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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
[Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from _____________ to
__________________
Commission file number 0-25678
MRV COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1340090
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
8917 Fullbright Avenue 91311
Chatsworth, California (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (818) 773-9044; (818) 773-0906 (Fax)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.0034 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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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 issuer's revenues for its most recent fiscal year: $88,815,000
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.
$363,373,768 based on the closing sale price at March 26, 1997 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:
22,964,039 at April 4, 1997
DOCUMENTS INCORPORATED BY REFERENCE:
None
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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.
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As used in this Report, "MRV" or the "Company" refers to MRV
Communications, Inc., its predecessor and its wholly-owned consolidated
subsidiaries, except where the context otherwise indicates. Any Speed to Any
Speed Ethernet, GigaHub, JavaMan, NBase, MegaStack, MegaSwitch, MegaSwitch II,
MegaVision, MRV Communications and West Hills LAN System are trademarks or trade
names of the Company. Trademarks of other companies are also used in this Report
and are the property of their respective owners.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
MRV is a leading manufacturer and marketer of high speed network
switching and fiber optic transmission systems which enhance the performance of
existing data- and telecommunications networks. The Company designs,
manufactures and sells two groups of products: (i) computer networking products,
primarily Ethernet LAN switches, hubs and related equipment and (ii) fiber optic
components for the transmission of voice, video and data across enterprise,
telecommunications and cable TV networks. The Company's advanced networking
solutions greatly enhance the functionality of LANs by reducing network
congestion while allowing end users to preserve their legacy investments in
pre-existing networks and providing cost-effective migration paths to next
generation technologies such as Gigabit Ethernet. The Company's fiber optic
components incorporate proprietary technology which delivers high performance
under demanding environmental conditions.
The Company offers a family of network, switching and related
products that enhance LAN performance and facilitate the migration to next
generation technologies such as Fast Ethernet, Gigabit Ethernet and
Asynchronous Transfer Mode ("ATM"). MRV's MegaSwitch family of switching
products range from complete switching systems to stackable switches which
upgrade performance of existing LANs by relieving congestion of overloaded
transmission speeds without requiring replacement of existing technologies. In
addition, the Company offers GigaHub, a multi-platform switchable hub, and
MegaStack, a LAN stackable hub, as well as a network management system and a
number of other products that support network connectivity.
The Company also offers a family of optical transmission components
and modules designed for transmission over fiber optic cable. These products
enable the transmission of voice, data, and video across fiber and are also
used in optical fiber test equipment. The Company's products include discrete
components, such as laser diodes and LEDs, and integrated components such as
transmitters, receivers and transceivers. The Company's components are used in
data networks, telecommunication transmission and access networks.
To position the Company for growth, management's strategy has been to
focus on rapidly developing markets in the communications arena, such as LAN
switching and access networks, and to concentrate on improving performance of
networks employing Ethernet protocols, thereby addressing the largest installed
base of network users. Management's strategy has also been to emphasize
development of innovative products that the Company may bring
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to market early and to capitalize on MRV's manufacturing expertise and ability
to combine proprietary fiber optic transmission and advanced switching
technologies to create high-speed, cost-effective networking solutions.
The Company's principal executive offices are located at 8917
Fullbright Avenue, Chatsworth, California 91311 and its telephone and fax
numbers are (818) 773-9044 and (818) 773-0906, respectively. The Company
maintains Web sites at "http://www.mrv.com" and "http://www.nbase.com."
Information contained on the Company's Web sites does not constitute part of
this Report.
COMPANY BACKGROUND
The Company was organized in July 1988 as MRV Technologies, Inc., a
California corporation and reincorporated in Delaware in April 1992, at which
time it changed its name to MRV Communications, Inc.
On May 1, 1995, the Company acquired certain assets and the
distribution business of Galcom Networking, Ltd. ("Galcom"), a network equipment
company located in Israel. The purchase price paid by the Company was
approximately $900,000 in cash and the assumption of approximately $1,800,000 in
liabilities and debt. In connection with the acquisition of assets from Galcom,
the Company issued to Galcom and certain of its employees five-year warrants to
purchase an aggregate of 300,000 shares at prices ranging from $4.25 to $7.38
per share.
