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 SEPTEMBER 30, 2001
[ ] 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.)
20415 NORDHOFF STREET, CHATSWORTH, CA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 773-0900
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 September 30, 2001, there were 77,494,009 shares of Common Stock, $.0017
par value per share, outstanding.
MRV COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2001
INDEX
PAGE NUMBER
-----------
PART I Financial Information
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000 3
Condensed Consolidated Statements of Operations (unaudited) for the
Nine and Three Months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the
Nine Months ended September 30, 2001 and 2000 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 27
Item 6: Exhibits and Reports on Form 8-K 27
SIGNATURES 28
As used in this Report, "we", "us", "our", "MRV" or the "Company" refer to MRV
Communications, Inc. and its consolidated subsidiaries.
2
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 158,049 $ 210,080
Restricted cash 53,332 56,181
Short-term investments 1,499 17,766
Accounts receivable 58,979 62,713
Inventories 65,818 77,005
Deferred income taxes 31,095 31,227
Other current assets 22,351 22,750
----------- -----------
Total current assets 391,123 477,722
PROPERTY AND EQUIPMENT -- At cost, net of depreciation and amortization 75,844 72,269
OTHER ASSETS:
Goodwill and other intangibles 437,227 504,027
Deferred income taxes 7,797 6,209
Investments 33,122 31,734
Other assets 12,049 5,660
----------- -----------
$ 957,162 $ 1,097,621
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of financing lease obligations and long-term debt $ 2,547 $ 2,937
Accounts payable 59,336 56,088
Accrued liabilities 40,393 34,894
Short-term debt 10,551 9,104
Deferred revenue 1,434 1,470
Income taxes payable 2,401 6,477
Other current liabilities 3,429 --
----------- -----------
Total current liabilities 120,091 110,970
LONG-TERM LIABILITIES:
Convertible debentures 89,646 89,646
Capital lease obligations, net of current portion 610 621
Long-term debt 61,692 60,257
Other long-term liabilities 2,574 3,980
----------- -----------
154,522 154,504
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 40,809 50,592
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or outstanding
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 77,542 shares in 2001 and 73,327 in 2000
Outstanding -- 77,494 shares in 2001 and 73,279 in 2000 132 126
Additional paid-in capital 1,094,361 1,060,650
Accumulated deficit (409,408) (171,330)
Deferred stock compensation, net (33,370) (100,862)
Treasury stock, 48 shares at cost in 2001 and 2000 (133) (133)
Accumulated other comprehensive loss (9,842) (6,896)
----------- -----------
Total stockholders' equity $ 641,740 $ 781,555
----------- -----------
$ 957,162 $ 1,097,621
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED THREE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES, net $ 259,364 $ 221,727 $ 69,730 $ 82,720
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of goods sold 212,777 136,439 57,621 47,910
Research and development expenses 70,094 48,452 19,307 21,803
Selling, general and administrative expenses 133,375 94,180 51,252 52,699
Amortization of goodwill and intangibles from acquisitions 84,385 40,417 27,218 27,348
--------- --------- --------- ---------
Operating loss (241,267) (97,761) (85,668) (67,040)
Other expense, net (4,303) (7,442) (1,410) (5,764)
Credit for income taxes (2,593) (1,888) (6,215) (1,005)
Minority interest 10,085 (902) 3,646 (570)
--------- --------- --------- ---------
NET LOSS $(238,078) $(107,993) $ (89,647) $ (74,379)
========= ========= ========= =========
NET LOSS PER SHARE -- BASIC AND DILUTED $ (3.13) $ (1.71) $ (1.16) $ (1.06)
========= ========= ========= =========
SHARES USED IN PER-SHARE CALCULATION -- BASIC
AND DILUTED 75,973 63,286 77,404 70,122
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- -------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(84,432) $(11,619)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,528) (12,178)
Proceeds from sale of property and equipment 36 --
Purchases of investments -- (14,269)
Investments in unconsolidated partner companies (3,457) (10,785)
Proceeds from sale or maturity of investments 16,267 31,914
Cash used in acquisitions and equity purchases, net of cash received -- (44,517)
-------- --------
Net cash provided by (used in) investing activities 9,318 (49,835)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 60,877
Net proceeds from issuance of common stock 18,989 6,995
Borrowings on long-term debt 2,890 --
Payments on long-term debt (1,682) --
Payments on short-term debt (16,860)
Borrowings on short-term debt 18,307
Principal payments on capital lease obligations (174) (544)
Net decrease in other long-term liabilities (1,719) --
-------- --------
Net cash provided by financing activities 19,751 67,328
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH, CASH EQUIVALENTS
AND RESTRICTED CASH 483 (1,698)
-------- --------
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH (54,880) 4,176
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period 266,261 34,330
-------- --------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $211,381 $ 38,506
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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 (SEC). 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 September 30, 2001, and the results of their operations and their cash flows
for the nine and three months then ended.
2. Business Combinations
No material business combinations occurred during the nine and three months
ended September 30, 2001. See our latest annual report on Form 10-K and
management's discussion and analysis of financial conditions and results of
operations in this 10-Q. The following unaudited pro forma financial information
presents the combined results of operations with the acquisitions as if the
acquisitions had occurred as of January 1, 2000, giving effect to certain
adjustments, including amortization of goodwill and other intangibles and
deferred stock compensation charges. The unaudited pro forma share data assumes
the shares issued in connection with these acquisitions were outstanding as of
January 1, 2000. (in thousands, except per share amounts; unaudited)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Pro forma revenue $ 259,364 $ 237,599 $ 69,730 $ 83,055
Pro forma net loss (229,990) (172,601) (93,194) (67,384)
Pro forma basic and diluted net loss
per share $ (3.03) $ (2.73) $ (1.20) $ (0.96)
3. Loss Per Share
Basic loss per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted loss
per common share include the incremental shares issuable upon the assumed
exercise of stock options and conversion of the convertible debentures. The
effect of the assumed conversion of $89.6 million convertible debentures has not
been included, as it would be anti-dilutive. The dilutive effect of MRV's 10.6
million stock options outstanding and 889,000 warrants outstanding have not
been included in the loss per share computation as their effect would be
anti-dilutive.
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 as follows (in thousands).
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net loss $(238,078) $(107,993) $ (89,647) $ (74,379)
Foreign currency translation 483 (1,698) 1,394 760
Unrealized loss on interest
rate swap (3,429) - (1,049) -
--------- --------- --------- ---------
Comprehensive loss $(241,024) $(109,691) $ (89,302) $ (73,619)
========= ========= ========= =========
6
5. Cash, Cash Equivalents, Restricted Cash and Short-Term Investments
MRV considers all highly liquid investments with an original maturity of 90 days
or less to be cash equivalents. Investments with maturities of less than one
year are considered short-term. In connection with MRV's interest rate swap and
its long-term debt (see Note 10, Interest Rate Swap), $53.3 million in cash has
been restricted until the term loan and the swap expire in 2003. Furthermore,
MRV maintains cash balances and investments in highly qualified financial
institutions. At various times such amounts are in excess of insured limits. As
of September 30, 2001 and December 31, 2000, cash, cash equivalents and
short-term investments of $93.7 million and $132.9 million, respectively, were
held by MRV's publicly traded subsidiary, Luminent.
6. 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 September 30, 2001 and December 31,
2000 (in thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Raw materials $ 25,714 $ 36,278
Work-in process 11,458 17,721
Finished goods 28,646 23,006
-------- --------
$ 65,818 $ 77,005
======== ========
7. Stock Distribution
On May 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.
8. Segment Reporting and Geographical Information
The Company operates several business units as well as invests in and manages
start-up companies. These companies fall into two segments: operating entities
and development stage enterprises. Segment information is therefore being
provided on this basis.
The operating business units of the Company design, manufacture and distribute
optical components, optical wireless and switching solutions, next generation
mobile communications systems, remote device management and managed fiber optic
infrastructure products. The development stage enterprises that the Company has
invested in or created focus on: core routing, network transportation, switching
and IP services, and fiber optic components and systems. The primary activities
of development stage entities have been to develop solutions and technologies of
which significant revenues have yet to be earned.
The accounting policies of the segments are the same as those described in the
summary of significant accounting polices in our latest annual report on Form
10-K. 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 nine and three months ended September 30,
2001 and 2000 (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Operating entities $259,364 $221,727 $ 69,730 $ 82,720
Development stage enterprises -- -- -- --
-------- -------- -------- --------
Total revenues $259,364 $221,727 $ 69,730 $ 82,720
======== ======== ======== ========
There were no inter-segment sales in the nine and three months ended September
30, 2001 and 2000.
