<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT.
FOR THE TRANSITION PERIOD FROM _______________ TO ______________
COMMISSION FILE NUMBER 0-25678
MRV COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1340090
(STATE OF OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8943 FULLBRIGHT AVE., CHATSWORTH, CA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 773-9044
Check whether the issuer: (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of June 30, 2000, there were 64,306,180 shares of Common Stock, $.0017 par
value per share, outstanding.
<PAGE> 2
MRV COMMUNICATIONS, INC.
Form 10-Q March 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 (audited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the Six and Three Months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Six and Three Months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURE 25
</TABLE>
As used in this Report, "MRV" or the "Company" refers to MRV Communications,
Inc. and its consolidated subsidiaries.
2
<PAGE> 3
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
(unaudited) (audited)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 45,207 $ 34,330
Short-term investments 3,427 10,141
Accounts receivable 63,555 60,637
Inventories (Including contract in progress of
$1,682 in 2000) 49,616 35,392
Refundable income taxes -- 3,216
Deferred income taxes 7,663 6,907
Other current assets 5,872 6,336
------------------------------------------------------------------------------------------------------------------
Total current assets 175,340 156,959
PROPERTY AND EQUIPMENT - At cost, net of depreciation
and amortization 48,497 19,600
OTHER ASSETS:
Goodwill & intangibles 321,764 27,214
U.S. treasury notes 95,014 97,704
Investments in partner companies 29,969 4,232
Deferred income taxes 6,827 5,324
Loan financing costs and other 6,655 3,500
------------------------------------------------------------------------------------------------------------------
$ 684,066 $ 314,533
------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of financing lease obligations $ 1,097 $ 198
Accounts payable 33,485 33,455
Accrued liabilities 21,744 15,403
Short term debt 78,801 -
Deferred revenue 1,293 1,478
Income taxes payable 714 -
------------------------------------------------------------------------------------------------------------------
Total current liabilities 137,134 50,534
LONG-TERM LIABILITIES:
Convertible debentures 90,000 90,000
Capital lease obligations, net of current portion 1,589 1,481
Deferred income taxes 1,213 281
Other long-term liabilities 10,152 2,647
------------------------------------------------------------------------------------------------------------------
Total long term liabilities 102,954 94,409
MINORITY INTERESTS 2,599 2,775
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
1,000 shares authorized, no shares outstanding
Common stock, $0.0017 par value:
160,000 shares authorized, 64,306 shares outstanding
in 2000 and 56,234 shares outstanding in 1999 128 124
Additional paid-in capital 542,867 191,440
Treasury Stock (133) (133)
Deferred compensation (40,795) -
Retained earnings (deficit) (51,991) (18,377)
Cumulative translation adjustments (8,697) (6,239)
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 441,379 166,815
------------------------------------------------------------------------------------------------------------------
$ 684,066 $ 314,533
------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
3
<PAGE> 4
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended, Three Months Ended
---------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, net $ 139,007 $ 143,367 $ 73,935 $ 73,251
---------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 88,529 93,961 45,793 47,595
Research and development expenses 13,367 12,098 7,307 5,969
Research and development expenses of
consolidated development stage enterprises 13,282 4,939 7,451 2,603
Selling, general and administrative expenses 41,481 29,804 26,467 14,750
Amortization of goodwill and intangibles from
acquisitions 13,069 1,933 12,055 1,142
---------------------------------------------------------------------------------------------------------------------
Operating (loss) income (30,721) 632 (25,138) 1,192
Interest expense (2,803) (2,250) (1,678) (1,125)
Other income, net (1) 1,125 2,660 488 1,257
Provision for income taxes 883 1,409 1,377 782
Minority interests (332) (17) (45) (17)
---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (33,614) $ (384) $ (27,750) $ 525
---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.56) $ (0.01) $ (0.44) $ 0.01
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.56) $ (0.01) $ (0.44) $ 0.01
---------------------------------------------------------------------------------------------------------------------
SHARES USED IN PER - SHARE CALCULATION - BASIC 59,839 53,358 62,754 53,472
SHARES USED IN PER - SHARE CALCULATION - DILUTED 59,839 53,358 62,754 57,621
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes cost of unconsolidated development stage enterprises of $1,437
and $951 for the six and three months ended June 30, 2000
See accompanying notes
4
<PAGE> 5
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
---------- ----------
Net cash (used in) provided by operating activities $ (5,039) $ 3,059
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,588) (3,325)
Purchases of investments (9,096) (1,511)
Investments in partner companies (10,785) --
Proceeds from sale or maturity of investments 12,216 13,984
Cash used in acquisitions and equity purchases, net of cash received (45,391) (5,595)
---------- ----------
Net cash provided by (used in) investing activities (55,644) 3,553
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 68,510 --
Net proceeds from issuance of common stock 6,001 689
Principal payments on capital lease obligations (493) (442)
---------- ----------
Net cash provided by financing activities 74,018 247
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,458) (1,490)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,877 5,369
CASH AND CASH EQUIVALENTS, beginning of period 34,330 20,692
---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 45,207 $ 26,061
========== ==========
</TABLE>
See accompanying notes
5
<PAGE> 6
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The accompanying condensed consolidated financial statements have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial position of MRV Communications and Subsidiaries as
of June 30, 2000, and the results of their operations and their cash flows for
the six and three months then ended.
2. BUSINESS COMBINATION
On April 24, 2000, the Company completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc. (FOCI), a
Republic of China corporation. FOCI is a manufacturer of passive fiber optic
components for Wavelength Division Multiplexing. Under the terms of the purchase
agreement, FOCI shareholders received approximately $48.6 million in cash and
approximately 4.8 million shares of common stock and warrants for a total
purchase price of approximately $310.4 million. The acquisition is being
accounted for using the purchase method of accounting. The excess purchase price
paid over the fair value of the net identifiable assets acquired of $262.5
million has been recorded as goodwill and is being amortized on a straight-line
basis over 5 years.
The results of operations of FOCI have been included in the Company's
consolidated financial statements from April 25, 2000. The following unaudited
pro forma financial information presents the combined results of operations of
the Company and FOCI as if the acquisition had occurred as of January 1, 2000
and 1999, giving effect to certain adjustments, including amortization of
goodwill and deferred compensation charges.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues, net $146,065 $152,220 $75,026 $78,436
Net income (loss) (33,087) (342) (27,398) 543
Basic and diluted net loss per share $ (0.55) $ (0.01) $ (0.44) $ 0.01
</TABLE>
3. NET INCOME (LOSS) PER SHARE
Basic earnings (loss) per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings (loss)
per common share include the incremental shares issuable upon the assumed
exercise of stock options and assumed conversion of $90.0 million convertible
debentures. For the six and three months ended June 30, 2000, common stock
equivalents were not considered in the diluted computation, as their effect was
antidilutive.
4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." For year-end financial statements, SFAS No. 130 requires that net
income (loss) and all other non-owner changes in equity be displayed in a
financial statement with the same prominence as other consolidated financial
statements. In addition, the standard requires companies to display the
components of comprehensive income.