On June 29, 1995, the Company acquired certain assets and the
distribution business of Ace 400 Communications Ltd. ("Ace"), a network
equipment company also located in Israel. The purchase price paid by the Company
was approximately $4,316,000 comprised of $100,000 in cash, the assumption of
approximately $467,000 in liabilities and debt and the issuance of approximately
855,000 shares of Common Stock valued at approximately $3,910,000 and extended a
right to Ace to sell to the Company up to $400,000 of Ace's inventory. In
connection with the acquisition of assets from Ace, the Company issued to the
trustee and an employee of Ace five-year warrants to purchase an aggregate of
330,000 shares of Common Stock at prices ranging from $4.57 to $4.67 per share.
The Galcom and Ace acquisitions provided the Company with experienced
personnel and technology for the Token Ring LAN, IBM Connectivity and
Multi-Platform Network Management IBM NetView and HP OpenView markets. Following
the acquisitions, the Company consolidated these operations in Israel with its
networking operations in the U.S.
On September 26, 1996, the Company completed an acquisition (the
"Fibronics Acquisition") from Elbit Ltd. ("Elbit") of certain of the assets and
selected liabilities of Elbit's wholly-owned subsidiary, Fibronics Ltd. and its
subsidiaries (collectively "Fibronics") related to Fibronics' computer
networking and telecommunications businesses (the "Fibronics Business") in
Germany, the United States, the United Kingdom, the Netherlands and Israel. The
assets acquired included Fibronics' technology in progress and existing
technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,770,000, which was paid using a combination of cash and shares
of Common Stock of the Company. In connection with the 458,991 shares of Common
Stock originally delivered to Elbit as partial payment of the purchase price,
the Company made certain guarantees to Elbit regarding the minimum proceeds
Elbit would receive upon resale of the shares. The Company secured such
guarantees by delivering to Elbit (i) a letter of credit from a major bank in
the amount of approximately $4,301,000 and (ii) an additional 137,305 shares of
its Common Stock (the "Security Shares"). In March 1997, MRV and Elbit agreed
to amend their agreement (the "March 1997 Amendment") regarding the Common Stock
portion of the purchase price paid to Elbit for the Fibronics Business. First,
the Company repurchased 184,381 shares, paying Elbit $4,230,000 (approximately
$23.00 per share) (plus accrued interest thereon at 0.67% per month from January
1, 1997 through March 13, 1997). Second, with respect to the remaining 274,610
shares (the "Additional Shares"), the Company guaranteed that the Additional
Shares can be resold by Elbit for at least $6,300,000 (approximately $23.00 per
share), plus interest thereon at 0.67% per month from January 1, 1997 through
the date of Elbit's resale. To secure any shortfall, the Company delivered to
Elbit pending resale of the Additional Shares a letter of credit from a major
bank, expiring on June 15, 1997, in the amount of approximately $6,536,000.
Elbit has agreed to sell the Additional Shares in the open market at no less
than the prevailing bid price at the time of sale; provided, however, that in no
event shall sales of the Additional Shares be at less than $23.00 per share.
Elbit must pay to the Company any difference between the amount received upon
resale of the Additional Shares and $6,300,000
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(plus the accrued interest) and return any unsold Additional Shares to the
Company. As part of the March 1997 Amendment, Elbit also returned the Security
Shares to the Company. The Company used proceeds it received from a private
placement of $30,000,000 principal amount of Debentures completed in September
1996 to fund the cash portion of the purchase price of the Fibronics
Acquisition.
With the integration of the Fibronics Business, MRV believes it will
be able to enhance the development of Fast Ethernet and Gigabit Ethernet
functions through the Fibronics GigaHub family of products, 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.
RISK FACTORS
The Company may from time to time 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 shareholders. 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" the
Company is 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:
Risks of Technological Change, Development Delays and Product
Defects. The Company is engaged in the design and development of devices for
the computer networking, telecommunications and fiber optic communication
industries. As with any new technologies, there is a substantial risk that the
marketplace may not accept the Company's new products. Market acceptance of the
Company's products will depend, in large part, upon the ability of the Company
to demonstrate performance and cost advantages and cost-effectiveness of its
products over competing products and the success of the sales efforts of the
Company and its customers. There can be no assurance that the Company will be
able to continue to market its technology successfully or that any of the
Company's current or future products will be accepted in the marketplace.
