UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] Quarterly report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended MARCH 31, 2002
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act for the transition period from __________ to __________
Commission file number 0-25678
MRV COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1340090
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) identification No.)
20415 NORDHOFF STREET, CHATSWORTH, CA 91311
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code: (818) 773-0900
Check whether the issuer: (1) has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of May 9, 2002, there were 90,590,429 shares of Common Stock, $.0017 par
value per share, outstanding.
MRV COMMUNICATIONS, INC.
FORM 10-Q, MARCH 31, 2002
INDEX
Page Number
-----------
PART I Financial Information 3
Item 1. Financial Statements: 3
Consolidated Condensed Statements of Operations (unaudited) for the 4
Three Months ended March 31, 2002 and 2001
Consolidated Condensed Balance Sheets as of March 31, 2002 (unaudited) 5
and December 31, 2001
Consolidated Condensed Statements of Cash Flows (unaudited) for the 6
Three Months ended March 31, 2002 and 2001
Notes to Unaudited Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results 13
of Operations
PART II Other Information 35
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 6. Exhibits and Reports in Form 8-K 35
Signatures 37
As used in this Report, "we, "us", "our", "MRV" or the "Company" refer to MRV
Communications, Inc. and its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in MRV's latest annual report on Form 10-K.
In the opinion of the Company, these unaudited statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position of MRV Communications, Inc. and Subsidiaries as of
March 31, 2002, and the results of their operations and their cash flows for the
three months then ended.
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
------------------------------
MARCH 31, March 31,
2002 2001
- -----------------------------------------------------------------------------------------------------
(Unaudited)
NET REVENUES $ 62,418 $ 100,104
Cost of goods sold 43,105 66,391
--------- ---------
GROSS PROFIT 19,313 33,713
--------- ---------
OPERATING COSTS AND EXPENSES -
Product development and engineering 15,620 25,005
Selling, general and administrative 23,539 38,412
Amortization of intangibles 2,504 28,139
--------- ---------
Total operating costs and expenses 41,663 91,556
--------- ---------
OPERATING LOSS (22,350) (57,843)
Other expense, net 13,122 520
--------- ---------
LOSS BEFORE MINORITY INTEREST, PROVISION (BENEFIT) FOR TAXES
AND EXTRAORDINARY ITEM (35,472) (58,363)
Minority interest 105 (1,388)
Provision (benefit) for taxes 186 (2,683)
--------- ---------
LOSS BEFORE EXTRAORDINARY GAIN (35,763) (54,292)
Extraordinary gain on extinguishment of debt, net of tax 3,244 --
--------- ---------
NET LOSS $ (32,519) $ (54,292)
========= =========
EARNINGS PER SHARE:
Basic and diluted loss per share -
Loss before extraordinary gain $ (0.42) $ (0.73)
========= =========
Extraordinary gain $ 0.04 $ --
========= =========
Net loss $ (0.38) $ (0.73)
========= =========
Weighted average number of shares -
Basic and diluted 84,789 74,370
========= =========
See accompanying notes
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
MARCH 31, December 31,
2002 2001
- --------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 90,685 $ 164,676
Short-term marketable securities 54,226 46,696
Time deposits 9,603 9,341
Accounts receivable 50,166 55,106
Inventories 55,787 57,308
Other current assets 11,706 10,044
---------- ----------
TOTAL CURRENT ASSETS 272,173 343,171
PROPERTY AND EQUIPMENT, NET 68,802 72,012
GOODWILL AND OTHER INTANGIBLES 392,236 395,312
DEFERRED INCOME TAXES 23,749 23,229
INVESTMENTS 7,604 16,937
OTHER NON-CURRENT ASSETS 9,084 13,834
---------- ----------
$ 773,648 $ 864,495
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,521 $ 52,226
Short-term obligations 19,247 18,679
Accounts payable 47,270 48,586
Accrued liabilities 31,541 39,035
Other current liabilities 6,637 9,277
---------- ----------
TOTAL CURRENT LIABILITIES 107,216 167,803
CONVERTIBLE SUBORDINATED NOTES 65,346 89,646
LONG-TERM DEBT 7,997 8,871
OTHER LONG-TERM LIABILITIES 3,940 3,737
MINORITY INTEREST 9,269 9,762
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or outstanding -- --
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 89,178 shares in 2002 and 82,824 in 2001
Outstanding -- 89,130 shares in 2002 and 82,776 in 2001 152 141
Additional paid-in capital 1,139,611 1,118,942
Accumulated deficit (530,202) (497,683)
Deferred stock compensation, net (20,467) (26,344)
Treasury stock, 48 shares at cost in 2002 and 2001 (133) (133)
Accumulated other comprehensive loss (9,081) (10,247)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 579,880 584,676
---------- ----------
$ 773,648 $ 864,495
========== ==========
See accompanying notes
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended
-------------------------------
MARCH 31, March 31,
2002 2001
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET CASH USED IN OPERATING ACTIVITIES $ (7,797) $ (25,677)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,894) (16,432)
Purchases of short-term marketable securities (7,530) --
Investments in unconsolidated equity method subsidiaries (605) --
Proceeds from sale or maturity of investments -- 16,790
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (11,029) 358
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 76 385
Payment to terminate interest rate swap (3,198) --
Payments on short-term debt -- (5,075)
Borrowings on short-term debt 568 10,212
Payments on long-term debt (50,579) (725)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (53,133) 4,797
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (2,032) 987
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (73,991) (19,535)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 164,676 210,080
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 90,685 $ 190,545
========= =========
See accompanying notes
MRV COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
common share include the incremental shares issuable upon the assumed exercise
of stock options and conversion of the convertible subordinated notes. The
effect of the assumed conversion of $65.3 million and $89.6 million of
convertible subordinated notes for the three months ended March 31, 2002 and
2001, respectively, have not been included, as it would be anti-dilutive. The
dilutive effect of all of MRV's stock options and warrants outstanding for the
three months ended March 31, 2002 and 2001, respectively, have not been included
in the loss per share computation as their effect would be anti-dilutive.
2. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS 142
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets", which was adopted on January 1, 2002, requires
disclosure of what reported income before extraordinary items and net income
would have been in all periods presented exclusive of amortization expense
(including any related tax effects) recognized in those periods related to
goodwill and other intangible assets that are no longer being amortized and
changes in amortization periods for intangible assets that will continue to be
amortized (including any related tax effects). Similarly, adjusted
per share amounts also are required to be disclosed for all periods presented.
MRV initially applied this statement as of January 1, 2002. The amortization of
goodwill, loss before extraordinary gains and net loss for the initial
application and prior corresponding period follows (in thousands, except per
share amounts).
Three Months Ended
------------------------------
March 31, March 31,
2002 2001
--------- ---------
LOSS BEFORE EXTRAORDINARY ITEM:
Reported loss before extraordinary gain $(35,472) $(54,292)
Amortization of goodwill -- 25,562
-------- --------
Adjusted loss before extraordinary gain $(35,472) $(28,730)
======== ========
NET LOSS:
Reported net loss $(32,519) $(54,292)
Amortization of goodwill -- 25,562
-------- --------
Adjusted net loss $(32,519) $(28,730)
======== ========
BASIC AND DILUTED EARNINGS PER SHARE:
Reported net loss $ (0.38) $ (0.73)
Amortization of goodwill -- 0.34
-------- --------
Adjusted net loss $ (0.38) $ (0.39)
======== ========
MRV is currently undergoing the first step in the transitional goodwill
impairment test prescribed in SFAS No. 142. MRV will complete the transitional
goodwill impairment test and expects to report any potential impairment in the
second quarter ended June 30, 2002.
3. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that net income
(loss) and all other non-owner changes in equity be displayed in a financial
statement with the same prominence as other consolidated financial statements.
In addition, the standard requires companies to display the components of
comprehensive loss, which were as follows (in thousands):
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
--------- ----------
Net loss $ (32,519) $ (54,292)
Realized loss on interest rate swap 3,198 --
Foreign currency translation (2,032) 987
--------- ---------
$ (31,353) $ (53,305)
========= =========
4. CASH AND CASH EQUIVALENTS, TIME DEPOSITS AND SHORT-TERM INVESTMENTS
MRV considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Investments with maturities of less
than one year are considered short-term. Time deposits represent investments
which are restricted as to withdrawal or use based on maturity terms.
Furthermore, MRV maintains cash balances and investments in highly qualified
financial institutions. At various times such amounts are in excess of insured
limits.
5. INVENTORIES
Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first-in, first-out
method. Inventories consisted of the following (in thousands):
March 31, 2002 December 31, 2001
-------------- -----------------
Raw materials $ 15,687 $ 15,444
Work-in process 19,501 19,230
Finished goods 20,599 22,634
--------- ---------
$ 55,787 $ 57,308
========= =========
6. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
MRV operates under a business model that includes its operating
divisions as well as start-up enterprises. These companies provide network
infrastructure products and services and fall into two business segments:
operating enterprises and development stage enterprises. Segment information is
therefore being provided on this basis.
Development stage enterprises, which MRV has created or invested in,
focus on core routing, network transportation, switching and IP services, and
fiber optic components and systems. The primary activities of development stage
enterprises have been to develop solutions and technologies of which significant
revenues have yet to be earned. MRV's operating enterprises design, manufacture
and distribute optical components, optical subsystems, optical networking
solutions and Internet infrastructure products.
The accounting policies of the segments are the same as those described
in the summary of significant accounting polices in our latest annual report on
Form 10-K. MRV evaluates segment performance based on revenues and operating
income (loss) of each segment. As such, there are no separately identifiable
segment assets nor are there any separately identifiable statements of
operations data below operating income.
