SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 28, 2001
MRV COMMUNICATIONS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1340090
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
20415 NORDHOFF STREET
CHATSWORTH, CA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER: (818) 773-0900
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Item 2. Acquisition or Disposition of Assets
On December 28, 2001, registrant completed the short-form merger of
Luminent, Inc. with and into registrant's wholly-owned subsidiary, MRV Merger
Sub Corp. Upon consummation of the merger, MRV Merger Sub became the surviving
corporation and the corporate existence of Luminent ceased. Each outstanding
share of Luminent common stock, $0.001 par value per share (except for shares
held by MRV Merger Sub, which were cancelled, and shares held by Luminent
stockholders who perfect their statutory appraisal rights under Delaware law),
was converted in the merger. Former Luminent stockholders whose shares were
converted are entitled to receive 0.43 of share of MRV common stock, $0.0017 par
value, for each share of Luminent common stock owned at the time of the merger
(an aggregate of up to 5,160,000 shares of MRV common stock). Immediately prior
to the merger, MRV Merger Sub held approximately 92% of the outstanding shares
of Luminent common stock. Upon consummation of the merger, MRV changed the name
of MRV Merger Sub Corp. to Luminent, Inc. and plans to continue to operate the
business of Luminent as a separate business unit of MRV.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The following financial statements of Luminent, Inc. are filed as part of
this report:
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS OF LUMINENT, INC
Report of Independent Public Accountants ............................. F-43
Consolidated Balance Sheets at December 31, 1999 and 2000 ............ F-44
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 ................................... F-45
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000 ....................... F-46
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 ................................... F-47
Notes to Consolidated Financial Statements ........................... F-48
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF
LUMINENT, INC
Condensed Consolidated Balance Sheets at December 31, 2000
and September 30, 2001 (unaudited) ................................. F-65
Unaudited Condensed Consolidated Statements of Operations
for the nine months ended September 30, 2000 and 2001 .............. F-66
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 2001 .............. F-67
Notes to Unaudited Condensed Consolidated Financial
Statements ......................................................... F-68
2
(b) Pro forma financial information:
The following pro forma financial information is filed as part of this report:
PAGE
----
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF LUMINENT, INC
Unaudited Pro Forma Condensed Consolidated Financial
Information ....................................................... F-160
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 2000 ................... F-161
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information ............................................. F-162
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF MRV COMMUNICATIONS, INC
Unaudited Pro Forma Condensed Consolidated Financial
Information ....................................................... F-163
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
September 30, 2001 ................................................ F-164
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 2001 ........... F-165
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2000 ................... F-166
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Information ............................................. F-167
3
(c) Exhibits
The following exhibits are filed as part of this report:
Exhibit No.
4.1 Certificate of Ownership and Merger Merging Luminent, Inc. into MRV
Merger Sub Corp., as filed with the Delaware Secretary of State on
December 28, 2001.
20.1 Notice of Merger of Luminent, Inc. with and into MRV Merger Sub Corp.
4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: January 8, 2002
MRV COMMUNICATIONS, INC.
By: /s/ NOAM LOTAN
------------------------
Noam Lotan
President and Chief Executive Officer
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Luminent, Inc.:
We have audited the accompanying consolidated balance sheets of Luminent,
Inc. (a Delaware corporation and a wholly owned subsidiary of MRV
Communications, Inc.) and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Luminent, Inc. and
subsidiaries as of December 31, 1999 and 2000, and the results of their
operations and their cash flows for the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
--------------------------------------
Arthur Andersen LLP
Los Angeles, California
January 25, 2001 (except
for Note 14 as to
which the date
is October 4, 2001)
F-43
LUMINENT, INC.
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
1999 2000
------- --------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 220 $131,778
Short-term investments.................................... -- 1,082
Accounts receivable, net of allowance of $1,724 in 1999
and $4,455 in 2000...................................... 10,544 22,463
Inventories............................................... 8,755 39,428
Deferred income taxes..................................... 2,190 6,220
Prepaids and other current assets......................... 5 9,106
------- --------
Total current assets.................................... 21,714 210,077
Property and Equipment, net:
Land...................................................... -- 3,559
Buildings................................................. -- 18,006
Machinery and equipment................................... 4,483 34,096
Furniture and fixtures.................................... 12 1,950
Computer hardware and software............................ 890 2,180
Leasehold improvements.................................... 180 2,694
Construction in progress.................................. -- 3,815
------- --------
5,565 66,300
Less -- Accumulated depreciation and amortization......... (4,152) (14,934)
------- --------
1,413 51,366
Goodwill and other intangibles, net......................... -- 341,540
Other assets................................................ -- 3,247
------- --------
Total assets............................................ $23,127 $606,230
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt......................... $ -- $ 2,607
Short-term borrowings..................................... -- 7,957
Accounts payable.......................................... 4,200 20,021
Accrued expenses.......................................... 1,163 10,337
Accrued returns and warranty.............................. -- 850
Income taxes payable...................................... 3,790 6,634
------- --------
Total current liabilities............................... 9,153 48,406
Long-term debt, net of current portion...................... -- 9,550
Other long-term liabilities................................. -- 779
Minority interest........................................... -- 444
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.001 par value, 30,000,000 shares
authorized; none issued and outstanding................. -- --
Common stock, $.001 par value, 300,000,000 shares
authorized; 156,000,000 shares issued and outstanding... -- 156
Additional paid-in capital................................ -- 635,066
Equity of MRV Communications.............................. 13,974 --
Accumulated deficit....................................... -- (29,241)
Deferred stock compensation, net.......................... -- (55,570)
Accumulated other comprehensive loss...................... -- (3,360)
------- --------
Total stockholders' equity.............................. 13,974 547,051
------- --------
Total liabilities and stockholders' equity.............. $23,127 $606,230
======= ========
</Table>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-44
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales.................................................. $ 38,596 $ 65,264 $124,193
Cost of sales(1)........................................... 24,289 43,078 84,384
-------- -------- --------
Gross profit.......................................... 14,307 22,186 39,809
Operating Costs and Expenses:
Selling, general and administrative(1)................... 2,642 5,675 38,768
Research and development(1).............................. 4,974 8,693 18,204
Parent company allocations............................... 808 885 588
Amortization of goodwill and other intangibles........... -- -- 47,421
-------- -------- --------
8,424 15,253 104,981
-------- -------- --------
Operating income (loss)............................... 5,883 6,933 (65,172)
Other income, net.......................................... -- 6 2,246
-------- -------- --------
Income (loss) before provision for income taxes and
minority interest................................... 5,883 6,939 (62,926)
Provision for income taxes................................. 2,343 2,764 2,766
Minority interest.......................................... -- -- (707)
-------- -------- --------
Net Income (loss)..................................... $ 3,540 $ 4,175 $(64,985)
======== ======== ========
Basic and diluted earnings (loss) per share................ $ 0.02 $ 0.03 $ (0.45)
======== ======== ========
Basic and diluted weighted average shares.................. 144,000 144,000 145,677
======== ======== ========
</Table>
- -------------------------
(1) Includes amounts relating to deferred stock compensation of $2.8 million,
$21.7 million and $4.3 million presented in "cost of sales", "selling,
general and administrative" and "research and development", respectively,
for the year ended December 31, 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
DEFERRED ACCUMULATED
COMMON STOCK ADDITIONAL STOCK OTHER
---------------- PAID-IN ACCUMULATED EQUITY OF COMPENSATION, COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT MRV NET LOSS TOTAL
------- ------ ---------- ----------- --------- ------------- ------------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1997....................... -- $ -- $ -- $ -- $ 5,782 $ -- $ -- $ 5,782
Net income................. -- -- -- -- 3,540 -- -- 3,540
Net distributions to MRV
Communications, Inc...... -- -- -- -- (1,232) -- -- (1,232)
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
1998....................... -- -- -- -- 8,090 -- -- 8,090
Net income................. -- -- -- -- 4,175 -- -- 4,175
Net advances from MRV
Communications, Inc...... -- -- -- -- 1,709 -- -- 1,709
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
1999....................... -- -- -- -- 13,974 -- -- 13,974
Comprehensive loss:
Net loss................. -- -- -- (29,241) (35,744) -- -- (64,985)
Foreign translation
adjustment............. -- -- -- -- -- -- (3,360) (3,360)
--------
Comprehensive loss......... (68,345)
Net advances from MRV
Communications, Inc...... -- -- -- -- 439,657 -- -- 439,657
Deferred stock
compensation............. -- -- -- -- 84,350 (84,350) -- --
Amortization of deferred
stock compensation....... -- -- -- -- -- 28,780 -- 28,780
Allocation of Equity of
MRV...................... 144,000 144 502,093 -- (502,237) -- -- --
Stock options issued in
exchange for consulting
services................. -- -- 683 -- -- -- -- 683
Common stock issued in
connection with initial
public offering.......... 12,000 12 132,290 -- -- -- -- 132,302
------- ---- -------- -------- --------- -------- ------- --------
BALANCE AT DECEMBER 31,
2000....................... 156,000 $156 $635,066 $(29,241) $ -- $(55,570) $(3,360) $547,051
======= ==== ======== ======== ========= ======== ======= ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
LUMINENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
-------- -------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 3,540 $ 4,175 $(64,985)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 1,000 1,461 52,020
Provision for doubtful accounts......................... 778 500 2,915
Amortization of deferred stock compensation............. -- -- 28,780
Loss on disposition of fixed assets..................... -- -- 16
Gain on sale of short-term investments.................. -- -- (50)
Minority interest....................................... -- -- (707)
Deferred income taxes................................... (168) (1,026) (4,030)
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable..................................... (326) (4,605) (4,044)
Inventories............................................. (2,172) (2,253) (16,903)
Prepaid and other current assets........................ -- (5) 753
Accounts payable........................................ (72) 842 13,118
Accrued expenses........................................ 116 381 3,058
Accrued returns and warranty............................ -- -- 850
Income taxes payable.................................... (915) 1,278 2,656
------- ------- --------
Net cash provided by operating activities............. 1,781 748 13,447
Cash flows from investing activities:
Purchases of property and equipment....................... (549) (2,237) (14,846)
Proceeds from sale of property and equipment.............. -- -- 1,520
Purchases of short-term investments....................... -- -- (3,022)
Proceeds from sale of short-term investments.............. -- -- 2,524
Net cash received in connection with acquisitions......... -- -- 5,472
Other assets.............................................. -- -- (5,822)
------- ------- --------
Net cash used in investing activities................. (549) (2,237) (14,174)
Cash flows from financing activities:
Net proceeds from issuance of common stock................ -- -- 132,302
Borrowings on long-term debt.............................. -- -- 6,092
Payments on long-term debt................................ -- -- (4,002)
Borrowings on short-term debt............................. -- -- 19,079
Payments on short-term debt............................... -- -- (21,349)
Net change in other liabilities........................... -- -- 190
Net cash (distributions to) advances from MRV
Communications.......................................... (1,232) 1,709 1,568
------- ------- --------
Net cash provided by (used in) financing activities... (1,232) 1,709 133,880
Effect of exchange rate on cash and cash equivalents........ -- -- (1,595)
------- ------- --------
Net increase in cash and cash equivalents................... -- 220 131,558
Cash and cash equivalents, beginning of year................ -- -- 220
------- ------- --------
Cash and cash equivalents, end of year...................... $ -- $ 220 $131,778
======= ======= ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BASIS OF PRESENTATION
Luminent, Inc. ("Luminent" or the "Company") designs, manufactures, and
sells a comprehensive line of fiber optic components that enable communications
equipment manufactures to provide optical networking solutions for the rapidly
growing metropolitan and access segments of the communications network. Its
products are designed to meet the increasing bandwidth requirements between
long-haul telecommunication networks and end users. Luminent specializes in
singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.