Moreover, the computer networking, telecommunications and fiber optic
communication industries are characterized by rapidly changing technology,
evolving industry standards and frequent new product introductions, any of which
could render the Company's existing products obsolete. The Company's success
will depend upon its ability to enhance existing products and to introduce new
products to meet changing customer requirements and emerging industry standards.
The Company will be required to devote continued efforts and financial resources
to develop and enhance its existing products and conduct research to develop new
products. The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation, as well as the
accurate anticipation of technological and market trends. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new or enhanced products successfully or on a timely basis,
that new Company products will gain market acceptance or that the Company will
be able to respond effectively to product announcements by competitors,
technological changes or emerging industry standards. Furthermore, from time to
time, the Company may announce new products or product enhancements,
capabilities or technologies that have the potential to replace or shorten the
life cycle of the Company's existing product offerings and that may cause
customers to defer purchasing existing Company products or cause customers to
return products to the Company.
Complex products, such as those offered by the Company, may contain
undetected software or hardware errors when first introduced or when new
versions are released. While the Company has not experienced such errors in the
past, the occurrence of such errors in the future could, and the inability to
correct such errors would, result in the delay or loss of market acceptance of
the Company's products, material warranty expense, diversion of engineering and
other resources from the Company's product development efforts and the loss of
credibility with the Company's customers, system integrators and end users, any
of which would have a material adverse effect on the Company's business,
operating results and financial condition.
Potential Fluctuations in Operating Results. The Company's revenue
and operating results could fluctuate substantially from quarter to quarter and
from year to year. This could result from any one or a combination of factors
such as the cancellation or postponement of orders, the timing and amount of
significant orders from the Company's largest customers, the Company's success
in developing, introducing and shipping product enhancements and new products,
the product mix sold by the Company, adverse effects to the Company's financial
statements resulting from,
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or necessitated by, possible future acquisitions, new product introductions by
the Company's competitors, pricing actions by the Company or its competitors,
the timing of delivery and availability of components from suppliers, changes in
material costs and general economic conditions. Although the Company has not had
adverse fluctuations in results from continuing operations in the past, there
can be no assurance that these factors or others would not cause such
fluctuations in the future. The volume and timing of orders received during a
quarter are difficult to forecast. The Company's customers from time to time
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 the Company. The Company's 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, operating
results could be materially adversely affected. Further, there can be no
assurance that the Company will be able to sustain its recent rate of growth
or continue profitable operations.
Competition. The markets for fiber optic components and network
switching 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. The
Company competes and will compete with numerous types of companies including
companies which 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 the Company.
This may give such competitors certain advantages, including the ability to
negotiate lower prices on raw materials and components than those available to
the Company. In addition, many of the Company's large competitors offer
customers broader product lines which provide more comprehensive solutions than
the Company currently offers. The Company expects that other companies will also
enter markets in which the Company competes. Increased competition could result
in significant price competition, reduced profit margins or loss of market
share. There can be no assurance that the Company will be able to compete
successfully with existing or future competitors or that competitive pressures
faced by the Company will not materially and adversely affect the business,
operating results and financial condition of the Company.
Management of Growth. The Company has grown rapidly in recent years,
with revenues increasing from $2,400,000 for the year ended December 31, 1991,
to $17,500,000, $39,200,000 and $88,800,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company's recent growth, both internally
and through the acquisitions it has made since January 1, 1995, has placed a
significant strain on the Company's financial and management personnel and
information systems and controls, and the Company must implement new and enhance
existing financial and management information systems and controls and must add
and train personnel to operate such systems effectively. While the strain placed
on the Company's personnel and systems has not had a material adverse effect on
the Company to date, there can be no assurance that a delay or failure to
implement new and enhance existing systems and controls will not have such an
effect in the future. The Company's recent growth through the acquisition of the
Fibronics Business discussed in "Risks Associated with Recent Acquisition and
Potential Future Acquisitions" below and its intention to continue to pursue its
growth strategy through efforts to increase sales of existing and new products
can be expected to place even greater pressure on the Company's existing
personnel and compound the need for increased personnel, expanded information
systems, and additional financial and administrative control procedures. There
can be no assurance that the Company will be able to successfully manage
expanding operations.