Net Revenues By Product for the nine and three months ended September 30, 2001
and 2000 (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Optical passive components $ 32,102 $ 15,430 $ 8,454 $ 7,740
Optical active components 83,100 55,342 13,315 22,270
Switches and routers 54,656 60,884 15,869 18,417
Remote device management 14,070 16,351 6,103 4,257
Network physical
infrastructure equipment 47,347 47,386 15,714 17,617
Services 16,545 15,985 6,955 5,691
Other 11,544 10,349 3,320 6,728
-------- -------- ------- -------
Total Revenues $259,364 $221,727 $69,730 $82,720
======== ======== ======= =======
</Table>
7
Business segment loss for the nine and three months ended September 30, 2001 and
2000 (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Operating loss
Operating entities $(199,419) $ (76,494) $(72,061) $(59,055)
Development stage enterprises (41,848) (21,267) (13,607) (7,985)
Other income (expense)
Interest expense related to convertible debentures (3,375) (3,375) (1,125) (1,125)
Other income (expense), net 1,986 2,661 (415) 652
Development stage enterprises (2,914) (6,728) 130 (5,291)
--------- --------- -------- --------
Loss before provision (credit) for income taxes and
minority interest $(245,570) $(105,203) $(87,078) $(72,804)
========= ========= ======== ========
For the nine months ended and as of September 30, 2001, the Company had no
single customer that accounted for more than 10 percent of revenues or accounts
receivable. The Company does not track customer revenues by region for each
individual reporting segment. A summary of external revenue by region follows
(in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
United States $ 93,789 $ 87,416 $ 21,597 $ 32,384
Asia Pacific 35,118 27,102 7,872 8,931
European 127,563 102,696 39,963 40,153
Other 2,894 4,513 298 1,252
-------- -------- -------- --------
Total net sales $259,364 $221,727 $ 69,730 $ 82,720
======== ======== ======== ========
Loss before credit for income taxes (in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
United States $(126,385) $ (99,778) $ (43,567) $ (74,022)
Foreign (109,100) (6,327) (39,865) 648
--------- --------- --------- ---------
Loss before credit for income taxes $(235,485) $(106,105) $ (83,432) $ (73,374)
========= ========= ========= =========
9. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2001, the management of Luminent, a publicly traded
subsidiary of the Company, approved and implemented a restructuring plan and
other actions in order to adjust operations and administration as a result of
the dramatic slowdown in the communications equipment industry generally and the
optical components sector in particular. Major actions comprising Luminent's
restructuring activities primarily involve the reduction of facilities in the
U.S. and in Taiwan, the reduction of workforce, the abandonment of certain
assets, and the cancelation and termination of purchase commitments. These
actions are expected to realign Luminent's business based on current and near
term growth rates. All of these actions are scheduled for completion by the
second quarter of 2002.
During the three and nine months ended September 30, 2001, Luminent recorded
restructuring charges totaling $3.0 million and $17.5 million, respectively.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future revenue
generating benefit or costs incurred under contractual obligations that existed
before the restructuring plan and will continue with either no future revenue
generating benefit or become a penalty incurred for termination of the
obligation.
Employee severance costs and related benefits of $1.1 million are related to
approximately 500 and 600 layoffs during the three and nine months ended
September 30, 2001, respectively, bringing Luminent's total workforce to
approximately 1,100 employees as of September 30, 2001. As of September 30,
2001, the employee severance reserve balance has been reduced by cash payments
of approximately $1.0 million resulting in an ending reserve balance of $38,000.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.
In addition to the costs associated with employee severance, Luminent identified
a number of assets, including leased facilities and equipment that are no longer
required due to current market conditions, operations and expected growth rates.
The net facility costs related to closed and abandoned facilities of
approximately $1.6 million and $2.7 million for the three and nine months ended
September 30, 2001, respectively, are primarily related to future obligations
under operating leases. The total lease charge is net of approximately $3.7
million in expected sublease revenue on leases that Luminent cannot terminate.
In connection with these closed and abandoned facilities, Luminent has recorded
asset impairment charges of $8.9 million in selling, general, and administrative
for the nine months ended September 30, 2001, consisting of leasehold
improvements and certain equipment to write-down the value of this equipment.
Due to the specialized nature of these assets, Luminent has determined that
these assets have minimal or no future benefit and has recorded a provision
reflecting the net book value relating to these assets. Luminent expects to
complete disposal of this equipment early in 2002. Purchase commitments of $1.5
million and $3.9 million, recorded in cost of sales, for the three and nine
months ended September 30, 2001, respectively, are to cancel or renegotiate
outstanding contracts for materials and capital assets that are no longer
required due to Luminent's significantly reduced orders for optical components
and sales projections over the next twelve months.
As of September 30, 2001, the provision has been reduced by cash payments of
$1.1 million and $1.3 million for the three and nine months ended September 30,
2001, respectively, and non-cash related charges of $8.9 million for the nine
months ended September 30, 2001, resulting in an ending balance of $7.4 million.
Luminent expects to utilize the remaining balance by the end of the second
quarter of 2002. Luminent expects that it will spend approximately $4.5 million
through the next three quarters to carry out the plan, which will be paid
through cash and cash equivalents and through operating cash flows. Luminent
expects to begin to realize savings related to the workforce reductions in late
2001 with estimated ongoing quarterly net savings of $2.4 million. In addition,
Luminent will realize reduced depreciation charges of approximately $384,000 per
quarter through December 2004 and $163,000 per quarter through December 2005 for
facility costs. These savings are expected to be realized as reductions in cost
of sales, research and development and selling, general and administrative
expenses.
A summary of the restructuring costs for the nine months ended September 30,
2001 consist of the following:
Remaining
Original Provision Additional Provision Utilized Balance
------------------ -------------------- ------------- -------------
Exit costs
Asset impairment $ 8,904,000 $ -- $ 8,904,000 $ --
Closed and abandoned facilities 1,108,000 1,584,000 89,000 2,603,000
Purchase commitments 2,402,000 1,460,000 102,000 3,760,000
Other 991,000 -- 41,000 950,000
------------- ------------- ------------- -------------
13,405,000 3,044,000 9,136,000 7,313,000
Employee severance costs 1,072,000 -- 1,034,000 38,000
------------- ------------- ------------- -------------
$ 14,477,000 $ 3,044,000 $ 10,170,000 $ 7,351,000
============= ============= ============= =============
A summary of the restructuring costs by line item for the three and nine months
ended September 30, 2001 consist of the following:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Cost of sales $ 1,460,000 $ 4,628,000
Selling, general and administrative 1,584,000 12,376,000
Research and development -- 501,000
Other income, net -- 16,000
----------- -----------
Total restructuring costs $ 3,044,000 $17,521,000
=========== ===========
As a result of the significant negative economic and industry trends impacting
Luminent's expected sales over the next twelve months, Luminent also recorded a
one-time $26.1 million charge to write-down the remaining book value of certain
inventory related to certain transceivers, duplexors, and triplexors that are
previous generation products to its realizable value during the three months
ended June 30, 2001. The one-time charge to write-down inventory was
subsequently reduced by $3.7 million during the three months ended September 30,
2001 to reflect the utilization of previously written-off items. An additional
$3.1 million of inventory was written down during the three months ended
September 30, 2001 to reflect the identification of additional inventory that is
not expected to be utilized as a result of Luminent's significantly reduced
orders for optical components and sales projections for the next twelve months.
The inventory charges and recoveries were recorded in cost of sales. Also
included in one-time charges is a $598,000 charge to bad debt recorded in
selling, general and administrative expenses during the nine months ended
September 30, 2001 to reflect customer bankruptcies that have resulted from the
severe market downturn.
In addition, as part of Luminent's review of the impairment of certain
long-lived assets, Luminent's management performed an assessment of the carrying
amount of goodwill recorded in connection with its various acquisitions. This
assessment, based on the undiscounted future cash flows, determined that no
write-down of goodwill was required for the nine months ended September 30, 2001
(see Note 8).
8
10. Interest Rate Swap
MRV entered into an interest rate swap in the second quarter of 2000 to
effectively change the interest rate characteristics of its $50.0 million
variable-rate term loan presented in Long-Term Debt, with the objective of
fixing its overall borrowing costs. The swap was entered into concurrently with
the issuance of the related debt. The notional amount, interest payment and
maturity dates of the swap match the principal, interest payment and maturity
dates of the related debt. Accordingly, any market risk or opportunity
associated with this swap is offset by the opposite market impact on the related
debt. The interest rate swap is considered to be 100 percent effective and is
therefore recorded using the short-cut method. The swap is designated as a cash
flow hedge and changes in fair value of the debt are generally offset by changes
in fair value of the related security, resulting in negligible net impact. The
gain or loss from the change in fair value of the interest rate swap as well as
the offsetting change in the hedged fair value of the long-term debt are
recognized in Other Comprehensive Income. Prior to the adoption of SFAS 133, the
interest rate swap related to this long-term debt was not recognized in the
balance sheet, nor were the changes in the market value of the debt. The net
settlements of the swap are included in interest expense. For the nine months
ended September 30, 2001, the Company recorded an unrealized loss on its
interest rate swap of $3.4 million included in Other Comprehensive Income. At
September 30, 2001, the interest rate swap had a fair value of $3.4 million
included in Other Current Liabilities.
11. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Investments and Hedging Activities," as amended by SFAS No. 137 and SFAS No.