On April 29, 2000, MRV Communications, Inc. (MRV) announced its plan to
create a separate company, Luminent, comprised of MRV's fiber optic transmission
business. Luminent was incorporated in Delaware in March 2000, as a wholly owned
subsidiary of MRV. Since the completion of Luminent's initial public offering in
November 2000, MRV owns approximately 92% of Luminent's outstanding common
stock.
On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the "Separation Agreement") effective on September 8,
2000 (the "separation date"), under which MRV continued to fund working capital
and other needs for the first few months of operations as a separate,
stand-alone entity. Additionally, MRV transferred to Luminent, substantially all
of the assets and liabilities associated with Luminent's business.
As of the separation date, Luminent began operating independently from MRV.
For periods prior to the separation date, the accompanying consolidated
financial statements reflect MRV's historical bases in the assets and
liabilities and the historical results of operations that were transferred to
Luminent. Additionally, the consolidated financial statements include
allocations of certain MRV corporate expenses, including centralized legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other MRV corporate and infrastructure costs.
The expense allocations have been determined on bases that MRV and Luminent
considered to be a reasonable reflection of the utilization of services provided
or the benefit received by Luminent. The allocation methods are based on
relative revenues, head counts or square footage. However, the financial
information included herein may not reflect the consolidated financial position,
operating results, changes in parent company investment and cash flows of
Luminent in the future or what they would have been had Luminent been a
separate, stand-alone entity during the periods presented.
Luminent faces numerous risks related to the fact that it has no history as
an independent company. In addition, Luminent faces risks commonly associated
with a technology company such as operating in a sector that is new and
characterized by rapid technological change, evolving industry standards, the
need to generate capital to fund operations and uncertainty regarding market
acceptance of its products and products under development.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EQUITY OF MRV COMMUNICATIONS, INC.
The MRV equity account represents the book value of net assets transferred
to Luminent. No intercompany interest income or expense has been allocated to,
or included in, the accompanying consolidated financial statements (see Note 7
for additional information regarding transactions with MRV). As of the
separation date, the remaining balance of MRV Communications' equity was
transferred to paid-in capital, and Luminent began to generate retained earnings
as a stand-alone company.
F-48
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Luminent and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
The reporting currency for the consolidated financial statements of the
Company is the U.S. dollar. The assets and liabilities of companies whose
functional currency is other than the U.S. dollar are included in the
consolidation by translating the assets and liabilities at the exchange rates
applicable at the end of the reporting period, while capital accounts are
translated at historical rates. The statements of operations and cash flows of
such companies are translated at the average exchange rates during the
applicable period. Translation gains or losses are accumulated as a separate
component of shareholders' equity. The Company has not tax effected the
cumulative translation adjustment as there is no intention to remit the
earnings.
REVENUE RECOGNITION
Luminent generally recognizes 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 are deferred until the
contingencies have been satisfied or the contingent period has lapsed.
Luminent generally warrants its 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.
Sales to MRV and its affiliates are made in the ordinary course of business
under terms and conditions that Luminent believes are substantially equal to
terms and conditions granted to third party customers (See Note 7).
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents. Luminent's short-term
investments have initial maturities of greater than three months. These
securities are classified as "available-for-sale" in accordance with Statement
of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These investments are carried at
fair market value with any unrealized gains and losses recorded as a separate
component of stockholders' equity. Fair value is based upon market prices quoted
on the last day of the year. Unrealized gains or losses on securities were
insignificant as of December 31, 2000.
Luminent maintains cash balances and investments in highly qualified
financial institutions. At various times, such amounts are in excess of insured
limits.
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.
F-49
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
<Table>
Buildings........................... 20 years
Machinery and equipment............. 3 years
Furniture and fixtures.............. 5 years
Computer hardware and software...... 3 years
Leasehold improvements.............. Lesser of lease term or useful lives
</Table>
Maintenance and repairs are charged to expense as incurred and the costs of
additions and betterments that increase the useful lives of the assets are
capitalized.
GOODWILL AND OTHER INTANGIBLES, NET
Goodwill and other intangibles, net represents the excess cost over the
fair value of net assets of the businesses acquired. Goodwill and other
intangibles are being amortized using the straight-line method over estimated
useful lives of 5 years. Amortization of goodwill and other intangibles of $47.4
million has been included in the accompanying consolidated statement of
operations for the year ended December 31, 2000.
IMPAIRMENT OF LONG-LIVED ASSETS
Luminent evaluates its long-term assets, such as patents, assembled work
forces, customer contracts, goodwill and property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may be impaired. Luminent considers events or changes such as product
discontinuance, plant closures, product dispositions, a history of operating
losses or other changes in circumstances that indicate that the carrying amount
may not be recoverable. The carrying value of an asset is considered impaired
when the anticipated undiscounted cash flow from such assets is less than its
carrying value. In that event, a loss is recognized based on the amount by which
the carrying value exceeds the fair market value. Fair market value is
determined using the anticipated cash flows discounted at a rate based on
Luminent's weighted average cost of capital, which represents the blended
after-tax costs of debt and equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and long-term debt are carried at cost,
which approximates their fair market value.
INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the statutory marginal income tax rate in effect
for the years in which the differences are expected to reverse. Deferred income
tax expenses or credits are based on the changes in the deferred income tax
assets or liabilities from period to period. For purposes of these financial
statements, income taxes have been calculated as if Luminent had prepared a tax
return on a stand-alone basis.
STOCK-BASED COMPENSATION
Luminent accounts for its employees stock plan under the intrinsic value
method prescribed by Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and
F-50
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
related interpretations, and has adopted the disclosure-only provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation."
Luminent accounts for option and warrant grants to non-employees using the
guidance prescribed by SFAS No. 123, Financial Accounting Standards Board (FASB)
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25," and Emerging
Issues Task Force (EITF) No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling,
Goods, or Services," whereby the fair value of such option and warrant grants
are determined using the Black-Scholes option pricing model at the earlier of
the date at which the non-employee's performance is completed or a performance
commitment is reached.
Deferred stock compensation is being amortized using the graded vesting
method. Using this method, approximately 57%, 26%, 13% and 4%, respectively, of
each option's compensation expense is amortized in each of the 4 years following
the date of grant.
EARNINGS PER SHARE
Basic and diluted earnings per common share are computed using the weighted
average number of common shares outstanding (adjusted for the effect of the
stock split discussed in Note 10). The weighted average number of shares used
for computation of basic and diluted earnings (loss) per share were 144,000,000
for 1998 and 1999, and 145,677,000 for 2000. The 10.3 million stock options
outstanding and 75,000 warrants outstanding have been excluded from the diluted
computations of earnings per share as their effect would be anti-dilutive.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 and June 1999, the FASB issued 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. Luminent will adopt the statement in January 2001 and does
not expect the adoption of this statement to have a material impact on its
financial position or results of operations.
In December 1999, the Securities and Exchange Commissions (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," and related interpretations. SAB No. 101 summarizes certain of the
Securities and Exchange Commission's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Luminent
has adopted the provisions of SAB No. 101, which did not have a material impact
on its financial position or results of operations.
In March 2000, the FASB issued FIN 44. 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 Luminent's financial
position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
F-51
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform
to the current year presentation.
3. BUSINESS ACQUISITIONS
In December 1999, MRV acquired 51% of the outstanding stock of Luminent
Korea in exchange for approximately $250,000 in cash. This investment was
accounted for using the purchase method. The assets and liabilities of this
acquired entity have been "pushed down" to Luminent.
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of MRV
common stock and options to purchase 680,000 shares of MRV common stock for a
total purchase price of approximately $309.7 million. The issuance price of the
MRV common stock was approximately $53 per share, which was determined based on
the average market price five days before and after the terms were agreed upon.
The options to purchase MRV common stock are exercisable at $3.00 per share,
have an aggregate intrinsic value of $14.1 million, and vest over a four-year
period. The acquisition is being accounted for using the purchase method of
accounting. The assets and liabilities of the acquired entity have been "pushed
down" to Luminent. The excess purchase price paid over the fair value of the net
identifiable assets acquired of $261.5 million has been recorded as goodwill and
is being amortized on a straight-line basis over 5 years. The deferred
compensation is being amortized using the graded vesting method over 4 years.
On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.1 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have a fair value of $4.0 million, of which unvested options
have an intrinsic value of $2.7 million and vested options have a fair value of
$1.3 million and the remaining vest over a four-year period. The acquisition is
being accounted for using the purchase method of accounting. The assets and
liabilities of the acquired entity have been "pushed down" to Luminent. The
excess purchase price paid over the fair value of the net identifiable assets
acquired of $27.8 million has been recorded as goodwill and is being amortized
on a straight-line basis over 5 years. The deferred compensation is being
amortized using the graded vesting method over 4 years.
On July 21, 2000, MRV completed the acquisition of approximately 99% of the
outstanding capital stock of Optronics International Corp., a Republic of China
corporation. Optronics International is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks. Under the
terms of the purchase agreement, Optronics International shareholders received
approximately 3.4 million shares of MRV common stock and options to purchase
approximately 800,000 shares of MRV common stock for a total purchase price of
approximately $123.9 million. The issuance price of the MRV common stock was
approximately $30 per share, which was determined based on the average market
price
F-52
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
five days before and after the terms were agreed upon. The options to purchase
MRV common stock are exercisable at $3.00 per share, have a fair value of $20.0
million, of which unvested options have an intrinsic value of $13.4 million and
vested options have a fair value of $6.6 million, and the remaining vest over a
four-year period. The acquisition is being accounted for using the purchase
method of accounting. The assets and liabilities of the acquired entity have
been "pushed down" to Luminent. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $99.4 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.
The purchase price of Fiber Optic Communications, Quantum Optech and
Optronics International were allocated as follows (in thousands, unaudited):
<Table>
Purchase price............................................ $469,768
Allocation of purchase price
Net tangible assets.................................. 50,896
Deferred stock compensation.......................... 30,150
Goodwill............................................. 388,722
</Table>
The outstanding capital stock of Fiber Optic Communications, Quantum Optech
and Optronics International, purchased by MRV, has been contributed to Luminent.
The results of operations of these acquisitions have been included in Luminent's
consolidated financial statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of Luminent, Fiber Optic Communications, Quantum Optech and Optronics
International as if the acquisitions had occurred as of January 1, 1999, giving
effect to certain adjustments, including amortization of goodwill and other
intangibles and deferred compensation charges.
<Table>
<Caption>
DECEMBER 31,
--------------------
1999 2000
-------- --------
(UNAUDITED)
Pro forma net sales.................................... $ 93,262 $137,782
Pro forma net loss..................................... $(95,557) $(91,830)
Pro forma basic and diluted net loss per share......... $ (0.66) $ (0.63)
</Table>
4. INVENTORIES
Inventories consisted of the following (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------
1999 2000
------ -------
Raw materials............................................. $4,291 $22,896
Work in process........................................... 3,655 12,402
Finished goods............................................ 809 4,130
------ -------
Total inventories....................................... $8,755 $39,428
====== =======
</Table>
5. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.
The Company depends on single or limited source suppliers for some of the
key components and materials in its products, which makes Luminent susceptible
to supply shortages or price fluctuations that
F-53
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
could adversely affect operating results. Management believes this will not have
a significant impact on operations.
For the two years ended December 31, 1998 and 1999, the Company had one
customer that accounted for more than 18% and 40% of net sales, respectively. As
of December 31, 1999, one customer accounted for approximately 30% of total
accounts receivable. For the year ended December 31, 2000, the Company had 2
customers that accounted for approximately 29% of net sales. As of December 31,
2000, the Company had one customer that accounted for approximately 13% of
accounts receivable. Certain geographical area information follows.
