components. The key elements of the
Company's strategy to achieve these objectives include:
Target Rapidly Growing Communication Markets
The Company leverages its transmission expertise by targeting the high
growth markets in the communications arena. Accordingly, MRV has focused on two
of the fastest growing communication markets: (i) the worldwide LAN switching
market, which according to Dataquest was estimated to be approximately $362
million in 1994 and was estimated to grow from $1.6 billion in 1995 to $6.9
billion in 1999, and (ii) access networks in order to capitalize on the efforts
of both cable and telephone companies in this area. MRV continually monitors
and develops products for additional growth markets, such as wireless
communications.
Bring State of the Art Technology Early to Market
The Company believes that bringing state of the art technology early
to market has been a critical component of its success. MRV plans to continue
to invest significant resources in research and development to maintain its
leadership position. As an example of how it has leveraged its technology
leadership, MRV was one of the first companies to introduce a Fast Ethernet
switch. This product is currently sold to Intel Corporation under an original
equipment manufacturer ("OEM") agreement as part of the Intel Ether-Express
Fast Ethernet product family. MRV also was one of the first companies to offer
switches with the smart/selective flow control feature and full duplex
transmission, designed to eliminate Ethernet packet losses in highly congested
networks and enable Fast Ethernet transmission distance of over 100 km over
fiber optic cable.
In June 1996, the Company introduced MegaSwitch II, which management
believes was the first dual speed auto-select 10/100 Mbps Ethernet switch with
planned uplinks to enterprise networks based on high-speed transmission
technologies such as ATM and Gigabit Ethernet. In addition, in the first
quarter of 1996, the Company started volume shipments of a new bidirectional
optical transmission and reception module for FTTC applications such as Bell
South's FTTC project, one of the largest FTTC projects in the United States.
The Company believes that participation in such leading-edge projects helps
maintain MRV's technology leadership position within the industry.
Focus on the Large and Fast Growing Switching Market
MRV has targeted and developed expertise in Ethernet, the most
commonly used technology within the LAN market. Industry analysts have
estimated that 60% to 70% of installed LANs are Ethernet-based and that
Ethernet switching represents over 90% of LAN switching implementations.
Moreover, the Company believes that Ethernet will continue to dominate the LAN
arena due to its rapidly improving performance and its large installed base of
users. The Company has developed high-speed network solutions which improve
Ethernet network performance without rendering the end user's existing network
equipment obsolete. As a result of this strategy, the Company plans to offer in
early 1997 a complete migration path to Any Speed to Any Speed Ethernet
technologies, including 10 Mbps (Ethernet), 100 Mbps (Fast Ethernet) and 1000
Mbps (Gigabit Ethernet). The Company has developed an expertise in ATM as it
anticipates that such technology will be increasingly used in backbones.
Leverage Proprietary Knowledge of Switching and Fiber Optic Transmission
Technologies
As the need for capacity and speed increases, management believes that
fiber will increasingly be used in all transmission modes and technologies.
Thus, MRV's ability to combine proprietary fiber optic transmission and
switching technologies to create high-speed, long distance networking solutions
is a key competitive advantage. Management further believes that as the
convergence of voice, video and data networking continues, closer integration
of the Company's core technologies, namely, fiber optic transmission,
high-speed LAN switching and ATM, will result.
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Convergence is also expected to enable the Company to cross market both of its
core technologies to existing customers of only one of its product lines.
Leverage Manufacturing Expertise
The Company has developed proprietary ASICs to implement high level
component integration in its networking product development process. Using
ASICs allows MRV to reduce manufacturing costs, enhance product reliability and
protect its intellectual property. The Company outsources the assembly, test
and quality control of its computer networking products to third party contract
manufacturers. This affords it scaleability, allows it to react quickly to
market demand, while avoiding the significant capital investment required to
establish and maintain manufacturing and assembly facilities and allowing it to
concentrate its resources on product design and development.
The Company relies exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its optical transmission
products. These semiconductor devices are manufactured under stringent and
accurate procedures using state-of-the-art wafer fabrication technology. The
Company believes that this provides it with a competitive advantage, including
quicker time to market, better quality control, significant cost benefits and
better protection of its intellectual property and trade secrets.
Facilitate Growth by Expanding Distribution Channels
The Company continually seeks to facilitate its growth by expanding
its distribution channels and capability to capitalize on its technological
expertise and production capacity. LAN switching products are sold through
value added resellers ("VARs"), systems integrators, distributors,
manufacturers' representatives and OEM customers. The Company continues to add
distribution channels and has entered into OEM agreements with Intel and, more
recently, with Fujitsu and U B Networks. In addition, MRV plans to continue
efforts to expand its distribution channels and, with the acquisition of the
Fibronics Business, has greatly expanded its distribution channels in Europe.
Selectively Target Acquisitions of Complementary Businesses, Products or
Technology
Management frequently reviews acquisition prospects that would
complement the Company's existing products, augment its market coverage and
distribution capability or enhance its technological capabilities. The 1995
acquisitions of Galcom and Ace, both Israel-based switching providers, enhanced
MRV's European market presence and distribution capabilities. To continue its
European expansion efforts, in May 1996 MRV acquired a controlling interest in
EDS LAN, a computer networking distributor in Italy and in September 1996, the
Company completed the Fibronics Acquisition, which greatly increased the
Company's presence in Europe. The Fibronics Acquisition also gave the Company
new products and technology, including the GigaHub, which, in addition to being
a significant product line, also allows it to target the enterprise market and
leverage its switching expertise into the GigaHub. While the Company has no
current agreements or negotiations underway with respect to any new
acquisitions, management plans to evaluate selective acquisition opportunities
as they arise, and the Company may make additional acquisitions of businesses,
products or technologies in the future.
PRODUCTS AND TECHNOLOGY
MRV offers advanced solutions for network connectivity requirements by
providing high speed LAN switching and fiber optic transmission products which
serve the computer networking and the broadband sections of the communications
industry. The Company designs and sells two groups of products: (i) high-speed
networking equipment, including LAN switches and (ii) fiber optic transmission
solutions for SONET, ATM, FDDI, Fast Ethernet, cable TV and wireless
infrastructure.
ENTERPRISE NETWORKING SOLUTIONS
The Company designs network switching systems that increase the
productivity and functionality of LANs. MRV offers its customers a family of
network, switching and related products that enhance LAN performance and
facilitate the migration to next generation technologies such as Fast Ethernet,
Gigabit Ethernet and ATM.
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The MegaSwitch Product Family. The Company's MegaSwitch products are a
family of Fast Ethernet switches which are marketed under MRV's NBase trade
name. The MegaSwitch products range from complete switching systems to
stackable switches which upgrade performance of existing LANs by relieving
congestion of overloaded network segments, enable full duplex and flow control
and provide an easy, cost-effective migration to higher transmission speeds
without requiring replacement of existing infrastructure. The MegaSwitch I,
which was first introduced in 1995, is a family of three Fast Ethernet
switches, which enhance the bandwidth of the corporate backbone to support
higher traffic levels. These systems are scalable and are compatible with a
wide range of existing network protocols and technologies. The Company's
MegaSwitch II products, introduced in 1996, are designed for corporate, campus
and metropolitan deployment as a cost-effective method of connecting existing
networks with higher-speed backbones and are based on "Any Speed to Any Speed"
Ethernet switching, including Gigabit Ethernet with access to ATM. Fast
Ethernet, Gigabit and ATM uplink modules incorporate InterSwitch VLAN
capabilities. InterSwitch VLANs enable the network administrator to define
separate VLANs spanning multiple switches in order to achieve optimal network
performance and serve multiple workgroups.
<TABLE>
<CAPTION>
Product Name Application and Functionality
------------ -----------------------------
<S> <C>
MegaSwitch II This cost-effective stackable switch is a 12 port, high performance switch which
provides an uplink to ATM and Gigabit Ethernet backbones, supports Ethernet/Fast
Ethernet traffic by automatically configuring for 10 Mbps/100 Mbps, provides for
zero packet loss even at extended network links of up to 110 km and incorporates
VLAN capability. This switch can be used as an upgrade for an existing workgroup
or as a fully configured enterprise switch.
MegaSwitch I These stackable switches, with up to 13 ports, provide a migration path to upgrade
from a legacy 10 Mbps LAN to a 100 Mbps network. These switches provide
segmentation of 10 Mbps shared LAN and higher speed server or backbone connections
enabling interconnection of workgroups or high-speed workstations.
</TABLE>
Hubs and Network Management. To implement network segments, the
Company offers GigaHub, a multi-platform switchable hub, and MegaStack, a
stackable hub; and, to enable management and control of its switching products
and hub products, MRV has developed and offers MegaVision.
<TABLE>
<CAPTION>
Product Name Application and Functionality
------------ -----------------------------
<S> <C>
GigaHub This enterprise network solution for medium to large corporate networks requiring
both shared and switched connectivity in a mixed protocol environment, provides a
12 Gbps modular enterprise switching hub, supporting Ethernet, Fast Ethernet,
FDDI, ATM and Token Ring, as well as voice and point-to-point protocols, and
allowing integration of LAN distribution and switching in a single hub.
MegaStack This high-speed stackable hub system implements Ethernet and Fast Ethernet LAN
segments, provides performance for mission-critical and bandwidth-intensive
applications, connects from 12 to 180 users, is stackable with fiber optic
connectivity to remote locations and offers plug-and-play convenience and built-in
auto-partitioning for instant isolation of network failures.
MegaVision This full-featured network management system provides affordable and comprehensive
management and control of all MegaSwitch and MegaStack products and automatically
detects and monitors any SNMP compliant devices. It operates on all major NMS
platforms including Windows 3.1, Windows 95, Windows NT Client, Novell NMS,
HP/Open View for Windows or UNIX.
</TABLE>
Related Networking Products. The Company also offers a number of other
products supporting network connectivity. Examples of such products are
summarized in the table below.
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<TABLE>
<CAPTION>
Products Description and Functionality
-------- -----------------------------
<S> <C>
Fiber Optic These products consist of Ethernet and Fast Ethernet fiber optic transceivers that
Transceivers and enable campus or metropolitan deployment of Ethernet or Fast Ethernet networks
Converters through fiber optic interconnection of LANs to a distance of over 100 km, and
multimode to single mode fiber converters for FDDI, ATM and SONET that extend the
range of FDDI, ATM and SONET via fiber.