Business segment net revenues for the three months ended March 31, 2002
and 2001 were as follows (in thousands):
Three Months Ended
------------------------------
March 31, March 31,
2002 2001
--------- ---------
Operating enterprises $ 62,418 $ 100,104
Development stage enterprises -- --
--------- ---------
$ 62,418 $ 100,104
========= =========
There were no inter-segment sales during the three months ended March
31, 2002 and 2001. Net revenues by product group for the three months ended
March 31, 2002 and 2001 were as follows (in thousands):
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
---------- ----------
Optical passive components $ 6,641 $ 11,469
Optical active components 15,642 36,401
Switches and routers 12,723 19,323
Remote device management 3,901 4,065
Network physical infrastructure equipment 14,436 18,088
Services 4,694 4,071
Other network products 4,381 6,687
--------- ---------
$ 62,418 $ 100,104
========= =========
For the three months ended and as of March 31, 2002 and 2001, MRV had
no single customer that accounted for more than 10% of net revenues or accounts
receivable, respectively. MRV does not track customer sales by region for each
individual reporting segment. A summary of external net revenues by region is as
follows (in thousands):
Three Months Ended
------------------------------
March 31, March 31,
2002 2001
--------- ---------
United States $ 18,232 $ 41,903
Asia Pacific 6,619 14,820
European 37,244 41,318
Other 323 2,063
--------- ---------
$ 62,418 $ 100,104
========= =========
Business segment operating loss for the three months ended March 31,
2002 and 2001 were as follows (in thousands):
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
--------- ----------
Operating enterprises $ (14,107) $ (43,864)
Development stage enterprises (8,243) (13,979)
--------- ---------
$ (22,350) $ (57,843)
========= =========
Loss before provision (credit) for income taxes for the three months
ended March 31, 2002 and 2001 was as follows (in thousands):
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
--------- ----------
United States $ (19,353) $ (29,483)
Foreign (12,980) (27,492)
--------- ---------
$ (32,333) $ (56,975)
========= =========
7. RESTRUCTURING CHARGES
From November 9, 2000 through December 28, 2001, MRV owned
approximately 92% of Luminent, Inc. and approximately 8% of Luminent's shares
where publicly traded. During the second quarter of 2001, Luminent's management
approved and implemented a restructuring plan 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 primarily involved 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 expected to be completed by the
end of the fiscal year 2002.
During the year ended December 31, 2001, Luminent recorded
restructuring charges totaling $20.3 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 $1.3 million are
related to 671 layoffs through March 31, 2002, bringing Luminent's total
workforce to 1,029 employees as of March 31, 2002. Affected employees came from
all divisions and areas of Luminent. The majority of affected employees were in
the manufacturing group.
In addition to the costs associated with employee severance, Luminent
identified a number of assets, including leased facilities and equipment that
are no longer required due to current market conditions, operations and expected
growth rates. The net facilities costs related to closed and abandoned
facilities were approximately $2.4 million for the year ended December 31, 2001,
which were are primarily related to future obligations under operating leases.
The total lease charge is net of approximately $3.7 million in expected sublease
revenue on leases that Luminent cannot terminate. As of March 31, 2002, $2.3
million in estimated future obligations remain. In connection with these closed
and abandoned facilities, Luminent recorded asset impairment charges of $10.4
million for the year ended December 31, 2001, consisting of leasehold
improvements and certain manufacturing equipment to write down the value of this
equipment. There were no additional asset impairment charges recorded during the
three months ended March 31, 2002. The liability for purchase commitments, $3.7
million still remaining as of March 31, 2002, are for the cancellation or
renegotiation of outstanding contracts for materials and capital assets that are
no longer required due to Luminent's significantly reduced orders for optical
components and sales projections over the next twelve months. During the three
months ended March 31, 2002, $1.1 million of the original purchase commitment
provision has been reversed to cost of goods sold. Of this amount, $457,000 is a
reduction in the estimated future liability due to vendor based on current
negotiations, and $637,000 represents inventory and equipment purchase
commitments, which will ultimately be utilized.
The restructuring provision has been reduced by cash payments of
$910,000 for the three months ended March 31, 2002 and non-cash related charges
of $1.1 million for the three months ended March 31, 2002, resulting in an
ending liability balance of $6.6 million. Luminent expects to utilize the
remaining balance in the year ending December 31, 2002, which will be paid
through cash and cash equivalents and through operating cash flows. Luminent
began to realize savings related to the workforce reductions in late 2001, with
estimated ongoing quarterly net savings of $2.4 million. In addition, Luminent
will realize reduced depreciation charges of approximately
$384,000 per quarter through December 2004 and $163,000 per quarter through
December 2005 for facility costs. These savings are expected to be realized as
reductions in cost of sales, research and development and selling, general and
administrative expenses.
A summary of the restructuring costs for the three months ended March
31, 2002 is as follows (in thousands):
December 31, Additional March 31,
2001 Provision Utilized (1) 2002
------------ ---------- ------------ ---------
EXIT COSTS:
Asset impairment $ -- $ -- $ -- $ --
Closed and abandoned facilities 2,317 -- 56 2,260
Purchase commitments 5,705 -- 2,003 3,702
------ ------ ------ ------
8,022 -- 2,059 5,962
Employee severance costs 655 -- -- 655
------ ------ ------ ------
$8,677 $ -- $2,059 $6,617
====== ====== ====== ======
(1) Includes $457,000 in reduction of future liabilities based on
current negotiations with vendors and $637,000 in expected
usage of previously reserved purchase commitments for
inventory and equipment. The provisions previously recognized
for these items have been reversed in the three months ended
March 31, 2002.
8. INTEREST RATE SWAP
MRV entered into an interest rate swap (the "Swap") in the second
quarter of 2000 to effectively change the interest rate characteristics of its
$50.0 million variable-rate term loan presented in long-term debt, with the
objective of fixing its overall borrowing costs. The Swap was considered to be
100% effective and was therefore recorded using the short-cut method. The Swap
was designated as a cash flow hedge and changes in fair value of the debt were
generally offset by changes in fair value of the related security, resulting in
negligible net impact. The gain or loss from the change in fair value of the
Swap as well as the offsetting change in the hedged fair value of the long-term
debt were recognized in other comprehensive loss. In February 2002, MRV paid off
the long-term debt of $50.0 million (see Note 9) and terminated the Swap. The
realized loss on the Swap of $3.2 million has been recorded as interest expense
and included in other expense, net in the accompanying statements of operations.
9. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES
During the three months ended March 31, 2002, MRV paid off a $50.0
million term loan. Additionally, during the three months ended March 31, 2002,
MRV acquired $24.3 million in Convertible Subordinated Notes (the "Notes") in
exchange for MRV's issuance of 6.3 million shares of its common stock to the
holders of the Notes. In connection therewith, MRV recognized an extraordinary
gain of $3.2 million, net of associated taxes. MRV retired the Notes acquired in
the exchange.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. MRV has reviewed this statement and has determined that there will
be no material impact on its financial position, results of operations or cash
flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. MRV adopted this
statement on January 1, 2002 and has determined that there will be no material
impact on its financial position, results of operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement 4, early
application is encouraged. MRV anticipates applying this statement for the six
months ended June 30, 2002 and expects the immediate impact of its application
to be the reclassification of the gains on the extinguishment of debt from an
extraordinary item to other income.
11. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Three Months Ended
--------------------------
March 31, March 31,
2002 2001
--------- ---------
SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION (IN THOUSANDS):
Cash paid during period for interest $ 982 $1,197
------ ------
Cash paid during period for taxes $ 287 $4,540
====== ======
During the three months ended March 31, 2002, MRV exchanged $24.3
million in convertible subordinated notes for 6.3 million shares of its common
stock. This non-cash transaction has been excluded from the accompanying
statements of cash flows.
12. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Consolidated Condensed Financial
Statements and Notes thereto included elsewhere in this Report. In addition to
historical information, the discussion in this Report contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth in the
following and elsewhere in this Report. We assume no obligation to update any of
the forward-looking statements after the date of this Report.
OVERVIEW
We create, acquire, finance and operate companies, and through them,
design, develop, manufacture and market products, which enable high-speed
broadband communications. We concentrate on companies and products devoted to
optical components and network infrastructure systems. We have leveraged our
early experience in fiber optic technology into a number of well-focused
operating units specializing in advanced fiber optic components, switching,
routing, and wireless optical transmission systems which we have created,
financed or acquired.
Revenues for the three months ended March 31, 2002 were $62.4 million,
compared to $100.1 million for the three months ended March 31, 2001, a decrease
of 38%. We reported a net loss of $32.5 million and $54.3 million for the three
months ended March 31, 2002 and 2001, respectively. A significant portion of
these losses were due to the amortization of goodwill and other intangibles and
deferred stock compensation related to our acquisitions in 2000 and our
employment arrangements with Luminent's former President and its Chief Financial
Officer. We will continue to record deferred stock compensation through 2004
relating to these acquisitions and Luminent's employment arrangements with its
executives. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, and we no longer amortize goodwill,
however, it may require us to record impairment charges (see Recently Issued
Accounting Standards, below). We are currently undergoing the first step in the
transitional goodwill impairment test prescribed in SFAS No. 142. We will
complete the transitional goodwill impairment test and expect to report any
potential impairment in the second quarter ending June 30, 2002. For the three
months ended March 31, 2002, we recorded impairment charges of $7.6 million in
connection with certain equity method investments as the fair value of these
assets was less than their carrying value. As a consequence of these deferred
stock compensation and potential impairment charges, we do not expect to report
net income in the foreseeable future.