Geographical Area Net Sales (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
North America........................................ $22,808 $52,737 $ 76,995
Asia-Pacific......................................... 7,646 3,812 25,773
Europe............................................... 3,056 4,678 18,575
Other................................................ 5,086 4,037 2,850
------- ------- --------
Total net sales.................................... $38,596 $65,264 $124,193
======= ======= ========
</Table>
For the years ended December 31, 1998 and 1999, the Company's sales consist
of active optical components used by telecommunications equipment manufacturers.
For the year ended December 31, 2000, the Company's sales consist of active and
passive optical components used by telecommunications equipment manufacturers.
Active optical components consist of transceivers, lasers, and others. Passive
optical components consist of couplers, jumpers, micro-optic products and
others.
The following table sets forth revenues from external customers for each
product group (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
Active............................................... $38,596 $65,264 $ 98,146
Passive.............................................. -- -- 26,047
------- ------- --------
Total net sales.................................... $38,596 $65,264 $124,193
======= ======= ========
</Table>
F-54
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------- -------
Current
Federal.............................................. $1,944 $ 2,968 $ 4,988
State................................................ 567 822 1,358
Foreign.............................................. -- -- 450
------ ------- -------
2,511 3,790 6,796
Deferred
Federal.............................................. (121) (817) (3,156)
State................................................ (47) (209) (874)
Foreign.............................................. -- -- --
------ ------- -------
(168) (1,026) (4,030)
------ ------- -------
Provision for income taxes............................. $2,343 $ 2,764 $ 2,766
====== ======= =======
</Table>
The income tax provision differs from the amount computed by applying the
federal statutory income tax rate to income before provision for income taxes as
follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
---- ---- ----
Tax computed at federal statutory rate...................... 34% 34% 35%
State income taxes, net of federal effect................... 6 6 (1)
Foreign taxes at rates less than domestic rates............. -- -- 4
Permanent differences....................................... -- -- (32)
Change in valuation allowance............................... -- -- (10)
-- -- ---
Provision for income taxes................................ 40% 40% (4)%
== == ===
</Table>
The components of the net deferred income tax assets at December 31, 1999
and 2000 are as follows (in thousands):
<Table>
<Caption>
DECEMBER 31,
-----------------
1999 2000
------ -------
Accrued expenses.......................................... $ 320 $ 209
Allowance for doubtful accounts........................... 687 1,307
Deferred stock compensation............................... -- 6,630
Inventory reserves........................................ 905 3,543
State income taxes........................................ 278 475
Other..................................................... -- 276
------ -------
2,190 12,440
Valuation allowance....................................... -- (6,220)
------ -------
Net deferred tax asset.................................. $2,190 $ 6,220
====== =======
</Table>
Realization of the net deferred tax assets is dependent on its ability to
carry losses back to prior periods or on generating sufficient taxable income
during the periods in which temporary differences will reverse. Management
reviews its deferred tax assets and has provided a valuation allowance based on
its assessment of the expected future benefit to be ultimately received from
each asset identified. Although
F-55
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
realization is not assured, management believes it is more likely than not that
the net deferred tax assets will be realized.
Income (Loss) before Provision for Income Taxes (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------ --------
United States.......................................... $5,883 $6,940 $ (8,277)
Non-United States...................................... -- (1) (53,942)
------ ------ --------
Income (loss) before provision for income taxes...... $5,883 $6,939 $(62,219)
====== ====== ========
</Table>
7. TRANSACTIONS WITH MRV COMMUNICATIONS, INC.
Luminent's sales of products to MRV and its affiliates was $2.1 million in
1998, $2.5 million in 1999, and $4.9 million in 2000. Through December 31, 2000,
Luminent had received a total of $6.5 million from MRV to fund payroll and other
operations related matters. Luminent repaid this amount to MRV through operating
cash and offsetting amounts due from MRV on or before December 31, 2000.
For the three years in the period ended December 31, 2000, intercompany
transactions between Luminent and MRV consisted of the following (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------- ------- --------
Sales to MRV and its affiliates...................... $ 2,104 $ 2,503 $ 4,878
Operating expenses................................... 7,218 9,512 14,213
Fair value of acquisitions........................... -- 250 440,628
Deferred stock compensation.......................... -- -- 40,950
Net cash advances (distributions).................... (1,232) 1,709 1,568
------- ------- --------
Equity of MRV Communications, Inc.................. $ 8,090 $13,974 $502,237
======= ======= ========
</Table>
Luminent's costs and expenses include allocations from MRV for centralized
legal, accounting, employee benefits, real estate, insurance services,
information technology services, treasury and other MRV corporate and
infrastructure costs. These allocations have been determined on bases that MRV
and Luminent considered to be a reasonable reflection of the utilization of
services provided for the benefit received by Luminent. The allocation methods
are based on relative revenues, headcount or square footage. No intercompany
interest income or expense has been allocated to, or included in, the
accompanying consolidated financial statements.
For purposes of governing the ongoing relationships between Luminent and
MRV at and after the separation and to provide for an orderly transition,
Luminent and MRV have entered into various agreements. A brief description of
each of the agreements follows.
Master Separation and Distribution Agreement
MRV and Luminent have entered into a Master Separation Agreement, which
contains key provisions relating to the separation, Luminent's initial funding,
initial public offering and the distribution of Luminent's common stock to MRV's
stockholders. The Master Separation and Distribution Agreement lists the
documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from MRV to Luminent, effective on the
separation date. The Master Separation and Distribution Agreement also contains
conditions that must occur prior to the distribution. The parties also entered
into ongoing covenants that survive the transactions, including covenants to
establish interim
F-56
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
service level agreements, exchange information, engage in certain auditing
practices and resolve disputes in particular ways.
General Assignment and Assumption Agreement
The General Assignment and Assumption Agreement identifies the assets that
MRV has transferred to Luminent and the liabilities that Luminent has assumed
from MRV in the separation. The Agreement General Assignment and Assumption also
describes when and how these transfers and assumptions occurred. In general,
these assets and liabilities were those that appeared in the consolidated
balance sheet as of September 30, 2000.
Intellectual Property Agreements
The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement and the Master Trademark Ownership and License
Agreement together are referred to as the Intellectual Property Agreements.
Under the Intellectual Property Agreements, MRV confirmed that Luminent owns or
transferred to Luminent its rights in specified patents, patent applications,
invention disclosures, specified trademarks and other intellectual property
related to Luminent's current business and research and development efforts.
Employee Matters Agreement
The Employee Matters Agreement outlines how MRV and Luminent allocated
assets, liabilities and responsibilities relating to current and former
employees of Luminent and their participation in the benefits plans, including
stock plans, that MRV currently sponsors and maintains. The Employee Matters
Agreement also contains provisions describing some of Luminent's employee
benefit and employee stock plans.
All eligible Luminent employees continue to participate in the MRV benefits
plans on comparable terms and conditions to those for MRV employees until the
distribution date or until Luminent establishes benefit plans for its employees,
or elects not to establish comparable plans if it is not legally or financially
practical. Luminent intends to establish its own benefit program no later than
the time of distribution.
Once Luminent establishes it own benefits plans, it may modify or terminate
each plan in accordance with the terms of that plan and its policies. No
Luminent benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan at the time of the distribution. Each Luminent
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding MRV benefits plan will be taken into account under that Luminent
benefit plan.
Following the date of MRV's distribution of its Luminent common stock to
its stockholders, Luminent will be under no obligation to maintain these plans
in the form in which they were established or at all. The transfer to Luminent
of employees at certain of MRV's international operations, and of certain
employee benefit plans, may not take place until Luminent receives consents or
approvals or has satisfied other applicable requirements.
Tax Sharing Agreement
The Tax Sharing Agreement allocates MRV's and Luminent's responsibilities
for certain tax matters. The agreement requires Luminent to pay MRV for the
incremental tax costs of Luminent's inclusion in consolidated, combined or
unitary tax returns with affiliated corporations. In determining these
incremental costs, the Tax Sharing Agreement takes into account not only the
group's incremental tax payments to the Internal Revenue Service or other taxing
authorities, but also the incremental use of tax losses of affiliates
F-57
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to offset Luminent's taxable income, and the incremental use of tax credits of
affiliates to offset the tax on Luminent's income. The Tax Sharing Agreement
also provides for compensation or reimbursement as appropriate to reflect
redeterminations of Luminent's tax liability for periods during which Luminent
joined in filing consolidated, combined or unitary tax returns.
The Tax Sharing Agreement also requires Luminent to indemnify MRV for
certain taxes and similar obligations, including (a) sales taxes on the sale of
products purchased by MRV from Luminent before the distribution, (b) customs
duties or harbor maintenance fees on products exported or imported by MRV on
behalf of Luminent, (c) the additional taxes that would result if an acquisition
of a controlling interest in Luminent's stock after the distribution causes the
distribution not to qualify for tax-free treatment to MRV, and (d) any taxes
resulting from transactions undertaken in preparation for the distribution.
Luminent's indemnity obligations include any interest penalties on taxes,
duties or fees for which Luminent must indemnify MRV.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a deficiency in the group's
federal income tax liability for a period during which Luminent was a member of
the group even if the Tax Sharing Agreement allocates that liability to MRV or
another member.
Master Transitional Services Agreement
The Master Transitional Service Agreement governs the provision of
information technology services by MRV and Luminent to each other, on an interim
basis, for one year from the date of separation, unless extended for specific
services or otherwise indicated in the agreement. The services include data
processing and telecommunications services, such as voice telecommunications and
data transmission, and information technology support services, for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement, and other administrative functions. Specified
charges for such services are generally intended to allow the providing company
to recover the direct and indirect costs of providing the services. The Master
Transitional Services Agreement also will cover the provision of certain
additional transitional services identified from time to time after the
separation date that were inadvertently or unintentionally omitted from the
specified services, or that are essential to effectuate an orderly transition
under the Master Separation and Distribution Agreement, so long as the provision
of such services would not significantly disrupt MRV's operations or
significantly increase the scope of its responsibility under the agreement.
In addition, the Master Transitional Services Agreement will provide for
the replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
Real Estate Matters Agreement
The Real Estate Matters Agreement addresses real estate matters relating to
the MRV leased and owned properties that MRV will transfer to or share with
Luminent. The Real Estate Matters Agreement describes the manner in which MRV
will transfer to or share with Luminent various leased and owned properties. The
Real Estate Matters Agreement provides that Luminent will be required to accept
the transfer of all sites allocated to Luminent, even if a site has been damages
by a casualty before the separation date. The Real Estate Matters Agreement also
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorney's fees will be paid by MRV.
F-58
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Indemnification and Insurance Matters Agreements
Effective as of the separation date, subject to specified exceptions,
Luminent and MRV will each release the other from any liabilities arising from
events occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The Indemnification and Insurance Matters
Agreement also contains provisions governing indemnification. In general,
Luminent and MRV will each indemnify the other from all liabilities arising from
their respective businesses or contracts, as well as liabilities arising from a
breach of the Master Separation and Distribution Agreement or any ancillary
agreement. In addition, MRV and Luminent will each indemnify the other against
liability for specified environmental conditions. Luminent will reimburse MRV
for the cost of any insurance coverage from the separation date to the
distribution date.