<TABLE>
<CAPTION>
(thousands)
Six Months Ended June 30, Three Months Ended June 30
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $(33,614) $ (384) $(27,750) $ 525
Change in foreign currency translation (2,458) (1,490) (2,691) (929)
-------- ------- -------- -----
Comprehensive loss $(36,072) $(1,874) $(30,441) $(404)
======== ======= ======== =====
</TABLE>
5. INVENTORIES
Inventories are stated at the lower of cost or market and consist of materials,
labor and overhead. Cost is determined by the first-in, first out method.
Inventories consist of the following as of June 30, 2000 and December 31, 1999
(in thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $18,664 $ 8,475
Work-in-process 17,583 8,083
Finished goods 13,369 18,834
------- -------
$49,616 $35,392
</TABLE>
6
<PAGE> 7
6. STOCK DISTRIBUTION
On March 26, 2000, the Company completed a two-for-one stock split. The effect
of this stock split has been reflected in the accompanying condensed
consolidated financial statements for all periods presented.
7. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
The Company operates under a business model that creates and manages start-up
companies and independent business units. These companies fall into two
segments, operating entities and development stage enterprises. Segment
information is therefore being provided on this basis which differs from prior
period presentations of portions of the operating entities as segments.
Development stage enterprises that the Company has created or invested in are
developing optical components, subsystems and networks and products for the
infrastructure of the Internet. Operating entities of the Company design,
manufacture and distribute optical components, optical subsystems, optical
networking solutions, Internet infrastructure products and provide IT system
integration services.
The accounting policies of the segments are the same as those described in the
summary of significant accounting polices. The Company evaluates segment
performance based on revenues, operating income (loss) and total assets of each
segment. As such, there are no separately identifiable segment assets nor are
there any separately identifiable statements of operations data below operating
income.
BUSINESS SEGMENT NET REVENUES for the six and three months ended June 30, 2000
and 1999 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <S> <C>
Operating entities $ 139,007 $ 143,367 $ 73,935 $ 73,251
Development stage enterprises -- -- -- --
--------- --------- ----------- ----------
Total Revenues $ 139,007 $ 143,367 $ 73,935 $ 73,251
========= ========= =========== ==========
</TABLE>
There were no inter-segment sales in the six and three months ended June 30,
2000 and 1999.
BUSINESS SEGMENT PROFIT (LOSS) for the six and three months ended June 30, 2000
and 1999 (in thousands):
<TABLE>
<CAPTION>
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <S> <C>
Operating income (loss):
Operating entities $ (17,439) $ 5,571 $ (17,687) $ 3,795
Development stage enterprises (13,282) (4,939) (7,451) (2,603)
--------- --------- ----------- ----------
$ (30,721) $ 632 $ (25,138) $ 1,192
========= ========= =========== ==========
</TABLE>
For the six and three months ended and as of June 30, 2000, the Company had no
one customers that accounted for more than 10 percent of revenue or accounts
receivable. A summary of external revenue by region follows. The Company does
not track customer revenue by region for each individual reporting segment.
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended Three Months Ended
June 30 June 30
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $ 55,032 $ 61,419 $28,113 $32,716
Asia Pacific 18,171 14,193 14,084 6,445
European 62,543 65,516 30,050 33,051
Other 3,261 2,239 1,688 1,039
-------- -------- ------- -------
Total net sales $139,007 $143,367 $73,935 $73,251
======== ======== ======= =======
</TABLE>
Income (loss) before provision for income taxes:
<TABLE>
<CAPTION>
(In thousands)
Six Months Ended Three Months Ended
June 30 June 30
------------------------- --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States $(25,756) $ 1,965 $(22,224) $ 1,038
Non-United States (6,975) (940) (4,149) 269
-------- -------- -------- -------
Income (loss) before provision
for income taxes $(32,731) $ 1,025 $(26,373) $ 1,307
======== ======== ======== =======
</TABLE>
7
<PAGE> 8
8. SUBSEQUENT EVENTS
On July 12, 2000, the Company completed the acquisition of all of the
outstanding capital stock of Quantum Optech, Inc. (QOI), a Republic of China
corporation. The acquisition was accounted for using the purchase method. Under
the terms of the agreement, QOI shareholders received 1,028,562 shares of
common stock and 80,000 options to purchase common stock for a total purchase
price of approximately $31.2 million. QOI is a manufacturer of optical thin
film coating and filters for Dense Wavelength Division Multiplexing.
On July 12, 2000, the Company completed the acquisition of all of the
outstanding capital stock of AstroTerra Corporation (AstroTerra), a
California corporation. The acquisition was accounted for using the purchase
method. Under the terms of the agreement, AstroTerra shareholders received
1,587,302 shares of common stock and 809,143 options to purchase common stock
for a total purchase price of approximately $159.3 million. AstroTerra develops
and manufactures free-space optical laser communication systems for data and
telecommunication networks.
On July 21, 2000, the Company completed the acquisition of approximately 99.9%
of the outstanding capital stock of Optronics International Corporation (OIC),
a Republic of China corporation. The acquisition was accounted for using the
purchase method. Under the terms of the agreement, OIC shareholders received
3,399,975 shares of common stock and 800,000 options to purchase common stock
for a total purchase price of approximately $103.2 million. OIC is a
manufacturer of high temperature semiconductor lasers, transceivers and
detectors for optical networks.
8
<PAGE> 9
9. SUPPLEMENTAL UNAUDITED PRO FORMA FINANCIAL DATA
The purpose of the following unaudited pro forma Condensed Consolidated
Statements of Operations for the six and three months ended June 30, 2000 and
1999 is to present the results of operations excluding certain charges such as
non-cash amortization of intangibles from acquisitions, non-cash deferred
compensation expense and expenses associated with development stage enterprises.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended, Three Months Ended
-----------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) AS REPORTED $ (33,614) $ (384) $ (27,750) $ 525
AMORTIZATION OF INTANGIBLES FROM ACQUISITIONS,
net of tax effects 13,069 1,933 12,055 1,142
DEFERRED COMPENSATION EXPENSE, net of tax effects 7,328 -- 7,328 --
DEVELOPMENT STAGE ENTERPRISES, net of tax effects 14,719 4,939 9,565 2,603
-----------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA NET INCOME BEFORE AMORTIZATION
OF ACQUISITION INTANGIBLES AND RECOGNIZED
DEVELOPMENT STAGE ENTERPRISE COSTS $ 1,502 $ 6,488 $ 1,198 $ 4,270
-----------------------------------------------------------------------------------------------------------------------
UNAUDITED PRO FORMA EARNINGS PER SHARE BEFORE
AMORTIZATION OF ACQUISITION INTANGIBLES AND
RECOGNIZED DEVELOPMENT STAGE ENTERPRISE
COSTS - BASIC $ 0.03 $ 0.12 $ 0.02 $ 0.08
UNAUDITED PRO FORMA EARNINGS PER SHARE BEFORE
AMORTIZATION OF ACQUISITION INTANGIBLES AND
RECOGNIZED DEVELOPMENT STAGE ENTERPRISE
COSTS - DILUTED $ 0.02 $ 0.12 $ 0.02 $ 0.07
-----------------------------------------------------------------------------------------------------------------------
SHARES USED IN PER - SHARE CALCULATION - BASIC 59,839 53,358 62,754 53,472
SHARES USED IN PER - SHARE CALCULATION - DILUTED 66,767 56,391 68,925 58,326
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE> 10
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
MRV is in the business of creating and managing growth companies in optical
technology and Internet infrastructure. The Company has created several start-up
companies and formed independent business units in the optical technology and
Internet infrastructure area. The Company's core operations include the design,
manufacture and sale of two groups of products: (i) optical networking and
internet infrastructure products, primarily subscribers' management, Network
Element Management, and physical layer, switching and routing management systems
in fiber optic metropolitan networks and (ii) fiber optic components for the
transmission of voice, video and data across enterprise, telecommunications and
cable TV networks. The Company's advanced optical networking and Internet
infrastructure solutions greatly enhance the functionality of carrier and
network service provider networks. The Company's fiber optic components
incorporate proprietary technology, which delivers high performance under
demanding environmental conditions.