Token Ring These products consist of multimedia Token Ring hubs with fiber, coax, UTP and STP
connectivity which extends the distance between segments of Token Ring networks,
and fiber optic transceivers with multimode and single mode fiber, which allow
flexible implementation of IBM midrange and mainframe terminal connectivity.
Midrange Connectivity These products consist of Twinax Star panels, multiplexers and repeaters which
allow flexible implementation of IBM mid-range and mainframe terminal
connectivity.
</TABLE>
The Company's Recent Advance in Gigabit Ethernet. Gigabit Ethernet
aims to support the extension of Ethernet and Fast Ethernet standards to higher
speeds while insuring full interoperability with existing networks. The
Company recently developed an advance in Gigabit technology which it proposed
to the IEEE Gigabit Ethernet task force. The Company's proposal maximizes
bandwidth utilization and doubles the span of the network while also providing
for delay sensitive applications such as video. At the core of this technology
is the ability to "save" one frame during a collision event. This way, at
least one frame transmitted will reach its destination, thereby doubling
throughput. The key advantages to the Company's Gigabit Ethernet
implementation include guaranteed bandwidth utilization not influenced by
collision, multimedia support and superior quality of service.
OPTICAL TRANSMISSION PRODUCTS
The Company offers a family of optical transmission components and
modules designed for transmission over fiber optic cable. These products
address transmission of voice, data and video across fiber and are also used in
optical fiber test equipment. The Company's products include discrete
components, such as laser diodes and LEDs and integrated components such as
transmitters, receivers and transceivers. The Company's components are used in
data networks, telecommunication transmission and access networks. Management
believes that the Company is benefitting from two major demand trends in this
area: first, the growth of the market, especially computer networking and the
access networks, by both LECs and cable TV providers; and second, as
transmission speed and capacity grow, a larger portion of all networks traffic
is transmitted via fiber optic versus copper wires.
Discrete Components. Discrete components include laser diodes and
LEDs. Every fiber optic communication system utilizes semiconductor laser
diodes or LEDs as its source of optical power. Laser diodes and LEDs are solid
state semiconductor devices that efficiently convert electronic signals into
pulses of light of high purity and brightness. The Company believes that its
lasers and LEDs, which can carry data over distances in excess of 20 km are
among the most powerful in their wavelength range in terms of optical power
coupled into single mode fiber.
Integrated Components. The Company's integrated components include an
LED and laser based transmitter/receiver product line, designed for computer
networking applications and the Company has recently introduced data link
products designed for SONET and ATM transmission standards. This product line
consists of products compatible with single mode fiber optic cable, which is
more suitable for long distance and high-speed transmission than multimode
fiber optic cable. As most currently available data link modules are designed
for multimode fiber optic cable, the Company has designed its products to be
adaptable, providing for easy conversion from a multimode type data link to a
single mode optical fiber.
Products for the Access Network. The Company has recently introduced
a line of products that addresses the rapidly growing deployment of the access
network. These products include fiber optic transmission by both LECs and cable
TV providers to address the increasing demand for telephony, Internet access
and interactive cable TV services. The following is a brief description of
these products.
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FTTC: Telephone and High-speed Internet Access. Recently, the Company
started volume shipments of a new "Bi-directional" optical
transmission and reception module for two-way simultaneous
transmission of telephony and data over one fiber instead of the two
fibers normally used to transmit and receive information. This
product is integrated into the DISC system currently deployed by Bell
South in one of the largest FTTC projects in the United States.
Downstream Cable TV. The Company has recently engaged in new
business opportunities for linear lasers and receivers for cable TV
and believes its products are well positioned to serve this market.
The Company further believes that the upgrade of existing cable
networks and the deployment of fiber by the telephone companies to
provide cable TV delivery services is expected to increase the demand
for the Company's products.
Return Path Laser Transmitters. The Company's return path laser
transmitters send video, voice and data signals from the end user to
the cable TV operator. For interactive applications such as cable
modems and Fast Internet access, a cable network must have two-way
optical transmitters and receivers in place before those services can
be offered. Most of today's cable networks still have just a one-way
downstream path.
DFB Laser Module for Cable TV (Narrowcasting). The Company offers DFB
laser modules with high power and stable analog transmission which
enable cable TV operators to send different signals to individual end
users, a capability known as narrowcasting.
PRODUCT DEVELOPMENT
All of the Company's research and development projects are geared
toward technological advances with the goal of enabling the Company to
introduce innovative products early to market. New networking and fiber optic
components are constantly introduced to the market. This product introduction
is driven by a combination of rapidly evolving technology and standards, as
well as changing customer needs. MRV's research and product development
strategy emphasizes continuing evaluation of emerging trends and technical
challenges in order to identify new markets and product opportunities. The
Company believes that its success is due in part to its ability to maintain
sophisticated technology research programs while simultaneously focusing on
practical applications to its customers' strategic needs.
In order to meet its customers' price and performance demands, MRV has
focused on developing custom ASICs to implement its core switching
technologies. The Company spends significant resources to maintain and extend
its comprehensive ASIC design and test expertise. All custom ASICs are
developed internally using third party state-of-the-art design tools and the
Company's proprietary methodologies. The Company's ASIC expertise in
conjunction with its innovative product architectures and firmware enable the
Company to develop products characterized by high performance, reliability and
low cost.
From its product development programs the Company expects to introduce
a number of new products within the next 12 months. One new product is JavaMan,
a platform independent, Internet-ready Network Management System ("NMS") which
the Company created to expand the reach of MegaVision over the Internet. All
necessary software is expected to reside on MegaSwitch II, pre-configured prior
to customer delivery. JavaMan's use of existing Web standards provides remote
manageability in both Internet and Intranet environments
The Company also has a number of other new networking product
development programs underway, including Gigabit Ethernet switching and ATM
uplink modules. These products are being developed in response to current
technological trends and end user demands for greater bandwidth and product
flexibility. The Company is in the process of consolidating Fibronics' research
and development projects with its own programs. Among initial projects, the
Company is focusing on the integration of the GigaHub with MegaSwitch II
technology, including Gigabit Ethernet. The Company has recently announced a
GigaFrame product strategy for 1997, the architecture for which will consist of
a Gigabit Ethernet Switch, a GigaHub enterprise switch, MegaSwitch II and two
new low cost 10 Mbps to 100 Mbps stackable switches.
New products under development in the area of fiber optics include
transmission products for cellular band and personal communication systems
which allow transmission over fiber optic cable. The Company is also developing
fiberoptic components that will improve the system performance for cable TV
transmission. MRV also has research and
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<PAGE> 34
development projects underway seeking to enhance various of its fiber optic
transmission products and is participating in Bell South's FTTC project.
There can be no assurance that the technologies and applications
under development by the Company will be successfully developed, or, if they
are successfully developed, that they will be successfully marketed and sold to
the Company's existing and potential customers.
At December 5, 1996, the Company had 53 employees dedicated to
research and product development. Research and development expenditures
totaled approximately $1,100,000, $2,100,000 and $4,000,000 for fiscal years
ended December 31, 1993, 1994 and 1995, respectively. Research and development
expenditures for the first nine months of fiscal year 1996 were $5,787,000.
CUSTOMERS
The Company has sold its products worldwide to over 500 diverse
customers a wide range of industries, primarily; data communications,
telecommunications and cable TV. The Company anticipates that these customers
will continue to purchase its products in the foreseeable future. No customer
accounted for more than 10% of the Company's revenues in 1993, 1994 or 1995.
Current customers include:
NETWORK SWITCHING
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
COMPUTERS AND ELECTRONICS GOVERNMENT AGENCIES
- ------------------------- -------------------
o Advanced Micro Devices, Inc. o Ealing (Borough of London)
o AMP Incorporated o Federal Bureau of Investigation
o Data General Corporation o MITI (Japan)
o Fujitsu Ltd. (Japan) o National Security Administration
o International Business Machines Corporation o National Library, Zagreb
o Intel Corporation o Police Department of Berlin/Potsdam
o Matsushita (Germany) o Social Security Administration
o U B Networks o US Coast Guard
- --------------------------------------------------------------------------------------------
BANKING, FINANCE AND INSURANCE DIVERSIFIED AND OTHER
- ------------------------------ ---------------------
o Bankhaus Rinderknecht (Zurich) o Bayer AG
o GE Capital o The Walt Disney Co.
o NationsBank o Eastman Kodak
o Trans America Corporation o Tele-Communications, Inc.
o Wells Fargo Bank NT&SA o United Airlines
- --------------------------------------------------------------------------------------------
</TABLE>
FIBER OPTIC COMPONENTS
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------
DATA COMMUNICATIONS TELECOMMUNICATIONS
- -------------------- ------------------
o Bay Networks, Inc. o Asea Brown Boveri
o Canoga Perkins o Broadband Network Inc.
o Cisco Systems, Inc. o Crosscom
o Connectware o Lucent Technologies Inc.
o Network Systems Corporation o Photon Technology (China)
o Nortel o Reltec
o Optical Data Systems o Transcom
- --------------------------------------------------------------------------------------------
VIDEO AND VOICE COMMUNICATIONS INSTRUMENTATION
- ------------------------------ ---------------
o Allied Wire and Cable o EXFO
o Augat Communication Products Inc. o Fiber Options
o C-Cor o GN Nettest
o General Instrument o Kingfisher International
o Optelecom, Inc. o Noyes Fiber Systems
o Tektronix o 3M
- --------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 35
MARKETING
The Company markets and sells its products under the NBase
Communications, NBase Switch Communications, MRV Communications and West Hills
LAN System brand names. Each product line has a dedicated sales and marketing
organization. The Company employs various methods, such as public relations,
advertising, and trade shows to build awareness of its products. Public
relations activities are conducted both internally and through relationships
with outside agencies. Major public relation activities are focused around new
product introductions, corporate partnerships and other events of interest to
the market. The Company supplements its public relations through media
advertising programs and attendance at various trade shows throughout the year,
both in the United States and internationally.