8. SHORT-TERM BORROWINGS
The Company's short-term borrowings consist of secured and unsecured
short-term loans and notes entered into with certain financial institutions. As
of December 31, 2000, these short-term borrowings totaled approximately $8.0
million and approximately $2.9 million of two Taiwanese subsidiaries' assets
have been pledged as collateral on these borrowings. The weighted average
interest rate on these notes is 6.2% and the notes are incurred and paid in the
New Taiwan Dollar. The unused line of credit is $446,000 at December 31, 2000.
9. LONG-TERM DEBT
Long-term debt consisted of the following as of December 31, 2000 (in
thousands):
<Table>
Notes payable to financial institutions bearing interest
ranging from 6.5% to 8.9%, payable in monthly or
quarterly installments of principal and interest through
October 2012, secured by $15.0 in pledged assets of two
Taiwanese subsidiaries................................... $12,157
Less -- Current Portion.................................. (2,607)
-------
$ 9,550
=======
</Table>
The following summarizes the required principal payments on long-term debt
as of December 31, 2000 (in thousands):
<Table>
Year ending December 31,
2001..................................................... $ 2,607
2002..................................................... 1,586
2003..................................................... 1,690
2004..................................................... 1,649
2005..................................................... 1,608
Thereafter............................................... 3,017
-------
$12,157
=======
</Table>
10. STOCKHOLDERS' EQUITY
Luminent's Board of Directors authorized 30,000,000 shares of its $.001 par
value of preferred stock, of which none was issued or outstanding as of December
31, 1999 and 2000. Luminent's Board of Directors also authorized 300,000,000 of
its $.001 par value common stock with 144,000,000 and 156,000,000 shares issued
and outstanding as of December 31, 1999 and 2000, respectively. Effective
F-59
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
July 25, 2000, the Board of Directors declared a 144,000-for-one stock split.
All references to share and per-share data for all periods presented have been
restated to give effect to this stock split.
On November 9, 2000, Luminent issued 12,000,000 shares of its common stock
for $12 per share, or $144.0 million, to complete its initial public offering.
Net proceeds of $132.3 million were received after deducting the underwriters'
discount and other costs of the offering.
STOCK OPTIONS
In July 2000, the Board of Directs adopted, and the stockholder approved
the 2000 Stock Option Plan (the Plan). The Plan provides for grants of qualified
incentive stock options, non-qualified stock options, restricted stock awards
and other stock-based awards to officers, employees, directors, consultants and
advisors of the Company. Stock-based awards are generally granted at not less
than fair market value at the grant date, and typically vest over a four-year
period and expire ten years after the grant date. 10,400,000 shares of common
stock have been reserved for issuance under the Plan. As of December 31, 2000
4,685,100 options have been granted under the Plan, and 5,715,000 are available
for future grant under the Plan.
In July 2000, Luminent and MRV entered into four-year employment contracts
with the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of
Luminent. The agreements provide for annual salaries, performance bonuses and a
combination of stock options to purchase common stock of MRV and Luminent. The
CEO received approximately 316,000 options to purchase shares of MRV common
stock at $32.56 per share (a substantial discount) expiring in five years. The
CFO received approximately 22,000 options to purchase shares of MRV common stock
at $33.44 per share (a substantial discount) expiring in five years. These
options are immediately exercisable, however they provide for the repurchase in
the event of voluntary termination. These grants have been accounted for under
APB No. 25 and the intrinsic value (fair market value less exercise price)
results in additional deferred stock compensation of approximately $11.1 million
that is being amortized over the four year vesting period. Furthermore, Luminent
granted 4.8 million and 800,000 of its stock options to the CEO and CFO,
respectively. The options are exercisable at $6.25 per share and vest over 4
years. These grants have been accounted for in accordance with APB No. 25 and
the intrinsic value (original mid point of filing range, $14, less $6.25)
resulted in aggregate deferred stock compensation of approximately $43.4
million. The deferred stock compensation is being amortized using the graded
vesting method over four years.
Stock option information with respect to options granted under the Plan and
MRV options granted to Luminent employees is as follows (in thousands, except
share prices):
Options granted by Luminent (in thousands, except share prices):
<Table>
<Caption>
YEAR ENDED
DECEMBER 31, 2000
-------------------
WTD. AVG.
SHARES EX. PRICE
------ ---------
Outstanding, beginning of year........................... -- --
Granted.................................................. 10,285 $8.77
Exercised................................................ -- --
Forfeited................................................ -- --
------ -----
Outstanding, end of year................................. 10,285 $8.77
====== =====
</Table>
F-60
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information about Luminent stock options outstanding at December 31, 2000
is summarized as follows (in thousands, except share prices):
<Table>
<Caption>
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT DECEMBER 31, REMAINING AT DECEMBER 31,
PRICE 2000 CONTRACT LIFE 2000
- ------------- ------------------ ---------------- ------------------
$ 6.00 - 6.25 5,767 9.53 years 1,400
$12.00 4,518 9.85 years 40
------ -----
10,285 1,440
====== =====
</Table>
Options granted by MRV (in thousands, except share prices):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
WTD. AVG. WTD. AVG. WTD. AVG.
SHARES EX. PRICE SHARES EX. PRICE SHARES EX. PRICE
------ --------- ------ --------- ------ ---------
Outstanding, beginning of year..... 140 $4.27 242 $2.62 434 $4.37
Granted............................ 102 3.85 256 5.59 2,060 8.81
Exercised.......................... -- -- (64) 2.68 (85) 3.44
Forfeited.......................... -- -- -- -- -- --
Canceled in repricing.............. (193) 4.47 -- -- -- --
Granted in repricing............... 193 2.63 -- -- -- --
---- ----- --- ----- ----- -----
Outstanding, end of year........... 242 $2.62 434 $4.37 2,409 $8.20
==== ===== === ===== ===== =====
</Table>
Information about MRV stock options outstanding at December 31, 2000 is
summarized as follows (in thousands, except share prices):
<Table>
<Caption>
NUMBER OUTSTANDING WEIGHTED AVERAGE NUMBER EXERCISABLE
EXERCISE AT DECEMBER 31, REMAINING AT DECEMBER 31,
PRICE 2000 CONTRACT LIFE 2000
- --------------- ------------------ ---------------- ------------------
$ 2.63 - $ 2.97 180 7.20 years 21
$ 6.69 - $ 6.82 169 8.50 years 11
$14.63 - $33.44 354 9.54 years 338
$42.13 - $64.88 83 9.29 years --
$ 3.00 1,623 9.44 years --
----- ---
2,409 370
===== ===
</Table>
In July 2000, Luminent granted 75,000 warrants to purchase common stock to
a non-employee in connection with the hiring of its CEO. The warrants had a fair
value on the date of grant of approximately $635,000, are immediately
exercisable and expire in July 2010. In November 2000, Luminent granted 10,000
options to purchase common stock to a non-employee in connection consulting
services received. The options had a fair value on the date of grant of
approximately $48,000, are immediately exercisable and expire in November 2010.
The expense related to the issuance of these warrants and options is included
the accompanying consolidated statements of operations.
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123 permits companies to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant. In
management's opinion, the existing stock option valuation models do not
necessarily provide a reliable single measure of the fair value of stock-based
awards.
F-61
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Therefore, as permitted, the Company applies the existing accounting rules under
APB No. 25 and provides pro forma net income and pro forma earnings per share
disclosures for stock based awards made during the year as if the
fair-value-based method defined in SFAS No. 123 had been applied. Net loss and
net loss per share would have been reduced to the following pro forma amounts
(in thousands, except per share amounts):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------ --------
Additional compensation expense........................ $ 86 $ 195 $ 25,544
Pro forma net income (loss)............................ $3,454 $3,980 $(90,529)
Pro forma basic and diluted net earnings (loss) per
share................................................ $ 0.02 $ 0.03 $ (0.62)
</Table>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. Option valuation models also require the input of
highly subjective assumptions such as expected option life and expected stock
price volatility. The following assumptions were applied for all periods
presented: (i) expected dividend yield of 0%, (ii) expected volatility rate
ranging from 64% to 230%, (iii) expected lives ranging from 5 to 10 years, and
(iv) the risk-free interest rate ranging from 4.29 to 6.23%.
Because the Company's employee stock-based compensation plan has
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, the Company believes that the existing option valuation models do not
necessarily provide a reliable single measure of the fair value of awards from
the plan.
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases facilities and certain equipment under lease
arrangements expiring in various years through July 2005. The aggregate minimum
annual lease payments under leases in effect on December 31, 2000 were as
follows (in thousands):
<Table>
<Caption>
OPERATING
LEASES
---------
2001....................................................... $1,556
2002....................................................... 972
2003....................................................... 929
2004....................................................... 603
2005....................................................... 295
Thereafter................................................. 1,012
------
$5,367
======
</Table>
Rental expense under lease agreements for the years ended December 31,
1998, 1999 and 2000 was $54,000, $349,000 and $882,000 million, respectively.
Through foreign subsidiaries, Luminent has open letters of credit totaling
approximately $4.0 million. The letters of credit expire through August 2001.
LITIGATION
Luminent has received notices from third party alleging possible
infringements of patents with respect to product features or manufacturing
processes. Management believes such notices are common in the communications
industry because of the large number of patents that have been filed on these
subjects.
F-62
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's policy is to discuss these notices with the senders in an effort
to demonstrate that the Company's products and/or processes do not violate any
patents. The Company is currently involved in such discussions with Ortel and
Rockwell. The Company is evaluating these claims and presently does not believe
that any of its products or processes violates any of the patents asserted by
these parties, and the claims are without merit. Additionally the Company
intends to vigorously defend its positions if any legal action is taken.
Management believes the ultimate outcome of such claims will not have a material
impact on the results of operations or financial position.
12. RELATED PARTY TRANSACTION
During the year the Company reimbursed $48,000 to the Chief Executive
Officer for legal fees incurred in connection with the negotiation of his
employment agreement.
13. SUPPLEMENTAL STATEMENTS OF CASH FLOWS INFORMATION
Supplemental information regarding the Statements of Cash Flows is as
follows (in thousands):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------
1998 1999 2000
----- ----- --------
Supplemental disclosure of cash flow information
Cash paid during the year for interest.................... $-- $-- $ 975
Cash paid during the year for income taxes................ $-- $-- $ 88
Supplemental schedule of noncash investing activities
Fair value of assets acquired, net of cash received....... $-- $-- $39,263
Less: Liabilities assumed................................. -- -- 33,791
--- --- -------
Cash acquired in acquisitions.......................... $-- $-- $ 5,472
=== === =======
</Table>
14. EVENTS SUBSEQUENT TO JANUARY 25, 2001
During the second quarter of 2001, the management of Luminent approved and
implemented a restructuring plan as a result of the dramatic slowdown in demand
for communications equipment. During the six months ended June 30, 2001,
Luminent recorded restructuring and other one-time charges totaling $41.2
million resulting from the lower demand for Luminent's products and pricing
pressures stemming from the continuing deterioration in the communications
equipment industry, specifically the optical components sector.
In June, 2001, the FASB approved two pronouncements: SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets", which provide guidance on the accounting for business combinations to
be accounted for using the purchase method. Under the new rules, goodwill will
no longer be subject to amortization over its useful life. Rather, goodwill will
be subject to at least an annual impairment assessment. This assessment is a
fundamentally different two-step approach and is based on a comparison between a
reporting unit's fair value and its carrying value. Intangible assets have newly
defined criteria and will be accounted for separately from goodwill and will
continue to be amortized over their useful lives. Luminent plans to adopt these
pronouncements on January 1, 2002. Luminent is currently reviewing these
standards to determine the impact on its results of operations and its financial
position. The most significant anticipated effect on Luminent's financial
statements at adoption would be the discontinuing of the amortization of
goodwill and the possible impairment loss measured as of the date of adoption.
