Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-25678
MRV COMMUNICATIONS, INC.
(Name of registrant as specified in its charter)
Delaware 06-1340090
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
20415 Nordhoff Street
Chatsworth, California 91311
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (818) 773-0900
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.0017 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $433,597,540 based on the closing sale price at March 29, 2001 as reported
by The Nasdaq National Market.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 74,634,001 at March 31, 2001.
DOCUMENTS INCORPORATED BY REFERENCE:
None
2
The Annual Report on Form 10-K contains forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the Section under Item 1 -
Description of Business - Risk Factors.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
MRV Communications, Inc. creates, acquires, finances and operates
companies, and through them, designs, develops, manufactures and markets
products, which enable high-speed broadband communications. We concentrate on
companies and products devoted to optical components and Internet infrastructure
systems. We have leveraged our early experience in fiber optic technology into a
number of well-focused operating units specializing in advanced fiber optic
components, switching, routing, transaction management and wireless optical
transmission systems which we have created, financed or acquired.
Our principal operating units that constituted wholly or majority owned
subsidiaries at December 31, 2000 were:
- LUMINENT, INC. Luminent designs, manufactures and sells a comprehensive
line of singlemode active and passive fiber optic components for
high-capacity data transmission in the metropolitan and access markets.
Leading network equipment manufacturers rely on Luminent to provide
technical depth, responsive customer service and volume manufacturing to
meet the increasing requirements for transmission capacity and speed
between nationwide telecommunications networks and end users.
In November 2000, Luminent completed an initial public offering of its
common stock, selling 12,000,000 shares at $12 per share and raising net
proceeds of approximately $132.3 million. At December 31, 2000, we owned
92% of the outstanding capital stock of Luminent. We have announced
plans to distribute all of our shares of Luminent common stock to our
stockholders on the later of three months after the receipt of a
favorable private letter ruling from the Internal Revenue Service or six
months after this offering, although we are not obligated to do so.
- OPTICAL ACCESS, INC. Optical Access designs, manufactures and markets
optical wireless products that enable the delivery of high-speed
communications traffic to the portion of the communications network
commonly known as the last mile, which extends from the end user to the
service provider's central office. Optical Access' solutions to the
last-mile bottleneck bypass the incumbent carrier's copper access
network with a comprehensive, integrated access solution,
2
3
using optical wireless technology. The building blocks of Optical
Access' solution include the TereScope(TM), for optical wireless links,
and the OptiSwitch(TM), for switching, provisioning and mesh enabling.
At December 31, 2000, we owned all of the outstanding capital stock of
Optical Access. On October 6, 2000, Optical Access filed a registration
statement with the Securities and Exchange Commission (SEC) for the
initial public offering of its common stock, which has not yet become
effective. Optical Access' common stock may not be sold nor may offers
to buy be accepted, prior to the time the registration statement becomes
effective.
- CESCOMM, INC. CEScomm (formerly Creative Electronic Systems SA or CES)
is developing and providing equipment to manufacturers of cellular
network infrastructure equipment and mobile operators and service
providers for the third generation of wireless solutions commonly known
as 3G. 3G is the generic term used for the next generation of mobile
communications systems. These new systems provide enhanced services to
those available today i.e., voice, text and data. CEScomm specializes in
products that provide the real-time conversion of radio signals
generated by Internet ready mobile devices into asynchronous transfer
mode, or ATM, traffic streams. At December 31, 2000, we owned all of the
outstanding capital stock of CEScomm.
- ITOUCH COMMUNICATIONS, INC. iTouch Communications, Inc. provides
next-generation Internet infrastructure solutions that enable service
providers and carriers to deliver and monitor, on a real-time basis,
high-speed Internet services. iTouch's products combine transaction
management with Internet protocol, or IP, routing and wide-area network,
or WAN, technologies, which allow for faster development of feature rich
high-speed data acquisition and management systems. At December 31,
2000, we owned all of the outstanding capital stock of iTouch.
- NBASE-XYPLEX, INC. NBase-Xyplex provides products and services, such as
the Fiber Driver, to enhance network infrastructures for city carriers,
service providers, cable operators and campus and enterprise networks.
Its products and technologies have been utilized in metropolitan area
fiber-based networks, enabling smart access to the WAN, as well as in
local area network, or LAN, switching, building enterprise/corporate
data networks. At December 31, 2000, we owned all of the outstanding
capital stock of Nbase-Xyplex.
Our development stage companies which we founded or have invested in as
of December 31, 2000 were:
- CHARLOTTE'S NETWORKS, INC. Charlotte's Networks is a start-up company
that is developing a core router for large service providers and
carriers. The Aranea core router is Charlotte's first product. The
Aranea router is capable of carrying both IP packets and time-division
multiplexing, or TDM, voice traffic and enables the current WAN to grow
in high orders of magnitude both in processing power and rate of
transmission. In addition, the router provides multi-services required
by telecommunication companies for efficient and flexible transmission
of voice over data networks. At December 31, 2000, we owned
approximately 53% of the outstanding capital stock of Charlotte's
Networks on a fully diluted basis.
- ZUMA NETWORKS, INC. Zuma Networks is a startup company that is
developing a next generation Gigabit Ethernet switch router platform. At
December 31, 2000, we owned all of the outstanding capital stock of Zuma
Networks.
- OPTICAL CROSSING INC. Optical Crossing designs, develops and
manufactures advanced fiber optic communication components and systems
for the telecommunications industry. At December 31, 2000, we owned
approximately 60% of the outstanding capital stock of Optical Crossing
on a fully diluted basis.
3
4
- ZAFFIRE, INC. Zaffire is focused on developing a next-generation,
optical services networking system for service providers. At December
31, 2000, we owned approximately 22% of the outstanding capital stock of
Zaffire on a fully diluted basis.
- REDC OPTICAL NETWORKS, INC. RedC has developed a complete line of
optical modules used for operating, monitoring and protecting optical
networks including: optical amplifiers, add/drop modules, protection and
restoration modules and dense wave division multiplexing, or DWDM,
monitoring. At December 31, 2000, we owned approximately 35% of the
outstanding capital stock of RedC on a fully diluted basis.
- HYPERCHANNEL LTD. Hyperchannel, which does business under its trademark
Hyporium is an independent Internet market maker for the information
technology, or IT, industry, enabling IT vendors, distributors and
resellers to trade online. Hyporium offers an alternative route to
market through an online trading hub and reseller web storefronts. At
December 31, 2000, we owned approximately 42% of the outstanding capital
stock of Hyperchannel on a fully diluted basis.
Our principal executive offices are located at 20415 Nordhoff Street,
Chatsworth, California 91311 and our telephone number is (818) 773-0900. We
maintain a website at http://www.mrv.com and that website links to certain of
our wholly and majority owned subsidiaries and key technology companies.
Information contained in our Web site or those of any of our affiliates are not
to be considered part of this Report.
BACKGROUND
We were organized in July 1988 as MRV Technologies, Inc., a California
corporation and reincorporated in Delaware in April 1992, at which time we
changed our name to MRV Communications, Inc. Our initial focus was in the
design, manufacture and marketing of semiconductor laser diodes, LEDs, and
fiber optic transmitting and receiving modules for the transmission of large
amounts of information at high speeds over long distances and LAN switching
products for the computer networking industry. From 1995 to 1998, we made
several acquisitions involving companies making networking equipment, including:
- in 1995 of certain assets and the distribution businesses of Galcom
Networking, Ltd. and Ace 400 Communications Ltd, both network equipment
companies located in Israel, which provided us with experienced
personnel and technology for the networking markets;
- in 1996 certain of the liabilities and assets of Fibronics Ltd. and its
subsidiaries, including its technology in progress and existing
technology, its marketing channels, its GigaHub family of computer
networking products and other rights, relating to Fibronics' computer
networking and telecommunications businesses in Germany, the United
States, the United Kingdom, the Netherlands and Israel, enabling us to
enhance the development of Fast Ethernet and Gigabit Ethernet functions,
to offer a broader range of networking products and to benefit from
combined distribution channels and sales in both the United States and
Europe and greater product development capability; and
- in 1998 of the outstanding capital stock of the entity owning the
outstanding capital stock of Xyplex, Inc., a leading provider of access
4
5
solutions between enterprise networks and wide area network and/or
Internet service providers, or ISPs. This acquisition enabled us to
expand our product lines with products that had WAN and remote access
capabilities, permitting us to offer these solutions not only to our own
existing base of customers, but also to the customer base added by
Xyplex. The acquisition of Xyplex (now known as iTouch Communications)
also increased our sales force, distribution channels and customer
support and service capabilities.