TRANSACTIONS WITH STOCK OF SUBSIDIARIES
In November 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12.00 per share for net proceeds
of approximately $132.3 million. Luminent designs, manufactures and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking equipment for the rapidly
growing metropolitan and access segments of the communications networks. While
we had planned to distribute all of our shares of Luminent common stock to our
stockholders, unfavorable business and economic conditions in the fiber optic,
data networking and telecommunications industries and the resulting adverse
effects on the market prices of our common stock and Luminent common stock,
caused us to determine to abandon the distribution and effect a short-form
merger of Luminent into one of our wholly-owned subsidiaries, thereby
eliminating public ownership of Luminent. This merger was completed on December
28, 2001.
In July 2000, we and Luminent, entered into employment agreements with
Luminent's former President and Chief Executive Officer and its Vice President
of Finance and Chief Financial Officer. The agreements provide for annual
salaries, performance bonuses and combinations of stock options to purchase
shares of our common stock and Luminent's common stock. The stock options were
granted to Luminent's executives at exercise prices below market value,
resulting in deferred stock compensation. Deferred stock compensation expense
from these stock option grants reported for the years ended December 31, 2001
and 2000, were $35.8 million and $54.2 million, respectively. We will incur
additional deferred stock compensation expense of approximately $2.1 million
through 2004. Luminent's President and Chief Executive Officer, Dr. Spivey,
resigned in September 2001. Dr. Spivey's
resignation was considered by the parties to be a termination other than for
cause under his employment agreement entitling him to the severance benefits of
his employment agreement, including payment over a one year period of an amount
equal to two times the sum of his annual salary plus bonus and the vesting of
all of his unvested Luminent options. Dr. Spivey's MRV and Luminent stock
options are now exercisable through September 11, 2003.
RESTRUCTURING CHARGES
In the second quarter of 2001, when Luminent's common stock was still
publicly traded, Luminent'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
primarily involved 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
Luminent's business based on current and near term growth rates. All of these
actions are expected to be completed in 2002.
During the year ended December 31, 2001, Luminent recorded
restructuring charges totaling $20.3 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 $1.3 million were
associated with 671 layoffs through March 31, 2002, bringing Luminent's total
workforce to 1,029 employees as of March 31, 2002. Affected employees came from
all divisions and areas of Luminent. The majority of affected employees were in
the manufacturing group.
Luminent identified a number of assets, including leased facilities and
equipment that are no longer required due to current market conditions,
operations and expected growth rates. The net facility costs related to closed
and abandoned facilities of approximately $2.4 million for the year ended
December 31, 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 Luminent cannot terminate. As of March 31, 2002,
$2.3 million in estimated future obligation remains. In connection with these
closed and abandoned facilities, Luminent recorded asset impairment charges of
$10.4 million for the year ended December 31, 2001 to write-down the value of
equipment, consisting of leasehold improvements and certain manufacturing
equipment. There were no additional asset impairment charges recorded during the
three months ended March 31, 2002. Due to the specialized nature of these
assets, Luminent determined that they have minimal or no future benefit and
recorded a provision reflecting the net book value relating to these assets.
Purchase commitments of $3.7 million still remain as of March 31, 2002, are to
cancel or renegotiate outstanding contracts for materials and capital assets
that are no longer required due to Luminent's significantly reduced orders for
optical components and sales projections over the next twelve months. During the
three months ended March 31, 2002, $1.1 million of the original purchase
commitment provision has been reversed to Cost of Goods Sold. Of this amount,
$457,000 reflects a reduction in the estimated future liability due to vendors
based on current negotiations, and $637,000 represents inventory and equipment,
which will ultimately be utilized.
As of December 31, 2001, the restructuring provision has been reduced
by cash payments of $910,000 for the three months ended March 31, 2002 and
non-cash related charges of $1.1 million for the three months ended March 31,
2002, resulting in an ending liability balance of $6.6 million. Luminent expects
to utilize the remaining balance in the year ending December 31, 2002. Luminent
expects that it will spend approximately $6.6 million through the year ending
December 31, 2002, to carry out the plan, which will be paid through cash and
cash equivalents and through operating cash flows. Luminent began to realize
savings related to the workforce reductions in late 2001 with estimated ongoing
quarterly net savings of $2.4 million. In addition, Luminent anticipates that it
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 goods sold, product development and engineering and selling, general and
administrative expenses.
MARKET CONDITIONS AND CURRENT OUTLOOK
Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for optical components and network
infrastructure products and services. The unfavorable economic conditions and
reduced capital spending has detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2002 to date, and may
continue to affect them for the remainder of 2002 and thereafter. Announcements
by industry participants and observers indicate there is a slowdown in industry
spending and participants are seeking to reduce existing inventories.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our
statements of operations data expressed as a percentage of net revenues.
Three Months Ended
--------------------------
MARCH 31, March 31,
2002 2001
------------------------------------------------------------------------------------------------
(Unaudited)
NET REVENUES 100% 100%
Cost of goods sold 69 66
GROSS PROFIT 31 34
OPERATING COSTS AND EXPENSES -
Product development and engineering 25 25
Selling, general and administrative 38 38
Amortization of intangibles 4 28
Total operating costs and expenses 67 91
OPERATING LOSS (36) (58)
Other expense, net 21 1
LOSS BEFORE MINORITY INTEREST, PROVISION (BENEFIT)
FOR TAXES AND EXTRAORDINARY ITEM (57) (58)
Minority interest -- (1)
Provision (benefit) for taxes -- (3)
LOSS BEFORE EXTRAORDINARY GAIN (57) (54)
Extraordinary gain on extinguishment of debt, net of tax 5 --
NET LOSS (52)% (54)%
The following management discussion and analysis refers to and analyzes
our results of operations into two segments as defined by our management. These
two segments are Operating Enterprises and Development Stage Enterprises, which
includes all start-up activities.
THREE MONTHS ENDED MARCH 31, 2002 AND 2001
NET REVENUES
We generally recognize product revenue, net of sales discounts and
allowances, when persuasive evidence of an arrangement exists, delivery has
occurred and all significant contractual obligations have been satisfied, the
fee is fixed or determinable and collection is considered probable. Products are
generally shipped "FOB shipping point" with no right of return. Sales with
contingencies, such as right of return, rotation rights, conditional acceptance
provisions and price protection are rare and insignificant and are deferred
until the contingencies have been satisfied or the contingent period has lapsed.
We generally warrant our products against defects in materials and workmanship
for one year. The estimated costs of warranty obligations and sales returns and
other allowances are recognized at the time of revenue recognition based on
contract terms and prior claims experience. Our major revenue-generating
products consist of: optical passive and active components; switches and
routers; remote device management; and network physical infrastructure
equipment. Revenue generated through the sales of services and systems support
has been insignificant.
Operating Enterprises. Revenues for the three months ended March 31,
2002 decreased $37.7 million, or 38%, to $62.4 million from $100.1 million for
the three months ended March 31, 2001. Overall, the communications equipment
industry was extremely depressed, as was the end markets that we serve.
Historically, the first quarter has been seasonally our weakest quarter.
Revenues generated from our optical passive and active components represented
the most significant impact on revenues, decreasing $25.6 million during the
three months ended March 31, 2002 to $22.3 million from $47.9 million for the
same period last year. The decrease in our optical passive and active components
was primarily the result of the dramatic downturn in the communications
equipment industry and specifically the optical components sector. Revenues
generated from our switches and routers decreased $6.6 million, or 34%, to $12.7
million for the three months ended March 31, 2002 as compared to $19.3 million
for the three months ended March 31, 2001. Network physical infrastructure
equipment revenues decreased $3.7 million, or 20%, to $14.4 million for the
three months ended March 31, 2002 as compared to $18.1 million for the three
months ended March 31, 2001. Revenues to the United States decreased $23.7
million, or 57%, for the three months ended March 31, 2002, to $18.2 million as
compared to $41.9 million for the three months ended March 31, 2001. Revenues to
the Asia Pacific decreased $8.2 million, or 55%, for the three months ended
March 31, 2002 to $6.6 million as compared to $14.8 million for the three months
ended March 31, 2001. Revenue to Europe decreased $4.1 million, or 10%, for the
three months ended March 31, 2002 to $37.2 million as compared to $41.3 million
for the three months ended March 31, 2001.
Development Stage Enterprises. No significant revenues were generated
by these entities for the three months ended March 31, 2002 and 2001.
GROSS PROFIT
Gross profit is equal to our net revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method.
Operating Enterprises. Gross profit for the three months ended March
31, 2002 was $19.3 million, compared to gross profit of $33.7 million for the
three months ended March 31, 2001. Gross profit decreased $14.4 million, or 43%,
for the three months ended March 31, 2002 as compared to the three months ended
March 31, 2001.
Our gross margins (defined as gross profit as a percentage of net
revenues) are generally affected by price changes over the life of the products
and the overall mix of products sold. Higher gross margins are generally
expected from new products and improved production efficiencies as a result of
increased utilization. Conversely, prices for existing products generally will
continue to decrease over their respective life cycles.
Our gross margin decreased to 31% for the three months ended March 31,
2002, compared to gross margin of 34% for the three months ended March 31, 2001.
The decrease in gross margin was primarily attributed to increased market
pressures resulting in lower revenue volumes with fixed overhead. Also, we
realized lower margins as we decreased inventories at lower average sales
prices. Prior to deferred stock compensation amortization of $1.1 million and
$2.3 million for the three months ended March 31, 2002 and 2001, respectively,
gross margins would have been $20.4 million, or 33% of net revenues and $36.0
million, or 36% of net revenues, respectively.
Development Stage Enterprises. No significant gross margins were
produced by these entities for the three months ended March 31, 2002 and 2001.
PRODUCT DEVELOPMENT AND ENGINEERING
Product development and engineering expenses decreased 38%, to $15.6
million for the three months ended March 31, 2002 as compared to $25.0 million
for the three months ended March 31, 2001.