In September 2001, Luminent's President and Chief Executive Officer
resigned. In connection with the resignation, Luminent's President and Chief
Executive Officer received a severance package, as defined
F-63
LUMINENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the employment agreement dated July 2000, providing severance payments of
approximately $1.0 million and the immediate vesting of all outstanding MRV and
Luminent stock options held as of the date of resignation. The MRV and Luminent
stock options are exercisable through September 11, 2003. Additionally, an
immediate recognition of deferred compensation expenses of $18.9 million will be
recorded during the third quarter of 2001 as a result of the acceleration of
these stock options.
In September 2001, MRV and Luminent jointly announced that MRV intends to
merge Luminent into MRV through the filing of a short-form merger. All Luminent
shareholders are entitled to receive 0.43 shares of MRV common stock for each
share of Luminent common stock held. Furthermore, outstanding Luminent employee
stock options will convert into options to purchase MRV common stock at the same
ratio. The merger is expected to be completed during the fourth quarter of 2001.
F-64
LUMINENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $131,778 $ 93,646
Short-term investments.................................... 1,082 55
Accounts receivable, net of allowance of $4,455 at
December 31, 2000, and $6,003 at June 30, 2001......... 22,463 18,484
Inventories............................................... 39,428 24,282
Deferred income taxes..................................... 6,220 6,977
Prepaid and other current assets.......................... 9,106 17,023
-------- ---------
Total current assets................................... 210,077 160,467
Property and equipment, net................................. 51,366 53,403
Goodwill and other intangibles, net......................... 341,540 283,076
Other assets................................................ 3,247 8,298
-------- ---------
Total assets........................................... $606,230 $ 505,244
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 2,607 $ 2,191
Short-term borrowings..................................... 7,957 10,289
Accounts payable.......................................... 20,021 9,406
Accrued expenses.......................................... 10,337 15,111
Accrued returns and warranty.............................. 850 3,964
Income taxes payable...................................... 6,634 5,764
-------- ---------
Total current liabilities.............................. 48,406 46,725
Long-term debt, net of current portion...................... 9,550 8,284
Other long-term liabilities................................. 779 540
-------- ---------
Total liabilities...................................... 58,735 55,549
Minority interest........................................... 444 349
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 30,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $.001 par value, 300,000,000 shares
authorized; 156,000,000 shares issued and
outstanding............................................ 156 156
Additional paid-in capital................................ 635,066 635,066
Accumulated deficit....................................... (29,241) (168,792)
Deferred stock compensation, net.......................... (55,570) (12,062)
Accumulated other comprehensive loss...................... (3,360) (5,022)
-------- ---------
Total stockholders' equity............................. 547,051 449,346
-------- ---------
Total liabilities and shareholders' equity............. $606,230 $ 505,244
======== =========
</Table>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-65
LUMINENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 2001
-------- ---------
Net Sales................................................... $ 78,964 $ 108,098
Cost of sales(1)(2)......................................... 53,667 105,335
-------- ---------
Gross Profit........................................... 25,297 2,763
Operating costs and expenses:
Selling, general and administrative(1)(2)................. 20,522 69,605
Research and development(1)(2)............................ 12,752 13,882
Parent company allocations................................ 588 --
Amortization of goodwill.................................. 27,933 58,464
-------- ---------
61,795 141,951
Operating loss......................................... (36,498) (139,188)
Other income, net(2)........................................ 526 3,569
-------- ---------
Loss before provision for income taxes and minority
interest.............................................. (35,972) (135,619)
Provision for income taxes.................................. 2,709 4,027
Minority interest........................................... 391 (95)
-------- ---------
Net loss............................................... $(39,072) $(139,551)
======== =========
Net loss per share, basic and diluted....................... $ (0.27) $ (0.89)
======== =========
Shares used in per-share calculation, basic and diluted..... 144,000 156,000
======== =========
</Table>
- -------------------------
(1) Includes amounts relating to deferred stock compensation of $1.9 million and
$1.7 million presented in "cost of sales", $10.1 million and $39.1 million
presented in "selling, general and administrative", and $2.9 million and
$2.7 million presented in "research and development" for nine months ended
September 30, 2001, respectively.
(2) Includes additional charges of $863,000 and $1.6 million presented in "cost
of sales" and "selling, general and administrative", respectively, for the
three months ended September 30, 2001 to adjust estimated facilities cost,
write-down inventory and record purchase commitments. Includes restructuring
and other charges of $30.1 million, $13.0 million, $501,000 and $16,000
presented in "cost of sales", "selling, general and administrative",
"research and development" and "other income, net", respectively, for the
nine months ended September 30, 2001 to write-down inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other non-recurring items. These charges, taken in the second and third
quarter of 2001, resulted from the lower demand for our products and pricing
pressures stemming from the continuing downturn in the communication
equipment industry generally and the optional components sector in
particular.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-66
LUMINENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 2001
-------- ---------
Cash Flows from Operating Activities:
Net loss.................................................. $(39,072) $(139,551)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................ 30,693 65,627
Amortization of deferred stock compensation.......... 14,943 43,508
Impairment loss on property and equipment............ -- 8,904
Minority interest.................................... 391 (95)
Deferred income taxes................................ (3,463) (757)
Changes in operating assets and liabilities:
Accounts receivable.................................... 1,288 3,979
Inventories............................................ (6,286) 15,146
Prepaid and other current assets....................... (5,390) (7,917)
Payable to MRV Communications.......................... 5,812 --
Accounts payable....................................... 5,024 (10,615)
Accrued expenses....................................... 485 4,774
Accrued returns and warranty........................... 850 3,114
Income taxes payable................................... 2,412 (870)
-------- ---------
Net cash provided by (used in) operating
activities...................................... 7,687 (14,753)
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (11,993) (18,519)
Proceeds from sale of property and equipment.............. 550 415
Net cash received in connection with acquisitions......... 5,472 --
Proceeds from sale of short-term investments.............. -- 1,027
Other assets.............................................. (757) (5,051)
-------- ---------
Net cash used in investing activities............. (6,728) (22,128)
Cash flows from financing activities:
Payments on long-term debt................................ (2,413) (1,682)
Borrowings on long-term debt.............................. 4,794 --
Payments on short-term debt............................... (6,476) (15,975)
Borrowings on short-term debt............................. 7,600 18,307
Net change in other long-term liabilities................. (6) (239)
Net cash distributions to MRV Communications, Inc. ....... 7,247 --
-------- ---------
Net cash provided by financing activities......... 10,746 411
Effect of exchange rate on cash and cash equivalents........ 403 (1,662)
-------- ---------
Net decrease in cash and cash equivalents................... 12,108 (38,132)
Cash and cash equivalents, beginning of period.............. 220 131,778
-------- ---------
Cash and cash equivalents, end of period.................... $ 12,328 $ 93,646
======== =========
Supplemental Cash Flow Information:
Cash paid for:
Income taxes........................................... -- 314
Interest............................................... -- 1,001
</Table>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
F-67
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS
Luminent, Inc. ("Luminent" or the "Company") designs, manufactures, and
sells a comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking solutions for the
metropolitan and access segments of the communications network. The Company's
products are designed to meet the increasing bandwidth requirements between
long-haul telecommunication networks and end users. Luminent specializes in
singlemode fiber optic components and subsystems for high-capacity data
transmission for long-reach applications in the metropolitan and access markets.
Luminent was incorporated in Delaware in March 2000 as a wholly owned
subsidiary of MRV Communications, Inc. ("MRV"). Since the completion of
Luminent's initial public offering in November 2000, MRV has owned approximately
92% of Luminent's outstanding common stock.
On July 25, 2000, MRV and Luminent entered into a Master Separation and
Distribution Agreement (the "Separation Agreement") which became effective as of
September 8, 2000 (the "Separation Date"). MRV transferred to Luminent,
substantially all of the assets and liabilities associated with Luminent's
business.
As of the Separation Date, Luminent began operating independently from MRV.
For periods prior to the Separation Date, the accompanying Consolidated
Condensed Financial Statements reflect MRV's historical bases in the assets and
liabilities and the historical results of operations that were transferred to
Luminent. Additionally, the Consolidated Condensed Financial Statements include
allocations of certain MRV corporate expenses, including centralized legal,
accounting, employee benefits, real estate, insurance services, information
technology services, treasury and other MRV corporate and infrastructure costs.
The expense allocations have been determined on bases that MRV and Luminent
considered to be a reasonable reflection of the utilization of services provided
or the benefit received by Luminent. The allocation methods are based on
relative revenues, head counts or square footage. However, the financial
information included herein may not reflect the consolidated financial position,
operating results, changes in parent company investment and cash flows of
Luminent in the future or what they would have been had Luminent been a
separate, stand-alone entity during the periods presented.
Luminent faces risks common to many technology companies, including but not
limited to, operating in a sector that is new and characterized by rapid
technological change, evolving industry standards, the need to generate capital
to fund operations and uncertainty regarding market acceptance of its products
and products under development and rapid changes in demand for products.
MRV has announced plans to effect a short-form merger (the "Merger") with
Luminent whereby each outstanding share of Luminent common stock (except for
shares presently held by MRV and shares held by Luminent stockholders who
perfect their statutory appraisal rights under Delaware law) will be converted
into 0.43 of a share of MRV common stock. Upon completion of the Merger (which,
subject to obtaining regulatory approvals, is expected in the fourth quarter of
2001), Luminent will cease to be a public company.
BASIS OF PRESENTATION
The accompanying Consolidated Condensed Financial Statements have been
prepared by the Company, in accordance with accounting principles generally
accepted in the United States for interim financial information and pursuant to
the rules and regulations of the Securities and Exchange Commission ("SEC").
Certain information and footnote disclosures normally included in the financial
statements
F-68
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. These Consolidated Condensed
Financial Statements should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary to present a fair presentation have
been included. The operating results for the nine months ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ended December 31, 2001.
Certain reclassifications have been made in the December 31, 2000 financial
statements to reflect the classifications in the September 30, 2001 financial
statements.
LOSS PER SHARE
Basic and diluted loss per common share are computed using the weighted
average number of common shares outstanding. All share and per share amounts
have been retroactively restated to give effect to the Company's 144,000-for-one
stock split that occurred on July 25, 2000. The weighted average number of
shares used for computation of basic and diluted loss per share was 156,000,000
for September 30, 2001, and 144,000,000 for September 30, 2000. The 12.2 million
stock options outstanding and 75,000 warrants outstanding as of September 30,
2001 and the 5.7 million stock options outstanding and 75,000 warrants
outstanding as of September 30, 2000 have been excluded from the diluted
computations of loss per share as their effect would be anti-dilutive.
2. BUSINESS ACQUISITIONS
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation. Fiber Optic Communications is a manufacturer of passive fiber
optic components for Wavelength Division Multiplexing. Under the terms of the
purchase agreement, Fiber Optic Communications shareholders received
approximately $48.6 million in cash and approximately 4.7 million shares of MRV
common stock and options to purchase 680,000 shares of MRV common stock for a
total purchase price of approximately $309.7 million. The issuance price of the
MRV common stock was approximately $53 per share, which was determined based on
the average market price five days before and after the terms were agreed upon.
The options to purchase MRV common stock are exercisable at $3.00 per share,
have an aggregate intrinsic value of $14.1 million at the acquisition date, and
vest over a four-year period. The acquisition is being accounted for using the
purchase method of accounting. The assets and liabilities of the acquired entity
have been "pushed down" to Luminent. The excess purchase price paid over the
fair value of the net identifiable assets acquired of $261.5 million has been
recorded as goodwill and is being amortized on a straight-line basis over 5
years. The deferred compensation is being amortized using the graded vesting
method over 4 years.