During 2000, we completed several strategic acquisitions. These
acquisitions were made to expand our product offering, enhance our technological
expertise and expand our manufacturing capabilities. The table below summarizes
our more notable acquisitions in that year.
Date of Total Form of Consideration
Acquired Company Acquisition Consideration and Other Notes to Acquisition
---------------- ----------- ------------- ------------------------------
Fiber Optic Communications, Inc. April 24, 2000 $310.4 million $48.6 million in cash and 5.4 million
shares of common stock and options
issued; approximately 97% of capital
stock assumed; goodwill recorded of
$261.6 million; deferred stock
compensation recorded of $14.1 million
Jolt Limited May 1, 2000 $57.7 million 1.9 million shares of common stock and
options issued; 100% of capital stock
assumed; goodwill recorded of $33.7
million; deferred stock compensation
recorded of $25.0 million
Quantum Optech Inc. July 12, 2000 $36.2 million 1.2 million shares of common stock and
options issued; 100% of capital stock
assumed; goodwill recorded of $27.9;
deferred stock compensation recorded of
$2.7 million
AstroTerra Corporation July 12, 2000 $160.3 million 2.4 million shares of common stock and
options issued; 100% of capital stock
assumed; goodwill recorded of $108.3
million; deferred stock compensation
recorded of $50.0 million
Optronics International Corp. July 21, 2000 $124.3 million 4.2 million shares of common stock and
options issued; approximately 99% of
capital stock assumed; goodwill
recorded of $99.5 million; deferred
stock compensation recorded of $13.4
million
Each of these acquisitions was accounted for using the purchase method and
therefore, the results of operations of the acquired businesses have been
included in our consolidated financial statements from the respective dates of
acquisition.
Fiber Optic Communications is a Taiwanese manufacturer of passive fiber
optic components for wavelength division multiplexing and has facilities in both
Taiwan and the People's Republic of China. Quantum Optech is a Taiwanese
manufacturer of passive fiber optic components specializing in
5
6
developing and manufacturing optical thin film coating and filters for dense
wavelength division multiplexing. Optronics International is a Taiwanese
manufacturer of active fiber optic components focused on developing and
manufacturing high temperature semiconductor lasers, transceivers and detectors
for optical networks. Fiber Optic Communications, Quantum Optech and Optronics
International were acquired and contributed to Luminent in September 2000 as
part of our plan to complete an initial public offering of our fiber optics
components business and eventually spin-off this business to our stockholders.
AstroTerra develops and manufactures free-space optical wireless
communication systems to connect data and telecommunications networks. Jolt
develops and manufactures multi-port wireless optics communications equipment.
These acquisitions provided strategic components and technology for Optical
Access' wireless optical solution. AstroTerra and Jolt were acquired and will be
contributed to our subsidiary, Optical Access, as part of part of our plan to
complete an initial public offering of our business which focuses on optical
wireless products that deliver high-speed communications traffic to the
so-called last mile portion of the communications network and eventually
spin-off this business to our stockholders.
RISK FACTORS
From time to time we may make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" we are hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statements made by or on behalf of the
Company. Any such statement is qualified by reference to the following
cautionary statements:
WE INCURRED A NET LOSS IN THE YEAR ENDED DECEMBER 31, 2000, PRIMARILY AS A
RESULT OF THE AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED
COMPENSATION CHARGES FROM RECENT ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR
NET LOSSES FOR THE FORESEEABLE FUTURE.
We reported a net loss of $153.0 million for the year ended December 31,
2000. A major contributing factor to the net loss was due to amortization of
goodwill and deferred stock compensation related to the acquisitions of Fiber
Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's President and Chief Financial Officer.
We will continue to record amortization of goodwill and deferred stock
compensation relating to these acquisitions and our employment arrangements with
Luminent's executives going forward. As a consequence of this amortization of
goodwill and deferred stock compensation charges, we do not expect to report net
income in the foreseeable future.
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 such 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
6
7
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 change 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 such errors in the future, and our
inability to correct such errors quickly or at all, could result in the delay or
loss of market acceptance of our products. It could also result in material
warranty expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with our customers, system
integrators and end users. Any of these or other eventualities resulting from
defects in our products could have a material adverse effect on our business,
operating results and financial condition.
OUR GROWTH RATE MAY BE LOWER THAN HISTORICAL LEVELS AND OUR RESULTS COULD
FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our revenues may grow at a slower rate in the future than we have
experienced in previous periods and, on a quarter-to-quarter basis, our growth
in revenue may be significantly lower than our historical quarterly growth
rates. Our operating results for a particular quarter are extremely difficult to
predict. Our revenue and operating results could fluctuate substantially from
quarter to quarter and from year to year. This could result from any one or a
combination of factors such as
- the cancellation or postponement of orders,
7
8
- the timing and amount of significant orders from our largest customers,
- our success in developing, introducing and shipping product enhancements
and new products,
- the mix of products we sell,
- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions or deferred compensation
charges,
- new product introductions by our competitors,
- pricing actions by our competitors or us,
- the timing of delivery and availability of components from suppliers,
- changes in material costs, and
- general economic conditions.
Moreover, the volume and timing of orders we receive during a quarter are
difficult to forecast. From time to time, our customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, our operating results could be materially adversely affected.
We can give no assurance that these factors or others, such as those discussed
below regarding the risks we face from our international operations or the risks
discussed immediately below, would not cause future fluctuations in operating
results. Further, there can be no assurance that we will be able to continue
profitable operations.
THE 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 life-time 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.
MACROECONOMIC FACTORS COULD NEGATIVELY IMPACT OUR GROWTH PLAN.
Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, could detrimentally impact demand for communication products, thereby
resulting in reduced demand for optical components in general. These factors
could negatively affect our ability to execute our growth plan.
8
9
As a result of recent unfavorable economic conditions and reduced
capital spending, sales to service providers, network equipment companies,
e-commerce and Internet businesses, and the manufacturing industry in the United
States, were impacted during the last quarter of 2000 and appear to be similarly
impacted in the first quarter of 2001. Announcements by industry participants
and observers indicate there is a slowdown in industry spending and participants
are seeking to reduce existing inventories. If the economic conditions in the
United States worsen generally or in the fiber optics and networking equipment
businesses particularly, or if a wider or global economic slowdown occurs, we
may experience a material adverse impact on our business, operating results, and
financial condition.
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 who
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.
FLUCTUATIONS IN THE PRICE OF THE COMMON STOCK OF OUR PUBLICLY TRADED SUBSIDIARY,
LUMINENT, INC., MAY AFFECT THE PRICE OF OUR COMMON STOCK.
The stock of our subsidiary, Luminent began trading publicly in November
2000. We own approximately 92% of Luminent. On March 29, 2001, our equity
interest in Luminent had a market value $333 million (based on Luminent's
closing price of $2.3125 per share on that date), which is significant with
respect to our market value of approximately $464 million (based on a closing
price of $6.2188 per share of our common stock on that date). Fluctuations in
the price of Luminent's common stock are likely to
9
10
affect the price of our common stock. The market price of Luminent's common
stock has been highly volatile and subject to fluctuations unrelated or
disproportionate to its operating performance.
OUR BUSINESS STRATEGY MAY NOT BE SUCCESSFUL IF VALUATIONS OF OPTICAL TECHNOLOGY
AND NETWORKING INFRASTRUCTURE COMPANIES CONTINUE TO DECLINE.
Our strategy involves creating value for our stockholders and the owners
of our subsidiaries and partner companies by helping our subsidiaries and
partner companies grow and access the public and private capital markets.