Operating Enterprises. Product development and engineering expenses
from our operating enterprises were $10.2 million, or 16% of net revenues, for
the three months ended March 31, 2002, as compared to $13.9 million, or 14% of
net revenues, for the three months ended March 31, 2001. This represents a
decrease of $3.7 million, or 27%, for the three months ended March 31, 2002.
Prior to deferred stock compensation amortization charges of $2.5 million and
$4.1 million for the three months ended March 31, 2002 and 2001, respectively,
product development and engineering expenses would have decreased by 21% to $7.7
million, or 12% of net revenues, from $9.8 million, or 10% of net revenues, for
the three months ended March 31, 2002 and 2001, respectively.
Development Stage Enterprises. Product development and engineering
expenses of the development stage enterprises were $5.4 million, or 9% of net
revenues, for the three months ended March 31, 2002, as compared to $11.1
million, or 11% of net revenues, for the three months ended March 31, 2001. This
represents a decrease of $5.7 million, or 51%, for the three months ended March
31, 2002.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses decreased $14.9 million to $23.5 million for the three
months ended March 31, 2002, compared to $38.4 million for the three months
ended March 31, 2001. SG&A expenses were 38% of net revenues for each of the
three months ended March 31, 2002 and 2001. Prior to deferred stock compensation
amortization charges of $2.2 million for the three months ended March 31, 2002
and deferred stock compensation amortization charges of $12.5 million for the
three months ended March 31, 2001, SG&A would have decreased 18% to $21.3
million from $25.9 million for the three months ended March 31, 2002,
respectively. As a percentage of net revenue, SG&A prior to deferred stock
compensation amortization expenses would have been 34% for the three months
ended March 31, 2002 and 26% for the three months ended March 31, 2001.
Operating Enterprises. SG&A expenses decreased 39% over the prior
period to $21.6 million for the three months ended March 31, 2002. SG&A expenses
were 35% and 36% of our net revenue for the three months ended March 31, 2002
and 2001, respectively. Prior to deferred stock compensation amortization
charges of $2.2 million and $12.5 million for the three months ended March 31,
2002 and 2001, respectively, SG&A would have decreased 16% to $19.4 million for
the three months ended March 31, 2002, as compared to $23.0 million for the
three months ended March 31, 2001. As a percentage of net revenues, SG&A prior
to deferred stock compensation charges would have been 31% for the three months
ended March 31, 2002, as compared to 23% for the three months ended March 31,
2001. These decreases are mainly due to the reduction of overhead expenses to
align operations with current revenue levels.
Development Stage Enterprises. SG&A expenses decreased 34% over the
prior period to $1.9 million for the three months ended March 31, 2002, as
compared to $2.9 million for the three months ended March 31, 2002. SG&A
expenses for these entities also decreased due to reductions in overhead
expenses.
AMORTIZATION OF INTANGIBLES
Operating Enterprises. Amortization of intangibles decreased to $2.5
million for the three months ended March 31, 2002, as compared to $28.1 million
for the three months ended March 31, 2001. The decrease of approximately $25.6
million was the result of the adoption of SFAS No. 142 (see Recently Issued
Accounting Standards, below). In accordance with SFAS No. 142, the amortization
of goodwill and certain other intangibles was discontinued effective on January
1, 2002. However, instead of amortization, an annual impairment analysis is to
be performed. We are undergoing the first step in the transitional goodwill
impairment test prescribed in SFAS No. 142. We will complete the transitional
goodwill impairment test and expect to report any potential impairment when we
report our financial results for the second quarter ending June 30, 2002.
Development Stage Enterprises. No significant amortization of
intangibles was recorded for these entities for the three months ended March 31,
2002 and 2001.
OTHER EXPENSE, NET; EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT
In June 1998, we issued $100.0 million principal amount of 5%
convertible subordinated notes (the Notes) due in June 2003. The Notes were
offered in a 144A private placement to qualified institutional investors at the
stated amount, less a selling discount of 3%. During the three months ended
March 31, 2002, we acquired $24.3 million in Notes in exchange for our issuance
of 6.3 million shares of our common stock to the holders of the Notes. In
connection with the acquisition and retirement of these Notes, we recognized an
extraordinary gain of $3.2 million net of associated taxes. In late 1998, we
repurchased $10.0 million principal amount of these notes for cash at a discount
from the stated amount. We incurred $1.4 million and $1.2 million in interest
expense relating to the Notes for the three months ended March 31, 2002 and
2001, respectively.
We account for certain unconsolidated subsidiaries using the equity
method. The increase in other expense from $520,000 to $13.1 million for the
three months ended March 31, 2002 is primarily attributable to our share of
losses from our unconsolidated subsidiaries of $1.3 million and impairment
charges of $7.6 million on our investments in these subsidiaries, partially
offset by interest income. As part of our asset realization evaluation, we
determined that the carrying value of certain investments were impaired. Our
share of losses from our unconsolidated subsidiaries was $1.3 million for the
three months ended March 31, 2001.
PROVISION (BENEFIT) FOR TAXES
The provision for taxes for the three months ended March 31, 2002 was
$186,000, compared to a benefit for taxes of $2.7 million for the three months
ended March 31, 2001. Our tax expense fluctuates primarily due to the tax
jurisdictions where we currently have operating facilities and the varying tax
rates in those jurisdictions.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release No. 33-8040, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policy," we identified the most
critical accounting principles upon which our financial status depends. We
determined the critical principles considering accounting principles to be
related to revenue recognition, inventory valuation and impairment of
intangibles and other long-lived assets. We state these accounting policies in
the Footnotes to our Consolidated Financial Statements and in relevant sections
in this management's discussion and analysis, including the Recently Issued
Accounting Standards discussed below.
RECENTLY ISSUED ACCOUNTING STANDARDS
The FASB recently 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, 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 adopted
these statements effective January 1, 2002. We are currently undergoing the
first step in the transitional goodwill impairment test prescribed in SFAS No.
142. We will complete the transitional goodwill impairment test and expect to
report any potential impairment in the second quarter ended June 30, 2002. SFAS
No. 142 represents a change in the methodology used to determine impairment in
that it is more market-focused. As of March 31, 2002, our common stock was
trading at amounts significantly lower than our book value. As such, we
anticipate recording, in the second quarter of 2002, impairment charges as a
result of our depressed market valuation. Should market values dramatically
improve during the first half of 2002, impairment losses, if any, could be
reduced or eliminated. Furthermore, as we continue to engage in strategic
acquisitions, we may record additional goodwill and other intangibles.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized costs are depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. We have reviewed this statement and have determined that there will
not be a material impact on our financial position, results of operations or
cash flows.
In October 2001, the FASB issues SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. We adopted this statement on January 1, 2002, and have determined
that there will not be a material impact on our financial position, results of
operations or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement 4, early
application is encouraged. We anticipate applying this statement for the six
months ended June 30, 2002 and expect the immediate impact of its application to
be the reclassification of our gain on the extinguishment of debt from an
extraordinary item to other income.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $90.7 million as of March 31, 2002, a
decrease of $74.0 million from cash and cash equivalents of $164.7 million as of
December 31, 2001. Working capital as of March 31, 2002 was $165.0 million
compared to $175.4 million as of December 31, 2001. Our ratio of current assets
to current liabilities as of March 31, 2002 was 2.5 to 1.0 compared to 2.0 to
1.0 as of December 31, 2001. The decrease in working capital is substantially
attributed to the cash requirements of our development stage enterprises and our
consolidated net operating losses. As of March 31, 2002 and December 31, 2001,
we did not have any "off-balance sheet" financing arrangements.
Cash used in operating activities was $7.8 million for the three months
ended March 31, 2002, as compared to cash used in operating activities of $25.7
million for the three months ended March 31, 2001. Cash used in operating
activities is a result of our net operating loss of $32.5 million, adjusted for
non-cash items such as depreciation and amortization and deferred stock
compensation charges, and offset by cash generated from operating assets and
liabilities. Cash used in operating activities were positively affected by
decreased accounts receivables, inventories and other assets partially offset by
decreases in accounts payable, accrued liabilities and other current
liabilities, during the period. The decrease in accounts receivable is due to
lower revenue volumes coupled with increased collection efforts, while the
decrease in inventory is primarily the result of the utilization of inventories
on-hand. Decreases in accounts payable and accrued liabilities are the result of
dramatic slowdown in the communications equipment industry and reductions in
overhead expenses.
Cash flows used in investing activities were $11.0 million for the
three months ended March 31, 2002, compared to cash provided by investing
activities of $358,000 for the three months ended March 31, 2001. Cash flows
used in investing activities for the three months ended March 31, 2002 were the
result of capital expenditures of $2.9 million, purchases of short-term
marketable securities of $7.5 million and investments in unconsolidated equity
method subsidiaries of $605,000. Cash flows provided by investing activities for
the prior period resulted from the net cash provided by the maturity of
investments, offset by net cash used in for capital expenditures.
Cash flows from financing activities were $53.1 million for the three
months ended March 31, 2002, as compared to cash provided in financing
activities of $4.8 million for the three months ended March 31, 2001. Cash used
in financing activities was primarily the result of paying off $50.0 million of
long-term debt and terminating our interest rate swap for $3.2 million, offset
by proceeds received from the exercise of stock options of $76,000 and
short-term borrowing of 568,000. Cash flows provided by financing activities in
the prior period represent the cash received through borrowings on our
short-term obligations and the exercise of stock options, offset by payments on
our short-term and long-term obligations.