The Company also establishes working relationships with trade
analysts, testing facilities and high visibility corporate accounts. Since the
results obtained by these organizations can often influence customers' purchase
decisions, a positive response from these organizations regarding the Company's
technology is important to product acceptance and purchase. Other activities
include attendance at technology seminars, preparation of competitive analyzes,
sales training, publication of technical and educational articles, maintenance
of a Web site and direct mailing of company literature. The Company also
believes that its participation in high-profile interactive projects such as
Bell South's FTTC project significantly enhances its reputation and name
recognition among existing and potential customers.
SALES AND DISTRIBUTION
The Company continually seeks to expand its distribution capability to
capitalize on its technological expertise and production capacity and to
augment and increase distribution channels to accelerate its growth. Products
are sold through VARs, systems integrators, distributors, manufacturer's
representatives and OEM customers. The Company's sales and distribution
divisions are organized along four primary lines: OEM sales and partnerships;
VARs and systems integrators; manufacturer's representatives; and domestic and
international distributors.
Direct Sales. The Company employs a worldwide direct sales force
primarily to sell its products to large OEM accounts and to a lesser extent to
end users of the Fibronics product line. MRV believes that a direct sales force
can best serve large customers by allowing salespeople to develop strong,
lasting relationships which can effectively meet the customers' needs. The
direct sales staff is located across the United States, Europe and Israel. The
integration of the Fibronics Business will more than double the Company's sales
force immediately preceding the acquisition. MRV plans to integrate Fibronics'
sales staff with its own so that it will have one sales force covering all of
the Company's networking products.
Each of the Company's OEM partners resells the products under its own
name. The Company believes that the OEM partnerships enhance its ability to
sell its products in significant quantities to large organizations. Since these
OEM partners provide their own technical and sales support to their customers,
the Company is able to focus on other sales channels. The Company customarily
enters into contracts with OEM customers to establish the terms and conditions
of sales made pursuant to orders from OEMs. These OEMs incorporate the
Company's product into systems or sub-systems, which are then sold to end users
via various distribution channels. The Company has established OEM
relationships in connection with its switching equipment with leading
communications and networking companies including U B Networks, Fujitsu and
Intel. The Company's fiber optic components are sold only to OEMs.
To complement its direct sales effort the Company utilizes the
following indirect sales channels:
Domestic and International Distributors. The Company works with
distributors domestically and internationally. Geographic exclusivity is
normally not awarded unless the distributor has exceptional performance.
Distributors must successfully complete the Company's training programs and
provide system installation, technical support, sales support and follow-on
service to local customers. Generally, distributors have agreements with a one
year term subject to automatic renewal unless otherwise canceled by either
party. The Company uses stocking distributors, which purchase the Company's
product and stock it in their warehouse for immediate delivery, and
non-stocking distributors, which purchase the Company's product after the
receipt of an order. Internationally, the Company sells through approximately
80 distributors in Asia, Africa, Europe, Australia, the Middle East, Canada and
Latin America.
32
<PAGE> 36
Value-Added Resellers. MRV uses a select group of VARs in the U.S.
which are generally selected for their ability to offer the Company's products
in combination with related products and services, such as system design,
integration and support. Such specialization allows the Company to penetrate
targeted vertical markets such as telecommunications and cable TV. Generally,
the Company uses a two-tier distribution system to reach a broader range of
customers, however VARs may purchase the product directly from the Company if
the volume warrants a direct relationship.
Manufacturers' Representatives. To supplement the Company's direct
sales efforts, manufacturer's representatives are assigned by territory in the
U.S. and work exclusively on commission.
Customer Support and Service. The Company is committed to providing
strong technical support to its customers. MRV operates a customer service
group, and provides support through its engineering group, sales staff,
distributors, OEMs and VARs. Customer support personnel are currently located
at the Company's offices in California, Maryland and Israel. Fibronics
currently has its own customer support and service personnel, which the Company
plans to integrate its own.
International Sales. International sales accounted for approximately
19% and 45% of the Company's net revenues in 1994 and 1995, respectively, and
approximately 50% of net revenues during the nine months ended September 30,
1996. On a pro forma basis, including Fibronics, international sales accounted
for approximately 58% and 59% of the Company's net revenues during the year
ended December 31, 1995 and the nine months ended September 30, 1996,
respectively.
MANUFACTURING
The Company has developed proprietary ASICs to implement high level
component integration in its networking product development process. To
develop ASICs successfully, the Company must transfer a code of instructions to
a single mask from which low cost duplicates can be made. Each iteration of a
mask involves a substantial up-front cost, which costs can adversely affect the
Company's result of operations and financial condition if errors or "bugs"
occur following multiple duplication of the masks. While the Company has not
experienced material expenses to date as a result of errors discovered in ASIC
masks, because of the complexity of the duplication process and the difficulty
in detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single foundry
to fabricate its ASICs and does not have long-term supply contract with this
supplier, any other ASIC vendor or any other of its limited source vendors,
purchasing all of such components on a purchase order basis. While the Company
believes it would be able to obtain alternative sources of supply for the ASICs
or other key components, a change in ASIC or other key suppliers of key
components could require a significant lead time and, therefore, could result
in a delay in product shipments. While the Company has not experienced delays
in the receipt of ASICs or other key components, any future difficulty in
obtaining any of these key components could result in delays or reductions in
product shipments which, in turn, could have material adverse effect on the
Company's business, operating results business and financial condition.
The Company outsources the assembly, test and quality control of its
computer networking products to third party contract manufacturers, thereby
allowing it to react quickly to market demand, to avoid the significant capital
investment required to establish and maintain manufacturing and assembly
facilities and to concentrate its resources on product design and development.
Final assembly, burn-in, final testing and pack-out are performed by the
Company to maintain quality control. The Company's manufacturing team is
experienced in advanced manufacturing and testing, in engineering, in ongoing
reliability/quality assurance and in managing third party contract
manufacturer's capacity, quality standards and manufacturing process. Although
there are a large number of contract manufacturers which the Company can use
for its outsourcing, MRV has elected to use one vendor for a significant
portion of its board assembly requirements in order to foster consistency in
quality of the products. This independent third party manufacturer also
provides these services to other companies. Risks associated with the use of
independent manufacturers include unavailability of or delays in obtaining
adequate supplies of products and reduced control of manufacturing quality and
production costs. If the Company's contract manufacturer fails to deliver
products in the future on a timely basis, or at all, it would be extremely
difficult for the Company to obtain adequate supplies of products from other
sources on short notice. There can be no assurance that the Company's third
party manufacturer will provide adequate supplies of
33
<PAGE> 37
quality products on a timely basis, or at all. The Company can outsource with
another vendor or vendors; however, such a change in vendors may require
significant time and result in shipment delays and expenses. The inability to
obtain such products on a timely basis, the loss of such vendor or a change in
the terms and conditions of the outsourcing would have a material adverse
effect on the Company's business, operating results and financial condition.
The Company relies exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its products. The Company's
optical transmission production process involves (i) a wafer processing
facility for semiconductor laser diode and LED chip manufacturing under
stringent and accurate procedures using state-of-the-art wafer fabrication
technology, (ii) high precision electronic and mechanical assembly, and (iii)
final assembly and testing. Relevant assembly processes include die attach,
wirebond, substrate attachment and fiber coupling. The Company also conducts
tests throughout its manufacturing process using commercially available and
in-house built testing systems that incorporate proprietary procedures. The
Company performs final product tests on all of its products prior to shipment
to customers. Many of the key processes used in the Company's products are
proprietary; and, therefore, many of the key components of the Company's
products are designed and produced internally. Because the Company manufactures
these and other key components of its products at its own facility and such
components are not readily available from other sources, any interruption of
the Company's manufacturing process could have a material adverse effect on
the Company's operations. Furthermore, the Company has a limited number of
employees dedicated to the operation and maintenance of its wafer fabrication
equipment, the loss of any of whom could result in the Company's inability to
effectively operate and service such equipment. Wafer fabrication is sensitive
to a wide variety of factors, including variations and impurities in the raw
materials, difficulties in the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. There
can be no assurance that the Company will be able to maintain acceptable
production yields and avoid product shipment delays. In the event adequate
production yields are not achieved resulting in product shipment delays, the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company believes that it has sufficient
manufacturing capacity for growth in the coming years.
The Company is subject to a variety of federal, state, and local
governmental regulations related to the storage, use, discharge, and disposal
of toxic, volatile or otherwise hazardous chemicals used in the manufacturing
process. There can be no assurance that environmental regulations will not
result in the need for additional capital equipment or other requirements.
Further, such regulations could restrict the Company's ability to expand its
operations. Any failure by the Company to obtain required permits for, control
of use of, or adequately restrict the discharge of, hazardous substances under
present or future regulations could subject the Company to substantial
liability or could cause its manufacturing operations to be suspended. Such
liability or suspension of manufacturing operations could have a material
adverse effect on the Company's operating results.
COMPETITION
The communications equipment and component industry is intensely
competitive. The Company competes directly with a number of established and
emerging computer, communications and networking device companies. Direct
competitors in network switching include Bay Networks, Inc., Cabletron Systems,
Inc., Cisco Systems Inc., Digital Equipment Corporation, FORE Systems, Inc.,
Hewlett-Packard Company, International Business Machines Corporation and 3Com
Corporation. In addition, direct competitors in fiber optic transmission
products include AMP Incorporated, Fujitsu, Hewlett-Packard Company, Lucent
Technologies Inc., Mitsubishi, NEC Electronics Inc., Ortel Corporation,
Phillips Semiconductors and Siemens Components, Inc. Many of the Company's
competitors have significantly greater financial, technical, marketing,
distribution and other resources and larger installed customer bases than the
Company. Several of these competitors have recently introduced or announced
their intentions to introduce new competitive products. Many of the larger
companies with which the Company competes offer customers a broader product
line which provides a more comprehensive networking solution than the Company's
products. The ability to act as a single source vendor and provide a customer
with an enterprise-wide networking solution has increasingly become an
important competitive factor. In addition, there are a number of early stage
companies which are developing Fast Ethernet, Gigabit Ethernet switching and
alternative solutions. If developed successfully, these solutions could be
higher in performance or more cost-effective than the Company's products.