On April 24, 2000, the Company completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc. (FOCI), a
Republic of China corporation. FOCI is a manufacturer of passive fiber optic
components for Wavelength Division Multiplexing. Under the terms of the purchase
agreement, FOCI shareholders received approximately $48.6 million in cash and
approximately 4.8 million shares of common stock and warrants for a total
purchase price of approximately $310.4 million. The acquisition is being
accounted for using the purchase method of accounting. The excess purchase price
paid over the fair value of the net identifiable assets acquired of $262.5
million has been recorded as goodwill and is being amortized on a straight-line
basis over 5 years.
On July 12, 2000, the Company completed the acquisition of all of the
outstanding capital stock of Quantum Optech, Inc. (QOI), a Republic of China
corporation. The acquisition was accounted for using the purchase method. Under
the terms of the agreement, QOI shareholders received 1,028,562 shares of
common stock and 80,000 options to purchase common stock for a total purchase
price of approximately $31.2 million. QOI is a manufacturer of optical thin
film coating and filters for Dense Wavelength Division Multiplexing.
On July 12, 2000, the Company completed the acquisition of all of the
outstanding capital stock of AstroTerra Corporation (AstroTerra), a
California corporation. The acquisition was accounted for using the purchase
method. Under the terms of the agreement, AstroTerra shareholders received
1,587,302 shares of common stock and 809,143 options to purchase common stock
for a total purchase price of approximately $159.3 million. AstroTerra develops
and manufactures free-space optical laser communication systems for data and
telecommunication networks.
On July 21, 2000, the Company completed the acquisition of approximately 99.9%
of the outstanding capital stock of Optronics International Corporation (OIC),
a Republic of China corporation. The acquisition was accounted for using the
purchase method. Under the terms of the agreement, OIC shareholders received
3,399,975 shares of common stock and 800,000 options to purchase common stock
for a total purchase price of approximately $103.2 million. OIC is a
manufacturer of high temperature semiconductor lasers, transceivers and
detectors for optical networks.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated statements of
operations data of the Company expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Six Months Ended, Three Months Ended
-----------------------------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, net 100.0% 100.0% 100.0% 100.0%
-----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 63.7 65.5 61.9 65.0
Research and development expenses 9.6 8.4 9.9 8.1
Research and development expenses of
consolidated development stage enterprises 9.6 3.4 10.1 3.6
Selling, general and administrative expenses 29.8 20.8 35.8 20.1
Amortization of goodwill and intangibles
from acquisitions 9.4 1.3 16.3 1.6
-----------------------------------------------------------------------------------------------------------------------
Operating (loss) income (22.1) 0.4 (34.0) 1.6
Interest expense related to convertible notes 2.0 1.6 2.3 1.5
Other income, net 0.8 1.9 0.7 1.7
Provision for income taxes 0.6 1.0 1.9 1.1
Minority interests 0.2 0.0 0.1 0.0
-----------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (24.2)% (0.3)% (37.5)% 0.7 %
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues
Revenues for the three and six months ended June 30, 2000 were $73,935,000 and
$139,007,000, respectively, as compared to revenues for the three and six months
ended June 30, 1999 of $73,251,000 and $143,367,000, respectively. The change
represented increases of $684,000 or 0.9% for the three months ended June 30,
2000 and decreases of $4,360,000 or 3.0% for the six months ended June 30, 2000
over the six months ended June 30, 1999. Revenues remained constant or decreased
during the periods principally as result of the Company's decision to exit the
LAN switching business. International sales accounted for approximately 62.0%
and 60.4% of revenues for the three and six months ended June 30, 2000 as
compared to 55.3% and 57.2% of revenues for the three and six months ended June
30, 1999. The increases in revenues from international sales were primarily the
result of incorporating results of FOCI which has the majority of its sales
outside the U.S. for April 25, 2000 until June 30, 2000.
Gross Profit
Gross profit for the three and six months ended June 30, 2000 was $28,142,000
and $50,478,000 compared to gross profit of $25,656,000 and $49,406,000 during
the three and six months ended June 30, 1999. The changes represented an
increase of $2,486,000 or approximately 9.7% for the three months ended June 30,
2000 over the three months ended June
10
<PAGE> 11
30, 1999 and an increase of $1,072,000 or approximately 2.2% for the six months
ended June 30, 2000 over the six months ended June 30, 1999. Gross Margin
defined as a percentage of revenues, increased from 35.0% during the three
months ended June 30, 1999 to 38.1% during the three months ended June 30, 2000
and from 34.5% during the six months ended June 30, 1999 to 36.3% during the six
months ended June 30, 2000. The increases in gross profit were principally the
result of sales of a more favorable mix of products with higher gross margins.
Research and Development
Research and development ("R&D") expenses were $7,307,000 and $13,367,000, and
represented 9.9% and 9.6% of revenues, for the three and six months ended June
30, 2000, respectively. R&D expenses were $5,969,000 and $12,098,000, and
represented 8.1% and 8.4% of revenues, for the three and six months ended June
30, 1999, respectively. The increase of $1,338,000 or 22.4% in R&D spending
during the three months ended June 30, 2000 over the three months ended in June
30, 1999 and the increase of $1,269,000 or 10.5% in R&D spending during the six
months ended June 30, 2000 over the six months ended in June 30, 1999 was
primarily attributable to the Company's decision to end further development of
LAN switching products.