On November 10, 2000, Luminent completed the initial public offering of
its common stock, selling 12.0 million shares at $12 per share. Their initial
public offering raised net proceeds of approximately $132.3 million. In December
2001, we reacquired, through a short-form merger, the minority interest of
Luminent representing approximately 8% of Luminent's outstanding common stock
(see the discussion above). Following this merger, we increased our liquidity
based on Luminent's cash, cash equivalents, restricted cash and cash equivalents
and short-term investments on hand as of the consummation of the merger, or
$107.7 million at December 31, 2001.
In June 1998, we issued $100.0 million principal amount of 5%
Convertible Subordinated Notes (the Notes) due in June 2003, in a private
placement raising net proceeds of $96.4 million. The share (equivalent to a
conversion rate of approximately 73.94 share per $1,000 principal amount of
notes), representing an initial conversion premium of 24% for a total of
approximately 7.4 million shares of our common stock. The notes bear interest at
5% per annum, which is payable semi-annually on June 15 and December 15 of each
year. The notes have a five-year term and have been callable by us since June
15, 2001. The premiums payable to call these notes are 102% of the outstanding
principal amount during the 12 months ending June 14, 2002 and 101% during the
12 months ending June 14, 2003, plus accrued interest through the date of
redemption. During the three months ended March 31, 2002, we acquired $24.3
million in Notes in exchange for the issuance of 6.3 million shares of our
common stock. In connection with the acquisition and retirement of these Notes,
we recognized an extraordinary gain of $3.2 million net of associated taxes.
The following table illustrates our total contractual cash obligations
as of March 31, 2002 (in thousands):
Less than 1
Cash Obligations TOTAL Year 1 - 3 Years 4 - 5 Years After 5 Years
- ------------------------------ -------- ----------- ----------- ----------- -------------
Long-term obligations $ 10,518 $ 2,521 $ 4,421 $ 3,088 $ 488
Convertible subordinated notes 65,346 -- 65,346 -- --
Unconditional purchase
obligations 16,191 13,915 1,860 357 59
Operating leases 28,288 7,791 11,614 5,240 3,643
Investments 9,450 3,820 1,920 1,920 1,790
-------- ------- ------- ------- ------
Total contractual cash
obligations $129,793 $28,047 $85,161 $10,605 $5,980
======== ======= ======= ======= ======
Our total contractual cash obligations as of March 31, 2002, were
$129.8 million, of which, $28.0 million are due during within the next 12
months. These total contractual cash obligations primarily consist of long-term
financing obligations including our convertible subordinated notes, operating
leases for our equipment and facilities, unconditional purchase obligations for
necessary raw materials and funding commitments for certain development stage
enterprises. Historically, these obligations have been satisfied through cash
generated from our operations or other avenues (see discussion below), and we
expect that this will continue to be the case.
Our remaining short-term obligations of $28.0 million consist primarily
of $7.8 million for operating leases, $13.9 million for unconditional purchase
obligations and $3.8 million for funding commitments for our development stage
enterprises. Our unconditional purchase obligations are to secure the necessary
raw goods for production of our products. As part of Luminent's restructure plan
(see our discussion above and the Footnotes to our Consolidated Condensed
Financial Statements), $3.7 million in unconditional purchase obligations have
been recorded as a liability and Luminent is in negotiations to cancel or
renegotiate contracts that are no longer required due to its significantly
reduced orders for optical components and sales projections. The remaining
purchase commitments are part of our ordinary course of business. Finally, we
will continue to fund start-up activities, which are complementary to our
business strategy.
Our remaining long-term obligations as of March 31, 2002 of $101.8
million consist primarily of $73.3 million of long-term financing obligations
including our $65.3 million in remaining convertible subordinated notes, $20.5
million in operating leases for our equipment and facilities, $2.3 million on
unconditional purchase obligations and $5.6 million for funding commitments for
certain development stage enterprises. Our remaining long-term financing
obligations consist of financing obtained for capital expenditures and produce
expansion. Our operating leases expire at various dates through 2049.
We believe that our cash on-hand and cash flows from operations will be
sufficient to satisfy our working capital, capital expenditures and research and
development requirements for at least the next 12 months. However, we may choose
to obtain additional debt or equity financing if we believe it appropriate. Our
future capital requirements will depend on many factors, including acquisitions,
our rate of revenue growth, the timing and extent of spending to support
development of new products and expansion of sales and marketing, the timing of
new product introductions and enhancements to existing products and market
acceptance of our products.
MARKET RISKS
Market risk represents the risk of loss that may impact our
Consolidated Financial Statements through adverse changes in financial market
prices and rates and inflation. Our market risk exposure results primarily from
fluctuations in interest rates and foreign exchange rates. We manage our
exposure to these market risks through our regular operating and financing
activities and have not historically hedged these risks through the use of
derivative financial instruments. The term hedge is used to mean a strategy
designed to manage risks of volatility in prices or interest and foreign
exchange rate movements on certain assets, liabilities or anticipated
transactions and creates a relationship in which gains or losses on derivative
instruments are expected to counter-balance the losses or gains on the assets,
liabilities or anticipated transactions exposed to such market risks.
Interest Rates. We are exposed to interest rate fluctuations on our
investments, short-term borrowings and long-term obligations. Our cash and
short-term investments are subject to limited interest rate risk, and are
primarily maintained in money market funds and bank deposits. Our variable-rate
short-term borrowings are also subject to limited interest rate risk due to
their short-term maturities. Our long-term obligations were entered into with
fixed and variable interest rates. In connection with our $50.0 million
variable-rate term loan due in 2003, we entered into a specific hedge, an
interest rate swap, to modify the interest characteristics of this instrument.
The interest rate swap was used to reduce our cost of financing and the
fluctuations in the aggregate interest expense. The notional amount, interest
payment and maturity dates of the swap match the principal, interest payment and
maturity dates of the related debt. Accordingly, any market risk or opportunity
associated with this swap is offset by the opposite market impact on the related
debt. In February 2002, we paid off our $50.0 million term loan and terminated
our interest rate swap for $3.2 million. To date, we have not entered into any
other derivative instruments, however, as we continue to monitor our risk
profile, we may enter into additional hedging instruments in the future.
Foreign Exchange Rates. We operate on an international basis with a
portion of our revenues and expenses being incurred in currencies other than the
U.S. dollar. Fluctuation in the value of these foreign currencies in which we
conduct our business relative to the U.S. dollar will cause U.S. dollar
translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results.
However, because we have expenses and revenues in each of the principal
functional currencies, the exposure to our financial results to currency
fluctuations is reduced. We have not historically attempted to reduce our
currency risks through hedging instruments; however, we may do so in the future.
Inflation. We believe that the relatively moderate rate of inflation in
the United States over the past few years has not had a significant impact on
our sales or operating results or on the prices of raw materials. However, in
view of our recent expansion of operations in Taiwan, Israel and other
countries, which have experienced greater inflation than the United States,
there can be no assurance that inflation will not have a material adverse effect
on our operating results in the future.
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
From time to time we may make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" we are hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statements made by or on behalf of the
Company. Any such statement is qualified by reference to the following
cautionary statements:
WE INCURRED A NET LOSS IN THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001, YEARS
ENDED DECEMBER 31, 2001 AND 2002, PRIMARILY AS A RESULT OF THE AMORTIZATION OF
GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION CHARGES FROM RECENT
ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR THE FORESEEABLE
FUTURE.
We reported a net loss of $32.5 million and $54.3 million for the three
months ended March 31, 2002 and 2001, respectively, $326.4 million for the year
ended December 31, 2001 and $153.0 million for the year ended December 31, 2000.
A major contributing factor to the net losses was the amortization of goodwill
and intangibles and
deferred stock compensation related to our acquisitions of Fiber Optic
Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's former President and Luminent's Chief
Financial Officer. We will continue to record deferred stock compensation
relating to these acquisitions and the employment arrangements with these
executives going forward. Effective January 1, 2002, we adopted SFAS No. 142 and
no longer amortize goodwill. However, we may be required to record goodwill
impairment charges if the fair value of the assets acquired is less than their
carrying value (see Recently Issued Accounting Standards). As a consequence of
deferred stock compensation charges and potential impairment charges, we do not
expect to report net income in the foreseeable future.
OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND
RELATED UNCERTAINTIES.
Weaker economic conditions worldwide, particularly in the U.S. and
Europe, have contributed to the current technology industry slowdown and
impacted our business resulting in:
- reduced demand for our products, particularly Luminent's fiber
optic components;
- increased risk of excess and obsolete inventories;
- increased price competition for our products;
- excess manufacturing capacity under current market conditions;
and
- higher overhead costs, as a percentage of revenues.
These unfavorable economic conditions and reduced capital spending in the
telecommunications industry detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States, during 2001 and the first quarter
of 2002, appear to continue to affect these industries in the second quarter of
2002 and may affect them for the balance of 2002 and thereafter. Announcements
by industry participants and observers indicate there is a slowdown in industry
spending and participants are seeking to reduce existing inventories and we are
experiencing these reductions in our business. As a result of these factors, we
recorded, during the year ended December 31, 2001, consolidated charges from our
subsidiary, Luminent, which include the write-off of inventory, purchase
commitments, asset impairment, workforce reduction, restructuring costs and
other unusual items. The aggregate charges recorded during the year ended
December 31, 2001 were $49.5 million. These charges are the result of the lower
demand for Luminent's products and pricing pressures stemming from the
continuing downturn in the communications equipment industry generally and the
optical components sector in particular.