Risks Associated with Recent Acquisition and Potential Future
Acquisitions. On September 26, 1996, the Company completed the Fibronics
Acquisition from Elbit, acquiring certain of the assets and selected liabilities
related to Fibronics' computer networking and telecommunications businesses in
Germany, the United States, the United Kingdom, the Netherlands and Israel. The
assets acquired include Fibronics' technology in progress and existing
technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,770,000, which was paid using a combination of cash and Common
Stock of the Company. During the years ended December 31, 1994 and 1995, and the
period from January 1, 1996 through September 25, 1996 (the day the Fibronics
Business was acquired by the Company), the Fibronics Business reported net
revenues of $33,355,000, $35,003,000 and $19,481,000, respectively, and net
income (losses) of ($11,557,000), $79,000 and $(6,143,000), respectively.
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In connection with the Fibronics Acquisition, the Company incurred charges of
$17,795,000, $6,974,000 and $4,357,000 for purchased technology, restructuring,
and interest expenses related to financing, respectively. These charges caused
the Company to incur a net loss of $9,654,000 for the year ended December 31,
1996. The Company's ability to operate the Fibronics Business profitably will
depend upon its ability to integrate this business successfully, including (i)
integration of the products, technologies and personnel of the Fibronics
Business into the Company, (ii) management's ability to reduce operating costs
of the Fibronics Business and (iii) the continued market acceptance of the
products and technology acquired from Fibronics.
An important element of management's strategy is to review
acquisition prospects that would complement the Company's existing products,
augment its market coverage and distribution ability or enhance its
technological capabilities. While the Company has no current agreements or
negotiations underway with respect to any new acquisitions, the Company may
acquire additional businesses, products or technologies in the future. Future
acquisitions by the Company could result in charges similar to those incurred in
connection with the Fibronics Acquisition, potentially dilutive issuance of
equity securities, the incurrence of debt and contingent liabilities and
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect the Company's business, financial
condition and results of operations and/or the price of the Company's Common
Stock. Acquisitions entail numerous risks, including the assimilation of the
acquired operations, technologies and products, diversion of management's
attention to other business concerns, risks of entering markets in which the
Company has no or limited prior experience and potential loss of key employees
of acquired organizations. Prior to the Fibronics Acquisition, management had
only limited experience in assimilating acquired organizations. There can be no
assurance as to the ability of the Company to successfully integrate the
products, technologies or personnel of any business that might be acquired in
the future, and the failure of the Company to do so could have a material
adverse effect on the Company's business, financial condition and results of
operations.
International Operations. International sales have become an
increasingly important segment of the Company's operations, with the
acquisitions of Galcom and Ace in 1995 and the Fibronics Business in 1996.
Approximately 19%, 45% and 53% of the Company's net revenues for the years ended
December 1994, 1995 and 1996, respectively, were from sales to customers in
foreign countries. The Company has offices in, and conducts a significant
portion of its operations in and from, Israel. MRV is, 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 the
Company's operations.
Sales to foreign customers are subject to government controls and
other risks associated with international sales, including difficulties in
obtaining export licenses, fluctuations in currency exchange rates, political
instability, trade restrictions and changes in duty rates. Although the Company
has not experienced any material difficulties in this regard to date, there can
be no assurance that it will not experience any such material difficulties in
the future. The Company's sales are currently denominated in U.S. dollars and to
date its business has not been significantly affected by currency fluctuations
or inflation. However, the Company conducts business in several different
countries and thus fluctuations in currency exchange rates could cause the
Company's products to become relatively more expensive in particular countries,
leading to a reduction in sales in that country. In addition, inflation in such
countries could increase the Company's expenses. To date, the Company has not
hedged against currency exchange risks. In the future, the Company 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. The Company's operating results could be adversely
affected by such fluctuations or as a result of inflation in particular
countries where material expenses are incurred. Moreover, the Company's
operating results could also be adversely affected by seasonality of
international sales, which are typically lower in Asia in the first calendar
quarter and in Europe in the third calendar quarter. These international factors
could have a material adverse effect on future sales of the Company's products
to international end-users and, consequently, the Company's business, operating
results and financial condition.