138. The Company adopted the statement in January 2001 and the adoption of this
statement did not have a material impact on the Company's financial position or
results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition." SAB No. 101 provides additional guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
Company has reviewed this bulletin and believes that its current revenue
recognition policy is consistent with the guidance of SAB No. 101.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on MRV's financial position or
results of operations.
The FASB recently approved two statements: SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets," which provide guidance
on the accounting for business combinations, requires all future business
combinations to be accounted for using the purchase method, discontinues
amortization of goodwill, defines when and how intangible assets are amortized,
and requires an annual impairment test for goodwill. We plan to adopt these
statements effective January 1, 2002. We are currently reviewing these standards
to determine the impact on our results of operation and financial position. The
most significant anticipated effect on our financial statement on adoption would
be discontinuing goodwill amortization and the possible recording of a goodwill
impairment loss measured as of the date of adoption.
12. Supplemental Statements of Cash Flows Information (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2001 2000
-------- --------
Supplemental disclosure of cash flow information:
Cash paid during period for interest $ 6,937 $2,677
Cash paid during period for taxes $ 3,144 $ 417
9
13. Certain Relationships
Prior to Luminent's separation from MRV, the companies entered into various
agreements providing for MRV to supply transitional services and support to
Luminent. As of September 30, 2001, Luminent had incurred $6.2 million in
estimated income tax liability due to MRV. Luminent has repaid approximately
$4.7 million of this obligation through offsetting amounts due from MRV on or
before September 30, 2001. As of September 30, 2000, Luminent had recorded a
total of $588,000 from MRV for corporate allocations and other operation related
matters. Luminent repaid this amount to MRV through operating cash and
offsetting amounts due from MRV on or before September 30, 2000. Although the
fees provided for in the agreements are intended to represent fair market value
of these services, MRV and Luminent cannot assure that these fees necessarily
reflect the costs of providing these services from unrelated third parties.
However, MRV believes that providing these services to Luminent provided an
efficient means of obtaining them. In connection with the Merger, these
agreements will be terminated.
14. Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS
OF OPERATIONS TOGETHER WITH THE CONDENSED FINANCIAL STATEMENTS AND THE NOTES TO
CONDENSED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS FORM 10-Q. THIS
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS, ASSUMPTIONS, ESTIMATES AND PROJECTIONS ABOUT US AND OUR INDUSTRY.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED IN THE
"FORWARD LOOKING STATEMENTS" SECTION AND THE "CERTAIN RISK FACTORS THAT COULD
AFFECT FUTURE RESULTS" SECTION OF THIS FORM 10-Q. WE UNDERTAKE NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS FOR ANY REASON, EVEN IF NEW INFORMATION
BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
OVERVIEW
We create, acquire, finance and operate companies, and through them, design,
develop, manufacture and market products, which enable high-speed broadband
communications. We concentrate on companies and products devoted to optical
components and network infrastructure systems. We have leveraged our early
experience in fiber optic technology into a number of well-focused operating
units specializing in advanced fiber optic components, switching, routing,
transaction management and wireless optical transmission systems which we have
created, financed or acquired.
During 2000, we completed several strategic acquisitions. These acquisitions
were made to expand our product offering, enhance our technological expertise
and expand our manufacturing capabilities. These acquisitions are summarized in
Item 7: "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- General" in our Annual Report on Form 10-K for the year ended
December 31, 2000. We plan to continue to pursue and seek out future
acquisitions that provide synergies with existing product offerings and
technology or allow us to penetrate into new markets and grow our business
model.
Goodwill and other intangibles totaled $437.2 million as of September 30, 2001.
For the three and nine months ended September 30, 2001, we recorded amortization
of goodwill and other intangibles of $27.2 million and $84.4 million,
respectively. We expect to record amortization charges of goodwill and other
intangibles of approximately $27.2 million per quarter through December 31,
2001. At January 1, 2002, we intend to implement SFAS No. 142, "Goodwill and
Other Intangible Assets." (see Recently Issued Accounting Standards).
In connection with these acquisitions, a portion of the purchase prices paid
represented deferred stock compensation relating to options to purchase our
common stock. The fair values of these options were $106.6 million and have been
recorded as deferred stock compensation. Deferred stock compensation
amortization expenses for the three and nine months ended September 30, 2001
relating to these stock options were approximately $28.1 million and $62.1
million, respectively, compared with $27.8 million and $35.3 million in the
three and nine months ended September 30, 2000, respectively. We expect to incur
approximately $33.4 million of additional deferred stock compensation, which
will be fully amortized by 2004. Deferred stock compensation is being amortized
using the graded method using an estimated employment period of four years.
In July 2000, we and our subsidiary, Luminent, entered into four year employment
agreements with Luminent's former President and Chief Executive Officer and its
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 our common stock and Luminent's common stock. The options
were granted to Luminent's executives at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation from these
option grants reported for the three and nine months ended September 30, 2001
was $22.3 million and $35.3 million, respectively, and we will incur additional
deferred stock compensation of approximately $2.6 million through 2004.
Luminent's President and Chief Executive Officer, Dr. William R. Spivey,
resigned in September 2001. Dr. Spivey's resignation was considered by the
parties to be a termination other than for cause under his employment agreement
entitling him to the severance benefits of his employment agreement, including
payment over a one-year period of an amount equal to two times the sum of his
annual salary plus bonus and the vesting of all of his unvested Luminent
options. Dr. Spivey's MRV and Luminent stock options are exercisable through
September 11, 2003. During the quarter ended September 30, 2001, we recorded a
charge of $1.0 million to reflect severance expense and an immediate write-down
of deferred stock compensation expense of $18.9 million.
11
We reported a net loss of $89.6 million and $238.1 million for the three and
nine months ended September 30, 2001 respectively. A significant portion of the
net loss was due to the amortization of goodwill and other intangibles and
deferred stock compensation related to our recent acquisitions and our
employment arrangements with Luminent's former President and its Chief Financial
Officer. Effective January 1, 2002, the adoption of SFAS 142 will stop
amortization of goodwill, however, it may require us to record an impairment
charge (see Recently Issued Accounting Standards). We will continue to record
amortization of deferred stock compensation through 2004, relating to these
acquisitions and our employment arrangements with Luminent's Chief Financial
Officer. As a consequence of the amortization of deferred stock compensation
charges, we do not expect to report net income in the foreseeable future.
On November 10, 2000, Luminent, our publicly owned subsidiary, completed the
initial public offering of its common stock, selling 12.0 million shares at
$12.00 per share for net proceeds of approximately $132.3 million. Luminent
designs, manufactures and sells a comprehensive line of fiber optic components
that enable communications equipment manufacturers to provide optical networking
equipment for the rapidly growing metropolitan and access segments of the
communications networks. While we had planned to distribute all of our shares of
Luminent common stock to our stockholders, unfavorable business and economic
conditions in the fiber optic, data networking and telecommunications industries
and the resulting adverse effects on the market prices of our common stock and
the common stock of Luminent has caused us to abandon the distribution and
effect a short-form merger of Luminent into our wholly-owned subsidiary, MRV
Merger Sub Corp., thereby eliminating public ownership of Luminent. Upon
consummation of this merger, MRV Merger Sub will become the surviving
corporation and the corporate existence of Luminent will cease. Each outstanding
share of Luminent common stock (except for shares held by MRV Merger Sub, which
will be cancelled, and shares held by Luminent stockholders who perfect their
statutory appraisal rights under Delaware law) will be converted in the merger.
Former Luminent stockholders whose shares are converted will be entitled to
receive 0.43 of a share of our common stock for each share of Luminent common
stock owned at the effective time of the merger. If all these Luminent shares
are converted in the merger, we will issue 5,160,000 shares of our common stock
to the former Luminent stockholders. In addition, upon completion of the merger,
we will assume in the merger, options to purchase Luminent common stock that are
outstanding. These Luminent stock options will be converted into options to
purchase approximately 5,245,580 shares of our common stock containing the same
vesting provisions and intrinsic value.
On October 6, 2000, our wholly owned subsidiary Optical Access filed a
registration statement with the Securities and Exchange Commission for the
initial public offering of its common stock. This offering has not been
completed and, based on current market conditions, we do not expect it to be
completed in the foreseeable future, if ever. Accordingly, Optical Access will
be submitting an application to the SEC to withdraw its registration statement.
Because of the time lapse since the initial filing, in the nine months ended
September 30, 2001, we expensed all costs ($1.1 million) of this offering.
Optical Access designs, manufactures and markets an optical wireless solution
that delivers high-speed communications traffic to the portion of the
communications network commonly known as the last mile, which extends from the
end user to the service provider's central office.
In the second quarter of 2001, the management of Luminent, our publicly traded
subsidiary, approved and implemented a restructuring plan and other actions in
order to adjust operations and administration as a result of the dramatic
slowdown in the communications equipment industry generally and the optical
components sector in particular. Major actions comprising Luminent's
restructuring activities primarily involve the reduction of facilities in the
U.S. and in Taiwan, the reduction of workforce, the abandonment of certain
assets, and the cancelation and termination of purchase commitments. These
actions are expected to realign Luminent's business based on current and near
term growth rates. All of these actions are scheduled for completion by the
second quarter of 2002.