Moreover, there are also several alternative network technologies. For
example, in the local access market, the Company's products compete with
telephone network technology known as "ADSL." In this technology, digital
34
<PAGE> 38
signals are transmitted through existing telephone lines from the central
office to the home. The Company also expects that competitive pricing
pressures could result in price declines for the Company's and its competitors'
products. Such increased competition could result in reduced margins and loss
of market share which would materially and adversely affect the Company's
business, operating results and financial condition.
The networking industry has become increasingly concentrated in recent
years as a result of consolidation. This consolidation is likely to permit the
Company's competitors to devote significantly greater resources to the
development and marketing of new competitive products and the marketing of
existing competitive products to their larger installed bases. The Company
expects that competition will increase substantially as a result of these and
other industry consolidations and alliances, as well as the emergence of new
competitors.
PROPRIETARY RIGHTS
To date, the Company has relied principally upon copyrights and trade
secrets to protect its proprietary technology. The Company generally enters
into confidentiality agreements with its employees and key suppliers and
otherwise seeks to limit access to and distribution of the source code to its
software and other proprietary information. There can be no assurance that
such steps will be adequate to prevent misappropriation of the Company's
technology or that a third party will not independently develop technology
similar or superior to the Company's technology. The Company has one patent
application pending. There can be no assurance that patents will be issued
with respect to the pending application or that the Company's patents will be
upheld as valid or will prevent the development of competitive products. In
addition, the laws of some foreign countries may not permit the protection of
the Company's proprietary rights to the same extent as do the laws of the
United States.
There has been substantial industry litigation regarding intellectual
property rights involving technology companies. In the future, litigation may
be necessary to protect trade secrets and other intellectual property rights
owned by the Company, to enforce any patents issued to the Company, to defend
the Company against claimed infringement of the rights of others and to
determine the scope and validity of the proprietary rights of others. Any such
litigation could be costly and a diversion of management's attention, which
could have a material adverse effect on the Company's business, operating
results and financial condition. An adverse determination in such litigation
could further result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
product, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. The Company typically has
agreed to indemnify its customers and key suppliers for liability incurred in
connection with the infringement of a third party's intellectual property
rights. While to date the Company has not received any communications alleging
that the Company's products infringe on the intellectual property rights of
others, there can be no assurance that the Company will not be subject to such
claims in the future.
EMPLOYEES
As of December 5, 1996, the Company had 345 full-time employees,
including six executive officers, 149 in production, 104 in marketing and sales,
53 in research and development and 33 in general administration. None of the
Company's employees are represented by a union or governed by a collective
bargaining agreement, and the Company believes its relationship with its
employees is good.
FACILITIES
The Company's principal administrative, sales and marketing, research
and development and manufacturing facility is located in Chatsworth,
California. The facility covers approximately 17,700 square feet and is leased
from an unaffiliated third party at an annual base rent of approximately
$106,000 (plus local taxes) for a lease term expiring in March 1999. In
addition, the Company leases space in two buildings near its primary facility
in Chatsworth, consisting of approximately 5,000 square feet and approximately
12,800 square feet from unaffiliated third parties at annual base rentals of
approximately $43,000 and $91,000 (plus local taxes), respectively. Both of
these lease terms also expire in March 1999.
35
<PAGE> 39
The Company also leases space in German Town, Maryland for its sales
office and warehouses. This facility covers approximately 4,800 square feet and
is leased from an unaffiliated third party at an annual base rent of
approximately $35,000 per year (plus local taxes) for a lease term expiring
August 2000.
The Company's administrative, sales and marketing, research and
development and manufacturing operations in Israel are located in Yokneam,
Israel in facilities that cover approximately 23,400 square feet, are leased for
total annual base rents of approximately $206,000, expiring through January
2002.
The Company leases approximately 5,200 square feet of space from an
unaffiliated third party in Basingstoke, England which is uses for sales,
marketing and warehousing. The premises are leased for total annual base rents
of approximately $75,000 expiring in August 1999.
The Company leases approximately 1,600 square feet of space from an
unaffiliated third party in Germany, which is uses for sales, marketing and
warehousing. The premises are leased for total annual base rents of
approximately $221,000 expiring through August 1999.
The Company also occupies space under a capital lease with an
unaffiliated third party in Milan, Italy which is uses for sales offices and
warehousing. Annual payments under the lease are approximately $220,000 and the
lease runs through March 2004.
The Company believes that its present facilities are sufficient to
meet its current needs and that adequate additional space will be available for
lease when required.
LEGAL PROCEEDINGS
In July 1996, R. Douglas Sherrod, a former employee of the Company who
was terminated in August 1994, filed an action in Superior Court of Los Angeles
County, California against the Company and three of its executive officers and
directors, Mr. Noam Lotan, Dr. Shlomo Margalit and Dr. Zeev Rav-Noy. The
complaint seeks compensatory and punitive damages in unspecified amounts,
together with attorneys fees and costs of suit, for alleged wrongful
termination, breach of contract, negligent misrepresentation and fraud. The
bases of the complaint are Mr. Sherrod's claims that he was terminated
supposedly in retaliation for having informed the Company of its alleged use of
proprietary information of a third party and claimed that he insisted that such
information be destroyed; that he was purportedly induced by the defendants to
join the Company by the entry into a stock option agreement which the Company
allegedly had no intention of performing; and that the Company allegedly
breached the stock option agreement. Management believes that the complaint is
without merit and intends to vigorously defend the action.
36
<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Noam Lotan(1) 45 President, Chief Executive Officer and Director
Shlomo Margalit(1) 55 Chairman of the Board of Directors, Chief Technical Officer and
Secretary
Zeev Rav-Noy(1) 49 Chief Operating Officer, Treasurer and Director
Edmund Glazer 36 Vice President of Finance and Administration and Chief Financial
Officer
Khalid (Ken) Ahmad 44 Vice President of Marketing and Sales
Ofer Iny 28 Vice President of Engineering
Leonard Mautner(2)(3) 79 Director
Milton Rosenberg(2)(3) 74 Director
- ------------------
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Noam Lotan has been the President, Chief Executive Officer and a
Director of the Company since May 1990 and became Chief Financial Officer of
the Company in October 1993, in which position he served until June 1995. From
March 1987 to January 1990, Mr. Lotan served as Managing Director of Fibronics
(UK) Ltd., the United Kingdom subsidiary of Fibronics International Inc.
("Fibronics"), a manufacturer of fiber optic communication networks. The
Company purchased the Fibronics Business in September 1996. See "The Company."
From January 1985 to March 1987, Mr. Lotan served as a Director of European
Operations for Fibronics. Prior to such time, Mr. Lotan held a variety of
sales and marketing positions with Fibronics and Hewlett-Packard. Mr. Lotan
holds a Bachelor of Science degree in Electrical Engineering from the Technion,
the Israel Institute of Technology, and a Masters degree in Business
Administration from INSEAD (the European Institute of Business Administration,
Fontainebleau, France).
Dr. Shlomo Margalit, a co-founder of the Company, has been Chairman
of the Board of Directors and Chief Technical Officer since the Company's
inception in July 1988. From May 1985 to July 1988, Dr. Margalit served as a
founder and Vice President of Research and Development for LaserCom, Inc.
("LaserCom"), a manufacturer of semiconductor lasers. From 1982 to 1985, Dr.
Margalit served as a Senior Research Associate at the California Institute of
Technology ("Caltech"), and from 1976 to 1982, a Visiting Associate at Caltech.
From 1972 to 1982, Dr. Margalit served as a faculty member and Associate
Professor at the Technion. During his tenure at the Technion, Dr. Margalit was
awarded the "Israel Defense" prize for his work in developing infrared
detectors for heat guided missiles and the David Ben Aharon Award for Novel
Applied Research. Dr. Margalit holds a Bachelor of Science degree, a Masters
degree and a Ph.D. in Electrical Engineering from the Technion.
Dr. Zeev Rav-Noy, a co-founder of the Company, has been its Chief
Operating Officer and a Director of the Company since inception and served as
its President until May 1990. From May 1985 to July 1988, Dr. Rav-Noy
co-founded and served as Vice President of Operations of LaserCom and, from
1982 to 1985, served as a research fellow at Caltech. From 1979 to 1982 Dr.
Rav-Noy served as a consultant to a number of companies, including Tadiran
Electronic Industries, Inc., an Israeli telecommunication, military, and
consumer electronics conglomerate, and the Yeda Research and Development Co.
Ltd., a technology exploitation and application company affiliated with the
Weizman Institute in Israel. Dr. Rav-Noy holds a Bachelor of Science degree
and a Masters degree in physics from Tel Aviv University and a Ph.D. in Applied
Physics from the Weizman Institute in Israel.
Edmund Glazer was appointed Vice President of Finance and
Administration and Chief Financial Officer in June 1995. He has been with the
Company since October 1994 serving as Operations Manager. In 1993 and 1994, Mr.
Glazer served as a consultant providing document imaging and information
systems to clients. From 1986 to 1993, Mr.
37
<PAGE> 41
Glazer served as Vice President of Finance at Concord Electrical Supply, a
distributor of electrical and electronic products. From 1984 to 1986, Mr.
Glazer worked as a certified public accountant at the accounting firm of
Singer, Lewak Greenbaum & Goldstein. From 1981 to 1984, Mr. Glazer worked as
an auditor at the accounting firm of Weber, Lipshie & Co. In 1983, Mr. Glazer
qualified as a Certified Public Accountant from the State of California. Mr.
Glazer holds a Bachelor of Science Degree in Business Administration from the
University of Southern California.
Khalid (Ken) Ahmad has been employed as Vice President of Marketing
and Sales since July 1990 and an Executive Officer since May 1992. From April
1990 to July 1990, Mr. Ahmad served as a consultant to the Company. From
January 1990 to March 1990, Mr. Ahmad served as a consultant to Welwyn
Microcircuits, a British manufacturer, providing market research information on
fiber optic technology. From October 1988 to November 1989, Mr. Ahmad served as
marketing manager and regional sales manager for STC Components, a manufacturer
of optical transmission components. From 1985 to 1988, he served as marketing
operations manager for PCO, Inc. a manufacturer of optical transmission devices
and data links. From 1977 to 1985, Mr. Ahmad also held a variety of marketing
and sales management positions with Canoga Data Systems, a data communications
equipment manufacturer, and Deutsch Company, an aerospace manufacturer. Mr.