Manufacturing and Dependence on Suppliers and Third Party
Manufacturers . The Company uses internally developed Application Specific
Integrated Circuits ("ASICs"), which provide the functionality of multiple
integrated circuits in one chip, in the manufacture of its Local Area Network
("LAN") switching products. To develop ASICs
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successfully, the Company must transfer a code of instructions to a single mask
from which low cost duplicates can be made. Each iteration of a mask involves a
substantial up-front cost, which costs can adversely affect the Company's result
of operations and financial condition if errors or "bugs" occur following
multiple duplication of the masks. While the Company has not experienced
material expenses to date as a result of errors discovered in ASIC masks,
because of the complexity of the duplication process and the difficulty in
detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single foundry
to fabricate its ASICs and does not have a long-term supply contract with this
supplier, any other ASIC vendor or any other of its limited source vendors,
purchasing all of such components on a purchase order basis. While the Company
believes it would be able to obtain alternative sources of supply for the ASICs
or other key components, a change in ASIC or other suppliers of key components
could require a significant lead time and, therefore, could result in a delay in
product shipments. While the Company has not experienced delays in the receipt
of ASICs or other key components, any future difficulty in obtaining any of
these key components could result in delays or reductions in product shipments
which, in turn, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company outsources the assembly, test and quality control of
material, components, subassemblies and systems relating to its networking
products to third party contract manufacturers. Though there are a large number
of contract manufacturers which the Company can use for its outsourcing, it has
elected to use a limited number of vendors for a significant portion of board
assembly requirements in order to foster consistency in quality of the products.
These independent third party manufacturers also provide these 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 the Company's
contract manufacturers fail to deliver products in the future on a timely basis,
or at all, it could be difficult for the Company to obtain adequate supplies of
products from other sources in the near term. 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 the Company could outsource with
other vendors, a change in vendors may require significant lead time and may
result in shipment delays and expenses. The 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 the Company's business,
operating results and financial condition.
The Company relies exclusively on its own production capability for
critical semiconductor lasers and light emitting diodes ("LEDs") used in its
products. Because the Company manufactures these and other key components of its
products at its own facility and such components are not readily available from
other sources, any interruption of the Company's manufacturing process could
have a material adverse effect on the Company's operations. Furthermore, the
Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of any of whom could
result in the Company's 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. There can
be no assurance that the Company 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, the Company's
business, operating results and financial condition could be materially
adversely affected.
Lack of Patent Protection; Dependence on Proprietary
Technology. The Company holds no patents and only recently has filed patent
applications with respect to certain aspects of its technology. The Company
currently relies on unpatented proprietary know-how, which may be duplicated,
and employs various methods, including confidentiality agreements with
employees, to protect its proprietary know-how. Such methods may not afford
complete protection, however, and there can be no assurance that others will not
independently develop such know-how or obtain access to it or independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In the event that protective measures are not successful,
the Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. There can be no assurance that any patents
will be issued as a result of the pending applications or any future patent
applications, or, if issued, would provide the Company with meaningful
protection from competition. In addition, there can be no assurance
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that any patents issued to the Company will not be challenged, invalidated or
circumvented. Since United States patent applications are maintained in secrecy
until patents issue and since the publication of inventions in technical or
patent literature tends to lag behind such inventions by several months, the
Company cannot be certain that it was the first creator of inventions covered by
pending patent applications, that it was the first to file patent applications
for such inventions or that the Company is not infringing on the patents of
others. Litigation may be necessary to enforce the Company's patents, if issued,
or other intellectual property rights, to protect the Company's trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations
regardless of the final outcome of such litigation. In the event that any of the
Company's products are found to infringe on the intellectual property rights of
third parties, the Company would be required to seek a license with respect to
such patented technology, or incur substantial costs to redesign the infringing
products. There can be no assurance that any such license would be available on
terms acceptable to the Company or at all, that any of the Company's products
could be redesigned on an economical basis or at all, or that any such
redesigned products would be competitive with the products of the Company's
competitors.
Dependence on Key Personnel. The Company is substantially dependent
upon a number of key employees, including Dr. Shlomo Margalit, its Chairman of
the Board of Directors and Chief Technical Officer, Dr. Zeev Rav-Noy, its Chief
Operating Officer, and Noam Lotan, its President and Chief Executive Officer.
The loss of the services of any one or more of these officers could have a
material adverse effect on the Company. The Company has entered into employment
agreements with each officer and owns and is the beneficiary of key man life
insurance policies in the amounts of $1,000,000 each on the lives of Drs.