On July 12, 2000, MRV completed the acquisition of all of the outstanding
capital stock of Quantum Optech Inc., a Republic of China corporation. Quantum
Optech is a manufacturer of optical thin film coating and filters for Dense
Wavelength Division Multiplexing. Under the terms of the purchase agreement,
Quantum Optech shareholders received approximately 1.0 million shares of MRV
common stock and options to purchase approximately 160,000 shares of MRV common
stock for a total purchase price of approximately $36.1 million. The issuance
price of the MRV common stock was approximately $30 per share, which was
determined based on the average market price five days before and after the
F-69
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
terms were agreed upon. The options to purchase MRV common stock are exercisable
at $3.00 per share, have an aggregate intrinsic value of $4.0 million at the
acquisition date, of which $1.3 million is vested, and the remaining vest over a
four-year period. The acquisition is being accounted for using the purchase
method of accounting. The assets and liabilities of the acquired entity have
been "pushed down" to Luminent. The excess purchase price paid over the fair
value of the net identifiable assets acquired of $27.8 million has been recorded
as goodwill and is being amortized on a straight-line basis over 5 years. The
deferred compensation is being amortized using the graded vesting method over 4
years.
On July 21, 2000, MRV completed the acquisition of approximately 99% of the
outstanding capital stock of Optronics International Corp., a Republic of China
corporation. Optronics International is a manufacturer of high temperature
semiconductor lasers, transceivers and detectors for optical networks. Under the
terms of the purchase agreement, Optronics International shareholders received
approximately 3.4 million shares of MRV common stock and options to purchase
approximately 800,000 shares of MRV common stock for a total purchase price of
approximately $123.9 million. The issuance price of the MRV common stock was
approximately $30 per share, which was determined based on the average market
price five days before and after the terms were agreed upon. The options to
purchase MRV common stock are exercisable at $3.00 per share, have an aggregate
intrinsic value of $20.0 million at the acquisition date, of which $6.6 million
is vested, and the remaining vest over a four-year period. The acquisition is
being accounted for using the purchase method of accounting. The assets and
liabilities of the acquired entity have been "pushed down" to Luminent. The
excess purchase price paid over the fair value of the net identifiable assets
acquired of $99.4 million has been recorded as goodwill and is being amortized
on a straight-line basis over 5 years. The deferred compensation is being
amortized using the graded vesting method over 4 years.
The purchase price of Fiber Optic Communications, Quantum Optech and
Optronics International in the aggregate were allocated as follows (in
thousands, unaudited):
<Table>
Purchase price.............................................. $469,768
Allocation of purchase price
Net tangible assets....................................... 50,896
Deferred stock compensation............................... 30,150
Goodwill.................................................. 388,722
</Table>
The outstanding capital stock of Fiber Optic Communications, Quantum Optech
and Optronics International, purchased by MRV, has been contributed to Luminent.
The results of operations of these acquisitions have been included in Luminent's
Consolidated Financial Statements from the date of acquisition. The following
unaudited pro forma financial information presents the combined results of
operations of Luminent, Fiber Optic Communications, Quantum Optech and Optronics
International as if the acquisitions had occurred as of January 1, 2000, giving
effect to certain adjustments, including amortization of goodwill and deferred
compensation charges (in thousands).
<Table>
<Caption>
MONTHS ENDING
SEPTEMBER 30,
---------------------
2000 2001
-------- ---------
(UNAUDITED)
Pro forma net sales......................................... $ 91,868 $ 108,098
Pro forma net loss.......................................... $(76,427) $(137,602)
Pro forma basic and diluted net loss per share.............. $ (0.53) $ (0.88)
</Table>
F-70
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. INVENTORIES
Inventories consisted of the following (in thousands):
<Table>
<Caption>
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
(UNAUDITED)
Raw materials.............................................. $22,896 $15,585
Work in process............................................ 12,402 6,092
Finished goods............................................. 4,130 2,605
------- -------
Total inventories..................................... $39,428 $24,282
======= =======
</Table>
As a result of the dramatic slowdown in the communications equipment
industry generally and the optical components sector in particular, the Company
has recorded $3.1 million in specific inventory reserves during the three months
ended September 30, 2001 (see Note 5). The Company also increased its general
reserves by $2.9 million during the nine months ended September 30, 2001,
respectively.
4. BUSINESS SEGMENTS AND CONCENTRATIONS OF RISK
Luminent operates under one reportable segment: fiber optic components and
modules. Fiber optic components and modules include discrete components such as
laser diodes and light emitting diodes and integrated components such as
transmitters, receivers and transceivers. These products are sold primarily to
original-equipment manufacturers and through distributors.
The Company depends on single or limited source suppliers for some of the
key components and materials in its products, which makes Luminent susceptible
to supply shortages or price fluctuations that could adversely affect operating
results. Management believes this will not have a significant impact on
operations.
For the nine months ended September 30, 2001, the Company had two customers
that accounted for approximately 24% of net sales. As of September 30, 2001, one
customer accounted for approximately 27% of total accounts receivable. Certain
geographical area information follows (in thousands).
Geographical Area Net Sales (in thousands):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 2001
------- --------
(UNAUDITED)
North America............................................... $49,136 $ 62,332
Asia-Pacific................................................ 16,103 27,977
Europe and others........................................... 13,725 17,789
------- --------
Total net sales........................................ $78,964 $108,098
======= ========
</Table>
For the nine months ended September 30, 2001, the Company's sales consist
of active and passive optical components used by telecommunications equipment
manufacturers. Active optical components consist of transceivers, lasers, and
others. Passive optical components consist of couplers, jumpers, micro-optic
products and others.
F-71
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The following table sets forth revenues from external customers for each
product group (in thousands):
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 2001
------- --------
(UNAUDITED)
Active...................................................... $63,096 $ 83,310
Passive..................................................... 15,868 24,788
------- --------
Total net sales........................................ $78,964 $108,098
======= ========
</Table>
5. RESTRUCTURING AND OTHER CHARGES
In the second quarter of 2001, the Company's management 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 the Company'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 cancellation and
termination of purchase commitments. These actions are expected to realign the
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 nine months ended September 30, 2001, the Company recorded
restructuring charges totaling $17.5 million. 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 600 layoffs during the nine months ended September 30, 2001,
bringing the Company'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 the Company. The majority of affected employees were
in the manufacturing group.
In addition to the costs associated with employee severance, the Company
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 $2.7 million for the nine months ended September 30, 2001, 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 the Company cannot terminate. In connection with these closed and
abandoned facilities, the Company 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, the Company 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. The Company expects to complete the disposal of this
equipment early in 2002. Purchase commitments of $3.9 million, recorded in cost
of sales, for the nine months ended September 30, 2001, are to cancel or
renegotiate outstanding contracts for materials and capital assets that are no
longer required due to the
F-72
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Company'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 $1.3 million for the nine months ended September 30, 2001, 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. The Company expects to utilize
the remaining balance by the end of the second quarter of 2002. The Company
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. The Company 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, the Company 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:
<Table>
<Caption>
ORIGINAL ADDITIONAL REMAINING
PROVISION 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
=========== ========== =========== ==========
</Table>
A summary of the restructuring costs by line item for the nine months ended
September 30, 2001 consist of the following:
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------
Cost of sales............................................... $ 4,628,000
Selling, general and administrative......................... 12,376,000
Research and development.................................... 501,000
Other income, net........................................... 16,000
-----------
Total restructuring costs.............................. $17,521,000
</Table>
As a result of the significant negative economic and industry trends
impacting the Company's expected sales over the next twelve months, the Company
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 sale of previously written-off items. Another
$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 the Company'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
F-73
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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 the Company's review of the impairment of certain
long-lived assets, 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).
6. SEPARATION FROM MRV COMMUNICATIONS, INC.
For purposes of governing the ongoing relationships between Luminent and
MRV at and after the separation, Luminent and MRV have entered into various
agreements. A brief description of each of the agreements (all of which will
terminate upon completion of the Merger) follows.
Luminent's sale of products to MRV and its affiliates was $2.5 million and
$5.1 million for the nine months ended September 30, 2000 and 2001,
respectively. As of September 30, 2000, Luminent had received a total of $5.8
million from MRV to fund payroll and other operations related matters. The
Company repaid this amount to MRV through operating cash and offsetting amounts
due from MRV on or before December 31, 2000. As of September 30, 2001, Luminent
had incurred $6.2 million in estimated income tax liability due MRV. The Company
repaid $4.7 million of this obligation through offsetting amounts due from MRV
on or before September 30, 2001.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
MRV and Luminent have entered into a Master Separation Agreement, which
contains key provisions relating to the separation, Luminent's initial funding,
initial public offering and the distribution of Luminent's common stock to MRV's
stockholders. The Master Separation and Distribution Agreement lists the
documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from MRV to Luminent, effective on the
separation date. The Master Separation and Distribution Agreement also contains
conditions that must occur prior to the distribution. The parties also entered
into ongoing covenants that survive the transactions, including covenants to
establish interim service level agreements, exchange information, engage in
certain auditing practices and resolve disputes in particular ways.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The General Assignment and Assumption Agreement identifies the assets and
certain capital stock that MRV has transferred to Luminent and the liabilities
that Luminent has assumed from MRV in the separation. The General Assignment and
Assumption Agreement also describes when and how these transfers and assumptions
occurred. In general, these assets and liabilities were those that appeared in
the consolidated balance sheet as of September 30, 2000.
INTELLECTUAL PROPERTY AGREEMENTS
The Master Technology Ownership and License Agreement, the Master Patent
Ownership and License Agreement and the Master Trademark Ownership and License
Agreement collectively are referred to as the Intellectual Property Agreements.
Under the Intellectual Property Agreements, MRV confirmed that Luminent owns or
MRV transferred to Luminent certain rights in specified patents, patent
applications, invention disclosures, specified trademarks and other intellectual
property related to Luminent's current business, research and development
efforts.
F-74
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EMPLOYEE MATTERS AGREEMENT
The Employee Matters Agreement outlines how MRV and Luminent allocated
assets, liabilities and responsibilities relating to current and former
employees of Luminent and their participation in the benefits plans, including
stock plans, that MRV currently sponsors and maintains. The Employee Matters
Agreement also contains provisions describing some of Luminent's employee
benefit and employee stock plans.
All eligible Luminent employees continue to participate in the MRV benefits
plans on comparable terms and conditions to those for MRV employees until the
distribution date or until Luminent establishes benefit plans for its employees,
or elects not to establish comparable plans if it is not legally or financially
practical. Luminent intends to establish its own benefit program no later than
the time of distribution.
Once Luminent establishes it own benefits plans, it may modify or terminate
each plan in accordance with the terms of that plan and its policies. No
Luminent benefit plan will provide benefits that overlap benefits under the
corresponding MRV benefit plan at the time of the distribution. Each Luminent
benefit plan will provide that all service, compensation and other benefit
determinations that, as of the distribution, were recognized under the
corresponding MRV benefits plan, will be taken into account under that Luminent
benefit plan.
Following the date of MRV's distribution of its Luminent common stock to
its stockholders, Luminent will be under no obligation to maintain these plans
in the form in which they were established or at all. The transfer to Luminent
of employees at certain of MRV's international operations, and of certain
employee benefit plans, may not take place until Luminent receives consents or
approvals or has satisfied other applicable requirements.