Therefore, our success is dependent on acceptance by the public and private
capital markets of optical technology and networking infrastructure companies in
general and of initial public offerings of those companies in particular. If the
capital markets for networking infrastructure companies or the market for
initial public offerings of those companies remains weak for an extended period
of time, our subsidiaries and partner companies may not be able to complete
initial public offerings and thus the value we hope to create for our
stockholders may not be realized.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking products are
intensely competitive and subject to frequent product introductions with
improved price/performance characteristics, rapid technological change and the
continual emergence of new industry standards. We compete and will compete with
numerous types of companies including companies that have been established for
many years and have considerably greater financial, marketing, technical, human
and other resources, as well as greater name recognition and a larger installed
customer base, than we do. This may give such competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. In addition, many of our large competitors offer
customers broader product lines, which provide more comprehensive solutions than
our current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of such price decreases
may have an adverse impact on our results of operations or financial condition.
There has been a trend toward industry consolidation for several years.
We expect this trend toward industry consolidation to continue as companies
attempt to strengthen or hold their market positions in an evolving industry. We
believe that industry consolidation may provide stronger competitors that are
better able to compete. This could have a material adverse effect on our
business, operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We have grown rapidly in recent years, with revenues increasing from
$88.8 million for the year ended December 31, 1996, to $319.4 million for the
year ended December 31, 2000. Our growth, both internally and through the
acquisitions we have made has placed a significant strain on our financial and
management personnel and information systems and controls. As a consequence, we
must continually implement new and enhance existing financial and management
information systems and controls and must add and train personnel to operate
such systems effectively. Our delay or failure to implement new and enhance
existing systems and controls as needed could have a material adverse effect on
our results of operations and financial condition in the future. Our intention
to continue to pursue a growth strategy can
10
11
be expected to place even greater pressure on our existing personnel and to
compound the need for increased personnel, expanded information systems, and
additional financial and administrative control procedures. We can give no
assurance that we will be able to successfully manage operations if they
continue to expand.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of our
operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the last three years:
Year ended Percent of total revenue
December 31, from foreign sales
- ------------------ -------------------------
1998 59%
1999 58
2000 63
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. 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;
11
12
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
Our sales are currently denominated in U.S. dollars and to date our
business has not been significantly affected by currency fluctuations or
inflation. However, as we conduct business in several different countries,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in such countries could increase our expenses. The Single
European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. We have made and
expect to continue to make changes to our internal systems in order to
accommodate doing business in the Euro. Any delays in our ability to be
Euro-compliant could have an adverse impact on our results of operations or
financial condition. Due to numerous uncertainties, we cannot reasonably
estimate at this time the effects a common currency will have on pricing within
the European Union and the resulting impact, if any, on our financial condition
or results of operations.
To date, we have not hedged against currency exchange risks. In the
future, we may engage in foreign currency denominated sales or pay material
amounts of expenses in foreign currencies and, in such event, may experience
gains and losses due to currency fluctuations. Our operating results could be
adversely affected by such fluctuations or as a result of inflation in
particular countries where material expenses are incurred.
THE SLOWDOWN IN GROWTH RATES IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR GROWTH.
Our success is dependent, in part, on the overall growth rate of the
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 decrease in industry growth rates. In
addition, we can give no assurance that our results in any particular period
will fall within the ranges for growth forecast by market researchers.
WE 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 such products on a timely
basis, the loss of a vendor or a change in the terms and conditions of the
outsourcing would have a material adverse effect on our business, operating
results and financial condition.
12
13
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 such
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 such equipment.
Wafer fabrication is sensitive to many factors, including variations and
impurities in the raw materials, the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. We can
give no assurance that we will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects
that would complement our existing companies and products, augment our market
coverage and distribution ability or enhance our technological capabilities.
Future acquisitions could have a material adverse effect on our
business, financial condition and results of operations because of the
- 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 related to goodwill and other
intangible assets and deferred compensation charges similar to those
arising with the acquisitions of FOCI, OIC, QOI, Jolt and Astroterra in
2000;
- difficulties assimilating the acquired operations, technologies and
products;
13
14
- 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.
WE CANNOT PREDICT THE IMPACT OF RECENT ACTIONS AND COMMENTS BY THE SEC.
Actions and comments from the SEC have indicated they are reviewing the
current valuation methodology of in-process research and development related to
business combinations. We believe we are in compliance with all of the existing
rules and related guidance as applicable to our business operations. However,
the SEC may change these rules or issue new guidance applicable to our business
in the future. There can be no assurance that the SEC will not seek to reduce
the amount of in-process research and development previously expensed by us.
This would result in the restatement of our previously filed financial
statements and could have a material adverse effect on our operating results and
financial condition for periods subsequent to the acquisitions.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications will
be approved, that any patents that may issue will protect our intellectual
property or that third parties will not challenge any issued patents. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us. We cannot be certain that the steps
we have taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Any such litigation, regardless of
outcome, could be expensive and time consuming, and adverse determinations in
any such litigation could seriously harm our business.
WE COULD BECOME SUBJECT TO LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD BE COSTLY AND SUBJECT US TO SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard, in March 1999,
we received a written notice from Lemelson Foundation Partnership in which
Lemelson claimed to have patent rights in our vision and automatic
identification operations, which are widely used in the manufacture of
electronic assemblies. In April 1999, we received a written notice from Rockwell
International Corporation in which Rockwell claimed to have patent rights in
certain technology related to our metal organic chemical vapor deposition, or
MOCVD, processes. In October 1999, we received written notice from Lucent
Technologies, Inc. in which Lucent claimed we have violated certain of Lucent's
patents falling into the general category of communications technology, with a
focus on networking functionality. In October 1999, we received a written notice
from Ortel Corporation, which has since been acquired by Lucent, in which Ortel
claimed to
14
15
have patent rights in certain technology related to our photodiode module
products. In July 2000, we received written notice from Nortel Networks which
claimed we violated Nortel's patent relating technology associated with local
area networks. We are evaluating the patents noted in the letters. Others'
patents, including Lemelson's, Rockwell's, Lucent's, Ortel's and Nortel's, may
be determined to be valid, or some of our products may ultimately be determined
to infringe the Lemelson, Rockwell, Lucent, Ortel and Nortel's patents, or those
of other companies. Lemelson, Rockwell, Lucent, Ortel or Nortel 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 or Nortel, 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 any of these
individuals, and the policies are not applicable in the event that any of them
becomes disabled or is otherwise unable to render services to us.
OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to develop, manufacture and market our products, 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 such personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, like those with Dr. William R. Spivey,
15
16
the President and Chief Executive of Luminent, that 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.
WE MAY INCUR SIGNIFICANT COSTS TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER
ADVERSE CONSEQUENCES IF DEEMED TO BE AN INVESTMENT COMPANY.
We may incur significant costs to avoid investment company status and
may suffer other adverse consequences if deemed to be an investment company
under the Investment Company Act of 1940. The Investment Company Act of 1940
requires registration for companies that are engaged primarily in the business
of investing, reinvesting, owning, holding or trading in securities. A company
may be deemed to be an investment company if it owns "investment securities"
with a value exceeding 40% of the value of its total assets (excluding
government securities and cash items) on an unconsolidated basis, unless an
exemption or safe harbor applies. Securities issued by companies other than
majority-owned subsidiaries are generally counted as investment securities for
purposes of the Investment Company Act. Investment companies are subject to
registration under, and compliance with, the Investment Company Act unless a
particular exclusion or safe harbor provision applies. If we were to be deemed
an investment company, we would become subject to the requirements of the
Investment Company Act. As a consequence, we would be prohibited from engaging
in business or issuing our securities as we have in the past and might be
subject to civil and criminal penalties for noncompliance. In addition, certain
of our contracts might be voidable.