R&D expenses of consolidated development stage enterprises reflects the costs
incurred by consolidated development stage enterprises. These expenses were
$7,451,000 or 10.1% of revenues for the three months ended June 30, 2000 as
compared to $2,603,000 or 3.6% of revenue for the three months ended June 30,
1999 and $13,282,000 or 9.6% of revenues for the six months ended June 30, 2000
as compared to $4,939,000 or 3.4% of revenue for the six months ended June 30,
1999. The increases of $4,848,000 or 186.2% and $8,343,000 or 168.9% in R&D
expenses of consolidated development stage enterprises during the three and six
months ended June 30, 2000 over the comparable periods in 1999 is the result of
increased development activities at existing enterprises and initiated
enterprises during the current periods.
The Company intends to continue to invest in the research and development of new
products both in its operating entities and in new and existing development
stage enterprises. Management believes that the ability of the Company to foster
such development and commercialize new products is an important competitive
factor.
Selling, General and Administrative
Selling, general and administrative expenses ("SG&A") increased to $26,467,000
and $41,481,000 for the three and six months ended June 30, 2000, respectively,
from $14,750,000 and 29,804,000 for the three and six months ended June 30,
1999, respectively. As a percentage of revenues, SG&A increased from 20.1% and
20.8% for the three and six months ended June 30, 1999 to 35.8% and 29.8% for
the three and six months ended June 30, 2000. The increases in SG&A expenses
both in dollar amounts and as a percentage of revenues were due primarily to
substantially increased marketing efforts as well as the addition of personnel
and deferred compensation expenses incurred in connection with acquisitions
occurring during the three months ended June 30, 2000.
Amortization of Goodwill and Intangibles from Acquisitions.
Expenses related to amortization of goodwill and intangibles from acquisitions
increased to $12,055,000 and $13,069,000 for the three and six months ended June
30, 2000, respectively, from $1,142,000 and $1,933,000 for the three and six
months ended June 30, 1999, respectively. The increases in expenses related to
amortization of goodwill and intangibles of revenues were due primarily to the
substantial amount of acquisition activities during 2000, primarily concentrated
in the three months ended June 30, 2000.
Interest expense
In June 1998, the Company sold $100,000,000 principal amount of 5% convertible
subordinated notes due 2003 (the "Notes") in a 144A private placement to
qualified institutional investors at 100% of their principal amount, less a
selling discount of 3% of the principal amount. The principal amount of the
Notes was reduced to $90,000,000 when the Company repurchased $10,000,000
principal amount of the Notes at a discount from par during the last quarter of
1998. The outstanding Notes resulted in interest expenses of $1,125,000 for each
of the three and six months ended June 30, 2000
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and 1999.
Other Income
Other income, net decreased from $1,257,000 and $2,660,000 during the
three and six months ended June 30, 1999 to $488,000 and $1,125,000 during the
three and six months ended June 30, 2000. As a percentage of revenues, other
income, net decreased from 1.7% and 1.9% for the three and six months ended June
30, 1999, respectively, to 0.7% and 0.8% for the three and six months ended June
30, 2000, respectively. The decreases in other income, net resulted primarily
from the Company's equity in the costs of development stage enterprises, which
it does not consolidate.
Provision for Income Taxes
The Company recorded provisions for income taxes of $1,377,000 and $883,000
during the three and six months ended June 30, 2000, respectively, as compared
to provisions for income taxes of $782,000 and $1,409,000 during the three and
six months ended June 30, 1999, respectively. The differences between tax
amounts during the periods in 2000 and 1999 represent the variance in the amount
of income and loss realized by the Company in the various countries in which it
operates and the varying tax rates that are applicable in those countries.
Minority Interests
Minority interests represent ownership by third parties in some of the Company's
partner companies that are consolidated.
Net Loss
The Company incurred net losses of $27,750,000 and $33,614,000 during the three
and six months ended June 30, 2000, respectively, compared to net income of
$525,000 and a net loss of $384,000 during the three and six months ended June
30, 1999. The net losses during 2000 were principally the result of the
Company's amortization of goodwill and intangibles and deferred compensation
expenses from its acquisitions, primarily in the quarter ended June 30, 2000,
and its costs recognized in connection with the Company's investments in
consolidated and unconsolidated development stage enterprises. Unaudited pro
forma net income for the three months and six months ended June 30, 2000 would
have been $1,198,000 and $1,502,000, respectively, if certain charges were not
incurred such as the amortization of goodwill and intangibles and deferred
compensation expenses incurred primarily in connection with the acquisition of
Fiber Optic Communications, Inc. (FOCI), a Taiwanese manufacturer of passive
optical components, and costs recognized in connection with the Company's
investments in consolidated and unconsolidated development stage enterprises.
Unaudited pro forma net income for the three months and six months ended June
30, 1999 would have been $4,270,000 and $6,488,000, respectively, if certain
charges were not incurred such as the amortization of intangibles principally
resulting from the Company's acquisition of Xyplex in 1998 and costs recognized
in connection with the Company's investments in consolidated and unconsolidated
development stage enterprises.
In July 2000, the Company completed three additional acquisitions including the
acquisition of the outstanding capital stock of Quantum Optech Inc. ("QOI"), a
Taiwanese manufacturer of active and passive fiber optic components, Optronics
International Corp., a Taiwanese manufacturer of active fiber optic components,
and Astroterra Corporation, a California developer of free-space optical
wireless technology. The Company expects to record amortization of goodwill
charges for these and the other acquisitions it has made thus far in 2000 of
approximately $21,237,000 during the three months ending September 30, 2000.
This excludes goodwill amortization charges that the Company will incur as a
result of the acquisition of Astroterra, which have not yet been determined.
A portion of the purchase prices paid in connection with certain acquisitions
the Company has made thus far in 2000, represented deferred stock compensation
relating to options to purchase the common stock of the Company. These options
had fair values aggregating approximately $63,915,000. Deferred stock
compensation expense for the three and six months ended June 30, 2000 relating
to these stock options totaled approximately $7,328,000. In connection with
these acquisitions, the Company expects to incur approximately $13,306,000
of deferred stock compensation expenses in
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<PAGE> 13
the three months ending September 30, 2000. This excludes deferred stock
compensation expenses that the Company will incur as a result of the acquisition
of AstroTerra, which have not yet been determined. Deferred stock compensation
will be amortized over the related employee service period.
In July 2000, the Company and its wholly-owned subsidiary, Luminent, Inc.
entered into four year employment agreements with Luminent's President and Chief
Executive Officer and Vice President of Finance and Chief Financial Officer. The
agreements provide for annual salaries, performance bonuses and combinations of
stock options to purchase shares of the Company's common stock and Luminent's
common stock. The options to purchase the Company's common stock are immediately
exercisable and are expected to result in deferred compensation charges of
$2,240,000 during the three months ending September 30, 2000. The options to
purchase Luminent's common stock vest over four years. The options granted by
Luminent to its Chief Executive Officer and Chief Financial Officer represent
the right to purchase the number of shares of Luminent common stock equal to
3.5% of the outstanding capital stock of Luminent reflected on a fully diluted
basis immediately prior to its initial public offering ("IPO") at an exercise
price per share equal to lower of (a) the amount determined by dividing one
billion dollars by the number of Luminent shares outstanding prior to the IPO
reflected on a fully diluted basis or (b) 60% of the low end of the filing range
for Luminent's common stock as initially filed with the Securities and Exchange
Commission. The Company will incur deferred stock compensation expenses relating
to these options in an amount to be determined once the number of shares
underlying the options, the exercise price of the option and the initial public
offering price of the Luminent shares are known. The deferred compensation
expense will be amortized through 2004.