TAX SHARING AND INDEMNIFICATION AGREEMENT
The Tax Sharing and Indemnification Agreement allocates MRV's and
Luminent's responsibilities and rights for certain tax matters. The agreement
requires Luminent to pay MRV for the incremental tax costs of Luminent's
inclusion in consolidated, combined or unitary tax returns will affiliated
corporations. In determining these incremental costs, the Tax Sharing and
Indemnification Agreement takes into account not only the group's incremental
tax payments to the Internal Revenue Service or other taxing authorities, but
also the incremental use of tax losses of affiliates to offset Luminent's
taxable income, and the incremental use of tax credits of affiliates to offset
the tax on Luminent's income. The Tax Sharing and Indemnification Agreement also
provides for compensation or reimbursement as appropriate to reflect
redeterminations of Luminent's tax liability for periods during which Luminent
joined in filing consolidated, combined or unitary tax returns.
The Tax Sharing and Indemnification Agreement also requires Luminent to
indemnify MRV for certain taxes and similar obligations, including (a) sales
taxes on the sale of products purchased by MRV from Luminent before the
distribution, (b) customs duties or harbor maintenance fees on products exported
or imported by MRV on behalf of Luminent, (c) the additional taxes that would
result if an acquisition of a controlling interest in Luminent's stock after the
distribution causes the distribution not to qualify for tax-free treatment to
MRV, and (d) any taxes resulting from transactions undertaken in preparation for
the distribution.
Luminent's indemnity obligations include any interest penalties on taxes,
duties or fees for which Luminent must indemnify MRV.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the group's federal income tax liability.
Accordingly, Luminent could be required to pay a
F-75
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
deficiency in the group's federal income tax liability for a period during which
Luminent was a member of the group even if the Tax Sharing and Indemnification
Agreement allocates that liability to MRV or another member.
MASTER TRANSITIONAL SERVICES AGREEMENT
The Master Transitional Services Agreement governs the individual
transitional services as requested by Luminent and provided by MRV, on an
interim basis, for one year from the date of separation, unless extended for
specific services or otherwise indicated in the agreement. The service include
data processing and telecommunications services, such as voice
telecommunications and data transmission, and information technology support
services, for functions including accounting, financial management, tax,
payroll, stockholder and public relations, legal procurement, and other
administrative functions. Specified charges for such services are generally
intended to allow the providing company to recover the direct and indirect costs
of providing the services. The Master Transitional Services Agreement also will
cover the provision of certain additional transitional services identified from
time to time after the Separation Date that were inadvertently or
unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the Master Separation and Distribution
Agreement, so long as the provision of such services would not significantly
disrupt MRV's operations or significantly increase the scope of its
responsibility under the agreement.
In addition, the Master Transitional Services Agreement will provide for
the replication of some computer systems, including hardware, software, data
storage or maintenance and support components. Generally, the party needing the
replicated system will bear the costs and expenses of replication. Generally,
the party purchasing new hardware or licensing new software will bear the costs
and expenses of purchasing the new hardware or obtaining the new software
licenses.
REAL ESTATE MATTERS AGREEMENT
The Real Estate Matters Agreement addresses real estate matters relating to
certain MRV leased and owned properties that MRV will transfer to or share with
Luminent. The Real Estate Matters Agreement describes the manner in which MRV
will transfer to or share with Luminent various leased and owned properties. The
Real Estate Matters Agreement provides that Luminent will be required to accept
the transfer of all sites allocated to Luminent, even if a site has been damaged
by a casualty before the separation date. The Real Estate Matters Agreement also
provides that all reasonable costs required to effect the transfers, including
landlord consent fees and landlord attorney's fees will be paid by MRV.
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
Effective as of the separation date, subject to specified exceptions,
Luminent and MRV released the other from any liabilities arising from events
occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, the initial public
offering and the distribution. The Indemnification and Insurance Matters
Agreement also contains provisions governing indemnification. In general,
Luminent and MRV will each indemnify the other from all liabilities arising from
their respective businesses or contracts, as well as liabilities arising from a
breach of the Master Separation and Distribution Agreement or any ancillary
agreement. In addition, MRV and Luminent will each indemnify the other against
liability for specified environmental conditions. Luminent will reimburse MRV
for the cost of any insurance coverage from the separation date to the
distribution date.
Prior to Luminent's separation from MRV, the companies entered into various
agreements providing for MRV to supply transitional services and support to
Luminent. Services totaling $588,000 have been recorded for the year ended
December 31, 2000. There were no transitional services provided by MRV to
F-76
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Luminent during 2001. Although the fees provided for in the agreements are
intended to represent the 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, the Company believes that
providing these services to Luminent provided an efficient means of obtaining
them. With the Merger, these agreements will be terminated.
7. LITIGATION
Luminent has received notices from third parties alleging possible
infringements of patents with respect to product features, or manufacturing
processes. Management believes such notices are common in the communications
industry because of the large number of patents that have been filed on these
subjects. The Company's policy is to discuss these notices with the senders in
an effort to demonstrate that the Company's products and/or processes do not
violate any patents. The Company is currently involved in such discussions with
Ortel, Rockwell and IBM. The Company is evaluating these claims and presently
does not believe that any of its products or processes violates any of the
patents asserted by these parties, and the claims are without merit.
Additionally the Company intends to vigorously defend its positions if any legal
action is taken. Management believes the ultimate outcome of such claims will
not have a material impact on the results of operations or financial position.
In September 2001, a lawsuit was filed against Luminent by Aram Precision
Tool and Die, Inc. (Aram) alleging failure to accept and pay for materials
requested under purchase orders. Aram claims compensatory damages in the amount
of $300,000, unspecified punitive damages, unspecified attorney's fees and
interest. The Company believes that the allegations of the lawsuit are without
merit due to product quality issues and intends to vigorously defend the action.
As such, Management believes the ultimate outcome of this claim will not have a
material impact on the results of operational or financial position.
8. RECENT ACCOUNTING PRONOUNCEMENTS
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 FSAB issued SFAS
No. 138 which provides additional guidance for the application of SFAS No. 133
for certain transactions. We adopted this statement on January 1, 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 "Revenue Recognition in Financial Statements," as
amended. SAB 101 summarizes certain of the Securities and Exchange Commission's
views in applying generally accepted accounting principles 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.
F-77
LUMINENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
statements of this adoption would be discontinuing goodwill amortization and the
possible recognition of a goodwill impairment loss measured as of the date of
adoption.
F-78
LUMINENT, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 24, 2000, MRV completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc., a Republic of
China corporation, in exchange for approximately 4.7 million shares of MRV's
common stock, options to purchase 300,000 shares of common stock and
approximately $48.6 million in cash. On July 12, 2000, MRV acquired all of the
outstanding capital stock of Quantum Optech Inc., a Republic of China
corporation, in exchange for approximately 1.1 million shares of MRV's common
stock and options to purchase common stock. On July 21, 2000, MRV acquired
approximately 99.9% of the outstanding capital stock of Optronics International
Corp., a Republic of China corporation, in exchange for approximately 4.2
million shares of MRV's common stock and options to purchase common stock. The
outstanding capital stock of Fiber Optic Communications, Quantum and Optronics,
purchased by MRV, has been contributed to Luminent as of the date of each
acquisition as part of the Master Separation and Distribution Agreements. As
such, Luminent's management has prepared the following unaudited pro forma
condensed consolidated financial information to give effect to these
acquisitions. The Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2000 give effect to the Fiber Optic
Communications, Quantum and Optronics acquisitions as if they had taken place on
January 1, 2000.
The pro forma adjustments, which are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances, are applied to the historical financial statements of Luminent,
Fiber Optic Communications, Quantum and Optronics. The acquisition of Fiber
Optic Communications was accounted for using the purchase method. The
acquisitions of Quantum and Optronics will be accounted for using the purchase
method. Luminent's allocation of purchase price for each acquisition is based
upon management's current estimates of the fair value of assets acquired and
liabilities assumed in accordance with Accounting Principles Board No. 16.
The accompanying unaudited pro forma condensed consolidated financial
information should be read in conjunction with the historical financial
statements and the notes thereto for Luminent, Fiber Optic Communications,
Quantum and Optronics. The unaudited pro forma condensed consolidated financial
information is provided for informational purposes only and does not purport to
represent what Luminent's financial position or results of operations would
actually have been had the these acquisitions occurred on such dates or to
project Luminent's results of operation or financial position for any future
period.
F-160
LUMINENT, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
FIBER OPTIC PRO FORMA
LUMINENT, INC. COMMUNICATIONS OPTRONICS QUANTUM ADJUSTMENTS TOTAL
-------------- -------------- --------- ------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............... $124,193 $7,058 $3,207 $2,859 $ -- $ 137,317
Cost of sales........... 84,384 4,229 2,917 2,336 888(2) 94,754
-------- ------ ------ ------ -------- ---------
Gross profit....... 39,809 2,829 290 523 (888) 42,563
-------- ------ ------ ------ -------- ---------
Operating costs and
expenses:
Selling, general and
administrative..... 38,768 1,520 497 262 3,606(2),(3) 44,653
Research and
development........ 18,204 527 599 455 1,400(2) 21,185
Parent company
allocation......... 588 -- -- -- -- 588
Amortization of
goodwill and other
intangibles........ 47,421 -- -- -- 30,323(1) 77,744
-------- ------ ------ ------ -------- ---------
104,981 2,047 1,096 717 35,329 144,170
-------- ------ ------ ------ -------- ---------
Operating income
(loss)........... (65,172) 782 (806) (194) (36,217) (101,607)
-------- ------ ------ ------ -------- ---------
Other income (expense),
net................... 2,246 (286) 224 (176) -- 2,008
-------- ------ ------ ------ -------- ---------
Income (loss)
before provision
for income
taxes............ (62,926) 496 (582) (370) (36,217) (99,599)
-------- ------ ------ ------ -------- ---------
Provision (credit) for
income taxes.......... 2,766 -- -- -- -- 2,766
Minority interest....... (707) (31) -- -- -- (738)
-------- ------ ------ ------ -------- ---------
Net income
(loss)........... $(64,985) $ 527 $ (582) $ (370) $(36,217) $(101,627)
======== ====== ====== ====== ======== =========
Basic and diluted net
loss per share........ $ (0.45) $ (0.70)
======== =========
Basic and diluted
weighted average
shares................ 145,677 --(4) 145,677
======== ======== =========
</Table>
See notes to unaudited pro forma condensed consolidated financial information.
F-161
LUMINENT, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
The following adjustments were applied to Luminent's historical financial
statements and those of Fiber Optic Communications, Optronics and Quantum to
arrive at the pro forma financial information:
(1) The pro forma adjustment is to record the amortization of goodwill and
other intangible assets related to the acquisitions of Fiber Optic
Communications, Optronics and Quantum as if the transactions occurred
on January 1, 2000. Goodwill recorded in relation to these acquisitions
was approximately $389.0 million and is being amortized on a
straight-line basis over 5 years or approximately $77.7 million on a
pro forma basis for the year ended December 31, 2000.
(2) The pro forma adjustment is to record deferred stock compensation
related to the acquisitions of Fiber Optic Communications, Optronics
and Quantum as if the transactions occurred on January 1, 2000.
Deferred stock compensation recorded in relation to theses acquisitions
was approximately $30.2 million and is being amortized using the graded
method over 4 years or approximately $17.3 million on a pro forma basis
for the year ended December 31, 2000.
(3) The pro forma adjustment is to record additional depreciation expense
on the step-up of net assets related to the acquisitions of Fiber Optic
Communications, Optronics, and Quantum as if the transactions occurred
on January 1, 2000. Additional depreciation expense recorded in
relation to these acquisitions is being amortized over 5 years or
approximately $1.1 million on a pro forma basis for the year ended
December 31, 2000.