Registration as an investment company would subject us to restrictions
that are inconsistent with our fundamental business strategy of equity growth
through creating, acquiring, building and operating optical components and
network infrastructure companies. Although our investment securities currently
comprise substantially less than 40% of our total assets, fluctuations in the
value of these securities or of our other assets may cause this limit to be
exceeded. In that case, unless an exclusion or safe harbor was available to us,
we would have to attempt to reduce our investment securities as a percentage of
our total assets. This reduction can be attempted in a number of ways, including
the disposition of investment securities and the acquisition of non-investment
security assets. If we were required to sell investment securities, we may sell
them sooner than we otherwise would. These sales may be at depressed prices and
we may never realize anticipated benefits from, or may incur losses on, these
investments. We may be unable to sell some investments due to contractual or
legal restrictions or the inability to locate a suitable buyer. Moreover, we may
incur tax liabilities when we sell assets. We may also be unable to purchase
additional investment securities that may be important to our operating
strategy. If we decide to acquire non-investment security assets, we may not be
able to identify and acquire suitable assets and businesses or the terms on
which we are able to acquire such assets may be unfavorable.
16
17
OUR ABILITY TO ISSUE PREFERRED STOCK COULD ADVERSELY AFFECT THE RIGHTS OF
HOLDERS OF COMMON STOCK AND DETER A TAKE-OVER.
We are authorized to issue up to 1,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the board of directors without further
action by stockholders. The terms of any such series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently outstanding.
The issuance of any such preferred stock could materially adversely affect the
rights of the holders of our common stock, and therefore, reduce the value of
our common stock. In particular, specific rights granted to future holders of
preferred stock could be used to restrict our ability to merge with, or sell our
assets to, a third party and thereby preserve control by the present management.
INDUSTRY BACKGROUND
As e-commerce and the Internet continue to proliferate, business
enterprises are increasingly reliant on communications networks and software
applications as critical strategic assets. Communications networks are being
expanded to deliver new services and distribute mission critical computing
applications such as customer network management, transaction processing,
enterprise resource planning, large enterprise databases, and sophisticated
on-line connections with vendors, and the increased use of traditional
applications, such as e-mail, video conferencing, to suppliers, customers and
employees. Bandwidth intensive applications that contain voice, video and
graphics through intranets and extranets, and growth in business-to-business
e-commerce and other on-line transactions are encumbering the optical networking
and internet infrastructure environment. Due to the significant growth of
network users who increasingly rely on secure access for higher speed and
quality of communications networks, even small network delays can result in lost
revenue, decreased employee productivity and customer dissatisfaction. As a
result, businesses and network service providers are realizing the critical
nature of network and application performance and the requirement for optical
networking and fiber optic equipment that increases the capacity through high
speed and more efficient transmission technologies.
Optical networking and internet infrastructure systems enhance the
carrier and network service provider networks by handling bandwidth and
providing enhanced services. Fiber optic transmission components enhance the
functionality of enterprise and residential access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Network service providers and carriers are reliant on higher value data centric
network services and are accordingly rapidly deploying next generation solutions
to accommodate the data service requirements
Growth in the use and availability of wide area networks is being
stimulated by many factors including the need to share information between
centralized repositories and remote enterprise locations, to access and use the
Internet for communications and marketing and to electronically access external
resources used by the enterprise. Growth is also being fueled by the increasing
availability of more cost-effective WAN services such as Frame Relay and
Integrated Service Digital Network ("ISDN") making it more affordable for many
organizations to set up a WAN or expand an existing one. The growth in the use
and availability of the Internet coupled with increasing use, power, speed and
complexity of metropolitan area networks ("MANs") and WANs has resulted in the
increasing need for equipment that permits high speed connections throughout the
infrastructure of the Internet.
OPTICAL NETWORKING AND INTERNET INFRASTRUCTURE ENVIRONMENT
The Internet has evolved into a network of hundreds of public and
private networks interconnected using Internet Protocol ("IP"). Industry
analysts expect continued dramatic growth worldwide in Internet use and Internet
traffic. As the Internet continues to explode, business enterprises are
increasingly reliant on
17
18
communications networks and software applications as strategic assets that are
critical to business success. Communications networks are being expanded to
deliver new services and distribute computing applications such as customer
networks management, e-mail, video, conferencing, and Voice Over Internet
Protocol ("VoIP") to suppliers, customers and employees.
While consumers use the Internet for education and communication,
business and service providers are realizing the critical nature of network and
application performance.
According to an industry report, RHK, a leading telecommunications
industry market research and consulting firm, projects a 300-fold increase in
demand for network bandwidth in the next eight to 10 years and Advantis, another
industry research firm proclaims that high-speed connections to the Internet
will drive demand for more capacity among network operators. This report also
refers to a study from Infonetics Research predicting that spending among large
nationwide telecommunications carriers will grow 220 percent, from $13.3 billion
in 2000 to $42.5 billion in 2004, further supporting the prediction that demand
will continue as operators try to keep up with the latest technology.
To meet the growth in the demand for high-speed data services, service
providers are investing heavily to construct and upgrade the transmission
foundation of the public network infrastructure worldwide. The public network
infrastructure, which was originally built for voice traffic, is inadequate to
handle data and must be rapidly upgraded. Current expenditures are spread across
fiber deployment, dense wavelength division multiplexing, or DWDM, products,
Synchronous Optical Network ("SONET") transmission equipment sand more recently,
intelligent optical networking solutions.
Advances in emerging intelligent optical networking market should
fundamentally change the architecture of the public network and create a host of
new opportunities in infrastructure development, service delivery and
applications. Intelligent optical networking offers a solution to public network
scaling and high-speed service delivery.
Intelligent optical networking will eventually deliver high speed data
services provisioned over wavelengths and intelligent optical light paths. The
flexibility and scalability of wave service is expected to offer service
providers the ability to satisfy this demand for increased bandwidth while
creating competitive differentiation in their service portfolio with
"just-in-time" provisioning capability.
FIBER OPTIC ENVIRONMENT
Fiber optic cable can generally carry more information at less expense
and with greater signal quality than copper wire. The higher the speed of
transmission, the greater the capacity and the larger the span of the network,
the more essential is fiber optic transmission. Fiber has long replaced copper
as the preferred technology for long distance communications and major backbone
telephony and data transmissions. Due to its advantages, fiber optic technology
is also increasingly used to enhance performance and capacity within enterprise
networks and access networks. As a result, the market for fiber optic products
continues to grow both domestically and internationally.
Demand for fiber optic transmission components is driven by four
factors: (i) fiber applications have expanded beyond traditional telephony
applications and are being deployed in enterprise network backbones to support
high-speed data communications; (ii) within access networks, fiber is rapidly
expanding downstream toward end-users as access networks deploy
"Fiber-in-the-Loop" and fiber to the curb, or FTTC architectures to support
services such as fast Internet access and interactive video; (iii) the growth of
cellular communications and PCs requires fiber to be deployed both within and
between cells; and (iv) the usage of fiber in short distances increases the
demand for components as more are used per mile of fiber. As the size, number
and
18
19
complexity of these fiber networks increases, management expects that the demand
for fiber optic components will grow significantly.
Fiber Optic Transmission in Data Communications. As higher speed
connections are implemented in LAN/WAN systems, fiber optic transmission becomes
an essential element in computer networks. For transmission speeds of 100 Mbps
and higher, and transmission distances of 100 meters and longer, fiber optic
transmission must be deployed. Virtually all high-speed transmission standards,
such as Fiber Distributed Data Interface ("FDDI"), Asynchronous Transfer Mode
("ATM"), Fast Ethernet and Gigabit Ethernet, specify fiber optic media as the
most practical technology for transmission. The steady rise in high-speed
connections and the growth in the span of networks, including the need to
connect remote workgroups, are driving the deployment of fiber optic cable
throughout enterprise networks.
Fiber Optic Transmission in Access Networks. To meet end users'
increased demand for content, software and services, network operators must
acquire additional bandwidth by either enhancing their existing networks or
constructing new ones. Cable TV operators are increasingly seeking to provide
general telecommunication services, high-speed Internet access and
video-on-demand. As a result, they are now faced with the need to transmit
"upstream," from customer premises to the cable TV operator and to send
different signals to individual end-users. Similarly, local exchange carriers
("LECs") are implementing new technological standards, such as SONET and
fiber-intensive architectures such as FTTC to enable high-speed Internet access
and the delivery of cable TV and Internet services to the home. Management
believes that deployment of and upgrades to these systems will increase the
demand for the Company's fiber optic components that typically are better able
to endure environmental factors, such as rain, snow, heat and wind,
cost-effectively. In addition, cellular and PCS communications represent a fast
emerging market for fiber optic networks, including their usage in the backbone
and landline portion of wireless networks.