Ahmad holds a Bachelor of Science degree in Biology from California State
University at San Bernardino.
Ofer Iny has been Vice President of Engineering of the Company since
May 1994. From January 1993 to May 1994, he served as a consultant to the
Company. From September 1991 to January 1993, Mr. Iny was a researcher at Jet
Propulsion Laboratory, Microgravity and Microwave Group. From May 1990 to
March 1992, Mr. Iny held the position of Senior Engineer at Whittaker
Electronic Systems, a manufacturer. Mr. Iny holds a Bachelor of Science degree
in Physics from California State University, Northridge, and a Masters degree
in Physics from University of California, Los Angeles ("UCLA").
Leonard Mautner has served as an advisor to the Company since its
inception and was elected a Director in March 1992. Mr. Mautner is President
of Leonard Mautner Associates, a management consulting company, which he
founded in 1973, and in addition, from 1982 to 1988, served as a visiting
lecturer at the Anderson School of Management of UCLA. Mr. Mautner is also a
Director of two mutual funds, the First Pacific Advisors Perennial Fund and the
First Pacific Advisors Paramount Fund. From 1969 to 1979, Mr. Mautner was a
General Partner of Goodman & Mautner, Ltd., a venture capital partnership, and
President of Goodman & Mautner, Inc., the partnership's investment manager.
Mr. Mautner holds a Bachelor of Science degree in Electrical Engineering from
the Massachusetts Institute of Technology.
Milton Rosenberg has been an advisor to the Company since its
inception and was elected a Director in March 1992. He is President of M. R.
Associates, an investment and consulting company, which he founded in 1978.
For the past 15 years, Mr. Rosenberg has been a director of Bell Industries, a
New York Stock Exchange company engaged in the distribution of electronics
components. Mr. Rosenberg has been a consultant to high technology companies
for over 20 years. Mr. Rosenberg holds a Bachelor of Science degree in
Electrical Engineering from Drexel University and did graduate course work
in Electrical Engineering at Princeton University.
Each director is elected for a period of one year at the Company's
annual meeting of stockholders and serves until the next annual meeting and
until his successor is duly elected and qualified. Officers are elected by,
and serve at the discretion of, the Board of Directors, subject to relevant
employment agreements. None of the Directors of the Company are related by
blood, marriage or adoption to any of the Company's Directors or executive
officers.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The members of the Board of Directors who are not employees of the
Company receive cash compensation of $800 per month and $500 for each Board of
Directors' meeting attended, while serving as Directors.
The following table sets forth a summary of all compensation paid by
the Company to its Chief Executive Officer and for each of its other executive
officers whose total annual salary and bonus exceeded $100,000 (the "Named
Executive Officers") during the fiscal year ended December 31, 1995:
38
<PAGE> 42
<TABLE>
<CAPTION>
Long-term
Compensation
------------
Annual Compensation Securities
------------------- Underlying
Name and Principal Positions Year Salary Bonus Options (#)
---------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Noam Lotan 1995 $100,000 $ 0 0
President and Chief Executive Officer 1994 $100,000 $ 0 0
1993 $100,000 $ 0 0
Shlomo Margalit 1995 $110,000 $ 0 0
Chairman of the Board of Directors, 1994 $110,000 $ 0 0
Chief Technical Officer and Secretary 1993 $110,000 $ 0 0
Zeev Rav-Noy 1995 $110,000 $60,000 0
Chief Operating Officer 1994 $110,000 $60,000 0
1993 $110,000 $25,000 0
Ken Ahmad 1995 $ 90,000 $24,750 150,000
Vice President of Marketing and Sales 1994 $ 90,000 $30,000 0
1993 $ 90,000 $18,000 0
</TABLE>
Mr. Lotan and Drs. Margalit and Rav-Noy do not hold any options to
purchase Common Stock of the Company and none were granted to any of them
during 1995. The following table provides certain information regarding stock
option grants made to Mr. Ahmad during 1995:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) 1995 ($/SH) (3) DATE 5% 10%
---- ---------- ---- ---------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Ken Ahmad 150,000(2) 7.5% $7.25 1/13/2000 $150,228 $331,965
- -----------
</TABLE>
(1) The dollar amounts under these columns are the result of calculations
assuming the price of Common Stock on the date of the grant of
the option ($3.625 per share) increases at the hypothetical 5% and 10%
rates set by the Securities and Exchange Commission and therefore are
not intended to forecast possible future appreciation, if any, of the
Company's stock price.
(2) Options are exercisable in equal annual increments of 1/3 beginning
on the anniversary of the grant date.
(3) The exercise price per share of the options granted represented the
fair market value of the underlying shares on the date of grant.
No options were exercised by Mr. Lotan, Dr. Margalit, Dr. Rav-Noy or
Mr. Ahmad during 1995. The following table provides certain information
concerning Mr. Ahmad's unexercised options at December 31, 1995:
39
<PAGE> 43
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1995 December 31, 1995 (1)
------------------ ---------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ken Ahmad 50,000 100,000 $241,750 $483,500
</TABLE>
___________
(1) Based on the difference between $8.46 per share (the last sale price
of the Common Stock on December 29, 1995 as reported on The Nasdaq
National Market, as adjusted for the 3-for-2 and 2-for-1 stock splits
(effected on March 20, 1996 and July 29, 1996, respectively) and the
per share exercise price (as similarly adjusted).
EMPLOYMENT AGREEMENTS
In March 1992, the Company entered into three-year employment
agreements with Mr. Lotan, Dr. Margalit and Dr. Rav-Noy, which in November 1994
were extended to March 1998. Pursuant to the agreements, Mr. Lotan serves as
President, Chief Executive Officer and a Director of the Company, Dr. Margalit
serves as Chairman of the Board of Directors, Chief Technical Officer and
Secretary, and Dr. Rav-Noy serves as a Chief Operating Officer, Treasurer and a
Director. Mr. Lotan, Dr. Margalit and Dr. Rav-Noy receive base annual salaries
of $100,000, $110,000 and $110,000, respectively, and each is entitled to
receive a bonus determined and payable at the discretion of the Board of
Directors upon the recommendation of the Compensation Committee of the Board.
Recommendations with respect to bonus levels are based on achievement of
specified goals, such as new product introductions, profitability levels,
revenue goals, market expansion and other criteria as established by the
Compensation Committee.
Each officer also receives employee benefits, such as vacation, sick
pay and insurance, in accordance with the Company's policies which are
applicable to all employees. The Company has obtained, and is the beneficiary
of, key man life insurance policies in the amount of $1,000,000 on the lives of
each of Drs. Margalit and Rav-Noy and Mr. Lotan. All benefits under these
policies will be payable to the Company upon the death of an insured. In
November 1994, each of Mr. Lotan and Drs. Margalit and Rav-Noy agreed to extend
the terms of their respective employment agreement until March 1998.
STOCK OPTION PLAN
On March 27, 1992, the Board of Directors and stockholders of the
Company adopted the Plan, which provides for the grant to employees, officers,
directors and consultants of options to purchase up to 900,000 shares of Common
Stock, consisting of both "incentive stock options" within the meaning of
Section 422 of the United States Internal Revenue Code of 1986, as amended (the
"Code"), and non-qualified options. Incentive stock options are issuable only
to employees of the Company, while non-qualified options may be issued to
non-employee directors, consultants and others, as well as to employees of the
Company. The Board increased the Plan by 900,000 shares in February 1995, which
was approved by stockholders in June 1995 and in May 1996 increased the Plan by
150,000 shares, which was approved by stockholders in July 1996.
Under the Plan, the Compensation Committee has the authority to
determine the persons to whom options will be granted, the number of shares to
be covered by each option, whether the options granted are intended to be
incentive stock options, the duration and rate of exercise of each option, the
option price per share, the manner of exercise and the time, manner and form of
payment upon exercise of an option.
The exercise price per share of Common Stock subject to incentive
stock options may not be less than the fair market value of the Common Stock on
the date the option is granted. The exercise price per share of Common Stock
subject to non-qualified options will be established by the Board of Directors.
The aggregate fair market value (determined as of the date the option is
granted) of the Common Stock that any employee may purchase in any calendar
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting
40
<PAGE> 44
power of all classes of stock of the Company shall be eligible to receive any
incentive stock options under the Plan unless the exercise price is at least
110% of grant. Non-qualified options are not subject to this limitation.
No incentive stock option may be transferred by an optionee other than
by will or the laws of descent and distribution and, during the lifetime of an
optionee, the option will be exercisable only by the optionee. In the event of
termination of employment other than by death or disability, the optionee will
have three months after such termination or until the expiration of such
option, whichever occurs first, to exercise the option. Upon termination of
employment of an optionee by reason of death or permanent total disability,
options remain exercisable for one year thereafter or until the expiration of
such option, whichever occurs first, to the extent they were exercisable on the
date of such termination. No similar limitation applies to non-qualified
options.
Stock options under the Plan must be granted within 10 years from the
effective date of the Plan. Incentive stock options granted under the Plan
cannot be exercised more than 10 years from the date of grant, except that
incentive stock options issued to 10% or greater stockholders are limited to
five year terms. All options granted under the Plan provide for the payment of
the exercise price in cash or by delivery to the Company of shares of Common
Stock already owned by the optionee having a fair market value equal to the
exercise price of the options being exercised, or by a combination of such
methods of payment. Therefore, an optionee may be able to tender shares of
Common Stock to purchase additional shares of Common Stock and may
theoretically exercise all of his stock options without making any additional
cash investment.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed with the Company become available once again
for issuance. At December 5, 1996, options for 1,531,599 shares were
outstanding under the Plan and 164,399 were reserved thereunder for options
available for future grant.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation includes a provision that
eliminates or limits the personal financial liability of the Company's
directors, except in situations where there has been a breach of the director's
duty of loyalty to the Company or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, liability under Section 174 of the Delaware General Corporation Law
("Section 174") relative to unlawful payment of dividends, stock purchases or
redemptions, or any transaction from which the director derived an improper
personal benefit. Furthermore, Section 174 eliminates monetary liability for
gross negligence in exercising the duty of due care related to the directors'
fiduciary duties under state corporate law, however, such section does not
eliminate monetary liability of directors under the federal Securities laws. In
addition, the Company's Bylaws include provisions to indemnify its officers and
directors and other persons against expenses, judgments, fines and amounts paid
in settlement in connection with threatened, pending or completed suits or
proceedings against such persons by reason of serving or having served as
officers, directors or in other capacities, except that in relation to matters
with respect to which such persons shall be determined to be liable for
misconduct or negligence in the performance of their duties, the Company's
Bylaws provide for indemnification only to the extent that the Company
determines that such person acted in good faith and in a manner not opposed to
the best interests of the Company. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against the public policy as
expressed in the Act and is therefore unenforceable.