(4) Weighted average shares used to calculate pro forma basic and diluted
net loss per share for the year presented is computed using the
weighted average number of common stock outstanding for the year
presented. In connection with the "push down" of the assets and
liabilities of Fiber Optic Communications, Optronics and Quantum, no
additional shares were exchanged with MRV. Therefore, no dilutive
effect has been provided for these acquisitions.
F-162
MRV COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On April 24, 2000, MRV Communications, Inc. (MRV) completed the acquisition
of approximately 97% of the outstanding capital stock of Fiber Optic
Communications, Inc. (FOCI), a Republic of China corporation, in exchange for
approximately 4.7 million shares of MRV's common stock, options to purchase
300,000 shares of common stock and approximately $48.6 million in cash. On July
21, 2000, MRV acquired approximately 99.9% of the outstanding capital stock of
Optronics International Corp. (OIC), a Republic of China corporation, in
exchange for approximately 4.0 million shares of MRV's common stock and options
to purchase common stock. On July 12, 2000, MRV acquired all of the outstanding
capital stock of AstroTerra, a California corporation, in exchange for
approximately 2.4 million shares of MRV's common stock and options to purchase
common stock. On September 13, 2000, MRV announced its intention to purchase the
minority interest of Luminent, Inc. Luminent stockholders will receive 0.43
shares of MRV common stock for each share of Luminent common stock. MRV will
exchange approximately 5.2 million shares of common stock to purchase
approximately 7.7% of the outstanding common stock of Luminent. The issuance
price of MRV's common stock is estimated to be approximately $2.91 per share,
which was determined based on the average market price five days before and
after the terms were agreed upon, for an estimated purchase price of $15.0
million. MRV's management has prepared the following unaudited pro forma
condensed consolidated financial information to give effect to these
acquisitions and purchase. The Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of September 30, 2001 gives effect to the purchase, by MRV, of
the minority interest of Luminent as if it had taken place on such date. The
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six
months ended September 30, 2001 gives effect to the purchase, by MRV, of the
minority interest in Luminent as if it had taken place on January 1, 2000. The
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 2000 gives effect to the FOCI, OIC and AstroTerra
acquisitions and the purchase, by MRV, of the minority interest in Luminent as
if they had taken place on January 1, 2000.
The pro forma adjustments, which are based upon available information and
certain assumptions that the Company believes are reasonable in the
circumstances, are applied to the historical financial statements of MRV,
Luminent, FOCI, OIC and AstroTerra. The acquisitions of FOCI, OIC and AstroTerra
were accounted for using the purchase method. The purchase of the minority
interest in Luminent was accounted for using the purchase method. MRV's
allocation of purchase price for each acquisition and the merger of Luminent is
based upon management's current estimates of the fair value of assets acquired
and liabilities assumed in accordance with Accounting Principles Board No. 16.
The accompanying unaudited pro forma condensed consolidated financial
information should be read in conjunction with the historical financial
statements and the notes thereto for MRV, Luminent, FOCI, OIC and Astroterra.
The unaudited pro forma condensed consolidated financial information is provided
for informational purposes only and does not purport to represent what MRV's
financial position or results of operations would actually have been had the
these acquisitions occurred on such dates or to project MRV's results of
operation or financial position for any future period.
F-163
MRV COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2001
<Table>
<Caption>
PRO FORMA
MRV ADJUSTMENTS TOTAL
---------- ----------- ----------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 158,049 $ 158,049
Restricted cash...................................... 53,332 53,332
Short-term investments............................... 1,499 1,499
Accounts receivable.................................. 58,979 58,979
Inventories.......................................... 65,818 65,818
Deferred income taxes................................ 31,095 31,095
Other current assets................................. 22,351 22,351
---------- -------- ----------
Total current assets.............................. 391,123 -- 391,123
Property and Equipment, net............................ 75,844 75,844
Other Assets:
Goodwill and intangibles............................. 437,227 (27,774)(5) 409,453
Deferred income taxes................................ 7,797 7,797
Investments.......................................... 33,122 33,122
Other non-current assets............................. 12,049 12,049
---------- -------- ----------
$ 957,162 $(27,774) $ 929,388
========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of capital lease obligations and
long-term debt.................................... 2,547 2,547
Accounts payable..................................... 59,336 59,336
Accrued liabilities.................................. 40,393 40,393
Short-term debt...................................... 10,551 10,551
Deferred revenue..................................... 1,434 1,434
Income taxes payable................................. 2,401 2,401
Other Current Liabilities............................ 3,429 3,429
---------- -------- ----------
Total current liabilities......................... 120,091 -- 120,091
Long-Term Liabilities:
Convertible debentures............................... 89,646 89,646
Capital lease obligations, net of current portion.... 610 610
Long-term debt....................................... 61,692 61,692
Other long-term liabilities.......................... 2,574 2,574
Minority Interest...................................... 40,809 (31,345)(5) 9,464
Stockholders' Equity
Preferred stock...................................... --
Common stock......................................... 132 132
Additional paid-in capital........................... 1,094,361 15,005(5) 1,109,366
Accumulated deficit.................................. (409,408) (11,434)(5) (420,842)
Deferred stock compensation, net..................... (33,370) (33,370)
Treasury stock....................................... (133) (133)
Accumulated other comprehensive loss................. (9,842) (9,842)
---------- -------- ----------
Total stockholders' equity........................ 641,740 3,571 645,311
---------- -------- ----------
$ 957,162 $(27,774) $ 929,388
========== ======== ==========
</Table>
F-164
MRV COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
<Table>
<Caption>
PRO FORMA
MRV ADJUSTMENTS TOTAL
-------- ----------- --------
Revenues, net............................................. 259,364 259,364
Cost of revenues.......................................... 212,777 212,777
-------- ------ --------
Gross profit......................................... 46,587 -- 46,587
-------- ------ --------
Operating Costs and Expenses:
Selling, general and administrative expenses............ 133,375 133,375
Research and development................................ 70,094 70,094
Amortization of goodwill and other intangibles.......... 84,385 (4,166)(6) 80,219
-------- ------ --------
287,854 (4,166) 283,688
-------- ------ --------
Operating loss....................................... (241,267) 4,166 (237,101)
-------- ------ --------
Other income (expense), net............................... (4,303) (4,303)
-------- ------ --------
Loss before provision for income taxes............. (245,570) 4,166 (241,404)
-------- ------ --------
Provision for income taxes................................ 2,593 2,593
Minority interest......................................... (10,085) 10,736(4) 651
-------- ------ --------
Net loss........................................... (238,078) (6,570) (244,648)
======== ====== ========
Basic and diluted net loss per share...................... (3.13) (3.02)
======== ========
Basic and diluted weighted average shares................. 75,973 5,160 81,133
======== ====== ========
</Table>
F-165
MRV COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
<Table>
<Caption>
FIBER OPTIC
COMMUNICATIONS OPTRONICS ASTROTERRA
THROUGH THROUGH THROUGH PRO FORMA
MRV APRIL 24, 2000 JULY 21, 2000 JULY 12, 2000 ADJUSTMENTS TOTAL
-------- -------------- ------------- ------------- ----------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................... 319,394 7,058 3,207 2,552 -- 332,211
Cost of sales............... 203,371 4,229 2,917 2,394 3,292(2) 216,203
-------- ----- ----- ------ ------- --------
Gross profit............ 116,023 2,829 290 158 (3,292) 116,008
-------- ----- ----- ------ ------- --------
Operating Costs and
Expenses:
Selling, general and
administrative
expenses................ 124,700 1,520 497 1,971 5,605(2),(3) 134,293
Research and
development............. 74,078 527 599 969 6,439(2) 82,612
Amortization of goodwill
and other intangibles... 66,814 -- -- -- 32,208(1)(6) 99,022
-------- ----- ----- ------ ------- --------
265,592 2,047 1,096 2,940 44,252 315,927
-------- ----- ----- ------ ------- --------
Operating loss.......... (149,569) 782 (806) (2,782) (47,544) (199,919)
-------- ----- ----- ------ ------- --------
Other income (expense),
net....................... (9,578) (286) 224 6 -- (9,634)
-------- ----- ----- ------ ------- --------
Loss before provision
for income taxes and
minority interest..... (159,147) 496 (582) (2,776) (47,544) (209,553)
-------- ----- ----- ------ ------- --------
Provision (credit) for
income taxes.............. (5,398) -- (5,398)
Minority interest........... (796) (31) -- -- 698(4) (129)
-------- ----- ----- ------ ------- --------
Net loss................ (152,953) 527 (582) (2,776) (48,242) (204,026)
======== ===== ===== ====== ======= ========
Basic and diluted net loss
per share................. (2.33) (2.72)
======== ========
Basic and diluted weighted
average shares............ 65,669 9,338(7) 75,007
======== ======= ========
</Table>
F-166
MRV COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
(1) The pro forma adjustment is to record the amortization of goodwill and other
intangibles related to the acquisitions of Fiber Optic Communications,
Optronics, and AstroTerra as if the transactions occurred on January 1,
2000. Goodwill and other intangibles recorded in relation to these
acquisitions was approximately $469.2 million and is being amortized on a
straight-line basis over 1 to 7 years or approximately $92.3 million for the
year ended December 31, 2000.
(2) The pro forma adjustment is to record deferred stock compensation related to
the acquisitions of Fiber Optic Communications, Optronics, and AstroTerra as
if the transactions occurred on January 1, 2000. Deferred stock compensation
recorded in relation to these acquisitions was approximately $77.5 million
and is being amortized using the graded method over 4 years or approximately
$45.2 million for the year ended December 31, 2000.
(3) The pro forma adjustment is to record additional depreciation expense on the
step-up of net assets related to the acquisitions of Fiber Optic
Communications and Optronics as if the transactions occurred on January 1,
2000. Additional depreciation expense recorded in relation to these
acquisitions is being amortized over 5 years or approximately $900,000 for
the year ended December 31, 2000.
(4) The pro forma adjustment is to eliminate the minority interest in the net
loss of Luminent for the nine months ended September 30, 2001 and the year
ended December 31, 2000 as if the merger with Luminent occurred on January
1, 2000.
(5) The pro forma adjustment is to record the purchase, by MRV, of the minority
interest in Luminent as if the merger occurred on January 1, 2000. Based on
an exchange ratio of 0.43 MRV shares of stock to each share of Luminent
stock, MRV exchanged approximately 5.2 million shares of common stock to
purchase approximately 7.7% of the outstanding common stock of Luminent. The
issuance price of the common stock was approximately $2.91 per share, for a
total purchase price of $15.0 million. Additionally, MRV recorded an
extraordinary gain based on the excess fair market value over cost of $27.8
million as of September 30, 2001.
(6) The pro forma adjustment is to record a reduction in the amortization of
goodwill and other intangibles as if the reduction of goodwill and other
intangibles of $27.8 million based on the excess fair market value over cost
recorded in relation to the merger of Luminent occurred on January 1, 2000
for the nine months ended September 30, 2001 and the year ended December 31,
2000. The reduction of amortization expense was $4.2 million and $5.6
million for the periods ended September 30, 2001 and December 31, 2000,
respectively.
(7) Weighted average shares used to calculate pro forma basic and diluted net
loss per share for the year presented is computed using the weighted average
number of common stock outstanding for the period presented and the shares
issued in connection with the acquisitions of Fiber Optic Communications,
Optronics, and AstroTerra and the shares to be issued to effect the merger
of Luminent. The pro forma shares included in the basic and diluted net loss
per share for the nine months ended September 30, 2001 only include the
effect of the proposed merger of Luminent had it occurred on January 1,
2000. The pro forma shares included in the basic and diluted net loss per
share for the year ended December 31, 2000, include the effect of these
transactions had they occurred on January 1, 2000.
F-167