MRV'S CONCENTRATION
We create, acquire, finance and operate companies, and through them,
design, develop, manufacture and market products, which enable high-speed
broadband communications. We concentrate on companies and products devoted to
optical components and network infrastructure systems. We have leveraged our
early experience in fiber optic technology into a number of well-focused
operating units specializing in advanced fiber optic components, switching,
routing, transaction management and wireless optical transmission systems which
we have created, financed or acquired. Products and product developments of our
wholly or majority owned subsidiaries include the following:
LUMINENT, INC.
Luminent provides an extensive offering of active and passive singlemode
fiber optic components that support a wide range of requirements for the
metropolitan and access networks. It is currently shipping a variety of active
and passive fiber optic components. Active components are the core technology
for optical networks and require electrical power to generate, boost or
transform optical signals. Luminent's active components include:
- Mixed signal, single fiber components, called duplexers and triplexers,
which are capable of transmitting bi-directional digital and analog
information over a single fiber;
- A wide variety of transceivers, the most common fiber-optic data link.
Transceivers have both a transmitter and receiver built into one unit. A
transmitter converts electrical signals into optical signals and
launches them into the fiber. A receiver receives the optical signal,
converts it back to an electrical signal and amplifies it;
- Coarse WDM subsystems, which enable communications equipment
manufacturers to implement wavelength division multiplexing inside their
equipment at a fraction of the cost of dense WDM;
19
20
- Light emitting diodes, or LEDs, used as a light source for fiber optic
transmission;
- Laser diodes, which convert electrical signals to optical signals and
are the most widely used light sources for optical communications
systems;
- Analog fiber optic links, which are used in cable television, cellular,
satellite and wireless local area networks transmissions;
- Photo detectors, which convert optical signals into electrical signals
and receivers that include photo detectors with electrical amplifiers
for greater functionality; and
- Electro-optic modulators, which are used to transfer information onto a
light signal without the modifying wavelength of the light and enable
data to travel extended transmission distances compared to a directly
modulated laser;
Luminent's passive fiber optic components are used to direct, split and
merge optical signals without the use of electricity. These components have
become critical due to the use of fiber amplifiers, passive networks and WDM
technology. Luminent's passive components include:
- A wide variety of couplers, one of the most common components of any
optical network, used to combine and/or split optical signals;
- Isolators, which allow transmission of optical signals in one direction
but block transmission in the other direction;
- WDM thin film add/drop components, which enable the transmission of
specific optical wavelengths and the reflection of others and allow for
the removal and insertion of wavelengths in WDM systems with minimal
power losses;
- Optical circulators, which are used in wavelength management
applications to direct optical signals to the appropriate sections of
the system;
- Variable fiber optic attenuators, which reduce the amplitude of a signal
without distorting the waveform and are used to equalize the power
between different WDM channels before being amplified by a fiber
amplifier;
- Optical connectors, which are used to couple light either directly from
a component or from another fiber; and
- Adapters, which facilitate the connection of any two connectors.
OPTICAL ACCESS, INC.
Optical Access is an optical networking and Internet infrastructure
company that designs, manufactures and markets optical wireless products
enabling service providers to offer high-speed broadband access within the last
mile of the communications network in a cost effective and timely manner.
Optical Access' products are designed to be deployed in a switched mesh
architecture, which means that its products allow transmission of data between
any two points on the network and enable full re-routing of traffic around a
transmission link or equipment failure. In addition, its products feature a
backup wireless radio frequency option, which reduces problems associated with
adverse weather conditions. Optical Access offers the TereScope family of
products, which provide optical wireless links, and an OptiSwitch(TM) products,
which enable switching, provisioning and aggregation. All of these products can
be remotely managed through Optical Access' MegaVision network management
system. Because each of it products can perform independently, Optical Access's
customers can also purchase products separately with no performance degradation.
TereScope. TereScope products are optical wireless links that utilize
high-powered optics, which allow for high-speed, long distance optical wireless
transmission of data. By installing its TereScope products in a mesh
configuration with a minimum of two connections into each building and utilizing
Optical Access' OptiSwitch(TM) switching technology, Optical Access' products
enable full re-routing of traffic around a link or
20
21
equipment failure. Optical Access believes that its TereScope products offer one
of the first commercially available wireless optic systems with built-in auto
fallback to radio frequency links.
TereScope devices can be installed on a building's rooftop or side or in
an office behind a window rather than a radio tower. They are constructed with a
transmitter, which emits light that does not damage the human eye, and a
receiver that detects light. Optical Access offers a range of TereScope
products, the smallest of which looks like a security camera and the largest of
which is the size of a computer monitor. The products feature a number of
recently developed technologies to account for issues that have historically
limited the use of optical wireless systems, including a system that enables
them to compensate for misalignment due to building movements or interference
caused by flying objects such as birds. In addition, TereScope products feature
high power laser transmitters and large optical receivers to permit connectivity
over longer distances. The TereScope ranges in list price from approximately
$4,000 to $120,000, depending on data rate and maximum range, with an additional
$5,000 to $10,000 for a 10 megabit per second radio frequency backup.
OptiSwitch(TM). Optical Access' family of OptiSwitch(TM) products
enables a mesh architecture, bandwidth distribution, provisioning and
termination for all-IP networks. The OptiSwitch is designed to provide customer
premise connectivity to business users, smart aggregation and to enable
execution of any service level agreement by advanced features and capabilities
of traffic classification and quality of service. Direct connection of the
OptiSwitch(TM) ports to TereScope products allow service providers to offer a
complete cost-effective metropolitan solution. The system is designed to manage
optical wireless mesh topology management and subscriber management in Ethernet
broadband networks. The OptiSwitch(TM) products range in price from $1,400 to
$190,000, depending upon data rate and number of ports.
MegaVision. Optical Access' MegaVision management system provides
software based graphical network management and monitoring that is fully
integrated with its optical transmission and switching products. The MegaVision
network management system allows service providers to provision their networks
from a centralized location. With the graphical interface offered by Optical
Access, the provider receives a comprehensive view of the network as well as
fault isolation, configuration, performance and security management of the
network.
CESCOMM, INC. (FORMERLY CREATIVE ELECTRONIC SYSTEMS SA OR CES)
CEScomm is developing and providing products for manufacturers of
cellular network infrastructure equipment and mobile operators and service
providers for the third generation of wireless solutions commonly known as 3G.
3G is the generic term used for the next generation of mobile communications
systems. These new systems provide enhanced wireless services to those available
today i.e., voice, text and data. CEScomm specializes in products that provide
the real-time conversion of radio signals generated by Internet ready mobile
devices into asynchronous transfer mode, or ATM, traffic streams. Its products
are based on distributed architectures that cluster super computer
multi-processing capabilities between the radio access network and the Internet
protocol, or IP, core network.
CEScomm's products make it possible for 3G mobile network operators and
equipment vendors to deliver more efficient service with enhanced options. End
users of CEScomm's products include leading 3G wireless network operators such
as NTT DoCoMo, the cellular telephone arm of Nippon Telegraph and Telephone
Corporation in Japan, and European operators using the Universal Mobile
Telecommunications System, or UMTS. CEScomm sells its products to leading
cellular equipment vendors, including Lucent Technologies, Nortel Networks and
Ericsson.
21
22
ITOUCH COMMUNICATIONS, INC.
iTouch provides next-generation Internet infrastructure solutions that
enable service providers and carriers to deliver and monitor, on a real-time
basis, high-speed Internet services. ITouch's products utilize internet
protocol, or IP, routing and wide area network, or WAN, technologies, which
allow for faster development of feature rich high-speed data acquisition and
management systems.
iTouch's In-Reach product suite supports network element management and
out-of-band management applications for large, heterogeneous communication
networks. In-Reach products offer console, alarm, sensor and power management
solutions and possess features ranging from simple network management protocol,
or SNMP, -based discrete alarm signal collection and distribution to remote
console management of routers, switches, and equipment from Sun Microsystems and
other providers. Standalone and chassis-based In-Reach products enable upgrades
at central sites and downloads of software to thousands of remote network
elements.