On July 26, 2000, Luminent filed a registration statement with the Securities
and Exchange Commission for the initial public offering of its common stock. The
Company currently plans, within six to twelve months after the offering, to
distribute all of the shares of Luminent common stock owned by the Company to
the holders of the Company's common stock, subject to certain conditions
including its receipt of a favorable tax ruling from the Internal Revenue
Service, board approval as well as market conditions.
A registration statement related to these securities has been filed with the
Securities and Exchange Commission by Luminent, Inc., but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted,
prior to the time the registration statement becomes effective. This
announcement does not constitute an offer to sell or the solicitation of an
offer to buy. There will not 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 laws of any such State.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998, the Company sold an aggregate $100,000,000 principal amount of 5%
convertible subordinated notes due 2003 (the "Notes") in a private placement
raising net proceeds of $96,423,000. The Notes are convertible into Common Stock
of the Company at a conversion price of $13.52375 per share (equivalent to a
conversion rate of approximately 73.94 shares per $1,000 principal amount of
notes), representing an initial conversion premium of 24%, for a total of
approximately 7.4 million shares of Common Stock of the Company. Interest on the
Notes is at 5% per annum and is payable semi-annually on June 15 and December 15
of each year. The Notes have a five-year term and are not callable until June
15, 2001. The premiums payable to call the Notes will be 102% of the outstanding
principal amount during the 12 months ending June 14, 2002 and 101% during the
12 months ending June 14, 2003, plus accrued interest to the date of redemption.
Cash and cash equivalents were $45,207,000 at June 30, 2000 as compared to
$34,330,000 at December 31, 1999. Net cash used in investing activities for the
six months ended June 30, 2000 was $49,416,000. The cash was primarily used for
the FOCI acquisition and to establish or increase ownership in partner companies
and to help fund their capital needs. Net cash provided by financing activities
for the six months ended June 30, 2000 was $74,018,000. The cash was provided
primarily by the issuance of short term debt to Bank of America.
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<PAGE> 14
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As a global enterprise, the Company faces exposure to adverse movements in
foreign currency exchange rates. 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 or fluctuations in currency exchange rates in such countries
could increase the Company's expenses. The Company's foreign currency exposures
may change over time as the level of activity in foreign markets grows and could
have an adverse impact upon the Company's financial results.
Certain of the Company's assets, including certain bank accounts and accounts
receivable, exist in non-dollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The non-dollar-denominated
currencies are principally Taiwanese Dollars, Italian Lire, Swedish Krona,
French Francs and Swiss Francs. Additionally, certain of the Company's current
and long-term liabilities are denominated principally in Italian lire, German
deutsch marks and Swedish krona, which are also sensitive to foreign currency
exchange rate fluctuations.
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.
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
WE HAVE INCURRED NET LOSS IN THE SIX MONTHS ENDED JUNE 30, 2000 PRIMARILY AS A
RESULT OF THE FOCI ACQUISITION. AS A RESULT OF THAT ACQUISITION AND OTHERS AND
ADDITIONAL DEFERRED COMPENSATION CHARGES, WE EXPECT TO CONTINUE TO INCUR NET
LOSSES FOR THE FORESEEABLE FUTURE.
We reported a net loss of $33.6 million for the six months ended June
30, 2000. The net loss was primarily due to amortization of goodwill and
deferred stock compensation related to the FOCI acquisition. Between July 1 and
August 1, 2000, we completed additional acquisitions, including the acquisitions
of OIC, QOI and Astroterra. We expect to record amortization of goodwill charges
of approximately $22,851,000 in the three months ended September 30, 2000 and
deferred compensation expenses of $13,306,000 in the three months ended
September 30, 2000. We also expect to incur substantial charges for goodwill
amortization and deferred compensation expenses in connection with the
Astroterra acquisition, the amount of which has not yet been determined.
In July 2000, we and our wholly-owned subsidiary, Luminent, Inc. entered
into four year employment agreements with Luminent's President and Chief
Executive Officer and Vice President of Finance and Chief Financial Officer. The
agreements provide for annual salaries, performance bonuses and combinations of
stock options to purchase shares of the Company's common stock and Luminent's
common stock. The options to purchase the Company's common stock are immediately
exercisable and are expected to result in deferred compensation charges of
$2,240,000 during the three months ending September 30, 2000. The options
to purchase
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<PAGE> 15
Luminent's common stock vest over four years. The options granted by Luminent to
its Chief Executive Officer and Chief Financial Officer represent the right to
purchase the number of shares of Luminent common stock equal to 3.5% of the
outstanding capital stock of Luminent reflected on a fully diluted basis
immediately prior to its initial public offering at an exercise price per share
equal to lower of (a) the amount determined by dividing one billion dollars by
the number of Luminent shares outstanding prior to the IPO reflected on a fully
diluted basis or (b) 60% of the low end of the filing range for Luminent's
common stock as initially filed with the Securities and Exchange Commission. We
will incur deferred stock compensation expenses relating to these options in an
amount to be determined once the number of shares underlying the options, the
exercise price of the option and the initial public offering price of the
Luminent shares are known. The deferred compensation expense will be amortized
through 2004.
OUR PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY TECHNOLOGICAL CHANGES
AND PRODUCT DEVELOPMENT DELAYS.
We are engaged in the design and development of devices for the computer
networking, telecommunications and fiber optic communication industries. As with
any new technologies, there are substantial risks that the marketplace may not
accept our new products. Market acceptance of our products will depend, in large
part, upon our ability to demonstrate performance and cost advantages and
cost-effectiveness of our products over competing products and the success of
our and our customers' sales efforts. We can give no assurance that we will be
able to continue to market our technology successfully, or that any of our
current products will continue to, or that our future products will, be accepted
in the marketplace. Moreover, the computer networking, telecommunications and
fiber optic communication industries are characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions,
any of which could render our existing products obsolete. Our success will
depend upon our ability to enhance existing products and to introduce new
products to meet changing customer requirements and emerging industry standards.
We are and will be required to devote continued efforts and financial resources
to develop and enhance our 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. It also requires the
accurate anticipation of technological and market trends. We can give no
assurance that we will be able to identify, develop, manufacture, market or
support new or enhanced products successfully or on a timely basis. Nor can we
give assurances that new products we introduce will gain market acceptance or
that we will be able to respond effectively to product announcements by
competitors, technological changes or emerging industry standards. Furthermore,
from time to time, we may announce new products or product enhancements,
capabilities or technologies that have the potential to replace or shorten the
life cycle of our existing product offerings. This may cause customers to defer
purchasing our existing products or cause customers to return products to us.