Additionally, these economic conditions are making it very difficult
for MRV and our other companies, our customers and our vendors to forecast and
plan future business activities. This level of uncertainty severely challenges
our ability to operate profitably or to grow our businesses. In particular, it
is difficult to develop and implement strategy, sustainable business models and
efficient operations, and effectively manage manufacturing and supply chain
relationships. We lost a key member of our management team in the terrorists
attacks on the World Trade Center of September 11, 2001 and thus the attacks
have already had adverse consequences on our business. However, we do not know
how the consequences of these attacks will additionally affect our business. It
is possible that a decrease in business and consumer confidence in the economy
and the stability of financial markets may lead to delays or reductions in
capital expenditures by our customers and potential customers. Concerns over
accounting practices of service providers and faltering growth prospects among
equipment manufactures could delay the economic recovery in the
telecommunications industry beyond 2002. In addition, further disruptions of the
air transport system in the United States and abroad may negatively impact our
ability to deliver products to customers, visit potential customers, to provide
support and service to our existing customers and to obtain components in a
timely fashion. If the economic or market conditions continue or further
deteriorate, or if the economic downturn is exacerbated as a result of
political, economic or military conditions associated with current domestic and
world events, our businesses, financial condition and results of operations
could be further impaired.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies
will emerge as competition and the need for higher and more cost effective
transmission capacity, or bandwidth, increases. Our future performance will
depend on the successful development, introduction and market acceptance of new
and enhanced products that address these changes as well as current and
potential customer requirements. The introduction of new and enhanced products
may cause our customers to defer or cancel orders for existing products. We have
in the past experienced delays in product development and these delays may occur
in the future. Therefore, to the extent customers defer or cancel orders in the
expectation of a new product release or there is any delay in development or
introduction of our new products or enhancements of our products, our operating
results would suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements, or to license
these technologies from third parties. Product development delays may result
from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical
personnel;
- difficulties in reallocating engineering resources and
overcoming resource limitations;
- difficulties with contract manufacturers; -
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to deliver
products to customers that are highly reliable, operate with its existing
equipment, lower the customer's costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis. Further,
we cannot assure you that our new products will gain market acceptance or that
we will be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Any failure to respond to
technological changes would significantly harm our business.
DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those our companies and we offer, may contain
undetected software or hardware errors when we first introduce them or when we
release new versions. The occurrence of these errors in the future, and our
inability to correct these errors quickly or at all, could result in the delay
or loss of market acceptance of our products. It could also result in material
warranty expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. For instance, during late 2000, we
were informed that certain Luminent transceivers sold to Cisco were experiencing
field failures. Through discussions with Cisco through September 2001,
Luminent's management agreed to replace the failed units, which we believe
resolves this issue. We expect the ultimate replacement of these failed
transceivers will cost approximately $2.9 million which has been fully reserved.
Any of these or other eventualities resulting from defects in our products could
cause our sales to decline and have a material adverse effect on our business,
operating results and financial condition.
OUR OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our operating results for a particular quarter are extremely difficult
to predict. Our revenue and operating results could fluctuate substantially from
quarter to quarter and from year to year. This could result from any one or a
combination of factors such as:
- the cancellation or postponement of orders,
- the timing and amount of significant orders from our largest
customers,
- our success in developing, introducing and shipping product
enhancements and new products,
- the mix of products we sell,
- software, hardware or other errors in the products we sell
requiring replacements or increased warranty reserves,
- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions or deferred
compensation charges,
- new product introductions by our competitors,
- pricing actions by our competitors or us,
- the timing of delivery and availability of components from
suppliers,
- changes in material costs, and
- general economic conditions.
Moreover, the volume and timing of orders we receive during a quarter
are difficult to forecast. From time to time, our customers encounter uncertain
and changing demand for their products. Customers generally order based on their
forecasts. If demand falls below these forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, our operating results could be materially adversely affected.
Our success is dependent, in part, on the overall growth rate of the
fiber optic components and networking industry. We can give no assurance that
the Internet or the industries that serve it will continue to grow or that we
will achieve higher growth rates. Our business, operating results or financial
condition may be adversely affected by any decreases in industry growth rates.
In addition, we can give no assurance that our results in any particular period
will fall within the ranges for growth forecast by market researchers.
Because of these and other factors, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that, in future periods, our results of
operations may be below the expectations of public market analysts and
investors. This failure to meet expectations could cause the trading price of
our common stock to decline. Similarly, the failure by our competitors or
customers to meet or exceed the results expected by their analysts or investors
could have a ripple effect on us and cause our stock price to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the length
and variability of the sales and implementation cycles for our products. We do
not recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant and
strategic decision. As a result, customers typically expend significant effort
in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be subjected
to lifetime and reliability testing, which also can take months or more. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales and marketing and research and development
expenses to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Even
after acceptance of orders, our customers often change the scheduled delivery
dates of their orders. Because of the evolving nature of the optical networking
and network infrastructure markets, we cannot predict the length of these sales,
development or delivery cycles. As a result, these long sales cycles may cause
our net sales and operating results to vary significantly and unexpectedly from
quarter-to-quarter, which could cause volatility in our stock price.
THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely
volatile. The market price of our common stock is likely to continue to be
highly volatile and could be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results,
- announcements of technological innovations or new product
introductions by us or our competitors,
- changes of estimates of our future operating results by
securities analysts,
- developments with respect to patents, copyrights or
proprietary rights, and
- general market conditions and other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies in particular, and that have been unrelated to
the operating performance of these companies. These factors, as well as general
economic and political conditions, may materially adversely affect the market
price of our common stock in the future. Similarly, the failure by our
competitors or customers to meet or exceed the results expected by their
analysts or investors could have a ripple effect on us and cause our stock price
to decline. Additionally, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, all of
whom have been granted stock options.
OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES.
We have created several start-up companies and formed independent
business units in the optical technology and Internet infrastructure areas. We
account for these investments in affiliates according to the equity or cost
methods as required by accounting principles generally accepted in the United
States. The market value of these investments may vary materially from the
amounts shown as a result of business events specific to these entities or their
competitors or market conditions. Actual or perceived changes in the market
value of these investments could have a material impact on our share price and
in addition could contribute significantly to volatility of our share price.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking products are
intensely competitive and subject to frequent product introductions with
improved price/performance characteristics, rapid technological change and the
continual emergence of new industry standards. We compete and will compete with
numerous types of companies including companies that have been established for
many years and have considerably greater financial, marketing, technical, human
and other resources, as well as greater name recognition and a larger installed
customer base, than we do. This may give these competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. In addition, many of our large competitors offer
customers broader product lines, which provide more comprehensive solutions than
our current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of these price decreases
may have an adverse impact on our results of operations or financial condition.
There has been a trend toward industry consolidation for several years.
We expect this trend toward industry consolidation to continue as companies
attempt to strengthen or hold their market positions in an evolving industry. We
believe that industry consolidation may provide stronger competitors that are
better able to compete. This could have a material adverse effect on our
business, operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES.
Our growth in recent years, both internally and through the
acquisitions we have made has placed a significant strain on our financial and
management personnel and information systems and controls. As a consequence, we
must continually implement new and enhance existing financial and management
information systems and controls and must add and train personnel to operate
these systems effectively. Our delay or failure to implement new and enhance
existing systems and controls as needed could have a material adverse effect on
our results of operations and financial condition in the future. Our intention
to continue to pursue a growth strategy can be expected to place even greater
pressure on our existing personnel and to compound the need for increased
personnel, expanded
information systems, and additional financial and administrative control
procedures. We can give no assurance that we will be able to successfully manage
operations if they continue to expand.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of
our operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the periods indicated
below:
Three Months Ended Year Ended
------------------------ --------------------------------------------------
March 31, March 31, December 31, December 31, December 31,
2002 2001 2001 2000 1999
--------- --------- ------------ ------------ ------------
Percent of total revenue
from foreign sales 71% 58% 67% 63% 58%
We have companies and offices in, and conduct a significant portion of
our operations in and from, Israel. We are, therefore, directly influenced by
the political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and other conditions affecting Taiwan and
People's Republic of China. Luminent has a large manufacturing facility in the
People's Republic of China in which it manufactures passive fiber optic
components and both Luminent and we make sales of our products in the People's
Republic of China. Our total sales in the People's Republic of China amounted to
approximately $10.4 million during the year ended December 31, 2001 and $2.7
million during the year ended December 31, 2000. Currently there is significant
political tension between Taiwan and People's Republic of China, which could
lead to hostilities. Risks we face due to international sales and the use of
overseas manufacturing include:
- greater difficulty in accounts receivable collection and
longer collection periods;
- the impact of recessions in economies outside the United
States;
- unexpected changes in regulatory requirements;
- seasonal reductions in business activities in some parts of
the world, such as during the summer months in Europe or in
the winter months in Asia when the Chinese New Year is
celebrated;
- certification requirements;
- potentially adverse tax consequences;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- trade restrictions;
- limited protection of intellectual property rights;
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
The majority of our sales are currently denominated in U.S. dollars and
to date our business has not been significantly affected by currency
fluctuations or inflation. However, as we conduct business in several different
countries, fluctuations in currency exchange rates could cause our products to
become relatively more expensive in particular countries, leading to a reduction
in sales in that country. In addition, inflation or fluctuations in currency
exchange rates in these countries could increase our expenses.
To date, we have not hedged against currency exchange risks. In the
future, we may engage in foreign currency denominated sales or pay material
amounts of expenses in foreign currencies and, in that event, may experience
gains and losses due to currency fluctuations. Our operating results could be
adversely affected by currency fluctuations or as a result of inflation in
particular countries where material expenses are incurred.
WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND
THEREFORE COULD FACE DELAYS HARMING OUR SALES.