41
<PAGE> 45
PRINCIPAL STOCKHOLDERS AND SELLING SECURITY HOLDERS
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 5, 1996, of (i) each
person known by the Company to own beneficially 5% or more of the Common Stock,
(ii) each current director of the Company, (iii) each of the Named Executive
Officers (iv) each Selling Stockholder and (v) all current directors and
executive officers as a group.
<TABLE>
<CAPTION>
Common Stock
NAME AND ADDRESS(1) OF BENEFICIAL ---------------------
OWNER(2) OR IDENTITY OF GROUP Number Percent
---------------------------------- ------ -------
<S> <C> <C>
Shlomo Margalit 2,048,930 9.5%
Zeev Rav-Noy 1,976,930 9.1%
Noam Lotan (3) 975,937 4.5%
Ken Ahmad (4) 294,464 1.4%
Leonard Mautner 61,850 *
1434 Sixth Street, Suite 10
Santa Monica, CA 90401
Milton Rosenberg (5) 52,710 *
10975 Torreyana Road, Suite 304
San Diego, CA 92121
All executive officers and 5,469,821 25.1%
directors as a group (8
persons)(6)
- ----------
</TABLE>
* Less than 1%
(1) Except as otherwise set forth in the table, the address of each of the
person listed is c/o MRV Communications, Inc., 8917 Fullbright Avenue,
Chatsworth, CA 91311.
(2) Pursuant to the rules of the Securities and Exchange Commission,
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.
(3) Includes 10,000 shares issuable pursuant to stock options exercisable
within 60 days of December 5, 1996.
(4) Includes 100,000 shares issuable pursuant to stock options exercisable
within 60 days from December 5, 1996.
(5) Includes 24,000 shares issuable pursuant to stock options exercisable
within 60 days from December 5, 1996.
(6) Includes 193,000 shares issuable pursuant to stock options exercisable
within 60 days from December 5, 1996.
42
<PAGE> 46
SELLING SECURITY HOLDERS
The table below sets forth certain information at December 5, 1996
concerning the Selling Stockholders, the Sellers of Warrant Shares and the
Sellers of Debenture Shares, including the number of Shares they beneficially
owned and their percentage ownership before this offering. Because the Selling
Security Holders may offer all or some of the Shares pursuant to the offering
contemplated by this Prospectus, and to the Company's knowledge there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the Shares that may be held by the Selling Security Holders after
completion of this offering, no estimate can be given as to the amount of Shares
that will be held by the Selling Security Holders after completion of this
offering. See "Plan of Distribution."
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Everest Capital International Ltd. 509,994 207,000 716,994 3.3%
Corner house, 20 Parliament St.
Hamilton 'HM 12 Bermuda
Alvardo Partners 75,318 75,318 *
1 Embarcadero Ctr Suite 2330
San Francisco, CA 94111
Arntz Builders Partners 2,400 2,400 *
Andron Capital Management
3650 Mt. Diablo Blvd., Suite 103
Lafayette, CA 94549
Banque de Gestion E. de Rothschild, Luxembourg 18,000 10,000 28,000 *
BBH New York
59 Wall Street
New York, NY 10005
Banque Privee Edmond de Rothschild/Geneva 88,000 50,000 138,000 *
C/o Brown Brothers Harriman
59 wall Street
New York, NY 10005
CUS Trust 36,000 36,000 *
Custodial Trust Co.
101 Carnegie Ctr.
Princeton, NT 08540
David Koch 658 10,500 11,158 *
55 Argyle Rd.
Scarsdale, NY 10583
</TABLE>
43
<PAGE> 47
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Elizabeth D. Holiday - IRA 900 900 *
Andron Capital Management
3650 Mt. Diablo Blvd., Suite 103
Lafayette, CA 94549
Ince & Co. 46,000 46,000 *
c/o Morgan Guaranty Trust New York
La Cie Financiere E. Rothschild Banque
55 Exchange Level A
New York, NY 10260
J. Steven Emerson 46,000 46,000 *
10506 Ilona Avenue, Suite 1410
Los Angeles, CA 90064
Jonathan Andron 2,100 2,100 *
Andron Capital Management
3650 Mt. Diablo Blvd., Suite 103
Lafayette, CA 94549
Mark Riez 3,000 3,000 6,000 *
6 rue de Villersexel '75007
Paris France
Northview Trading Ltd. 6,000 10,500 16,500 *
Banque Financiere de la Cite
P.O. Box 5030
1211 Geneve 11
Switzerland
Robert Danloy Vrancken II 3,000 3,000 *
2548 Fettersmill Rd.
'Huntingdon, PA 19006
Spencer Allen - IRA 300 300 *
Andron Capital Management
3650 Mt. Diablo Blvd., Suite 103
Lafayette, CA, 94549
</TABLE>
44
<PAGE> 48
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Tom Zimberoff - IRA 300 300 *
Andron Capital Management
3650 Mt. Diablo Blvd., Suite 103
Lafayette, CA 94549
Aharon Orlansky 958 92,984 93,942 *
201 E. 62nd Street, Apt. 10A
New York, NY 10021
Elbit Ltd. 458,991 458,991 2.1%
The Advanced Technology Center
P.O. Box 539
Haifa 31053, Israel
Hampshire Securities 814 814 *
919 Third Avenue
New York, NY 10022
Jeffrey M. Berman 47,544 47,544 *
c/o Hampshire Securities
919 Third Avenue
New York, NY 10022
Leo T. Abbe 42,530 42,530 *
c/o Hampshire Securities
919 Third Avenue
New York, NY 10022
</TABLE>
45
<PAGE> 49
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Richard K. Abbe 36,644 36,644 *
c/o Hampshire Securities
919 Third Avenue
New York, NY 10022
John H. Starr 16,378 16,378 *
c/o Hampshire Securities
919 Third Avenue
New York, NY 10022
Nathan Shilo, Trustee 834,212 834,212 3.7%
Eckhouse, Talman, Shilo, Diehno
3 Daniel Frisch St.
Tel Aviv 64731
Israel
GME Designs, Inc. 43,000 43,000 *
4505 Las Virgenes Rd. #202
Calabasas, CA 91302
Jacques Cory 30,000 30,000 *
c/o Eckhouse, Talman, Shilo, Diehno
3 Daniel Frisch St.
Tel Aviv 64731
Israel
Oppenheimer & Co. 2,000 2,000 *
One World Financial Center
200 Liberty Street
New York, NY 10281
</TABLE>
46
<PAGE> 50
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Heidron Engler 6,000 6,000 *
301 E. 64th St. Apt. 2A
New York, NY 10021
Robert Coane 6,000 6,000 *
46 West Lane
Bay Shore, NY 11706
Jeanette Coane Cust for Robert Coane Jr. 3,000 3,000 *
46 West Lane
Bay Shore, NY 11706
Jeanette Coane Cust for Mary Coane 3,000 3,000 *
46 West Lane
Bay Shore, NY 11706
Jeanne Coane Cust for Kevin Coane 3,000 3,000 *
46 West Lane
Bay Shore, NY 11706
Bill Musser 60,000 60,000 *
c/o Barker Lee & Co.
747 Fifth Avenue
New York, NY 10017
Isabelle Orlansky 57,000 57,000 *
201 E. 62nd St., Apt. 10A
New York, NY 10021
</TABLE>
47
<PAGE> 51
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
James C. Powers 18,900 18,900 *
345 E. 80 St., Apt. 185
New York, NY 10021
Terence Lambert 1,500 1,500 *
155 So. Bay Avenue
Brightwaters, NY 11718
Lipa Meir/Alon Cohen Trustees 4,074 4,074 *
3 Daniel Frisch St.
Tel Aviv 64731
Israel
Jay Tucker 9,000 9,000 *
325 E. 79th Apt. 15B
New York, NY 10021
</TABLE>
48
<PAGE> 52
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Jean Michel Nahon 15,000 15,000 *
7616 North 69th Place
Paradise Valley, AZ 85253
Lucien Selle 4,500 4,500 *
Banque Financiere de la Cite
Attn: Mr. Nerfin
P.O. Box 5030
1211 Geneve 11
Switzerland
Perlman & Associates 75,000 75,000 *
539 Dusie Avenue
Closter, NJ 07624
Bank of the West Trustee 1,200 1,200 *
50 West San Fernando
San Jose, CA 95113
</TABLE>
49
<PAGE> 53
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
The Excelsior Fund 100,000 100,000 *
7616 North 69th Place
Paradise Valley, AZ 85253
Joel Packer 6,000 6,000 *
531 Main Street
New York, NY 10044
Sergio Ciambellini 30,000 30,000 *
Via Oropa, 3
20132 Milano
Italy
Elio Bianchi 30,000 30,000 *
Via Oropa, 3
20132 Milano
Italy
Bill Klepper 500 500 *
c/o MRV Communications, Inc.
8943 Fullbright Ave.
Chatsworth, CA 91311
Holger Germer 35,000 35,000 *
c/o MRV Communications, Inc.
8943 Fullbright Avenue
Chatsworth, CA 91311
Wilhiem Solch 15,000 15,000 *
c/o MRV Communications, Inc.
8943 Fullbright Avenue
Chatsworth, CA 91311
D. Scott Tracy 500 500 *
c/o David Koch
55 Argyle Road
Scarsdale, N.Y. 10583
Halifax Fund, L.P 289,006 247,000 579,049 1,115,055 (3) 4.9%(3)
c/o Citco Fund Services Ltd.