During the three and nine months ended September 30, 2001, Luminent recorded
restructuring charges totaling $3.0 million and $17.5 million, respectively.
Costs for restructuring activities are limited to either incremental costs that
directly result from the restructuring activities and provide no future revenue
generating benefit or costs incurred under contractual obligations that existed
before the restructuring plan and will continue with either no future revenue
generating benefit or become a penalty incurred for termination of the
obligation.
Employee severance costs and related benefits of $1.1 million are related to
approximately 500 and 600 layoffs during the three and nine months ended
September 30, 2001, respectively, bringing Luminent's total workforce to
approximately 1,100 employees as of September 30, 2001. As of September 30,
2001, the employee severance reserve balance has been reduced by cash payments
of approximately $1.0 million resulting in an ending reserve balance of $38,000.
Affected employees came from all divisions and areas of Luminent. The majority
of affected employees were in the manufacturing group.
In addition to the costs associated with employee severance, Luminent identified
a number of assets, including leased facilities and equipment that are no longer
required due to current market conditions, operations and expected growth rates.
The net facility costs related to closed and abandoned facilities of
approximately $1.6 million and $2.7 million for the three and nine months ended
September 30, 2001, respectively, are primarily related to future obligations
under operating leases. The total lease charge is net of approximately $3.7
million in expected sublease revenue on leases that Luminent cannot terminate.
In connection with these closed and abandoned facilities, Luminent has recorded
asset impairment charges of $8.9 million in selling, general, and administrative
for the nine months ended September 30, 2001, consisting of leasehold
improvements and certain manufacturing equipment to write-down the value of this
equipment. Due to the specialized nature of these assets, Luminent has
determined that these assets have minimal or no future benefit and has recorded
a provision reflecting the net book value relating to these assets. Luminent
expects to complete disposal of this equipment early in 2002. Purchase
commitments of $1.5 million and $3.9 million, recorded in cost of sales, for the
three and nine months ended September 30, 2001, respectively, are to cancel or
renegotiate outstanding contracts for materials and capital assets that are no
longer required due to Luminent's significantly reduced orders for optical
components and sales projections over the next twelve months.
As of September 30, 2001, the provision has been reduced by cash payments of
$1.1 million and $1.3 million for the three and nine months ended September 30,
2001, respectively, and non-cash related charges of $8.9 million for the nine
months ended September 30, 2001, resulting in an ending balance of $7.4 million.
Luminent expects to utilize the remaining balance by the end of the second
quarter of 2002. Luminent expects that it will spend approximately $4.5 million
through the next three quarters to carry out the plan, which will be paid
through cash and cash equivalents and through operating cash flows. Luminent
expects to begin to realize savings related to the workforce reductions in late
2001 with estimated ongoing quarterly net savings of $2.4 million. In addition,
Luminent will realize reduced depreciation charges of approximately $384,000 per
quarter through December 2004 and $163,000 per quarter through December 2005 for
facility costs. These savings are expected to be realized as reductions in cost
of sales, research and development and selling, general and administrative
expenses.
A summary of the restructuring costs for the nine months ended September 30,
2001 consist of the following:
Remaining
Original Provision Additional Provision Utilized Balance
------------------ -------------------- ------------- -------------
Exit costs
Asset impairment $ 8,904,000 $ -- $ 8,904,000 $ --
Closed and abandoned facilities 1,108,000 1,584,000 89,000 2,603,000
Purchase commitments 2,402,000 1,460,000 102,000 3,760,000
Other 991,000 -- 41,000 950,000
------------- ------------- ------------- -------------
13,405,000 3,044,000 9,136,000 7,313,000
Employee severance costs 1,072,000 -- 1,034,000 38,000
------------- ------------- ------------- -------------
$ 14,477,000 $ 3,044,000 $ 10,170,000 $ 7,351,000
============= ============= ============= =============
A summary of the restructuring costs by line item for the three and nine months
ended September 30, 2001 consist of the following:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------ ------------------
Cost of sales $ 1,460,000 $ 4,628,000
Selling, general and administrative 1,584,000 12,376,000
Research and development -- 501,000
Other income, net -- 16,000
----------- -----------
Total restructuring costs $ 3,044,000 $17,521,000
=========== ===========
As a result of the significant negative economic and industry trends impacting
Luminent's expected sales over the next twelve months, Luminent also recorded a
one-time $26.1 million charge to write-down the remaining book value of certain
inventory related to certain transceivers, duplexors, and triplexors that are
previous generation products to its realizable value during the three months
ended June 30, 2001. The one-time charge to write-down inventory was
subsequently reduced by $3.7 million during the three months ended September 30,
2001 to reflect the utilization of previously written-off items. An additional
$3.1 million of inventory was written down during the three months ended
September 30, 2001 to reflect the identification of additional inventory that is
not expected to be utilized as a result of Luminent's significantly reduced
orders for optical components and sales projections for the next twelve months.
The inventory charges and recoveries were recorded in cost of sales. Also
included in one-time charges is a $598,000 charge to bad debt recorded in
selling, general and administrative expenses during the nine months ended
September 30, 2001 to reflect customer bankruptcies that have resulted from the
severe market downturn.
In addition, as part of Luminent's review of the impairment of certain
long-lived assets, Luminent's management performed an assessment of the carrying
amount of goodwill recorded in connection with its various acquisitions. This
assessment, based on the undiscounted future cash flows, determined that no
write-down of goodwill was required for the nine months ended September 30, 2001
(see Note 8).
12
MARKET CONDITIONS AND CURRENT OUTLOOK
Macroeconomic factors, such as an economic slowdown in the U.S. and abroad, have
detrimentally impacted demand for optical components and networking
infrastructure equipment. The unfavorable economic conditions and reduced
capital spending has detrimentally affected sales to service providers, network
equipment companies, e-commerce and Internet businesses, and the manufacturing
industry in the U.S. during the last nine months, and appear to continue to
affect these industries in the fourth quarter of 2001 and may affect them beyond
the fourth quarter. Announcements by industry participants and observers
indicate there is a slowdown in industry spending and participants are seeking
to reduce existing inventories.
As a result of the current slowdown in the communications industry we have
recorded in our consolidated results for the second quarter of 2001, a one-time
charge for Luminent's write-down of inventory, cancelation and termination of
purchase commitments, asset impairment, workforce reduction, restructuring costs
and other non-recurring items. These charges, totaling $41.2 million, resulted
from the lower demand for Luminent's products and pricing pressures stemming
from the continuing downturn in the general communications equipment industry
and the optical components sector in particular. As a result of this
restructuring program, Luminent recorded net additional restructuring and other
charges of $2.4 million during the three months ended September 30, 2001,
primarily as a result of adjusted inventory valuations, increased facility costs
and other commitments.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of total
net sales for the nine and three months ended September 30, 2001 and 2000.
NINE MONTHS ENDED THREE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------
REVENUES, net 100% 100% 100% 100%
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of goods sold 82 62 83 58
Research and development expenses 27 22 28 26
Selling, general and administrative expenses 51 42 74 64
Amortization of goodwill and intangibles from
acquisitions 33 18 39 33
-------- -------- -------- --------
Operating (loss) income (93) (44) (123) (81)
Other expense, net (2) (3) (2) (7)
Provision (credit) for income taxes (1) (1) (9) (1)
Minority interest 4 0 5 (1)
-------- -------- -------- --------
NET LOSS (92)% (49)% (129)% (90)%
-------- -------- -------- --------
13
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The following management discussion and analysis refers to and analyzes our
results of operations into two segments as defined by our management. These two
segments are Operating Entities and Development Stage Enterprises including all
startups activities.
REVENUES, NET.
We generally recognize product revenue, net of sales discounts and allowances,
when persuasive evidence of an arrangement exists, delivery has occurred and all
significant contractual obligations have been satisfied, the fee is fixed or
determinable and collection is considered probable. Products are generally
shipped "FOB shipping point" with no rights of return. Sales with contingencies,
such as rights of return, rotation rights, conditional acceptance provisions and
price protection, are rare and insignificant and are deferred until the
contingencies have been satisfied or the contingent period has lapsed. We
generally warrant our products against defects in materials and workmanship for
one year. The estimated costs of warranty obligations and sales returns and
other allowances are recognized at the time of revenue recognition based on
contract terms and prior claims experience. Our major revenue-generating
products consist of: optical passive and active components; switches and
routers; remote device management; and network physical infrastructure
equipment. Revenue generated through the sales of services and systems support
has been insignificant in relation to our consolidated revenues.