NBASE-XYPLEX, INC.
NBase-Xyplex provides products and services, such as the Fiber Driver
family of products, to enhance network infrastructures for city carriers,
service providers, cable operators and campus and enterprise networks. The Fiber
Driver family of products focuses on providing more effective usage of
fiber-optic cables for carriers, service providers, cable operators and campus
and enterprise networks. The Fiber Driver product line is designed to address
the growing need for connecting networks of different media and speed into
today's expanding fiber optic infrastructure.
The Fiber Driver family consists of over 150 different converters,
repeaters, switches, distance extenders and Coarse Wave Division Multiplexer)
modules, all of which operate on the same modular, and scalable platform. Each
module provides a different solution and together the family covers almost every
communication protocol. The family includes a base chassis in one, two, four and
16 slot varieties and is fully managed through any network management system
based on simple network management protocol, or SNMP, including the MegaVision
network management system discussed above under Optical Access.
CHARLOTTE'S NETWORKS, INC.
Charlotte's is developing a core router for large service providers and
carriers. The Aranea core router is Charlotte's first product. The Aranea router
is capable of carrying both IP packets and time-division multiplexing, or TDM,
voice traffic and enables the current WAN to grow in high orders of magnitude
both in processing power and rate of transmission. The router has the ability to
emulate a class 4 or 5 switch, enabling its voice traffic capability. It offers
various interfaces and allows multiple Aranea machines to be clustered into a
single virtual router for ultra-high speed. This feature allows construction of
a machine with an aggregate bandwidth of multiple terabits per second. The
Aranea can be configured to combine up to 16 port interfaces of any kind into a
single dense wavelength division multiplexing link of up to 40 Gbps. The
clustered machines may be managed as a single virtual router through the
operating system or AROS. The Aranea is designed to meet the exact requirements
of new generation telecommunication service providers in terms of bandwidth,
differentiated services, scalability and reliability and is positioned to take
advantage of the explosive growth predicted for the WAN or terabit router
segment of the router market. According to recent analyst's estimates, this
segment is expected to grow from less than $1 billion in 1999 to over $14
billion in 2003.
ZUMA NETWORKS, INC.
Zuma is developing a next generation gigabit Ethernet switch router
platform. The platform is distinguished by very high gigabit ethernet port
density in a single chassis, outstanding packet forwarding performance; a
multi-processor, multi-component hardware architecture supporting carrier class
survivability;
22
23
and a multi-processor software architecture supporting the coupling of wire
speed switch routing functions with wire speed network services in a single
platform. This router, named Zuma LightReef(TM) entered beta trials in December
2000.
OPTICAL CROSSING
Optical Crossing's core expertise is in free-space laser communications
and semiconductor optoelectronic components. Optical Crossing has three internal
product groups - Optoelectronics Products, Optical Wireless Products and
Networking Products and Services - that address multiple aspects of optical
wireless technology, from components to architectural implementation of
all-optical networks. Products are currently in the prototyping and development
stage.
OTHER KEY TECHNOLOGY INTERESTS
In addition to our wholly owned and majority owned companies, we have
significant interests in other key technology companies, including Zaffire, Inc.
RedC Optical Networks and Hyperchannel Ltd.
Zaffire is focused on developing a next-generation, optical services
networking system for regional and metropolitan telecommunications networks.
Zaffire offers a packet-enabled, DWDM optical solution designed specifically for
deployment in metropolitan and regional-area networks.
RedC Optical Networks has developed a complete line of optical modules
used for operating, monitoring and protecting optical networks including:
optical amplifiers, add/drop modules, protection and restoration modules and
DWDM monitoring.
Hyperchannel, which does business under its trademark Hyporium is an
independent net market maker for the information technology, or IT, industry,
enabling IT vendors, distributors and resellers to trade online. Hyporium offers
an alternative route to market through an online trading hub and reseller web
storefronts.
SALES AND MARKETING
Each of our operating company maintains its own separate sales and
marketing staffs, enabling the sales personnel to develop strong customer
relationships and expertise in their respective areas. Each company has
established their own direct sales force experienced in each subsidiary's
business to address the new and evolving requirements of their business arena.
Our companies have sold their products worldwide to over 500 diverse
customers in a wide range of industries; primarily, data communications,
telecommunications and cable. No customer accounted for more than 10% of our
consolidated revenues in 1998, 1999 or 2000.
Our companies and we employ various methods, such as public relations,
advertising, and trade shows to build awareness of our products. Public
relations activities are conducted both internally and through relationships
with outside agencies. Major public relation activities are focused around new
product introductions, corporate partnerships and other events of interest to
the market. The Company supplements its public relations through media
advertising programs and attendance at various trade shows throughout the year,
both in the United States and internationally.
23
24
SALES, SUPPORT AND DISTRIBUTION
We continually seek to augment and increase our distribution channels
and sales forces to accelerate our growth. Products are sold through our
operating companies direct sales forces, VARs, systems integrators,
distributors, manufacturer's representatives and OEM customers. sales and
distribution divisions are organized along five primary lines: direct sales,
OEM, domestic and international distributors, VARs and systems integrators and
manufacturer's representatives; and domestic and international distributors.
Direct Sales. Our companies employ worldwide direct sales forces
primarily to sell their products to large OEM accounts and in some cases to end
users. We believe that a direct sales force can best serve large customers by
allowing salespeople to develop strong, lasting relationships which can
effectively meet the customers' needs. Direct sales staffs are located across
the United States, Europe and Israel.
Domestic and International Distributors. Our companies and we work with
both domestic and international distributors. Geographic exclusivity is normally
not awarded unless the distributor has exceptional performance. Distributors
must successfully complete our training programs and provide system
installation, technical support, sales support and follow-on service to local
customers. Generally, distributors have agreements with a one year term subject
to automatic renewal unless otherwise canceled by either party. In certain cases
with major distributors, the agreements are terminable on 30 days' notice. We
use stocking distributors, which purchase our product and stock it in their
warehouse for immediate delivery, and non-stocking distributors, which purchase
our products after the receipt of an order. Internationally, we sell through
over 100 distributors in Asia, Africa, Europe, Australia, the Middle East,
Canada and Latin America.
Value-Added Resellers and Systems Integrators. Our companies and we use
a select group of VARs and system integrators in the U.S. which are generally
selected for their ability to offer our products in combination with related
products and services, such as system design, integration and support. Such
specialization allows us to penetrate targeted vertical markets such as
telecommunications and cable TV. Generally, we use a two-tier distribution
system to reach a broader range of customers, however VARs may purchase the
product directly from one or more of our companies if the volume warrants a
direct relationship.
Manufacturers' Representatives. To supplement our direct sales efforts,
manufacturer's representatives are assigned by territory in the United States
and work exclusively on commission.
Customer Support and Service. We and our companies are committed to
providing strong technical support to our customers. We operate customer service
groups, and provide support through engineering groups, sales staff,
distributors, OEMs and VARs. Customer support personnel are currently located at
the our offices in California, Massachusetts, Maryland, Germany, England, Italy
and Israel.
International Sales. International sales accounted for approximately
59%, 58% and 63% of our consolidated net revenues in 1998, 1999 and 2000,
respectively.
MANUFACTURING
We outsource the board-level assembly, test and quality control of our
Internet infrastructure products to third party contract manufacturers, thereby
allowing us to react quickly to market demand, to avoid the significant capital
investment required to establish and maintain manufacturing and assembly
facilities and to concentrate resources on product design and development. Final
assembly, burn-in, final testing and pack-out are performed by our companies and
us and selected third-party contract manufacturers to maintain quality control.
Our manufacturing teams are experienced in advanced manufacturing and testing,
in engineering, in ongoing reliability/quality assurance and in managing third
party contract manufacturer's capacity, quality standards and manufacturing
process. Risks associated with the use of independent manufacturers include
24
25
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. If our contract
manufacturers fail to deliver products in the future on a timely basis, or at
all, it would be extremely difficult for us to obtain adequate supplies of
products from other sources on short notice. There can be no assurance that the
Company's third party manufacturers will provide 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 time and result in shipment
delays and expenses. The inability to obtain our key products on a timely basis,
the loss of a particular vendor or a change in the terms and conditions of the
outsourcing could have a material adverse effect on our business, operating
results and financial condition.