Corporate Centre, West Bay Rd.
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
BWI
</TABLE>
50
<PAGE> 54
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Heracles Fund 20,243 6,000 26,243 *
c/o Bank of Bermuda (Cayman) Limited
P.O. Box 513
Third Floor
British American Tower
Dr. Roy's Drive
Georgetown
Grand Cayman, Cayman Islands, BWI
Leonardo, L.P. 95,320 49,500 260,747 405,567 1.8%
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167
GAM Arbitrage Investments, Inc. 18,688 10,500 57,944 87,132 *
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167
AG Super Fund International Partners, Inc. 15,573 7,500 36,215 59,288 *
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167
Raphael, L.P. 15,573 7,500 36,215 59,288 *
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167
Promethean Investment Group 165,147 165,147 *
40 West 57th Street
Suite 1520
New York, NY 10019
Colonial Penn Insurance Company 83,794 22,778 246,261 352,833 1.6%
1818 Market Street
Philadelphia, PA 19181
Colonial Penn Life Insurance Company 83,794 22,778 246,261 352,833 1.6%
1818 Market Street
Philadelphia, PA 19181
</TABLE>
51
<PAGE> 55
<TABLE>
<CAPTION>
Beneficial Share Ownership Before Offering(1)
------------------------------------------------------------
Outstanding Warrant Debenture Total Percentage
Name and Address of Selling Security Holders shares Shares Shares (2) Shares Ownership
-------------------------------------------- ----------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Gleneagles Fund Company 14,484 3,797 39,836 58,117 *
c/o Citco Fund Services, Ltd.
Corporate Centre, West Bay Rd.
P.O. Box 31106 SMB
Grand Cayman, Cayman Islands
BWI
Samyang Merchant Bank 57,269 362,149 419,418 1.9%
11th Floor, Youngpoong Bldg.
33 Seorin-dong, Chongno-ku
Seoul 110-110, Korea
CIBC Wood Gundy Securities Corporation 29,539 35,000 441,822 506,361 2.3%
425 Lexington Avenue
New York, NY 10017
Billy K. Yeh, M.D. 26,264 6,000 32,264 *
13145 Old Cutter Road
Miami, FL 33156
Copernicus Capital LLC 35,838 16,500 79,673 132,011 *
40 West 57th Street
New York, NY 10019
Intel Corporation 200,000(4) 500,000 700,000 *(4)
2200 Mission College Boulevard
Santa Clara, CA 95052-8114
- ----------
</TABLE>
* Less than 1%.
(1) Pursuant to the rules of the Securities and Exchange Commission,
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
or the conversion of convertible securities 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) The Debentures are convertible into Common Stock at any time at the
option of the holders (and will automatically convert into Common
Stock at maturity if not earlier converted or redeemed at a conversion
rate (the "Conversion Rate") equal to the quotient determined by
dividing the principal plus accrued but unpaid interest at the
conversion date by the "Conversion Date Market Price," as defined in
the Debenture. The Conversion Date Market Price is a specified
percentage of the prevailing market price of the Company's Common
Stock on the conversion date, which is defined in the Debentures as
the average of the closing bid price of a share of the Company's Stock
on the Nasdaq National Market for the five trading days immediately
preceding the conversion date. The Conversion Date Market Price is
85.5% of the applicable market price if the Debentures are converted
during the 30 days beginning December 6, 1996. The Conversion Date
Market Price decreases by an additional 1% each 30 days after January
4, 1997 until it reaches a floor of 77.5%. The number of Debenture
Shares shown in the table includes the maximum number of such
additional indeterminate number of shares as may be issuable upon
conversion by reason of adjustments and fluctuations of the conversion
price and assumes conversion of $17,825,000 principal amount of
Debentures held by such holders at a rate of approximately $5.60 per
share of Common Stock. At December 5, 1996, there were $17,825,000
principal amount of Debentures outstanding. Through December 5, 1996,
$12,175,000 principal amount of Debentures had been converted into
785,385 shares of Common Stock at an average conversion rate of $15.50
per share. As the Conversion Rate applicable to, and therefore the
number of Shares issuable upon, conversion of the outstanding
Debentures is subject to adjustment based on the fluctuating
Conversion Date Market Price and may be otherwise adjusted under
certain other circumstances, the number of Debenture Shares issuable
upon conversion of the Debentures outstanding from time to time may
increase or decrease. The maximum number of Shares issuable upon
conversion of the Debentures are 3,182,123, including up to 600,000
shares reserved for exercise of the Warrants and 785,385 shares
issued upon conversion of the Debentures through December 5, 1996.
52
<PAGE> 56
(3) Under the Debentures, conversion is limited so that a holder's
beneficial ownership of the Company's Common Stock following
conversion will not exceed 4.9% of the total issued and outstanding
shares of Common Stock. But for such limitation, based on the same
assumptions set forth in Note (2), the table would reflect for Halifax
Fund: Outstanding Shares - 289,006; Warrant Shares - 247,000;
Debenture Shares - 774,999; Total Shares - 1,311,005; and Percentage
Ownership - 5.7%.
(4) Pursuant to an agreement with the Company, the outstanding shares are
not transferable until February 25, 1997. The percentage ownership
excludes shares issuable upon exercise of Intel's warrants, none of
which was exercisable at December 5, 1996 or within 60 days thereafter.
Warrants to purchase an aggregate of 300,000 shares become exercisable
on February 25, 1997, and accordingly from and after February 25, 1997,
Intel may sell up to 500,000 shares pursuant to this Prospectus.
The information concerning the Selling Security Holders may change
from time to time and will be set forth in Supplements to this Prospectus as
required.
The Company has agreed to pay all expenses incident to the
registration of the offer and sale of the shares of Common Stock to the public
pursuant to this Prospectus other than selling commissions and fees.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, par value $0.0034 per share, and 1,000,000 shares of
Preferred Stock, par value $0.01 per share. As of December 5, 1996, there were
21,641,169 shares of Common Stock outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Holders of Common Stock also are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefore, subject to preferences that
may be applicable to any outstanding Preferred Stock. In the event of
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption,
conversion or cumulative voting rights. The outstanding shares of Common Stock,
including the shares offered by the Selling Stockholders hereby, are, and the
Warrant Shares and Debenture Shares offered hereby by the Sellers of Warrant
Shares and Sellers of Debenture Shares will be, when the Warrant Shares are
duly issued upon exercise of the Warrants and when the Debenture Shares are
issued upon conversion of the Debentures, as the case may be, validly
authorized and issued, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Certificate of Incorporation, the Board of
Directors has the authority to issue 1,000,000 shares of Preferred Stock in one
or more series and to fix the powers, designations, preferences, and relative,
participating, optional, or other rights thereof, including dividend rights,
conversion rights, voting rights, redemption terms, liquidation preferences,
and the number of shares constituting any series, without any further vote or
action by the Company's stockholders. The issuance of Preferred Stock in
certain circumstances may have the effect of delaying, deferring, or preventing
a change of control of the Company without further action by the stockholders,
may discourage bids for the Common Stock at a premium over the market price of
the Common Stock, and may adversely affect the market price of, and the voting
and other rights of the holders of, the Common Stock. The Company has no shares
of Preferred Stock outstanding and has no plans to issue any such shares. The
Company has agreed not to issue any shares
53
<PAGE> 57
of preferred stock before December 7, 1997, without the prior written consent
of H. J. Meyers & Co., Inc. (the successor to Thomas James Associates, Inc. the
Company's underwriter in its initial public stock offering).
WARRANTS
At December 5, 1996 the Company had outstanding warrants to purchase
an aggregate of 3,533,280 shares of Common Stock at exercise prices ranging
from $4.25 to $26.75 and expiring from January 1998 to January 2001.
DEBENTURES
In September 1996, the Company completed a private placement of an
aggregate of $30,000,000 principal amount of Debentures to a total of 12
investors. At December 5, 1996, there were $17,825,000 principal amount of
Debentures outstanding. The Debentures bear interest at 5% per annum payable
semi-annually on February 7 and August 7. The Debentures are convertible into
Common Stock at any time at the option of the holders (and will automatically
convert into Common Stock at maturity if not earlier converted or redeemed at a
conversion rate (the "Conversion Rate") equal to the quotient determined by
dividing the principal plus accrued but unpaid interest at the conversion date
by the "Conversion Date Market Price," as defined in the Debenture. The
Conversion Date Market Price is a specified percentage of the prevailing market
price of the Company's Common Stock on the conversion date, which is defined in
the Debentures as the average of the closing bid price of a share of the
Company's Stock on the Nasdaq National Market for the five trading days
immediately preceding the conversion date. The Conversion Date Market Price is
85.5% of the applicable market price if the Debentures are converted during the
30 days beginning December 6, 1996. The Conversion Date Market Price decreases
by an additional 1% each 30 days after January 4, 1997 until it reaches a floor
of 77.5%. Provided that the Registration Statement of which this Prospectus is a
part (the "Registration Statement") remains effective, the Company can force
conversion of $8,050,000 principal amount of Debentures (the "First Series of
Debentures") at the applicable Conversion Rate from and after 60 business days
of the effective date of the Registration Statement (the "Effective Date") upon
at least 30 business days' prior notice and the Company can force conversion of
the remaining $9,775,000 principal amount of Debentures at the applicable
Conversion Rate from and after the business day following the conversion of the
First Series of Debentures in their entirety upon at least 30 business days'
prior notice. In conjunction with the issuance of the Debentures the Company
issued the Debenture Warrants, exercisable until August 6, 1999 at a weighted
average exercise price of $26.67 per share, to purchase an aggregate of 600,000
shares of Common Stock. The shares underlying the Debenture Warrants are also
included in the Warrant Shares covered by this Prospectus.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Common Stock is American Stock
Transfer & Trust Co., New York, New York.