OPERATING ENTITIES - Revenues for the three and nine months ended September 30,
2001 were $69.7 million and $259.4 million, respectively, compared to revenues
of $82.7 million and $221.7 million for the three and nine months ended
September 30, 2000, respectively. The change represented a decrease of $13.0
million or 15.7% for the three months ended September 30, 2001 and an increase
of $37.6 million or 17.0% for the nine months ended September 30, 2001 over the
three and nine months ended September 30, 2000, respectively. Revenue generated
through our recent acquisitions for the three and nine months ended September
30, 2001, was $10.8 million and $51.6 million, respectively. Revenue from our
existing business was $58.9 million and $207.8 million for the three and nine
months ended September 30, 2001, respectively. The decrease in revenue for the
three months ended September 30, 2001 is primarily due to decreases in optical
passive and active component revenue of 27.5%, or $8.2 million. In contrast to
the reduction in revenue realized during the three months ended September 30,
2001, revenue increases for the nine months ended September 30, 2001, are a
result of increases in optical passive and active component revenue of 62.8%, or
44.4 million. The dramatic shift in optical passive and active components was a
result of the continued downturn in the communication equipment industry, which
occurred during the second and third quarters of 2001.
DEVELOPMENT STAGE ENTERPRISES - No significant revenues were generated by those
entities during the three and nine months ended September 30, 2000 and 2001.
GROSS PROFIT.
Gross profit is equal to our revenues less our cost of goods sold. Our cost of
goods sold includes materials, direct labor and overhead. Cost of inventory is
determined by the first-in, first-out method.
OPERATING ENTITIES - Gross profit for the three and nine months ended September
30, 2001 was $12.1 and $46.6 million, compared to gross profit of $34.8 million
and $85.3 million during the three and nine months ended September 30, 2000. The
changes represented a decrease of $22.7 million or 65.2% for the three months
ended September 30, 2001 over the three months ended September 30, 2000 and a
decrease of $38.7 million or 45.4% for the nine months ended September 30, 2001
over the nine months ended September 30, 2000.
Our gross margins (defined as gross profit as a percentage of revenues) are
generally affected by price changes over the life of the products and the
overall mix of products sold. Higher gross margins are generally expected from
new products and improved production efficiencies as a result of increased
utilization. Conversely, prices for existing products generally will continue to
decrease over their respective life cycles. Our gross margin decreased to 17.3%
and 18.0% for the three and nine months ended September 30, 2001 compared to
gross margins of 42.0% and 38.4% for the three and nine months ended September
30, 2000. The decrease in gross margin was partially attributed to a write-off
of inventory and other charges of $30.1 million taken by Luminent during the
nine months ended September 30, 2001. The gross margin decreases for the three
and nine months were also partially due to the increase of the inventory reserve
taken by other MRV networking subsidiaries. In addition, certain profitable, but
low margin projects in Europe, contributed to the reduction in gross margin for
the three months ended September 30, 2001, resulting from the concentration of
European revenue which increased from 48.5% for the nine months ended September
30, 2001 to 57.4% out of total sales in the three months ended September 30,
2001. The decrease in our gross margins was also partially attributable to
increased deferred compensation amortization expense. Prior to Luminent's
restructuring and other charges of $863,000 and deferred stock compensation
amortization of $3.3 million for the three months ended September, 30 2001, and
Luminent's inventory write-downs and other market related charges of $ 30.1
million and deferred stock compensation amortization of $8.0 million for the
nine months ending September, 30 2001 and deferred stock compensation
amortization of $3.6 million for the three months and $4.3 million for the nine
months ended September 30, 2000, gross margin would have been $16.3 million or
23.3% and $84.7 million or 32.7%, respectively, for the three and nine months
ended September 30, 2001, compared to $38.4 million or 46.4% and $89.6 or 40.4%
for the three and nine months ended September 30, 2000.
DEVELOPMENT STAGE ENTERPRISES - No significant gross margins were produced by
those entities during the three and nine months ended September 30, 2000 and
2001.
RESEARCH AND DEVELOPMENT EXPENSES (R&D).
R&D expenses decreased by 11.4%, to $19.3 million for the three months and
increased by 44.7 to $70.1 million for nine months ended September 30, 2001,
over the same three and nine month periods in 2000.
OPERATING ENTITIES - R&D expenses of the operating entities were $8.4 million or
12.1% of revenues for the three months and $35.8 million or 13.8% of revenues
for the nine months ended September 30, 2001, as compared to $13.8 million or
16.7% of revenues for the three months, and $27.2 million or 12.3% of revenues
for the nine months ended September 30, 2000. This represents a decrease of $5.4
million or 38.9% for the three months and increase of $8.6 million or 31.5% for
the nine months ended September 30, 2001 compared to the same periods in 2000.
Excluding a benefit to deferred stock compensation amortization expense of
$554,000 for the three months ended September 30, 2001 and deferred stock
compensation amortization of $9.6 million for the nine months ended September
30, 2001 and deferred stock compensation amortization of $5.6 million and $6.8
million for the three months and nine months ended September 30, 2000, R&D
expenses would have increased by 9.9% from $8.2 million to $9.0 million for the
three months ended September 30, 2000 and 2001, respectively. R&D expenses would
have increased by 28.2% from $20.4 million to $26.1 million during the nine
months ended September 30, 2000 and 2001, respectively.
DEVELOPMENT STAGE ENTERPRISES -. R&D expenses of the development stage
enterprises were $10.9 million or 15.6% of revenues for the three months and
$34.3 million or 13.2% of revenues for the nine months ended September 30, 2001,
as compared to $8.0 million or 9.7% of revenues for the three months, and $21.3
million or 9.6% of revenues for the nine months ended September 30, 2000. This
represents an increase of $2.9 million or 36.1% for the three months and an
increase of $13.0 million or 61.5% for the nine months ended September 30, 2001
compared to the same periods in 2000.
The increase in R&D expenses of consolidated development stage enterprises is
due to the acceleration in the growth of those enterprises consistent with their
objectives of bringing new products to market.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A).
Overall SG&A expenses decreased 2.7% to $51.3 million for the three months and
increased 41.6% to $133.4 million for the nine months ended September 30, 2001,
compared to the same three and nine month periods in 2000. SG&A expenses were
73.5% of Revenues for the three months and 51.4% of Revenues for the nine months
ended September 30, 2001, respectively. Prior to Luminent's restructuring and
other charges of $2.6 million and deferred stock compensation amortization of
$25.4 million for the three months ended September 30, 2001 and Luminent's
restructuring and other charges of $14.0 million and deferred stock compensation
amortization of $45.6 million for the nine months ended September 30, 2001 and
deferred stock compensation amortization of $14.6 million for the three months
and $16.6 million for the nine months ended September 30, 2000, SG&A would have
decreased 39.0% to $23.2 million for the three months, and decreased 4.9% to
$73.8 million for the nine months ended September 30, 2001, respectively. As a
percentage of sales, SG&A prior to Luminent's restructuring and other charges
and deferred stock compensation amortization expenses would have been 28.4% and
33.3% in the three and nine month periods ended September 30, 2001,
respectively, compared to 46.1% and 35.0% of net sales in the three and nine
months periods ended September 30, 2000, respectively.
OPERATING ENTITIES - SG&A expenses increased 20.4% to $45.2 million for the
three months and increased 61.2% to $121.8 million for the nine months ended
September 30, 2001, over the same three and nine month periods in 2000. SG&A
expenses were 64.8% of net sales for the three months and 47.0% of net sales for
the nine months ended September 30, 2001, respectively. Prior to Luminent's
restructuring and other charges of $2.6 million and deferred stock compensation
amortization of $25.4 million for the three months ended September 30, 2001 and
Luminent's restructuring and other charges of $14.0 million and deferred stock
compensation amortization of $45.6 million for the nine months ended September
30, 2001 and deferred stock compensation amortization of $14.6 million for the
three months and $16.6 million for the nine months ended September 30, 2000,
SG&A would have decreased 25.1% to $17.2 million for the three months, and
decreased 5.5% to $62.2 million for the nine months ended September 30, 2001,
respectively. As a percentage of revenues, SG&A prior to deferred stock
compensation expenses would have been 24.6% and 24.0% in the three and nine
month periods ended September 30, 2001, respectively, compared to 27.7% and
26.6% of revenues in the three and nine months periods ended September 30, 2000,
respectively. These decreases are mainly due to the reduction of overhead
expenses.
DEVELOPMENT STAGE ENTERPRISES - The Development Stage Enterprises did not report
SG&A expenses during the three and nine months ended September 30, 2000. During
2001 these companies began to develop their administrative capabilities and
reported $6.0 million for the three months and $11.5 million for the nine months
ended September 30, 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES FROM ACQUISITIONS.
OPERATING ENTITIES - Amortization of goodwill and other intangibles decreased to
$27.2 million for the three months and increased to $84.4 million for the nine
months ended September 30, 2001, from $27.3 million and $40.4 million in the
corresponding periods ending September 30, 2000. The increase in these costs
during the nine months ended September 30, 2001 was the result of our recent
acquisitions in 2000. We expect to incur additional amortization of goodwill and
other intangibles resulting from these acquisitions totaling approximately $27.2
million each quarter through December 31, 2001 (see Recently Issued Accounting
Standards). Furthermore, as we continue to engage in strategic acquisitions,
additional goodwill and intangibles may be recorded.
DEVELOPMENT STAGE ENTERPRISES - No amortization of goodwill was recorded in any
of the Development Stage Enterprises.
OTHER EXPENSE, NET.