DEFECTS IN OUR PRODUCT RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those we offer, may contain undetected software
or hardware errors when we first introduce them or when we release new versions.
The occurrence of such errors in the future, and our inability to correct such
errors quickly or at all, could result in the delay or loss of market acceptance
of our products. It could also result in material warranty expense, diversion of
engineering and other resources from our product development efforts and the
loss of credibility with our customers, system integrators and end users. Any of
these or other eventualities resulting from defects in our products could have a
material adverse effect on our business, operating results and financial
condition.
OUR GROWTH RATE MAY BE LOWER THAN HISTORICAL LEVELS AND OUR RESULTS COULD
FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our revenues may grow at a slower rate in the future than we have
experienced in previous periods and, on a quarter-to-quarter basis, our growth
in revenue may be significantly lower than our historical quarterly growth
rates. Our operating results for a particular quarter are extremely difficult to
predict. Our 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 cancellation or postponement of orders,
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<PAGE> 16
- the timing and amount of significant orders from our largest customers,
- our success in developing, introducing and shipping product
enhancements and new products,
- the mix of products we sell,
- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions,
- new product introductions by our competitors,
- pricing actions by us or our competitors,
- the timing of delivery and availability of components from suppliers,
- changes in material costs, and
- general economic conditions.
Moreover, the volume and timing of orders we receive during a quarter are
difficult to forecast. From time to time, our customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our 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, our operating results could be materially adversely affected.
Furthermore, in certain instances, sales cycles are becoming longer and more
uncertain as we bid on larger projects. As a result, we are finding it more
difficult to predict the timing of the awards of contracts and the actual
placement of orders stemming from awards. We can give no assurance that these
factors or others, such as those discussed below regarding the risks we face
from our international operations or the risks discussed immediately below,
would not cause future fluctuations in operating results. Further, there can be
no assurance that we will be able to continue profitable operations.
THE PRICES OF OUR SHARES HAVE BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely volatile.
The market price of our common sock is likely to continue to be highly volatile
and could be significantly affected by factors such as
- actual or anticipated fluctuations in our operating results,
- announcements of technological innovations or new product introductions
by us or our competitors,
- changes of estimates of our future operating results by securities
analysts,
- developments with respect to patents, copyrights or proprietary rights,
and
- 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 our common stock. For example, during
the period of less than 30 days from March 7, 2000 to April 4, 2000, our stock
price (adjusted for a two-for-one stock split effective on May 11, 2000) ranged
from a high of $96.94 to a low of $30. In addition, it is possible that in a
future fiscal quarter, our results of operations will fail to meet the
expectations of securities analysts or investors and, in such event, the market
price of our common stock would be materially adversely affected. For example,
as a result of weaker than anticipated demand for our networking products,
especially in Europe, and delays in transitions to next generation, higher
margin, networking products, in August 1998, we announced that we expected
operating results in the third quarter of 1998 to be adversely affected.
Following that announcement, the market price of our common stock dropped
substantially. Similarly, in February 1999, following our release of fourth
quarter and 1998 financial results, we announced that we did not expect revenues
in the first quarter of 1999 to be as strong as revenues reported for the fourth
quarter of 1998. Following that announcement, the market price of our stock
again dropped significantly. See the section of this prospectus captioned "Price
Range of Common Stock" below.
OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES.
We have created several start-up companies and formed independent business
units in the optical technology and Internet infrastructure areas. We account
for these investments in affiliates according to the equity or cost methods as
required by accounting principles generally accepted in the United States. The
market value of these investments may
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vary materially from the amounts shown as a result of business events specific
to these entities or their competitors or market conditions. Actual or perceived
changes in the market value of these investments could have a material impact on
our share price and in addition could contribute significantly to volatility of
our share price.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking 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. We compete and will compete with
numerous types of companies including companies that 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 we do. This may give such competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. In addition, many of our large competitors offer
customers broader product lines, which provide more comprehensive solutions than
our current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of such price decreases
may have an adverse impact on our results of operations or financial condition.
There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving industry. We believe
that industry consolidation may provide stronger competitors that are better
able to compete. This could have a material adverse effect on our business,
operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We have grown rapidly in recent years, with revenues increasing from
$39,202,000 for the year ended December 31, 1995, to $288,524,000 for the year
ended December 31, 1999. Our recent growth, both internally and through the
acquisitions we have made since January 1, 1995, has placed a significant strain
on our financial and management personnel and information systems and controls.
As a consequence, we must implement new and enhance existing financial and
management information systems and controls and must add and train personnel to
operate such systems effectively. Our delay or failure to implement new and
enhance existing systems and controls as needed could have a material adverse
effect on our results of operations and financial condition in the future. Our
intention to continue to pursue a growth strategy can be expected to place even
greater pressure on our existing personnel and to compound the need for
increased personnel, expanded information systems, and additional financial and
administrative control procedures. We can give no assurance that we will be able
to successfully manage operations if they continue to expand.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of our
operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the last three years:
<TABLE>
<CAPTION>
Percent of total
Year ended revenue
December 31, from foreign sales
------------ ------------------
<S> <C>
1997 60%
1998 59
1999 58
</TABLE>
We have offices in, and conduct a significant portion of our operations in and
from, Israel, Taiwan and China. We are, therefore, directly influenced by the
political and economic conditions affecting Israel, Taiwan and China. Any major
hostilities involving Israel, Taiwan or China, the
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interruption or curtailment of trade between Israel, Taiwan or China and their
respective trading partners or a substantial downturn in the economic or
financial condition of Israel, Taiwan or China could have a material adverse
effect on our 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, inflation, political instability, trade restrictions and changes in duty
rates. Although we have not experienced any material difficulties in this regard
to date, we can give no assurance that we will not experience material
difficulties in the future.
Our sales are currently denominated in U.S. dollars and to date our
business has not been significantly affected by currency fluctuations or
inflation. However, as we conduct business in several different countries,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in such countries could increase our expenses. The Single
European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. We have made and
expect to continue to make changes to our internal systems in order to
accommodate doing business in the Euro. Any delays in our ability to be
Euro-compliant could have an adverse impact on our results of operations or
financial condition. Due to numerous uncertainties, we cannot reasonably
estimate at this time the effects a common currency will have on pricing within
the European Union and the resulting impact, if any, on our financial condition
or results of operations.
To date, we have not hedged against currency exchange risks. In the
future, we 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. Our operating results could be
adversely affected by such fluctuations or as a result of inflation in
particular countries where material expenses are incurred. Moreover, our
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 our products to
international end users and, consequently, our business, operating results and
financial condition.
THE SLOWDOWN IN GROWTH RATES IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR GROWTH.