Margalit and Rav-Noy and Mr. Lotan. There can be no assurance that the proceeds
from these policies will be sufficient to compensate the Company in the event of
the death of any of these individuals, and the policies do not cover the Company
in the event that any of them becomes disabled or is otherwise unable to render
services to the Company.
Attraction and Retention of Qualified Personnel. The Company's
ability to develop, manufacture and market its products and its ability to
compete with its current and future competitors depends, and will depend, in
large part, on its ability to attract and retain qualified personnel.
Competition for qualified personnel in the networking and fiber optics
industries is intense, and the Company will be required to compete for such
personnel with companies having substantially greater financial and other
resources than the Company. If the Company should be unable to attract and
retain qualified personnel, the business of the Company could be materially
adversely affected. There can be no assurance that the Company will be able to
attract and retain qualified personnel.
Share Prices Have Been and May Continue to Be Highly Volatile. Over
the last several months, the market price of the Company's Common Stock has been
extremely volatile. The market price of the Common Stock is likely to continue
to be highly volatile and could be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results,
announcement of technological innovations or new product introductions by the
Company or its competitors, changes of estimates of the Company's future
operating results by securities analysts, developments with respect to patents,
copyrights or proprietary rights, general market conditions and other factors.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the common stocks of technology companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In
addition, it is possible that in a future fiscal quarter, the Company's results
of operations will fail to meet the expectations of securities analysts or
investors and, in such event, the market price of the Company's Common Stock
would be materially adversely affected.
Possible Issuance of Preferred Stock; Anti-takeover Provisions. The
Company is authorized to issue up to 1,000,000 shares of Preferred Stock, par
value $.01 per share. The 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, and the Company has no present plans for the issuance
thereof. The Company has agreed not to issue any shares of preferred stock until
December 7, 1997, without the prior written consent of H. J. Meyers & Co., Inc.
(the successor to Thomas James Associates, Inc. the Company's underwriter in its
initial public stock offering). The issuance of any such preferred stock could
materially adversely affect the rights
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of the holders of Common Stock, and therefore, reduce the value of the Common
Stock. In particular, specific rights granted to future holders of preferred
stock could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party, thereby preserving control of the Company by the
present owners.
Forward-looking Statements. This Report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such forward-looking
statements may be deemed to include the Company's plans to develop and offer new
and enhanced networking and optical transmission products and its efforts to
expand its customer base. Such forward-looking statements may also be deemed to
include the Company's expectations concerning factors affecting the markets for
its products, the growth in those markets in general, the timing of new product
introductions by the Company and anticipated benefits from such product
introductions or technological developments. Such forward-looking statements
also may include the Company's expectations of benefits from the acquisition of
the Fibronics Business or its OEM or other arrangements with certain of its
customers. Actual results could differ from those projected in any
forward-looking statements for, among other things, the reasons detailed in the
other sections of this "Risk Factors" portion of this Report. The
forward-looking statements are made as of the date of this Report and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
INDUSTRY BACKGROUND
The global communications industry has undergone significant
transformation and growth since the mid-1980's as a result of increased demand
for communications services and applications, as well as advances in technology
and changes in network architectures and public policy. The client server
network architecture with its shared information and resources, the increased
power of conventional applications as well as the proliferation of graphic
intensive applications such as multimedia, Internet and intranets, have resulted
in a strong demand for bandwidth. This trend is expected to continue as
additional bandwidth intensive applications, such a video conferencing, are used
increasingly. Further, as a result of changes in communications regulations and
the adoption of common standards, enterprise networks, such as LANs and WANs,
and access networks, such as telecommunications and cable TV, are expected to
converge. The demand for high bandwidth applications, as well as the convergence
of data communications and telecommunications, has significantly increased the
requirement for networking and fiber optic equipment that increases the capacity
of networks through high speed and more efficient transmission technologies.
High-speed switching systems enhance the bandwidth of LANs so that a
greater number of users can utilize more complex applications without
experiencing network congestion. Fiber optic transmission components also
enhance the functionality of enterprise and access networks by enabling
high-speed transmission of voice, video and data across fiber optic cable.
Market research firms forecast strong growth in both of these sectors. In August
1996, an industry analyst estimated that the market for LAN switches will grow
from $1.7 billion in 1995 to $10.5 billion in 1999, a compounded annual growth
rate of 58%. In February 1996, KMI Corporation estimated that the worldwide
fiber optics market, including cables, connectors and transceivers, was $6.1
billion in 1995 and that it will grow to $12.3 billion by 1999, a compounded
annual growth rate of 19%. The Company believes that the growth of fiber optic
components will outpace that of the overall fiber optics industry.