In June 1998, we issued $100.0 million principal amount of 5% convertible
subordinated debentures due in 2003. The debentures were offered in a 144A
private placement to qualified institutional investors at the stated amount,
less a selling discount of 3%. In late 1998, we repurchased $10.0 million
principal amount of the Notes at a discount from the stated amount. We incurred
$3.4 million and $1.1 million in interest expense relating to the Notes during
the three and nine months ended September 30, 2001, as well as during the three
and nine months ended September 30, 2000. No significant other expenses had been
recorded in the Development Stage Enterprises.
Other Expenses, Net, were $1.4 million for the three months and $4.3 million for
the nine months ended September 30, 2001, as compared to $5.8 million for the
three months, and $7.4 million for the nine months ended September 30, 2000.
This represents a decrease of $4.4 million for the three months and $3.1 million
for the nine months ended September 30, 2001, compared to the same periods in
2000. The decrease in other expenses net is primarily due to the increase of
interest income of $1.1 million for the three months and $5.1 million for the
nine months ended September 30, 2001. An additional decrease is attributed to
the MRV's net loss in unconsolidated partner companies of $5.1 million for the
three months and $3.3 for nine months ended September 30, 2001.
14
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and restricted cash were $211.4 million at September 30,
2001, a decrease of $54.9 million from cash, cash equivalents and restricted
cash of $266.3 million at December 31, 2000. Working capital at September 30,
2001 was $271.0 million compared to $366.8 million at December 31, 2000. Our
ratio of current assets to current liabilities at September 30, 2001 was 3.3 to
1.0 compared to 4.3 to 1.0 at December 31, 2000. The decrease in working capital
is substantially attributed to the cash requirements of our development stage
enterprises and our consolidated net operating losses.
Cash used in operating activities was $84.4 million for the nine months ended
September 30, 2001, compared to cash used in operating activities of $11.6
million for the nine months ended September 30, 2000. Cash used in operating
activities is a result of our net operating loss of $238.1 million, adjusted for
non-cash items such as depreciation and amortization and deferred stock
compensation charges, and offset by cash generated from operating assets and
liabilities. Cash used in operating activities were primarily the result of
decreased accounts receivables and inventories and increases in accounts payable
and accrued liabilities, partially offset by increases in other current assets
and decreases in income taxes payable, during the period. The decrease in
inventory is primarily the result of inventory write-downs taken by Luminent.
Increases in accounts payable and accrued liabilities are the result of growth
in our non-Luminent businesses.
Cash flows from investing activities were $9.3 million for the nine months ended
September 30, 2001, compared to cash used in investing activities of $49.8
million for the nine months ended September 30, 2000. Cash flows provided by
investing activities were the result of net proceeds of $16.3 million for the
sale of short-term investments, offset by capital expenditures and investments
in unconsolidated partner companies. Cash flows used in investing activities in
the prior period resulted from the net cash used in our recent acquisitions of
$44.5 million.
Cash flows from financing activities were $19.8 million for the nine months
ended September 30, 2001, compared to cash provided in financing activities of
$67.3 million for the nine months ended September 30, 2000. Cash generated from
financing activities was the result of proceeds received from the issuance of
our common stock of $19.0 million and short-term borrowing of $18.3 million,
offset by payments on short-term borrowings of $16.9 million, during the period.
Cash flows provided by financing activities in the prior period represent the
cash received through borrowings on our line of credit and the issuance of
common stock.
On November 10, 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12 per share. Their initial public
offering raised net proceeds of approximately $132.3 million.
In June 1998, we issued $100.0 million principal amount of 5% convertible
subordinated debentures due in 2003 in a private placement raising net proceeds
of $96.4 million. The debentures are convertible into our common stock at a
conversion price of $13.52 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 our common stock. The debentures bear interest at 5%
15
per annum, which is payable semi-annually on June 15 and December 15 of each
year. The debentures have a five-year term and have been callable by us since
June 15, 2001. The premiums payable to call the debentures are 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 through the
date of redemption.
We believe that our cash on-hand and cash flows from operations will be
sufficient to satisfy our working capital, capital expenditures and research and
development requirements for at least the next 12 months. However, we may
require or choose to obtain additional debt or equity financing in order to
finance acquisitions or other investments in our business. We will continue to
devote resources for expansion and other business requirements. Our future
capital requirements will depend on many factors, including acquisitions, our
rate of revenue growth, the timing and extent of spending to support development
of new products and expansion of sales and marketing, the timing of new product
introductions and enhancements to existing products and market acceptance of our
products. Additionally, following the proposed merger with Luminent (see
Overview), we will increase our liquidity based on Luminent's cash, cash
equivalents and short-term investments on hand as of the consummation of the
merger, or $93.7 million at September 30, 2001.
MARKET RISKS
Market risk represents the risk of loss that may impact our Consolidated
Financial Statements through adverse changes in financial market prices and
rates and inflation. Our market risk exposure results primarily from
fluctuations in interest rates and foreign exchange rates. We manage our
exposure to these market risks through our regular operating and financing
activities and have not historically hedged these risks through the use of
derivative financial instruments. The term "hedge" is used to mean a strategy
designed to manage risks of volatility in prices or interest and foreign
exchange rate movements on certain assets, liabilities or anticipated
transactions and creates a relationship in which gains or losses on derivative
instruments are expected to counter-balance the losses or gains on the assets,
liabilities or anticipated transactions exposed to such market risks.
Interest Rates. We are exposed to interest rate fluctuations on our
investments, short-term borrowings and long-term obligations. Our cash and
short-term investments are subject to limited interest rate risk, and are
primarily maintained in money market funds and bank deposits. Our variable-rate
short-term borrowings are also subject to limited interest rate risk due to
their short-term maturities. Our long-term obligations were entered into with
fixed and variable interest rates. In connection with our $50.0 million
variable-rate term loan due in 2003, we entered into a specific hedge, an
interest rate swap, to modify the interest characteristics of this instrument.
The interest rate swap was used to reduce our cost of financing and the
fluctuations in the aggregate interest expense. The notional amount, interest
payment and maturity dates of the swap match the principal, interest payment
and maturity dates of the related debt. Accordingly, any market risk or
opportunity associated with this swap is offset by the opposite market impact
on the related debt. To date, we have not entered into any other derivative
instruments, however, as we continue to monitor our risk profile, we may enter
into additional hedging instruments in the future.
Foreign Exchange Rates. We operate on an international basis with a portion of
our revenues and expenses being incurred in currencies other than the U.S.
dollar. Fluctuations in the value of these foreign currencies in which we
conduct our business relative to the U.S. dollar will cause U.S. dollar
translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results.
However, because we have expenses and revenues in each of the principal
functional currencies, the exposure to our financial results to currency
fluctuations is reduced. We have not historically attempted to reduce our
currency risks through hedging instruments; however, we may do so in the future.
Inflation. We believe that the relatively moderate rate of inflation in the
United States over the past few years has not had a significant impact on our
sales or operating results or on the prices of raw materials. However, in view
of our recent expansion of operations in Taiwan, Israel and other countries,
which have experienced substantial inflation, there can be no assurance that
inflation will not have a material adverse effect on our operating results in
the future.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Investments and Hedging Activities," and SFAS No. 137, which
delayed the effective date of SFAS No. 133. In June 2000, the FASB issued SFAS
No. 138, which provides additional guidance for the application of SFAS No. 133
for certain transactions. We adopted this statement in January 2001 and the
adoption of this statement did not have a material impact on our financial
position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements," and
related interpretations. SAB 101 summarized certain of the Securities and
Exchange Commission's views in applying accounting principles generally accepted
in the United States to revenue recognition in financial statements. We have
applied the provisions of SAB 101 in the consolidated financial statements. The
adoption of SAB 101 did not have a material impact on our financial condition or
results of operations.
In March 2000, the FASB issued interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25." FIN 44 clarifies the application of APB No. 25 for certain
issues, including the definition of an employee, the treatment of the
acceleration of stock options and the accounting treatment for options assumed
in business combinations. FIN 44 became effective on July 1, 2000, but is
applicable for certain transactions dating back to December 1998. The adoption
of FIN 44 did not have a significant impact on our financial position or results
of operations.
The FASB recently approved two statements: SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets," which provide guidance
on the accounting for business combinations, requires all future business
combinations to be accounted for using the purchase method, discontinues
amortization of goodwill, defines when and how goodwill and other intangible
assets are amortized, and requires an annual impairment test for goodwill. We
plan to adopt those statements effective January 1, 2002. We are currently
reviewing these standards to determine the impact on our results of operation
and financial position. The most significant anticipated effect on our financial
statements on adoption would be discontinuing goodwill amortization and the
possible recording of a goodwill impairment loss measured as of the date of
adoption.
16
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
From time to time we may make written or oral forward-looking statements.
Written forward-looking statements may appear in documents filed with the
Securities and Exchange Commission, in press releases, and in reports to
stockholders.
The Private Securities Reform Act of 1995 contains a safe harbor for
forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" we are hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statements made by or on behalf of the
Company. Any such statement is qualified by reference to the following
cautionary statements:
WE INCURRED A NET LOSS IN THE YEAR ENDED DECEMBER 31, 2000 AND DURING THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001, PRIMARILY AS A RESULT OF THE
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION CHARGES
FROM RECENT ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE
FORESEEABLE FUTURE.