We rely extensively on our companies own production capabilities for
critical semiconductor lasers and LEDs used in our products. Our optical
transmission production process involves (i) a wafer processing facility for
semiconductor laser diode and LED chip manufacturing under stringent and
accurate procedures using state-of-the-art wafer fabrication technology, (ii)
high precision electronic and mechanical assembly, and (iii) final assembly and
testing. Relevant assembly processes include die attach, wire bond, substrate
attachment and fiber coupling. We also conduct tests throughout our
manufacturing processes using commercially available and internally built
testing systems that incorporate proprietary procedures. Our companies perform
final product tests on all of their products prior to shipment to customers.
Many of the key processes used in our products are proprietary; and, therefore,
many of the key components of our products are designed and produced internally.
Because our companies manufacture these and other key components of their
products at our their own facilities and such components are not readily
available from other sources, any interruption of the their manufacturing
process could have a material adverse effect on our operations. Furthermore, our
companies have a limited number of employees dedicated to the operation and
maintenance of wafer fabrication equipment, the loss of any of whom could result
in our inability to effectively operate and service such equipment. Wafer
fabrication is sensitive to a wide variety of factors, including variations and
impurities in the raw materials, difficulties in the fabrication process and
performance of the manufacturing equipment. There can be no assurance that our
companies 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 believe our
companies have sufficient manufacturing capacity for growth in the coming years.
In addition, at various times there have been shortages of parts in the
electronics industry, and certain critical components have been subject to
limited allocations. Although shortages of parts and allocations have not had a
material adverse effect on our results of operations, there can be no assurance
that any future shortages or allocations would not have such an effect.
Our companies are subject to a variety of federal, state, and local
governmental laws and regulations related to the storage, use, emission,
discharge, and disposal of toxic, volatile or otherwise hazardous chemicals used
in the manufacturing process. There can be no assurance that environmental laws
and regulations will not result in the need for additional capital equipment or
other requirements. Further, such laws and regulations could restrict our
ability to expand operations. Any failure by our companies or us to obtain
required permits for, control of use of, or adequately restrict the discharge,
emission or release of, hazardous substances under present or future laws and
regulations could subject us to substantial liability or could cause our
manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on our operating
results. To date, such laws and regulations have not had a material adverse
effect on our operating results.
COMPETITION
The communications equipment and component industry is intensely
competitive. Our companies competes directly with a number of established and
emerging computer, communications and networking device companies. Direct
competitors in optical networking and Internet infrastructure, generally include
Cisco Systems Inc, Lucent Technologies, Nortel Networks, and 3Com Corporation.
Direct competitors for our optical
25
26
wireless technology include AirFiber, Canon and TeraBeam. Direct competitors in
fiber optic components include Agilent Technologies, Corning Incorporated,
Finisar Corporation, Fujitsu, Infineon AG, International Business Machines
Corporation, JDS Uniphase Corp., Lucent Technologies, Inc., Sumitomo, Tyco
International, Ltd. Many of our competitors have significantly greater
financial, technical, marketing, distribution and other resources and larger
installed customer bases than MRV. Several of these competitors have recently
introduced or announced their intentions to introduce new competitive products.
Many of the larger companies with which the Company competes offer customers a
broader product line, which provides a more comprehensive networking solution
than the Company's products.
In addition to competitors competing with products that perform similar
functions there are also several alternative network technologies. For example,
in the local access market, our products compete with telephone network
technology known as "ADSL," an acronym for asymmetric digital subscriber line.
In this technology, digital signals are transmitted through existing telephone
lines from the central office to the home. We also expect that competitive
pricing pressures could result in price declines for our companies and their
competitors' products. Such increased competition, if not accompanied by
decreasing costs, could result in reduced margins and loss of market share which
would materially and adversely affect our business, operating results and
financial condition.
The communications industry has become increasingly concentrated in
recent years as a result of consolidation. This consolidation is likely to
permit our various competitors to devote significantly greater resources to the
development and marketing of new competitive products and the marketing of
existing competitive products to their larger installed bases. We expect that
competition will increase substantially as a result of these and other industry
consolidations and alliances, as well as the emergence of new competitors.
PROPRIETARY RIGHTS
To date, our companies and we have relied principally upon copyrights
and trade secrets to protect our proprietary technology. Generally, we enter
into confidentiality agreements with our employees and key suppliers and
otherwise seek to limit access to and distribution of the source code to
software and other proprietary information. There can be no assurance that such
steps will be adequate to prevent misappropriation of our technologies or that a
third party will not independently develop technology similar or superior to any
we possess.
We have received notices from third party alleging possible infringement
of patents with respect to product features or manufacturing processes. We
believe such notices are common in the communications industry because of the
large number of patents that have been filed on these subjects. Our policy is to
discuss these notices with the senders in an effort to demonstrate that our
products and/or processes do not violate any patents. We are currently involved
in such discussions with Lucent Technologies, Nortel Networks, Ortel, Rockwell
International Corporation and the Lemelson Medical, Education & Research
Foundation. We do not believe that any of our or our companies' products or
processes violates any of the patents asserted by these parties and we further
believe that we have meritorious defenses if any legal action is taken by any of
these parties. However if one or more of these parties were to assert a claim
and gain a conclusion unfavorable to us such claims could materially and
adversely affect our business, operating results and financial condition.
In the future, litigation may be necessary to protect trade secrets and
other intellectual property rights owned by us, to enforce any patents issued to
our companies or us, to defend against claimed infringement of the rights of
others and to determine the scope and validity of the proprietary rights of
others. Any such litigation could be costly and a diversion of the attention of
our management involved, which could have a material adverse effect on our
business, operating results and financial condition. An adverse determination in
such litigation could further result in the loss of the Company's proprietary
rights, subject the Company to significant liabilities, require the Company to
seek licenses from third parties or prevent the Company from
26
27
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company typically has agreed to indemnify its customers and key
suppliers for liability incurred in connection with the infringement of a third
party's intellectual property rights.
EMPLOYEES
As of December 31, 2000, our consolidated companies and we employed a
total of approximately 2,600 full-time employees. None of our employees is
represented by a union or governed by a collective bargaining agreement, and we
believe our employee relationships are satisfactory.
27
28
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research
and development and manufacturing facility is located in Chatsworth, California.
The table below lists the locations, square footage and expiration dates of our
owned and leased facilities for our major operations.
Square footage Lease
Location Owned/Leased Expiration Dates
-------- -------------- ----------------
Chatsworth, California, USA 17,700 February 2004
Chatsworth, California, USA 20,950 January 2003
Chatsworth, California, USA 12,800 March 2002
Chatsworth, California, USA 50,000 July 2004
Chatsworth, California, USA 5,000 December 31, 2002
Littleton, Massachusetts 101,000 September 2003
Yokneam, Israel 23,400 January 2002
Milan, Italy 46,600 March 2013
Hsinchu, Taiwan 165,910 March 2016
Hsinchu, Taiwan 12,712 Owned
Hsinchu, Taiwan 18,895 June 2001
Hsinchu, Taiwan 9,437 February 2001
Hsinchu, Taiwan 7,876 September 2000
Miao-Li County, Taiwan 24,398 Owned
Chu-Pei, Taiwan 15,989 Owned
Shanghai, People's Republic of China 48,495 October 2047
Shanghai, People's Republic of China 139,008 January 2049
Stockholm, Sweden 52,200 June 2003
Rome, Italy 15,700 December 2012
Paris, France 19,400 Owned
We believe that our facilities are sufficient to meet our current needs
and that adequate additional space will be available for lease when required.
ITEM 3. LEGAL PROCEEDINGS
We are 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 we expect to be
material in relation to our business, consolidated financial condition, results
of operations or cash flows.
We have received notices from third parties alleging possible
infringement of patents with respect to product features or manufacturing
processes. We believe such notices are common in the communications industry
because of the large number of patents that have been filed on these subjects.
