MRV COMMUNICATIONS, INC.
20415 NORDHOFF STREET
CHATSWORTH, CALIFORNIA 91311
(818) 773-0900
Fax: (818) 407-5656
Email: sgonen@mrv.com
April 27, 2005
Via EDGAR
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: MRV COMMUNICATIONS, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
Dear Ms. Crane:
This is in response to your comment letter of April 14, 2005 to Shay Gonen of
MRV Communications, Inc. ("MRV" or the "Company"). For the convenience of the
staff, each comment is repeated verbatim with the Company's response immediately
following.
Form 10-K for the year ended December 31, 2004
Item 7A Quantitative and Qualitative Disclosures About Market Risk -- Page 44
1. In future filings please disclose quantitative and qualitative information
concerning foreign currency exchange risk. Your discussion should include
the exchange rate risk for the Euro, Swedish Krona, Swiss Franc and the
Taiwan dollar. Refer to Item 305 of Regulation S-K and our publication
"Question and Answers About the New Market Disclosure Rule" available on
our web site at www.sec.gov.
RESPONSE:
Your comment is noted and disclosure will be added in future filings beginning
with the Company's Form 10-Q for the quarter ended March 31, 2005.
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 2
Statement of Cash Flows -- Page 52
2. Please tell us how you determined the effect of exchange rate changes on
cash and cash equivalents. We noted that this amount is the same as your
adjustment to other comprehensive income in fiscal year 2003 and 2004.
Refer to paragraphs 25 and 146 of SFAS 95.
RESPONSE
The effect of foreign exchange rate changes on cash and cash equivalents was
materially the same as the foreign translation adjustment presented in other
comprehensive income for 2003 and 2004. Admittedly, the Company has used what it
believes to be an industry-wide practiced "short-cut" method for computing its
statement of cash flows in connection with its foreign translation adjustments,
but such method has not resulted in material differences from the results of
preparing cash flows in a more detailed manner. In fact, the results of the
method employed by the Company versus the detailed method prescribed in
Paragraph 25 of SFAS 95 resulted in a 7% difference on the total cash flows from
operations activities, a 2% difference in the total cash flows from financing
activities and no change to the total cash flows from investing activities,
which in the Company's opinion, are clearly immaterial. While there have not
been material differences in the past and it is not expected that there would be
material differences in the future if the Company were to continue to use same
method of preparing its statements of cash flows, the Company will use the
method prescribed in Paragraph 25 of SFAS 95 for future filings beginning with
the Company's Form 10-Q for the quarter ended March 31, 2005.
Note 1 Summary of Significant Accounting Policies
Stock-Based Compensation -- Page 57
3. We note that you reversed stock compensation expense related to unvested
forfeited stock options for which stock compensation as previously
recognized. Explain to us in more detail your accounting and demonstrate
that it complies with GAAP. Also, discuss the consideration given to the
guidance in EITF 00-23, Issue 11. We may have additional comments after
reviewing your response.
RESPONSE
The deferred compensation charges are being amortized using the graded vesting
method provided by SFAS 123, paragraph 31 and Interpretation 28, over the
expected employee service period. Under the graded method, approximately 57%,
26%, 13% and 4%, respectively, of each
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 3
option's compensation expense is recognized in each of the four years following
the date of grant for options vesting over four years. Since the underlying
options vest on a straight-line basis, when an employee terminates before the
vesting period is complete, the forfeited unvested awards will have had
compensation cost recognized in previous periods due to the accelerated nature
of the graded method. Consistent with EITF 00-23, Issue 11, the previously
recognized compensation cost on the forfeited unvested options is reversed to
income in the period of forfeiture and any remaining deferred compensation
charges relating to the forfeited unvested options is reversed to "Additional
Paid-In Capital." Termination does not result in the forfeiture of vested
options; therefore, compensation cost previously recognized on vested options is
not adjusted upon termination, including when those vested options lapse.
Transactions with Stock of a Subsidiary -- Page 59
4. We note that you recorded an extraordinary gain in conjunction with the
acquisition of a minority interest. Supplementally tell us more about the
acquisition and your accounting for the extraordinary gain. Cite the
accounting literature upon which you relied.
RESPONSE
On September 9, 2003, MRV acquired 666,666 shares of preferred stock (1.9%
ownership) from a minority shareholder of a subsidiary of MRV for a total
purchase price of $50,000 in cash. MRV's total ownership following this
acquisition was approximately 60% of this subsidiary. The primary asset of this
subsidiary was approximately $25 million of cash and cash equivalents at that
time. The minority interest account balance relating to this minority
shareholder was $2.0 million prior to the purchase, due to liquidation
preferences that provided $2.0 million in cash to this minority shareholder upon
liquidation. In accordance with APB 16, the purchase of a minority interest is
accounted for using the "purchase" accounting method and since the purchase
price was less than book and fair value of the minority interest, negative
goodwill was generated. The negative goodwill was recorded as an extraordinary
item in the income statement in accordance with SFAS 141.
Reclassifications -- Page 60
5. We noted that you reclassified amounts that were previously recorded as
sales of accounts receivable. Please clarify for us the nature of the
receivables and the recourse provision. In addition, tell us what led to
this reclassification and why reclassification is appropriate, rather than
a change in accounting or a correction of an error.
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 4
RESPONSE
MRV, through two subsidiaries in Italy, has historically used receivables in
certain financing transactions. Management, through representations from the
local managements of the subsidiaries, believed that these subsidiaries would
"sell" (transfer risk of loss and title to the financial institutions) certain
receivables to financial institutions with recourse. In October and November
2004, after reviewing the terms of these transactions, management concluded that
its understanding of these financing arrangements was inaccurate and that these
receivables were not in fact "sold," but rather used as collateral or security
for lending arrangements. These subsidiaries provide receivables to their
respective financing institutions who in turn provide certain amounts of cash
"availability," through lines of credit or other short-term debt arrangements.