Our success is dependent, in part, on the overall growth rate of the
networking industry. We can give no assurance that the Internet or the
industries that serve it will continue to grow or that the Company will achieve
higher growth rates. Our business, operating results or financial condition may
be adversely affected by any decrease in industry growth rates. In addition, we
can give no assurance that our results in any particular period will fall within
the ranges for growth forecast by market researchers.
WE FACE RISKS INVOLVED IN THE MANUFACTURE AND SUPPLY OF CRITICAL COMPONENTS FOR
OUR PRODUCTS.
We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large number
of contract manufacturers that we can use for outsourcing, we have elected to
use a limited number of vendors for a significant portion of our board assembly
requirements in order to foster consistency in quality of the products. These
independent third-party manufacturers also provide the same 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 our contract
manufacturers failed to deliver needed components timely, we could face
difficulty in obtaining adequate supplies of products from other sources in the
near term. We can give no assurance that our third party manufacturers will
provide us with adequate supplies of quality products on a timely basis, or at
all. While we could outsource with other vendors, a change in vendors may
require significant lead-time and may result in shipment delays and expenses.
Our inability to obtain such products on a timely basis, the loss of a vendor or
a change in the terms and conditions of the outsourcing would have a material
adverse effect on our business, operating results and financial condition.
We rely heavily on our own production capability for critical
semiconductor lasers and light emitting diodes used in our products. Because we
manufacture these and other key components at our own facility and such
components are not readily available from other sources, any interruption of our
manufacturing process could have a material adverse
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effect on our operations. Furthermore, we have a limited number of employees
dedicated to the operation and maintenance of our wafer fabrication equipment,
the loss of any of whom could result in our 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. We can give no assurance that we 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, our business, operating results and financial condition could be
materially adversely affected.
WE HAVE SUFFERED ADVERSE FINANCIAL CONSEQUENCES AS A RESULT OF THE XYPLEX
ACQUISITION.
On January 30, 1998, we completed the Xyplex acquisition from Whittaker
Corporation. Xyplex is a leading provider of access solutions between enterprise
networks and WAN and/or Internet service providers. The purchase price paid to
Whittaker consisted of $35 million in cash and three-year warrants to purchase
up to 842,804 shares of our common stock at an exercise price of $17.50 per
share. In connection with the Xyplex acquisition, we incurred charges of
$20,633,000 and $15,671,000 for purchased technology and restructuring during
the year ended December 31, 1998. The charges resulting from the Xyplex
acquisition resulted in our incurring a net loss of $20,106,000 or $0.43 per
share during the year ended December 31, 1998.
We originally recorded charges of $30.6 million related to research and
development projects in progress at the time of the Xyplex acquisition. Although
we reported these charges in our first, second and third quarter results of 1998
in accordance with established accounting practice and valuations of Xyplex'
purchased technology in progress provided by independent valuators, we
reconsidered these valuations in light of subsequent SEC guidance regarding
valuation methodology. Based on this newer valuation methodology, we reduced the
value of the purchased technology in progress related to the Xyplex acquisition
to $20,633,000 and increased the amount of goodwill by $9,938,000. This has
resulted in additional charges during 1998 of $759,000 and charges during 1999
of approximately $828,000 for amortization of intangibles, including goodwill,
resulting from the Xyplex acquisition charges and will continue to result in
annual charges of approximately $828,000 after 1999 as these intangibles are
amortized through January 2010.
Recent actions and comments from the SEC have indicated that the SEC is
reviewing the current valuation methodology of purchased in-process research and
development related to business combinations. Unlike the case of many other
companies, the SEC has not notified us of any plans to review our methodology
for valuing purchased in-process research and development. Our action in 1998 to
reconsider that valuation of in process research and development related to the
Xyplex acquisition was voluntary. We believe we are in compliance with all of
the rules and related guidance as they currently exist. However, there can be no
assurance that the SEC will not review our accounting for the Xyplex acquisition
and seek to apply retroactively new guidance and further reduce the amount of
purchased in-process research and development we have expensed. This would
result in an additional restatement of our previously filed financial statements
and could have a material adverse impact on our financial results for periods
subsequent to the acquisition.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects
that would complement our existing products, augment our market coverage and
distribution ability or enhance our technological capabilities.
Future acquisitions could have a material adverse effect on our business,
financial condition and results of operations because of the
- possible charges to operations for purchased technology and
restructuring similar to those incurred in connection with the Xyplex
acquisition mentioned above,
- potentially dilutive issuances of equity securities,
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- incurrence of debt and contingent liabilities;
- incurrence of amortization expenses related to goodwill and other
intangible assets and deferred compensation charges similar to those
arising with the acquisitions of FOCI, OIC, QOI and Astroterra
mentioned above,
- difficulties assimilating the acquired operations, technologies and
products,
- diversion of management's attention to other business concerns,
- risks of entering markets in which we have no or limited prior
experience,
- potential loss of key employees of acquired organizations, and
- difficulties in honoring commitments made to customers by management of
the acquired entity prior to the acquisition.
We can give no assurance as to whether we can successfully integrate the
products, technologies or personnel of any business that we might acquire in the
future.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications will
be approved, that any patents that may issue will protect our intellectual
property or that third parties will not challenge any issued patents. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us. We cannot be certain that the steps
we have taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Any such litigation, regardless of
outcome, could be expensive and time consuming, and adverse determinations in
any such litigation could seriously harm our business.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard, in March 1999,
we received a written notice from Lemelson Foundation Partnership in which
Lemelson claimed to have patent rights in our vision and automatic
identification operations, which are widely used in the manufacture of
electronic assemblies. In April 1999, we received a written notice from Rockwell
Corporation in which Rockwell claimed to have patent rights in certain
technology related to our metal organic chemical vapor deposition, or MOCVD,
processes. In October 1999, we received written notice from Lucent Technologies,
Inc. in which Lucent claimed we have violated certain of Lucent's patents
falling into the general category of communications technology, with a focus on
networking functionality. In October 1999, we received a written notice from
Ortel Corporation, which has since been acquired by Lucent, in which Ortel
claimed to have patent rights in certain technology related to our triplexer and
duplexer products. We are evaluating the patents noted in the letters. Others'
patents, including Lemelson's, Rockwell's, Lucent's and Ortel's, may be
determined to be valid, or some of our products may ultimately be determined to
infringe the Lemelson, Rockwell, Lucent and Ortel patents, or those of other
companies. Lemelson, Rockwell, Lucent or Ortel or other companies may pursue
litigation with respect to these or other claims. The results of any litigation
are inherently uncertain. In the event of an adverse result in any litigation
with respect to intellectual property rights relevant to our products that could
arise in the future, we could be required to obtain licenses to the infringing
technology, to pay substantial damages under applicable law, to cease the
manufacture, use and sale of infringing products or to expend
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significant resources to develop non-infringing technology. Licenses may not be
available from third parties, including Lemelson, Rockwell, Lucent or Ortel,
either on commercially reasonable terms or at all. In addition, litigation
frequently involves substantial expenditures and can require significant
management attention, even if we ultimately prevail. Accordingly, any
infringement claim or litigation against us could significantly harm our
business, operating results and financial condition.