We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large number
of contract manufacturers that we can use for outsourcing, we have elected to
use a limited number of vendors for a significant portion of our board assembly
requirements in order to foster consistency in quality of the products and to
achieve economies of scale. These independent third-party manufacturers also
provide the same services to other companies. Risks associated with the use of
independent manufacturers include unavailability of or delays in obtaining
adequate supplies of products and reduced control of manufacturing quality and
production costs. If our contract manufacturers failed to deliver needed
components timely, we could face difficulty in obtaining adequate supplies of
products from other sources in the near term. We can give no assurance that our
third party manufacturers will provide us with adequate supplies of quality
products on a timely basis, or at all. While we could outsource with other
vendors, a change in vendors may require significant lead-time and may result in
shipment delays and expenses. Our inability to obtain these products on a timely
basis, the loss of a vendor or a change in the terms and conditions of the
outsourcing would have a material adverse effect on our business, operating
results and financial condition.
WE MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR
NEEDS.
Our companies currently purchase several key components used in the
manufacture of our products from single or limited sources. We depend on these
sources to meet our needs. Moreover, we depend on the quality of the products
supplied to us over which we have limited control. We have encountered shortages
and delays in obtaining components in the past and expect to encounter shortages
and delays in the future. If we cannot supply products due to a lack of
components, or are unable to redesign products with other components in a timely
manner, our business will be significantly harmed. We have no long-term or
short-term contracts for any of our components. As a result, a supplier can
discontinue supplying components to us without penalty. If a supplier
discontinued supplying a component, our business may be harmed by the resulting
product manufacturing and delivery delays.
OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE
MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS.
We rely heavily on our own production capability for critical
semiconductor lasers and light emitting diodes used in our products. Because we
manufacture these and other key components at our own facilities and these
components are not readily available from other sources, any interruption of our
manufacturing processes could have a material adverse effect on our operations.
Furthermore, we have a limited number of employees dedicated to the operation
and maintenance of our wafer fabrication equipment, the loss of any of whom
could result in our inability to effectively operate and service this equipment.
Wafer fabrication is sensitive to many factors, including variations and
impurities in the raw materials, the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. We can
give no assurance that we will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.
WE MAY BE HARMED BY OUR FAILURE TO PURSUE ACQUISITIONS AND IF WE DO PURSUE
ACQUISITIONS HARM COULD RESULT.
An important element of our strategy has been to review acquisition
prospects that would complement our existing companies and products, augment our
market coverage and distribution ability or enhance our technological
capabilities. We expect that our acquisitions of businesses or product lines
will decrease in comparison to historical levels. The networking business is
highly competitive and our failure to pursue future acquisitions could hamper
our ability to enhance existing products and introduce new products on a timely
basis. If we do choose to pursue
acquisitions, they could have a material adverse effect on our business,
financial condition and results of operations because of the following:
- possible charges to operations for purchased technology and
restructuring similar to those incurred in connection with our
acquisition of Xyplex in 1998;
- potentially dilutive issuances of equity securities;
- incurrence of debt and contingent liabilities;
- incurrence of amortization expenses and impairment charges
related to goodwill and other intangible assets and deferred
compensation charges similar to those arising with the
acquisitions of Fiber Optic Communications, Optronics, Quantum
Optech, Jolt and AstroTerra in 2000 (see Recently Issued
Accounting Standards);
- difficulties assimilating the acquired operations,
technologies and products;
- diversion of management's attention to other business
concerns;
- risks of entering markets in which we have no or limited prior
experience;
- potential loss of key employees of acquired organizations; and
- difficulties in honoring commitments made to customers by
management of the acquired entity prior to the acquisition.
- We can give no assurance as to whether we can successfully
integrate the companies, products, technologies or personnel
of any business that we might acquire in the future.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications will
be approved, that any patents that may be issued will protect our intellectual
property or that third parties will not challenge any issued patents. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us. We cannot be certain that the steps
we have taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Any of this kind of litigation,
regardless of outcome, could be expensive and time consuming, and adverse
determinations in any of this kind of litigation could seriously harm our
business.
WE ARE CURRENTLY, AND COULD IN THE FUTURE BECOME, SUBJECT TO LITIGATION
REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH COULD BE COSTLY AND SUBJECT US TO
SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard:
- In March 1999, we received a written notice from Lemelson
Foundation Partnership in which Lemelson claimed to have
patent rights in our vision and automatic identification
operations, which are widely used in the manufacture of
electronic assemblies.
- In April 1999, we received a written notice from Rockwell
Automation Technologies Corporation in which Rockwell claimed
to have patent rights in certain technology related to our
metal organic chemical vapor deposition, or MOCVD, processes
and this claim initially resulted in litigation, which has
since been dismissed pending the results of litigation not
directly involving us (see "Part II, Item 1. Legal
Proceedings").
- In October 1999, we received written notice from Lucent
Technologies, Inc. in which Lucent claimed we have violated
certain of Lucent's patents falling into the general category
of communications technology, with a focus on networking
functionality.
- In October 1999, we received a written notice from Ortel
Corporation, which has since been acquired by Lucent, in which
Ortel claimed to have patent rights in certain technology
related to our photodiode module products. In January 2001, we
were advised that Lucent had assigned certain of its rights
and claims to Agere Systems, Inc., including the claim made on
the Ortel patent. To date, we have not been contacted by Agere
regarding this patent claim. In July 2000, we received written
notice from Nortel
Networks, which claimed we violated Nortel's patent relating
to technology associated with local area networks.
- In May 2001, we received written notice from IBM, which claims
that several of our optical components and Internet
infrastructure products make use of inventions covered by
certain patents claimed by IBM. We are evaluating the patents
noted in the letters.
Aggregate net sales potentially subject to the foregoing claims
amounted to approximately 28% of our total sales during the year ended December
31, 2001 and 30% of our total sales during the year ended December 31, 2000.
Others' patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's
and IBM's, may be determined to be valid, or some of our products may ultimately
be determined to infringe the Lemelson, Rockwell, Lucent, Agere, Nortel or IBM
patents, or those of other companies.
As was the case with Rockwell, Lemelson, Lucent, Agere, Nortel or IBM,
or other companies may pursue litigation with respect to these or other claims.
The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required to
obtain licenses to the infringing technology, to pay substantial damages under
applicable law, to cease the manufacture, use and sale of infringing products or
to expend significant resources to develop non-infringing technology. Licenses
may not be available from third parties, including Lemelson, Rockwell, Lucent,
Ortel, Nortel or IBM, either on commercially reasonable terms or at all. In
addition, litigation frequently involves substantial expenditures and can
require significant management attention, even if we ultimately prevail.
Accordingly, any infringement claim or litigation against us could significantly
harm our business, operating results and financial condition.
IN THE FUTURE, WE MAY INITIATE CLAIMS OR LITIGATION AGAINST THIRD PARTIES FOR
INFRINGEMENT OF OUR PROPRIETARY RIGHTS TO PROTECT THESE RIGHTS OR TO DETERMINE
THE SCOPE AND VALIDITY OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF
COMPETITORS. THESE CLAIMS COULD RESULT IN COSTLY LITIGATION AND THE DIVERSION OF
OUR TECHNICAL AND MANAGEMENT PERSONNEL.
Necessary licenses of third-party technology may not be available to us
or may be very expensive, which could adversely affect our ability to
manufacture and sell our products. From time to time we may be required to
license technology from third parties to develop new products or product
enhancements. We cannot assure you that third-party licenses will be available
to us on commercially reasonable terms, if at all. The inability to obtain any
third-party license required to develop new products and product enhancements
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, either of which could seriously harm our ability
to manufacture and sell our products.
WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.
We are substantially dependent upon Dr. Shlomo Margalit, our Chairman
of the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered into
employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of
key man life insurance policies in the amounts of $1.0 million each on their
lives. However, we can give no assurance that the proceeds from these policies
will be sufficient to compensate us in the event of the death of either of these
individuals, and the policies are not applicable in the event that either of
them becomes disabled or is otherwise unable to render services to us.
OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to develop, manufacture and market our products, run our
companies and our ability to compete with our current and future competitors
depends, and will depend, in large part, on our ability to attract and retain
qualified personnel. Competition for executives and qualified personnel in the
networking and fiber optics industries is intense, and we will be required to
compete for that personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, which have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives If
we should be
unable to attract and retain qualified personnel, our business could be
materially adversely affected. We can give no assurance that we will be able to
attract and retain qualified personnel.
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure by
us to comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, these kinds of
regulations could restrict our ability to expand our facilities or could require
us to acquire costly equipment or to incur other significant expenses to comply
with environmental regulations. We cannot assure you that these legal
requirements will not impose on us the need for additional capital expenditures
or other requirements. If we fail to obtain required permits or otherwise fail
to operate within these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities.
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to
determine our component requirements. It is very important that we accurately
predict both the demand for our products and the lead times required to obtain
the necessary components and materials. Lead times for components and materials
that we order vary significantly and depend on factors such as specific supplier
requirements, the size of the order, contract terms and current market demand
for the components. For substantial increases in production levels, some
suppliers may need six months or more lead-time. If we overestimate our
component and material requirements, we may have excess inventory, which would
increase our costs. If we underestimate our component and material requirements,
we may have inadequate inventory, which could interrupt our manufacturing and
delay delivery of our products to our customers. Any of these occurrences would
negatively impact our net sales.
Current softness in demand and pricing in the communications market
have necessitated a review of our inventory, facilities and headcount. As a
result, we and Luminent recorded in the year ended December 31, 2001 one-time
charges to write down inventory to realizable value and inventory purchase
commitments of approximately $35.4 million.
WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has been brought
against a company following periods of volatility in the market price of its
securities. Due to the volatility and potential volatility of our stock price or
the volatility of Luminent's stock price following its initial public offering,
we may be the target of securities litigation in the future. Additionally, while
Luminent and we informed investors that we were under no obligation to, and
might not, make the distribution to our stockholders of our Luminent common
stock and that we could and might eliminate public ownership of Luminent through
a short-form merger with us, our decisions to abandon our distribution of
Luminent's common stock to our stockholders or to eliminate public ownership of
Luminent's common stock through the merger of Luminent into one of our
wholly-owned subsidiaries may result in securities or other litigation.