As part of the financing arrangement, the financial institutions provide
collection services that typically result in a majority of the receivables being
collected directly by the institutions on behalf of the subsidiaries.
Ultimately, any uncollected balances are then the obligations of the
subsidiaries and they take responsibility for collection.
Historically, MRV had recorded these instruments as if a "sale" of the
receivable occurred, resulting in a reduction in accounts receivable equal to
the amount of invoices "accepted" by the financing institutions and a decrease
in short-term obligations in accordance with SFAS 125. No gain or loss was ever
recognized in connection with this accounting treatment.
Once it became apparent to management that this accounting treatment was not
reflective of the underlying transaction or instruments, it immediately brought
the matter to the attention of the audit committee. Management assessed the
accounting implications and concluded that the appropriate accounting treatment
was to "gross-up" the accounts receivable and short-term obligation accounts for
these invoices that were provided as financing collateral (rather than "netting"
the receivables with the financing provided by the financial institutions).
In order to determine the most appropriate course of action, management analyzed
the materiality of this "gross-up" on the financial statements and its impact on
the decision-making process of a "knowledgeable investor or creditor."
Management considered the qualitative and quantitative factors of materiality
promulgated by SAB 99 and as well as the guidance prescribed by FASB Concept
Statements 1 and 2. A significant factor affecting management's conclusion on
materiality was the fact that these obligations had been historically disclosed
in detail, including the amounts of exposure to these instruments, and that any
"reasonable person," or "knowledgeable investor or creditor," had enough
information to fully understand and determine the obligations of the company and
economics of the transactions in order to make an investment decision (e.g.
irrespective of presenting these instruments on the face of the financials or in
the
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 5
notes thereto, this reclassification would not affect the investment decision of
a "knowledgeable investor or creditor").
As a result of its analysis, and after consultation with the audit committee and
the external auditor, management concluded that a "reasonable person" or
"knowledgeable investor or creditor" had sufficient information about the assets
and liabilities of the Company and that this balance-sheet only "gross-up" was
not material for the following reasons:
- The Statement of Cash Flows presented the gross borrowings and
payments including these financing instruments for all applicable
periods;
- The Notes to Financial Statements historically provided full
disclosure of the nature and amount of receivables and short-term
obligations, including the amounts of such receivables and
obligations not presented in the balance sheet but for which the
Company was liable;
- The threshold for reporting financial information is that the
"information should be comprehensible to those who have a reasonable
understanding of the business and economic of activities and are
willing to study the information with reasonable diligence" thus
reinforcing that the financial statements and the notes thereto must
be considered in their entirety; and
- Although SAB 99 addresses balance sheet materiality through the
qualitative discussions addressed above, there are no specific
numeric thresholds or baselines provided to measure materiality for
such balance sheet items.
It was and is management's opinion, which is shared by the audit committee and
external auditor that this balance-sheet only adjustment would not impact or
other wise affect a "reasonable person's" decision making process.
Management concluded that the most appropriate accounting treatment is to
present these receivables and short-term obligations "grossed-up" in the
financial statements going forward (beginning with the Form 10-K as of December
31, 2004) and to reclassify prior years to conform with this presentation as
each new periodic report is released. Additionally, the Company revised the
disclosure to no longer disclose these instruments as "receivables sold with
recourse," and provided the reclassification disclosure to appropriately notify
the readers of the financial statements and notes thereto of the change in
presentation.
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 6
Note 6 Accrued Liabilities -- Page 62
6. Please revise future filings to provide the disclosures required by
paragraph 14 of FIN 45, as it relates to your product warranties.
RESPONSE
Your comment is noted and disclosure will be added in future filings beginning
with the Company's Form 10-Q for the quarter ended March 31, 2005.
Note 10 Convertible Debt -- Page 65
7. Please tell us if there is a value related to the conversion feature of
the convertible notes. In addition, tell us when the notes become
convertible and how the conversion price was determined. Support your
method of valuing, accounting for and classifying related balances in the
financial statements. Refer to the guidance in EITF 98-5 and FAS 150, as
necessary.
RESPONSE
The convertible notes agreement was entered into on Sunday, June 1, 2003. The
closing prices of MRVC on Friday, May 30, 2003 and Monday, June 2, 2003 were
$2.27 and $2.08, respectively, which were lower than the conversion price of
$2.32. The conversion price was calculated as a 10% premium over the Wednesday,
May 28, 2003 closing price of $2.11 and is fixed for the life of the convertible
notes. The convertible notes were immediately convertible on demand by the
holder. At the commitment date, Sunday, June 1, 2003, the fixed conversion price
was "out-of-the-money" (no beneficial conversion feature exists) and therefore
not subject to the accounting treatment prescribed in EITF 98-5. SFAS 150
specifically excludes from its scope convertible debt instruments and thus is
also not applicable to this convertible debt issuance. The convertible debt
issuance has been accounted for in accordance with APB 14 with no value
attributed to the conversion feature.
* * *
In accordance with your comment letter, the following acknowledges the Company's
understanding that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in the filings;
Ms. Angela Crane
Branch Chief
United States Securities and Exchange Commission
April 27, 2005
Page 7
o Staff comments or changes to disclosure in response to staff
comments in the filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
If you have any further comments or questions, please do not hesitate to contact
the undersigned.
Sincerely,
MRV COMMUNICATIONS, INC.
By: /s/ Shay Gonen
-----------------------
Shay Gonen
Chief Financial Officer
Cc: Julie Sherman
Division of Corporation Finance via fax (202) 942-9585