In the future, we may initiate claims or litigation against third parties
for infringement of our proprietary rights to protect these rights or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. These claims could result in costly litigation and the
diversion of our technical and management personnel.
NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY MAY NOT BE AVAILABLE TO US OR MAY
BE VERY EXPENSIVE, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MANUFACTURE AND
SELL OUR PRODUCTS.
From time to time we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, either of which could seriously harm our ability to manufacture and sell
our products.
WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.
We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of
the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered into
employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of
key man life insurance policies in the amounts of $1,000,000 on each of their
lives. However, we can give no assurance that the proceeds from these policies
will be sufficient to compensate us in the event of the death of any of these
individuals, and the policies are not applicable in the event that any of them
becomes disabled or is otherwise unable to render services to us.
OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to develop, manufacture and market our products and our
ability to compete with our current and future competitors depends, and will
continue to depend, in large part, on our ability to attract and retain
qualified personnel. Competition for qualified personnel in the networking and
fiber optics industries is intense, and we will be required to compete for such
personnel with companies having substantially greater financial and other
resources than we do. If we should be unable to attract and retain qualified
personnel, our business could be materially adversely affected. We can give no
assurance that we will be able to attract and retain qualified personnel.
OUR ABILITY TO ISSUE PREFERRED STOCK COULD ADVERSELY AFFECT THE RIGHTS OF
HOLDERS OF COMMON STOCK AND DETER A TAKE-OVER.
We are authorized to issue up to 1,000,000 shares of preferred stock. This
preferred stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any such series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently outstanding.
The issuance of any such preferred stock could materially adversely affect the
rights of the holders of our common stock, and therefore, reduce the value of
our common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell our
assets to, a third party and thereby preserve control by the present management.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
(a) Not applicable
(b) Not applicable
(c) (i) In April 2000, the Company issued an aggregate of 4,663,458 shares
of its common stock to the shareholders of Fiber Optic Communications, Inc.
("FOCI"), a Republic of China corporation in exchange for the Company's
acquisition of approximately 97% of the outstanding capital stock of FOCI from
these shareholders.
(ii) In April 2000, the Company issued an aggregate of 367,000 shares of
its common stock to the shareholders of Creative Electronic Systems SA ("CES"),
a Swiss corporation, in exchange for the Company's acquisition of the
outstanding capital stock of CES from these shareholders.
(iii) In April 2000 the Company issued an aggregate of 81,494 shares of
its Common Stock to Optical Crossing, Inc. one of its partner companies in
connection with its investment in this partner company receiving for such shares
and other consideration 12,000 shares of Series A Convertible Preferred Stock,
$.001 par value per share of the partner company.
(iv) In April 2000, the Company issued an aggregate of 1,061,174 shares
of its common stock and options to purchase 349,377 shares of its common stock
to the 26 shareholders of Jolt, Ltd., an Israeli corporation, in exchange for
the Company's acquisition of the outstanding capital stock of Jolt from these
shareholders.
(v) In April 2000, the Company issued an aggregate of 30,000 shares of
its common stock to the one shareholder of Multiport Corp., a Massachusetts
corporation, in exchange for the Company's acquisition of the outstanding
capital stock of Multiport from this shareholder.
The issuance of the shares referred to above were not effected through a
broker-dealer, and no underwriting discounts or commissions were paid in
connection with such issuance.
As to the transactions described in subsection (c)(i) and (ii), exemption
from registration requirements is claimed under the Securities Act of 1933 (the
"Securities Act") in reliance on Regulation S under the Securities Act. The
Company believed that the buyers were outside the United States and no directed
selling efforts were made in the United States. Each Investor (all of whom had
addresses outside the United States) represented that it was not a "U.S. Person"
as defined in Regulation S and, at the time the buy order for these transaction
was originated, each Investor was outside the United States and no offer to
purchase the Securities was made in the United States. Each Investor agreed not
to reoffer or sell the securities, or to cause any transferee permitted under
the Securities Purchase Agreement to reoffer or sell the Securities, within the
United States, or for the account or benefit of a U.S. person, (i) as part of
the distribution of the securities at any time, or (ii) otherwise, only in a
transaction meeting the requirements of Regulation S, including without
limitation, where the offer (i) is not made to a person in the United States and
either (A) at the time the buy order is originated, the buyer is outside the
United States or the Company and any person acting on its behalf reasonably
believe that the buyer is outside the United States, or (B) the transaction is
executed in, on or through the facilities of a designated offshore securities
market and neither the seller nor any person acting on its behalf knows that the
transaction has been pre- arranged with a buyer in the United States, and (ii)
no direct selling efforts shall be made in the United States by the buyer, an
affiliate or any person acting on their behalf, or in a transaction registered
under the Securities Act or pursuant to an exemption from such registration.
Appropriate legends were affixed to the certificates evidencing the securities
in such transaction.
As to the transactions described in subsection (c)(iii) through (v),
exemption from registration requirements is claimed under the Securities Act of
1933 (the "Securities Act") in reliance on in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder. The purchasers
represented their intention to acquire the securities for investment only and
not with a view to, or for sale in connection with, any distribution thereof and
appropriate legends
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were affixed to the certificates evidencing the securities in such transactions.
The purchasers had adequate access to information about the Company.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter covered by this Report, as
follows:
(i) A report on Form 8-K dated May 3, 2000 was filed on May 3, 2000
reporting under Item 5.
(ii) A report on Form 8-K dated May 8, 2000 was filed on May 9, 2000
reporting the acquisition of FOCI under Item 2 and 7.
(iii) A report on Form 8-K/A dated July 7, 2000 was filed on July 8, 2000
supplementing and completing the Form 8-K referred to in
subparagraph (ii) above. In that Form 8-K/A, the following financial
statements and pro forma financial information were filed under Item
7:
Financial statements of Fiber Optics Communications, Inc. as
follows:
Audited Consolidated Financial Statements As Of December 31, 1997,
1998 And 1999:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1997, 1998 and 1999
Consolidated Statements of Operations and Comprehensive Income for
the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Changes in Stockholders Equity for the
year ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the year ended December
31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
Unaudited Consolidated Financial Statements as of March 31, 1999 and
2000:
Consolidated Balance Sheets at March 31, 1999 and 2000
Consolidated Statements of Operations And Comprehensive Income for
the Periods Ended March 31, 1999 and 2000
Consolidated Statements Of Cash Flows For the Periods Ended March
31, 1999 and 2000
Notes to Consolidated Financial Statements
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Pro Forma Financial Information:
Unaudited Pro Forma Condensed Consolidated Financial Information
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March
31, 2000
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1999
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Three Months Ended March 31, 2000
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on August 14, 2000.
MRV COMMUNICATIONS, INC.
By: /s/ Edmund Glazer
----------------------------------
Edmund Glazer
Vice President of Finance and
Administration and Chief Financial
Officer
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