LAN ENVIRONMENT
The most common LAN architecture, "shared-media" networking, cannot
effectively accommodate the market's requirements for high-speed networking.
Shared-media networks require computers to alternate communication over a single
LAN, thereby allowing a computer to send information only when other computers
are not doing so. As more computers are added to a single LAN, demand for access
to the network increases and, as a result, individual users experience slower
network response times and data transfer rates. Most of these networks operate
with the Ethernet protocol, which is significantly less expensive than the
closest competing technology, Token Ring.
There are two fundamentally different but complementary approaches to
alleviating network congestion. The first approach, referred to as
"segmentation," reduces the number of desktops connected to a single LAN
segment, which increases the available bandwidth per user. The segmentation of
users into smaller LANs alleviates network congestion by allowing fewer users to
share a given amount of capacity. The second approach is to increase the
capacity of
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networks through new high-speed transmission technologies and high bandwidth
fiber optic applications. LAN switching technology is an innovation that enables
both of these solutions. A switch is a device that partitions a network into
multiple segments which enables several simultaneous "conversations," thereby
reducing the traffic on each segment while allowing access to the entire
network. A switch also allows connection with different speeds, thereby
facilitating faster backbones and migration to faster technologies.
Enhanced LAN Performance through Segmentation and Switching. LAN
switching systems have emerged as the preferred method for segmenting networks
because these systems are implemented more easily, efficiently and cost-
effectively than hub architectures which once dominated the networking equipment
industry. In contrast to hubs, which indiscriminately forward data to all ports,
Ethernet switches only forward network traffic to the designated receiving port
or ports. Ethernet switches can also support different data rates on different
ports with some ports operating at 10 Mbps and others at substantially higher
speeds, thus enabling "Any Speed to Any Speed" Ethernet transmission. A major
driver to the growth in Ethernet switching is the large installed base. Between
60% to 70% of all LANs are currently based on Ethernet standards. As a result,
Ethernet switching offers fast and cost-effective upgrades without impacting
network performance or requiring infrastructure changes to existing cabling and
network adapters. Switching also allows LANs based on different architectures,
such as Ethernet and Token Ring, to be connected efficiently and allows these
systems to access servers and backbones which use a variety of high-speed
technologies, such as Fast Ethernet, Gigabit Ethernet, Fiber Distributed Data
Interface ("FDDI") and ATM.
Another important benefit of switches is their ability to combine
groups of computers into virtual LANs ("VLANs"). As a result, workgroups can be
set up according to business relationships rather than physical proximity.
Unlike hub and router systems, which require segment users to be physically
grouped together, VLANs simplify network administration as users relocate. VLANs
can also be used for controlling bandwidth and directing excess capacity to
workgroups and users as needed. Moreover, by confining traffic to desired
workgroups, VLANs improve network security.
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Enhanced LAN Performance Through High-speed Transmission Technologies
and Switching. While Ethernet switching is being used to increase the efficiency
of existing capacity, switching technology also incorporates high-speed
transmission technologies that increases a system's capacity. High-speed
technologies such as Fast Ethernet, Gigabit Ethernet, FDDI and ATM increase
transmission speeds from 10 Mbps to 100 Mbps and from 100 Mbps to 1,000 Mbps (1
Gbp). Higher transmission speeds have helped to increase the demand for LAN
switches in two important ways. First, LAN switches create uplinks between slow
desktops and high-speed fiber backbones, which are necessary if data transfer is
to occur between devices that operate at different speeds. Second, as high-speed
file servers or fiber backbones are upgraded, the system's switches must be
upgraded as well.
Two alternative high-speed networking technologies, FDDI and ATM, are
used in networking backbones, but because of their high cost for end-users they
are rarely used to connect desktop computers within a LAN. Both FDDI and ATM
transmit data in unique formats which also make them difficult to incorporate
into pre-existing Ethernet LANs.