Securities or other litigation could result in substantial costs and divert
management's attention and resources.
DEPENDING ON OUR FUTURE ACTIVITIES OR AS A RESULT OF THE POSSIBLE SALE OF ONE OR
MORE OF OUR PORTFOLIO COMPANIES, WE COULD BE FORCED TO INCUR SIGNIFICANT COSTS
TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER ADVERSE CONSEQUENCES IF DEEMED
TO BE AN INVESTMENT COMPANY.
In the past through 2000, we embarked upon a business strategy of
creating, acquiring and managing companies in the optical technology and
Internet infrastructure areas, with a view toward creating equity growth by
operating or investing in these companies and then potentially spinning them
off, taking them public or selling them or our
interest in them. If this strategy proved successful, we were concerned that we
might incur significant costs to avoid investment company status and would
suffer other adverse consequences if deemed to be an investment company under
the Investment Company Act of 1940. The Investment Company Act of 1940 requires
registration for companies that are engaged primarily in the business of
investing, reinvesting, owning, holding or trading in securities. A company may
be deemed to be an investment company if it owns investment securities with a
value exceeding 40% of the value of its total assets (excluding government
securities and cash items) on an unconsolidated basis, unless an exemption or
safe harbor applies. Securities issued by companies other than majority-owned
subsidiaries are generally counted as investment securities for purposes of the
Investment Company Act. Investment companies are subject to registration under,
and compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company, we
would become subject to the requirements of the Investment Company Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable.
As a result of the current economic slowdown in the communications
industry generally and the fiber optic components industry particularly, we have
abandoned plans to spin-off Luminent, one of our subsidiaries, and withdrawn the
initial public offering of Optical Access, another of our subsidiaries. The
economic slowdown and its consequences have caused us to reevaluate our strategy
and to focus currently on holding and operating our existing businesses. This
current focus makes it less likely that we would attain investment company
status. However, if economic and market conditions recover to the point at which
they existed prior to the fourth quarter of 2000, we may return to our prior
strategy which, depending on future events, might again subject us to the
potential risks associated with investment company status, including
registration as an investment company.
Moreover, although our portfolio of investment securities currently
comprises substantially less than 40% of our total assets, fluctuations in the
value of these securities or of our other assets as a result of future economic
conditions or events, or, more likely, the sale of one or more of companies in
exchange for the securities of the purchaser, may cause this limit to be
exceeded. For example, while we have no plans to sell all or any portion of
Luminent to a third party after the merger, we are periodically contacted by
third parties regarding potential transactions and, depending on the proposal,
could complete a sale if we determine that it would be in our best interest and
those of our stockholders. In any case, where our investment securities
resulting from a sale of Luminent or another of our companies or otherwise were
in excess of the 40% limit unless an exclusion or safe harbor was available to
us, in that case, we would have to attempt to reduce our investment securities
as a percentage of our total assets. This reduction could be attempted in a
number of ways, including the disposition of investment securities and the
acquisition of non-investment security assets. If we were required to sell
investment securities, we may sell them sooner than we otherwise would. These
sales may be at depressed prices and we may never realize anticipated benefits
from, or may incur losses on, these investments. We may be unable to sell some
investments due to contractual or legal restrictions or the inability to locate
a suitable buyer. Moreover, we may incur tax liabilities when we sell assets. We
may also be unable to purchase additional investment securities that may be
important to our operating strategy. If we decide to acquire non-investment
security assets, we may not be able to identify and acquire suitable assets and
businesses or the terms on which we are able to acquire these assets may be
unfavorable. The mere existence of these issues could cause us to forego a
transaction, which might otherwise have been beneficial to us.
DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.
We are authorized to issue up to 1,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any series of preferred stock may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividend, liquidation, conversion and redemption rights and
sinking fund provisions. No preferred stock is currently outstanding. The
issuance of any preferred stock could materially adversely affect the rights of
the holders of our common stock, and therefore, reduce the value of our common
stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with, or sell our assets
to, a third party and thereby preserve control by the present management. We are
also subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibit us from engaging in a business
combination with an interested stockholder for a period of three years after
the date of the transaction in which the person became an interested stockholder
unless the business combination is approved in the manner prescribed under
Section 203. These provisions of Delaware law also may discourage, delay or
prevent someone from acquiring or merging with us, which may cause the market
price of our common stock to decline.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MRV is involved in lawsuits, claims, investigations and proceedings,
including patent, commercial and environmental matters, which arise in the
ordinary course of business. There are no matters pending that MRV currently
expects to be material in relation to MRV's business, consolidated financial
condition, results of operations or cash flows.
On March 1, 2002, Rockwell Automation Technologies, Inc. filed a patent
infringement lawsuit against MRV and two of its affiliated companies, Optronics
International Corp. and Luminent, Inc. in U.S. District Court in Delaware.
Several other companies that are not related to MRV were also named as
defendants in the lawsuit. The lawsuit alleges that in January, 1983, a Rockwell
affiliate obtained United States Letters Patent No. 4,368,098 entitled
"Epitaxial Composite and Method of Making" from the U.S. Patent and Trademark
Office. The patent is directed to an organo-metallic process for producing
epitaxial films of Group III-V semiconductor on a single crystal substrate. This
process generally is referred to as Metal Organic Chemical Vapor Deposition, or
MOCVD. The rights to the patent were ultimately assigned to Rockwell. In the
lawsuit, Rockwell alleges that
- it gave a company it calls IQE a nonexclusive, nontransferable
license to import and sell in the United States MOCVD wafers;
- the license prohibited IQE from passing onto others any rights
under the patent, including the right to make, use, sell or
import into the United States MOCVD devices made from MOCVD
wafers; and
- the license required IQE to provide its customers of MOCVD
wafers with written notice that the customers must obtain a
license from Rockwell to use the MOCVD wafers to make, use,
sell or import MOCVD devices into the United States.
IQE has sued Rockwell in another action seeking declaratory relief
that, among other things, IQE has not infringed the patent and that the patent
is invalid and unenforceable. That action is pending. Nevertheless, Rockwell has
claimed in its patent infringement lawsuit against MRV that the defendants
infringed its patent by using at least some of the MOCVD wafers purchased from
IQE or others and/or fabricated wafers themselves that were manufactured by a
process that infringes one or more claims of Rockwell's patent to make, sell
and/or import into the United States MOCVD devices such as laser diodes. In the
litigation, Rockwell claims it has been damaged by the defendants in an
unspecified amount, and seeks to recover those damages, and also seeks an
increase in damages and attorneys' fees for alleged willful infringement.
On April 9, 2002, MRV and its affiliates, on the one hand, and
Rockwell, on the other, signed a tolling agreement under which, among other
things, Rockwell agreed to dismiss its suit against MRV and its affiliates
without prejudice, MRV and its affiliates agreed to treat any suit for
infringement of the above-mentioned patent filed by Rockwell against them within
90 days after final dismissal of Rockwell's litigation against IQE would be
deemed filed on March 1, 2002. In April 2002, shortly following the signing by
the parties of this tolling agreement, Rockwell filed with the court its notice
of voluntary dismissal other patent litigation against MRV and its affiliates.
MRV has received notices from third parties alleging possible
infringement of other patents with respect to product features or manufacturing
processes. For a discussion of these notices and the claims, see Item 1.
Description of Business -- Proprietary Rights in MRV's Annual Report on Form
10-K for the year ended December 31, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable..
(c) During the three months ended March 31, 2002, registrant
issued an aggregate of 6,325,742 shares of its common stock to
two holders of its 5% Convertible Subordinated Notes due 2003
(the "Notes") in exchange for $24.3 million principal amount
of the Notes.
Exemption from the registration requirements is claimed under the
Securities Act of 1933 (the "Securities Act") in reliance on Section 3(a)(9) of
the Securities Act in that the shares were exchanged by registrant with its
existing security holders exclusively where no commission or other remuneration
was paid or given directly or indirectly for soliciting such exchange.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 - Computation of per share earnings - See Note 1 of Notes to
Unaudited Consolidated Condensed Financial Statements.
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the period covered by this
Report, as follows:
(i) A report on Form 8-K dated January 8, 2002 was filed on
January 8, 2002 reporting matters under Item 2 and 7. The
financial statements filed as part of that Report were the
following:
(A) CONSOLIDATED FINANCIAL STATEMENTS OF LUMINENT, INC.
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1999 and 2000
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF
LUMINENT, INC.
Condensed Consolidated Balance Sheets at December 31, 2000 and
September 30, 2001 (unaudited)
Unaudited Condensed Consolidated Statements of Operations the
nine months ended September 30, 2000 and 2001
Unaudited Condensed Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 2001
Notes to Unaudited Condensed Consolidated Financial Statements
(B) Pro forma financial information:
The following pro forma financial information was also filed
as part of that Form 8-K:
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF LUMINENT, INC.
Unaudited Pro Forma Condensed Consolidated Financial
Information
Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the year ended December 31, 2000
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION OF MRV COMMUNICATIONS, INC.
Unaudited Pro Forma Condensed Consolidated Financial
Information
Unaudited Pro Forma Condensed Consolidated Balance Sheet at
September 30, 2001
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 2001
Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2000
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information
(ii) A report on Form 8-K dated February 13, 2002 was filed on
February 13, 2002 reporting matters under Item 5.
SIGNATURE
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant certifies that it has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on May 13, 2002.
MRV COMMUNICATIONS, INC
By: /s/ Noam Lotan
--------------------------------------
Noam Lotan
President and Chief Executive Officer
By: /s/ Shay Gonen
--------------------------------------
Shay Gonen
Chief Financial Officer