Our policy is to discuss these notices with the senders in an effort to
demonstrate that our products and/or processes do not violate any patents. We
are currently involved in such discussions with Lucent Technologies, Nortel
Networks, Ortel, Rockwell International Corporation and the Lemelson Medical,
Education & Research Foundation. We do not believe that any of our or our
companies' products or processes violate any of the patents asserted by these
parties and we further believe that we have meritorious defenses if any legal
action is taken by any of these parties. However, if one or more of these
parties were to assert a claim and gain a conclusion unfavorable to us, such
claims could materially and adversely affect our business, operating results and
financial condition.
28
29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 12, 2000, we held our Annual Meeting of Stockholders at
which, among other things, the Company's entire board of directors was elected.
The name of each director elected at the Annual Meeting, and the number of votes
cast for and against (or withheld) were as follows:
Number of Votes
Name For Against or Withheld
- ------------------------------ ---------- -------------------
Noam Lotan 53,459,296 6,524,529
Shlomo Margalit 59,558,034 425,791
Igal Shidlovsky 59,558,034 425,791
Guenter Jaensch 59,558,034 425,791
Baruch Fischer 59,557,394 425,891
Daniel Tsui 59,557,394 425,891
The other matters voted upon at the meeting and the number of votes cast
for, against or withheld, including abstentions and broker non-votes, as to each
matter were as follows:
PROPOSAL FOR AGAINST ABSTAIN
-------- ---------- ---------- -------
To approve amendments to the Company's 49,774,982 10,030,697 178,146
1997 Incentive and Nonstatutory Stock
Option Plan to increase by 500,000
shares the number of shares of Common
Stock that can be optioned and sold
under the Stock Option Plan
To ratify the selection of Arthur 59,638,849 316,645 28,331
Andersen LLP as independent auditors for
the Company for the fiscal year ending
December 31, 2000.
29
30
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MRV's common stock is traded in the over-the-counter market and has been
included in the Nasdaq National Market since February 28, 1994 under the symbol
"MRVC." The following table sets forth the high and low closing sale prices of
it common stock for the periods indicated as reported by the Nasdaq National
Market. The prices have been adjusted to give retroactive effect to the
two-for-one stock split of MRV's common stock effected on May 11, 2000.
High Low
---- ---
1999
First Quarter $ 4.94 $2.97
Second Quarter 7.03 2.97
Third Quarter 12.41 6.32
Fourth Quarter 32.82 9.72
2000
First Quarter $95.25 $25.88
Second Quarter 67.25 23.44
Third Quarter 78.56 45.31
Fourth Quarter 49.19 11.06
At March 31, 2001, MRV had 3,384 stockholders of record.
RECENT SALES OF UNREGISTERED SECURITIES
In November 2000, MRV issued an aggregate of 109,686 shares of its
common stock to the former shareholders of Creative Electronic Systems SA
("CES"), a Swiss corporation, in connection with an agreement between MRV and
these shareholders guaranteeing the minimum price of the shares of MRV common
stock issued to these shareholders to acquire the outstanding capital stock of
CES.
With respect to the foregoing issuance, exemption from registration
requirements is claimed under the Securities Act of 1933 in reliance on
Regulation S under the Securities Act. MRV believed that the buyers were
outside the United States and no directed selling efforts were made in the
United States. Each CES shareholder (all of whom had addresses outside the
United States) represented that it was not a "U.S. Person" as defined in
Regulation S and, at the time the buy order for these transaction was
originated, each such shareholder was outside the United States and no offer to
purchase the shares was made in the United States. Each CES shareholder agreed
not to reoffer or sell the securities, or to cause any transferee to reoffer or
sell the shares, within the United States, or for the account or benefit of a
U.S. person, (i) as part of the distribution of the securities at any time, or
(ii) otherwise, only in a transaction meeting the requirements of Regulation S.
Appropriate legends were affixed to the certificates evidencing the securities
in such transaction.
In December 2000, MRV issued an aggregate of 341,889 shares of its
common stock to Tellaire Corporation in connection with its investment in
Tellaire receiving for such shares 5,775,149 shares of Series B Convertible
Preferred Stock, $.001 par value per share of Tellaire, representing
approximately 32% of Tellaire's outstanding capital stock at the date of the
investment.
With respect to the foregoing issuance, exemption from registration
requirements is claimed under the Securities Act of 1933 in reliance on Section
4(2) of the Securities Act or Regulation D promulgated thereunder. The purchaser
represented its intention to acquire the shares for investment only and not with
a view to, or for sale in connection with, any distribution thereof and an
appropriate legend was affixed to the certificates evidencing the shares in such
transaction. The purchasers had adequate access to information about MRV.
30
31
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the three years
in the period ended December 31, 2000 and the balance sheet data as of December
31, 1999 and 2000 are derived from our consolidated financial statements and
notes thereto, included elsewhere herein, and are audited by Arthur Andersen
LLP, independent public accountants, as set forth in their report included later
in this Report. The selected statement of operations data for the two years in
the period ended December 31, 1997 and the balance sheet data as of December 31,
1996, 1997 and 1998 were derived from our audited financial statements, which
are not included in this Report. The following data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of the
Company, including the notes thereto, included elsewhere in this Report.
Consolidated Statements of Operations Data: Year ended December 31,
- ------------------------------------------- -------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
Revenues, net $ 88,815 $ 165,471 $ 264,075 $ 288,524 $ 319,394
Cost of goods sold (1,4) 51,478 94,709 165,385 197,442 203,371
Research and development (1) 8,201 13,093 25,817 35,319 74,078
Selling, general and administrative (1) 13,858 26,993 53,852 67,859 124,700
Purchased technology in progress (2) 17,795 - 20,633 - -
Restructuring costs (2) 6,974 - 15,671 - -
Amortization of goodwill and other intangibles 167 372 2,901 3,898 66,814
--------- --------- --------- --------- ---------
Operating income (loss) (9,658) 30,304 (20,184) (15,994) (149,569)
Other income (expense), net (4,204) 1,901 4,339 322 (9,578)
--------- --------- --------- --------- ---------
Income (loss) before provision for income taxes,
minority interests and extraordinary item (13,862) 32,205 (15,845) (15,672) (159,147)
Provision (benefit) for income taxes (4,404) 9,474 5,707 (2,153) (5,398)
Minority interests (196) (146) (1,345) 610 796
Gain on repurchase of convertible notes, net of tax - - 2,791 - -
--------- --------- --------- --------- ---------
Net income (loss) $ (9,654) $ 22,585 $ (20,106) $ (12,909) $(152,953)
========= ========= ========= ========= =========
Net income (loss) per share - Basic $ (0.24) $ 0.48 $ (0.38) $ (0.24) $ (2.33)
========= ========= ========= ========= =========
Net income (loss) per share - Diluted $ (0.24) $ 0.44 $ (0.38) $ (0.24) $ (2.33)
========= ========= ========= ========= =========
Shares used in per share calculation - Basic 39,478 47,340 53,064 53,920 65,669
Shares used in per share calculation - Diluted 39,478 51,468 53,064 53,920 65,669
Consolidated Balance Sheet Data: At December 31,
- -------------------------------- -------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------- --------- --------- --------- ---------
(In thousands)
Cash and cash equivalents $14,641 $ 19,428 $ 20,692 $ 34,330 $ 210,080
Working capital 56,973 111,559 115,318 106,425 366,752
Total assets 96,943 236,236 320,192 314,533 1,096,771
Total long-term liabilities 18,892 2,853 94,317 94,409 154,504
Stockholders' equity 41,771 189,969 174,429 166,815 781,555
- -----------
(1) For the year ended December 31, 2000, includes amounts related to deferred
stock compensation of: $8.3 million in "cost of goods sold"; $13.2 million in
"research and development" expenses; and $38.4 million in "selling, general and
administrative" expenses.
(2) Purchased technology in progress and restructuring charges were incurred as
a result of acquisitions. Purchased technology in progress for the year ended
December 31, 1996 was in conjunction with the Fibronics Acquisition.
Restructuring costs during the year ended December 31, 1996 were associated with
a plan adopted by the Company