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Security Holders may be
effected from time to time in one or more transactions for their own accounts
(which may include block transactions) on The Nasdaq National Market or any
exchange on which the Common Stock may then be listed, in negotiated
transactions, through the writing of options on shares (whether such options
are listed on an options exchange or otherwise), or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Security Holders may effect such
transactions by selling Shares to or through broker-dealers, including
broker-dealers who may act as underwriters, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Security Holders and/or the purchasers of Shares for whom such
broker-dealers may act as agent or to whom they sell as principal or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Security Holders may also sell Common Stock
pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") or pledge Shares as collateral for margin accounts, and
such Shares could be resold pursuant to the terms of such accounts.
54
<PAGE> 58
The aggregate proceeds to the Selling Security Holders from the sale of
the Shares will be the purchase price of such Shares less discounts,
concessions or commissions, if any. The Company will pay all other expenses of
this offering which are estimated at $110,000.
The Selling Security Holders and any brokers, dealers, agents or
underwriters that participate with the Selling Security Holders in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act, in which event any discounts, concessions or
commissions received by such broker-dealers, agents or underwriters and any
profit on the resale of the Shares may be deemed to be underwriting
compensation under the Securities Act.
Certain of the Selling Security Holders may utilize Hampshire
Securities as a broker to effectuate sales for them. Included in the Warrant
Shares are 146,910 shares of Common Stock (the "Representative's Warrant
Shares") being offered by Hampshire Securities Corporation ("Hampshire
Securities") and certain of its principals. Hampshire Securities was the
representative of the underwriters in the Company's public offering in January
1995 and the Company issued Hampshire Securities warrants (the
"Representative's Warrants") to purchase the Warrant Shares at $5.60 per share.
Under the Exchange Act and the regulations thereunder, any person
engaged in a distribution of the Shares of the Company offered by this
Prospectus (other than any broker-dealer qualifying as a "passive market-maker"
and effecting transactions in accordance with Rule 10b-6A under the Exchange
Act) may not simultaneously engage in market making activities with respect to
the Shares of the Company during the applicable "cooling off" periods prior
to the commencement of such distribution. In addition, without limiting the
foregoing, each Selling Warrant Holders and Selling Stockholders will need to
comply with the applicable provisions of the Exchange Act and the rules and
regulations thereunder including, without limitation, Rules 10b-6 and 10B-7,
which provisions may limit the timing of purchases and sales of Shares by such
Selling Warrant Holders or Selling Stockholders.
LEGAL MATTERS
The validity of the Common Stock being offered hereby has been passed
upon for the Selling Security Holders by Freshman, Marantz, Orlanski, Cooper &
Klein, a law corporation, Beverly Hills, California.
EXPERTS
The audited Consolidated Financial Statements of the Company
incorporated by reference into this Prospectus from the Company's Form 10-K AND
10-K/A for the year ended December 31, 1995 and the Combined Financial
Statements of the Fibronics Ltd. Group incorporated herein from the Company's
Form 8-K/A have been audited by Arthur Andersen LLP, and Luboshitz, Kasierer &
Co. Arthur Andersen, respectively, independent public accountants, as indicated
in their reports with respect thereto, and are incorporated herein in reliance
upon the authority of said firms as experts in giving said reports.
55
<PAGE> 59
================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER
MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE
COMMON STOCK OFFERED HEREBY IN ANY JURISDICTION IN WHICH IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
_________________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Available Information . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . 5
The Company . . . . . . . . . . . . . . . . . . . . 10
Use of Proceeds . . . . . . . . . . . . . . . . . . 11
Dividend Policy . . . . . . . . . . . . . . . . . . 11
Price Range of Common Stock . . . . . . . . . . . . 12
Selected Financial Data . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of
Results of Operations and Financial Condition . . 15
Business . . . . . . . . . . . . . . . . . . . . . 22
Management . . . . . . . . . . . . . . . . . . . . 37
Principal Stockholders and Selling
Security Holders . . . . . . . . . . . . . . . . . 42
Description of Capital Stock . . . . . . . . . . . 53
Plan of Distribution . . . . . . . . . . . . . . . 54
Legal Matters . . . . . . . . . . . . . . . . . . . 55
Experts . . . . . . . . . . . . . . . . . . . . . . 55
</TABLE>
7,886,707 SHARES
MRV COMMUNICATIONS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
December __, 1996
================================================================
<PAGE> 60
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale of the Common Stock being registered
hereby, other than underwriting commissions and discounts, all of which are
estimated except for the SEC filing fee.
<TABLE>
<CAPTION>
Item Amount
---- ------
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . 34,407
Printing expenses . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . 50,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . 20,000
Miscellaneous expenses . . . . . . . . . . . . . . . . . . . . . 5,593
-------
Total . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law allows for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article 8 of the Registrant's
Certificate of Incorporation and Article IX of the Registrant's Bylaws provide
for indemnification of the Registrant's directors, officers, employees, and
other agents to the extent and under the circumstances permitted by the
Delaware General Corporation Law. The Registrant has also entered into
agreements with its directors and executive officers that will require the
Registrant, among other things, to indemnify them against certain liabilities
that may arise by reason of their status or service as directors to the fullest
extent not prohibited by law.
ITEM 16. EXHIBITS
5 Opinion of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Luboshitz, Kasierer & Co. Arthur Andersen
23.3 Consent of Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation (contained in Exhibit 5)
24.1 Power of Attorney (contained in Signature page)
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(a) to include any prospectus required by Section 10(a)(3) of
the Securities Act;
II-1
<PAGE> 61
(b) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b), if in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement.
(c) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration Statement.
provided, however, that the undertakings set forth in paragraph (a) and (b)
above shall not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that are incorporated by reference in
this Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, 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 of 1933 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 such director, officer or
controlling person in connection with the securities being registered, 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 of 1933 and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement 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.
For purposes of determining any liability under the Securities Act of
1933, 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 of 1933 shall be deemed to be part of this
Registration Statement as of the time it was declared effective. For the
purpose of determining any liability under the Securities Act of 1933, each
post-effective 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-2
<PAGE> 62
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and 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 December 1996.
MRV COMMUNICATIONS, INC.
By: /s/ NOAM LOTAN
_________________________________
Noam Lotan, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes an appoints Noam Lotan, Zeev Rav-Noy and Edmund
Glazer, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution for him in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys- in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Names Title Date
----- ----- ----
<S> <C> <C>
/s/ NOAM LOTAN President, Chief Executive Officer December 6, 1996
------------------------------------ (Principal Executive Officer), and a
Noam Lotan Director
/s/ ZEEV RAV-NOY Chief Operating Officer, December 6, 1996
------------------------------------ Treasurer, and a Director
Zeev Rav-Noy
/s/ SHLOMO MARGALIT Chairman of the Board, Chief Technical December 6, 1996
------------------------------------ Officer, Secretary, and a Director
Shlomo Margalit
/s/ EDMUND GLAZER Vice President of Finance and December 6, 1996
------------------------------------ Administration, Chief Financial Officer
Edmund Glazer (Principal Financial and Accounting
Officer)
/s/ LEONARD MAUTNER Director December 6, 1996
------------------------------------
Leonard Mautner
/s/ MILTON ROSENBERG Director December 6, 1996
------------------------------------
Milton Rosenberg
</TABLE>
<PAGE> 1
EXHIBIT 5
[FRESHMAN, MARANTZ, ORLANSKI, COOPER & KLEIN LETTERHEAD]
December 6, 1996
MRV Communications, Inc.
8917 Fullbright Avenue
Chatsworth, CA 91311
Re: Registration Statement on Form S-3
Dear Sirs:
We have examined the Registration Statement on Form S-3 (the
"Registration Statement") to be filed with the Securities and Exchange
Commission (the "Commission") in connection with the registration under the
Securities Act of 1933, as amended, of up to 5,160,999 shares (the "Shares") of
Common Stock, $0.0034 par value (the "Common Stock"), of MRV Communications,
Inc. (the "Company"). The Shares consist of (a) 2,283,304 shares of Common
Stock outstanding (the "Outstanding Shares") at December 5, 1996 (and include
854,928 shares of Common Stock being carried forward from the Company's
Registration Statement on Form S-1 declared effective by the Commission on June
21, 1996 (the "June 21, 1996 S-1") and are to be offered for the accounts of
the holders; (b) 3,021,280 shares of Common Stock (the "Warrant Shares")
issuable upon exercise of certain warrants of the Company outstanding at
December 5, 1996 (and include 1,870,780 shares of Common Stock being carried
forward from the June 21, 1996 S-1) and are to be offered for the accounts of
the holders of such Warrants; and (c) up to 2,582,123 shares of Common Stock
(the "Debenture Shares") issuable upon conversion of the balance outstanding at
December 5, 1996 of $30,000,000 principal amount of the Company's 5%
Convertible Subordinated Debentures due August 6, 1999 (the "Debentures") and
are to be offered for the accounts of holders of the Debentures.
It is our opinion that:
(1) The Outstanding Shares are legally and validly issued, fully
paid and nonassessable shares of the Company;
(2) The Warrant Shares, upon proper exercise and payment of the
consideration to the Company pursuant to the terms applicable
warrant, will be validly issued, fully paid and nonassessable
shares of the Company; and
(3) The Debenture Shares, upon proper conversion pursuant to the
terms of the applicable Debenture, will be validly issued,
fully paid and nonassessable shares of the Company.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and further consent to the use of our name under the
heading "Legal Matters" in the Prospectus constituting a part thereof and any
amendment thereto.
Very truly yours,
/s/ FRESHMAN, MARANTZ, ORLANSKI,
COOPER & KLEIN
Freshman, Marantz, Orlanski,
Cooper & Klein
A Law Corporation
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report dated
February 9, 1996 included in MRV Communications' Form 10-K and Form 10-K/A for
the year ended December 31, 1995 and to all references to our Firm included in
this registration statement.
/s/ Arthur Andersen
ARTHUR ANDERSEN LLP
Los Angeles, California
December 4, 1996
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the incorporation by
reference into this Registration Statement of our report dated February 29,
1996 (except with respect to the subsequent events discussed in Note 20 as to
which the date is October 30, 1996) appearing in the Current Report on Form
8-K/A of MRV Communications, Inc. and to all references to our Firm included in
this Registration Statement.
/s/ Luboshitz, Kasierer & Co.
LUBOSHITZ, KASIERER & CO.
A member firm of Andersen Worldwide Sc.
Haifa, Israel
December 4, 1996