We reported a net loss of $153.0 million for the year ended December 31, 2000
and $259.4 million for the nine months ended September 30, 2001. A major
contributing factor to the net losses was the amortization of goodwill and other
intangibles and deferred stock compensation related to our acquisitions of Fiber
Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's former President and Luminent's Chief
Financial Officer. We will continue to record amortization of goodwill and other
intangibles and deferred stock compensation relating to these acquisitions and
the employment arrangements with these executives going forward. Effective
January 1, 2002, with the adoption of SFAS 142, we will stop amortization of
goodwill, however, we may be required to record an impairment charge (see
Recently Issued Accounting Standards). As a consequence of goodwill and other
intangibles and deferred stock compensation charges, we do not expect to report
net income in the foreseeable future.
OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND
RELATED UNCERTAINTIES.
Weaker economic conditions worldwide, particularly in the U.S. and Europe, have
contributed to the current technology industry slowdown and impacted our
business resulting in:
- reduced demand for of our products, particularly Luminent's fiber
optic components;
- increased risk of excess and obsolete inventories;
- increased price competition for our products;
- excess manufacturing capacity under current market conditions; and
- higher overhead costs, as a percentage of revenues.
These unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2001 to date, and may affect
them for the balance of 2001 and thereafter. Announcements by industry
participants and observers indicate there is a slowdown in industry spending and
participants are seeking to reduce existing inventories and we are experiencing
these reductions in our business. As a result of these factors, we have recorded
in the nine months ended September 30, 2001, consolidated charges from our
subsidiary, Luminent, which include the write-off of inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs,
severance expenses and other unusual items. The aggregate charges recorded
during the nine months ended September 30, 2001 were $44.7 million. These
charges are primarily the result of the lower demand for Luminent's products and
pricing pressures stemming from the continuing downturn in the communications
equipment industry generally and the optical components sector in particular.
Additionally, these economic conditions are making it very difficult for MRV,
Luminent and our other companies, our customers and our vendors to forecast and
plan future business activities. This level of uncertainty severely challenges
our ability to operate profitably or to grow our businesses. In particular, it
is difficult to develop and implement strategy, sustainable business models and
17
efficient operations, and effectively manage manufacturing and supply chain
relationships. Many analysts are predicting a further downturn in the U.S.
economy in the aftermath of the terrorist attacks on the World Trade Center in
New York and the Pentagon in Washington DC in September 2001. As discussed below
in the section of these Risk Factors entitled, "We may have difficulty managing
our business," we have lost a key member of our management team in the attack on
the World Trade Center and that loss has already had and may in the future have
adverse consequences on our business. However, we do not know how the
consequences of these attacks will additionally affect our business. If the
economic or market conditions continue or further deteriorate, or if the
economic downturn is exacerbated as a result of political, economic or military
conditions associated with current domestic and world events, our businesses,
financial condition and results of operations could be further impaired.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
The markets for our products are characterized by rapid technological change,
frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective transmission
capacity, or bandwidth, increases. Our future performance will depend on the
successful development, introduction and market acceptance of new and enhanced
products that address these changes as well as current and potential customer
requirements. The introduction of new and enhanced products may cause our
customers to defer or cancel orders for existing products. We have in the past
experienced delays in product development and these delays may occur in the
future. Therefore, to the extent customers defer or cancel orders in the
expectation of a new product release or there is any delay in development or
introduction of our new products or enhancements of our products, our operating
results would suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements, or to license
these technologies from third parties. Product development delays may result
from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical personnel;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to deliver
products to customers that are highly reliable, operate with its existing
equipment, lower the customer's costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological changes would significantly harm our business.
DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those our companies and we offer, may contain
undetected software or hardware errors when we first introduce them or when we
release new versions. The occurrence of these errors in the future, and our
inability to correct these 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, and legal actions by, our
customers, system integrators and end users. Any of these or other eventualities
resulting from defects in our products could cause our sales to decline and have
a material adverse effect on our business, operating results and financial
condition.
18
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;
- 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 or deferred compensation
charges;
- new product introductions by our competitors;
- pricing actions by our competitors or us;
- 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 these 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.
Our success is dependent, in part, on the overall growth rate of the fiber optic
components and networking industry. We can give no assurance that the Internet
or the industries that serve it will continue to grow or that we will achieve
higher growth rates. Our business, operating results or financial condition may
be adversely affected by any decreases 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.
Because of these and other factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
may be below the expectations of public market analysts and investors. This
failure to meet expectations could cause the trading price of our common stock
to decline. Similarly, the failure by our competitors or customers to meet or
exceed the results expected by their analysts or investors could have a ripple
effect on us and cause our stock price to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the length and
variability of the sales and implementation cycles for our products. We do not
recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be subjected
to
19
lifetime and reliability testing, which also can take months or more. While our
customers are evaluating our products and before they place an order with us, we
may incur substantial sales and marketing and research and development expenses
to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Even
after acceptance of orders, our customers often change the scheduled delivery
dates of their orders. Because of the evolving nature of the optical networking
and network infrastructure markets, we cannot predict the length of these sales,
development or delivery cycles. As a result, these long sales cycles may cause
our net sales and operating results to vary significantly and unexpectedly from
quarter-to-quarter, which could cause volatility in our stock price.
THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely volatile. The
market price of our common stock 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 experienced extreme price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies in particular, and that have been unrelated to
the operating performance of these companies. These factors, as well as general
economic and political conditions, may materially adversely affect the market
price of our common stock in the future. Similarly, the failure by our
competitors or customers to meet or exceed the results expected by their
analysts or investors could have a ripple effect on us and cause our stock price
to decline. Additionally, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, all of
whom have been granted stock options.
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 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 DECISION TO ABANDON THE SPIN-OFF OF LUMINENT TO OUR STOCKHOLDERS AND TO
ELIMINATE PUBLIC OWNERSHIP OF LUMINENT'S COMMON STOCK COULD HARM THE MARKET
PRICE OF OUR COMMON STOCK.
In 2000, we announced our intention to distribute to our stockholders the
outstanding common stock of Luminent that we owned assuming certain conditions
were met. While we informed our stockholders that we were not obligated to make
this distribution and might not if economic, market or other conditions caused
our board to decide against it, stockholders and analysts may react negatively
to our decision to abandon the distribution or to eliminate public ownership of
Luminent's common stock through the merger. On September 17, 2001, the first
trading day following the announcement of our decision to abandon the
distribution and effect the merger the closing price of our stock decreased from
$3.23 to $2.43. While September 17, 2001, was the first day of the reopening of
the stock market in the United States following the terrorists events of
September 11, 2001 and our stock price has since increased, the decrease in the
market price of our stock immediately following the announcement of the merger
could reflect a negative reaction to the news of the merger and, depending on
investors' continuing assessment of the impact of these events on our company,
this reaction could be sustained or cause the market price of our shares drop
lower.
20
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 these 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 these 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 BUSINESSES.
We have grown rapidly in recent years, with revenues increasing from $88.8
million for the year ended December 31, 1996, to $319.4 million for the year
ended December 31, 2000. Our growth, both internally and through the
acquisitions we have made has placed a significant strain on our financial and
management personnel and information systems and controls. As a consequence, we
must continually implement new and enhance existing financial and management
information systems and controls and must add and train personnel to operate
these 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.
Edmund Glazer, our Vice President of Finance and Administration and Chief
Financial Officer was killed on September 11, 2001 in the terrorists' attack on
the World Trade Center. His death has created a void in our management team that
will exist until a suitable replacement or replacements are found. Until a
successor or successors to Mr. Glazer are found and begin performing duties he
previously handled and managed, we may face difficulties in compiling, reviewing
and releasing financial information and this could result in delays in releasing
this information to the public and our meeting deadlines to file the reports
required of a public company. These difficulties could adversely affect the
marketplace's perception of MRV resulting in decreases in our stock price.
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 periods indicated
below:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1998 1999 2000 2000 2001
---- ---- ---- ---- ----
Percent of total revenue from foreign sales 59% 58% 63% 61% 64%
We have companies and offices in, and conduct a significant portion of our
operations in and from, Israel. We are, therefore, directly influenced by the
political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and
21
other conditions affecting Taiwan and People's Republic of China. Currently
there is significant political tension between Taiwan and People's Republic of
China, which could lead to hostilities. Risks we face due to international sales
and the use of overseas manufacturing include:
- greater difficulty in accounts receivable collection and longer
collection periods;
- the impact of recessions in economies outside the United States;
- unexpected changes in regulatory requirements;
- seasonal reductions in business activities in some parts of the world,
such as during the summer months in Europe or in the winter months in
Asia when the Chinese New Year is celebrated;
- certification requirements;
- potentially adverse tax consequences;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- trade restrictions;
- limited protection of intellectual property rights;
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
The majority of 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 these 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
Eurocompliant 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 that event, may experience gains and
losses due to currency fluctuations. Our operating results could be adversely
affected by currency fluctuations or as a result of inflation in particular
countries where material expenses are incurred.
WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND
THEREFORE COULD FACE DELAYS HARMING OUR SALES.
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 and to achieve
economies of scale. 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
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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 these 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 MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR
NEEDS.
Our companies currently purchase several key components used in the manufacture
of our products from single or limited sources. We depend on these sources to
meet our needs. Moreover, we depend on the quality of the products supplied to
us over which we have limited control. We have encountered shortages and delays
in obtaining components in the past and expect to encounter shortages and delays
in the future. If we cannot supply products due to a lack of components, or are
unable to redesign products with other components in a timely manner, our
business will be significantly harmed. We have no long-term or short-term
contracts for any of our components. As a result, a supplier can discontinue
supplying components to us without penalty. If a supplier discontinued supplying
a component, our business may be harmed by the resulting product manufacturing
and delivery delays.
OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE
MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS.
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 facilities and these components are
not readily available from other sources, any interruption of our manufacturing
processes could have a material adverse 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 this 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.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects that
would complement our existing companies and 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 following:
- possible charges to operations for purchased technology and
restructuring similar to those incurred in connection with our
acquisition of Xyplex in 1998;
- potentially dilutive issuances of equity securities;
- incurrence of debt and contingent liabilities;
- incurrence of amortization expenses and impairment charges related to
goodwill and other intangible assets and deferred compensation charges
similar to those arising with the acquisitions of Fiber Optic
Communications, Optronics, Quantum Optech, Jolt and Astroterra in 2000
(see Recently Issued Accounting Standards);
- 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.
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We can give no assurance as to whether we can successfully integrate the
companies, products, technologies or personnel of any business that we might
acquire in the future.
WE CANNOT PREDICT THE IMPACT OF POTENTIAL ACTIONS BY THE SEC WITH RESPECT TO OUR
VALUATION METHODOLOGY FOR IN-PROCESS RESEARCH AND DEVELOPMENT RELATED TO
BUSINESS COMBINATIONS.
Actions and comments from the SEC have indicated it has been reviewing the
valuation methodology of in-process research and development related to business
combinations. We believe we are in compliance with all of the existing rules and
related guidance as applicable to our business operations. However, the SEC may
change these rules or issue new guidance applicable to our business in the
future. There can be no assurance that the SEC will not seek to reduce the
amount of in-process research and development previously expensed by us. This
would result in the restatement of our previously filed financial statements and
could have a material adverse effect on our operating results and financial
condition for periods subsequent to the acquisitions.
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 be issued 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 of this kind of litigation,
regardless of outcome, could be expensive and time consuming, and adverse
determinations in any of this kind of 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
International 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 photodiode
module products. In January 2001, we were advised that Lucent had assigned
certain of its rights and claims to Agere Systems, Inc., including the claim
made on the Ortel patent. To date, we have not been contacted by Agere regarding
this patent claim. In July 2000, we received written notice from Nortel
Networks, which claimed we violated Nortel's patent relating to technology
associated with local area networks. In May 2001, we received written notice
from IBM, which claims that several of our optical components and Internet
infrastructure products make use of inventions covered by certain patents
claimed by IBM. We are evaluating the patents noted in the letters. Aggregate
net sales potentially subject to the foregoing claims amounted to approximately
30% of our total net sales during the year ended December 31, 2000, and 26% of
our total net sales during the nine months ended September 30, 2001. Others'
patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's and
IBM's, may be determined to be valid, or some of our products may ultimately be
determined to infringe the Lemelson, Rockwell, Lucent, Agere, Nortel or IBM
patents, or those of other companies.
Lemelson, Rockwell, Lucent, Agere, Nortel or IBM, 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 significant
resources to develop non-infringing technology. Licenses may not be available
from third parties, including Lemelson, Rockwell, Lucent, Ortel, Nortel or IBM,
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.
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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 $1.0 million each on 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 either of these
individuals, and the policies are not applicable in the event that either 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, run our companies
and our ability to compete with our current and future competitors depends, and
will depend, in large part, on our ability to attract and retain qualified
personnel. Competition for executives and qualified personnel in the networking
and fiber optics industries is intense, and we will be required to compete for
that personnel with companies having substantially greater financial and other
resources than we do. To attract executives, we have had to enter into
compensation arrangements, which have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives,
including a new executive or executives to assume the duties previously handled
and managed by Edmund Glazer, our recently deceased Vice President of Finance
and Administration and Chief Financial Officer. 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.
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.
We are subject to a variety of environmental regulations relating to the use,
storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure by
us to comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, these kinds of
regulations could restrict our ability to expand our facilities or could require
us to acquire costly equipment or to incur other significant expenses to comply
with environmental regulations. We cannot assure you that these legal
requirements will not impose on us the need for additional capital expenditures
or other requirements. If we fail to obtain required permits or otherwise fail
to operate within these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities.
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IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to determine our
component requirements. It is very important that we accurately predict both the
demand for our products and the lead times required to obtain the necessary
components and materials. Lead times for components and materials that we order
vary significantly and depend on factors such as specific supplier requirements,
the size of the order, contract terms and current market demand for the
components. For substantial increases in production levels, some suppliers may
need nine months or more lead time. If we overestimate our component and
material requirements, we may have excess inventory, which would increase our
costs. If we underestimate our component and material requirements, we may have
inadequate inventory, which could interrupt our manufacturing and delay delivery
of our products to our customers. Any of these occurrences would negatively
impact our net sales.
Current softness in demand and pricing in the communications market have
necessitated a review of our inventory, facilities and headcount. As a result,
we and Luminent recorded in the nine months ended September 30, 2001, a charges,
to write-down inventory to realizable value and inventory purchase commitments
of approximately $43.7 million.
WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has been brought against a
company following periods of volatility in the market price of its securities.
Due to the volatility and potential volatility of our stock price or the
volatility of Luminent's stock price following its initial public offering, we
may be the target of securities litigation in the future. Additionally, while
Luminent and we informed investors that we were under no obligation to, and
might not, make the distribution to our stockholders of our Luminent common
stock and that we could and might eliminate public ownership of Luminent through
a short-form merger with us, our decisions to abandon our distribution of
Luminent's common stock to our stockholders or to eliminate public ownership of
Luminent's common stock through the merger may result in securities or other
litigation. Securities or other litigation could result in substantial costs and
divert management's attention and resources.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and may suffer
other adverse consequences if deemed to be an investment company under the
Investment Company Act of 1940. The Investment Company Act of 1940 requires
registration for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading in securities. A company may
be deemed to be an investment company if it owns "investment securities" with a
value exceeding 40% of the value of its total assets (excluding government
securities and cash items) on an unconsolidated basis, unless an exemption or
safe harbor applies. Securities issued by companies other than majority-owned
subsidiaries are generally counted as investment securities for purposes of the
Investment Company Act. Investment companies are subject to registration under,
and compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company, we
would become subject to the requirements of the Investment Company Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable.
Registration as an investment company would subject us to restrictions that are
inconsistent with our fundamental business strategy of equity growth through
creating, acquiring, building and operating optical components and network
infrastructure companies. Although our investment securities currently comprise
substantially less than 40% of our total assets, fluctuations in the value of
these securities or of our other assets, or the sale of one or more of companies
in exchange for the securities of the purchaser, may cause this limit to be
exceeded. In that case, unless an exclusion or safe harbor was available to us,
we would have to attempt to reduce our investment securities as a percentage of
our total assets. This reduction can be attempted in a number of ways, including
the disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we otherwise would. These sales may be at depressed prices and
we may never realize anticipated benefits from, or may incur losses on, these
investments. We may be unable to sell some investments due to contractual or
legal restrictions or the inability to locate a suitable buyer. Moreover, we may
incur tax liabilities when we sell assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security
26
assets, we may not be able to identify and acquire suitable assets and
businesses or the terms on which we are able to acquire these assets may be
unfavorable.
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PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Not applicable
(b) Reports on Form 8-K
Three reports on Form 8-K were filed during the quarter covered by this Report.
(1) The first Report, dated and filed on July 11, 2001, reported under
Item 5 the announcement on July 5, 2001 of the preliminary financial results for
the second quarter ended June 30, 2001 of Luminent, Inc., registrant's
92.3%-owned subsidiary.
(2) The second Report, dated and filed July 31, 2001, reported under
Item 5 registrant's financial results for the three and six months ended June
30, 2001.
(3) The third Report, dated and filed September 17, 2001, reported
under Item 5: (i) the announcement of the death on September 11, 2001 of Edgar
Glazer, registrant's Vice President of Finance and Administration and Chief
Financial Officer and (ii) the joint announcement on September 13, 2001 by
registrant and Luminent of registrant's intent to effect a short-form merger
with Luminent.
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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 November 14, 2001.
MRV COMMUNICATIONS, INC
By: /s/ Noam Lotan
---------------------------------------------
Noam Lotan, President and Chief Executive
Officer (Principal Executive Officer)
By: /s/ Shay Gonen
---------------------------------------------
Shay Gonen
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
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