Fast Ethernet has emerged as a cost-effective, interoperable
technology that enables the integration of ATM and FDDI backbones with Ethernet
switches and provides a non-disruptive, tenfold increase in speed from 10 Mbps
to 100 Mbps. Furthermore, unlike FDDI and ATM, Fast Ethernet is based on fully
defined standards which use the same data format and core communication protocol
as Ethernet. This similarity permits easy integration with existing Ethernet
networks and allows organizations to retain the benefit of network
administrators who have been trained in the management of Ethernet networks.
Thus, migration from Ethernet to Fast Ethernet involves a simple change of
adapter cards and an upgrade of hubs and switches. In addition, implementation
of Fast Ethernet costs end users approximately $150, which is significantly less
expensive than FDDI or ATM implementation that generally costs more than $500
per NIC connection. As a result of these factors, in January 1996 an industry
analysis reported market estimates that Fast Ethernet revenues increased from $7
million in 1994 to $45 million in 1995 and that the market was expected to
approach $300 million during 1996.
Many industry experts believe that similar benefits will be offered
by the next generation of Ethernet technology, Gigabit Ethernet, which is
expected to provide raw data bandwidth of 1,000 Mbps while maintaining full
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compatibility with the installed base of Ethernet nodes. Management believes
that demand for Gigabit Ethernet is likely to grow as more LANs move to Fast
Ethernet, generating substantial traffic loads on backbone networks. Dataquest
has recently forecasted that the Gigabit Ethernet market will reach $2.9 billion
by 2000, at which time will become the dominant communications backbone
technology.
To promote the implementation of Gigabit Ethernet, the Gigabit
Ethernet Alliance ("GEA") was formed in May 1996. The Company is a member of the
GEA which includes Advanced Micro Devices, Inc., Bay Networks, Inc., Cabletron
Systems, Inc., Cisco Systems, Inc., Compaq Computer Corporation, Digital
Equipment Corporation, Hewlett- Packard Company, Intel Corporation, Lucent
Technologies Inc., Sun Microsystems, Incorporated, U B Networks and 3Com
Corporation.
FIBER OPTIC ENVIRONMENT
Fiber optic transmission 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 FTTC architectures to support services such as fast
Internet access and interactive video; (iii) the growth of cellular
communications and personal communications systems ("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 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. From 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 FDDI, 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 user's
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 enterprise carriers
("LECs") are implementing new technological standards, such as Synchronous
Optical Network ("SONET") and fiber-intensive architectures such as FTTC to
enable High-speed Internet Access and the delivery of cable TV and ATM 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 which
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.
PRODUCTS AND TECHNOLOGY
MRV offers advanced solutions for network connectivity requirements
by providing high speed LAN switching and fiber optic transmission products
which serve the computer networking and the broadband sections of the
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communications industry. The Company designs and sells two groups of products:
(i) high-speed networking equipment, including LAN switches and (ii) fiber optic
transmission solutions for SONET, ATM, FDDI, Fast Ethernet, cable TV and
wireless infrastructure.
ENTERPRISE NETWORKING SOLUTIONS
The Company designs network switching systems that increase the
productivity and functionality of LANs. MRV offers its customers a family of
network, switching and related products that enhance LAN performance and
facilitate the migration to next generation technologies such as Fast Ethernet,
Gigabit Ethernet and ATM.
The MegaSwitch Product Family. The Company's MegaSwitch products are
a family of Fast Ethernet switches which are marketed under MRV's NBase trade
name. The MegaSwitch products range from complete switching systems to stackable
switches which upgrade performance of existing LANs by relieving congestion of
overloaded network segments, enable full duplex and flow control and provide an
easy, cost-effective migration to higher transmission speeds without requiring
replacement of existing infrastructure. The MegaSwitch I, which was first
introduced in 1995, is a family of three Fast Ethernet switches, which enhance
the bandwidth of the corporate backbone to support higher traffic levels. These
systems are scalable and are compatible with a wide range of existing network
protocols and technologies. The Company's MegaSwitch II products, introduced in
1996, are designed for corporate, campus and metropolitan deployment as a
cost-effective method of connecting existing networks with higher-speed
backbones and are based on "Any Speed to Any Speed" Ethernet switching,
including Gigabit Ethernet with access to ATM. Fast Ethernet, Gigabit and ATM
uplink modules incorporate InterSwitch VLAN capabilities. InterSwitch VLANs
enable the network administrator to define separate VLANs spanning multiple
switches in order to achieve optimal network performance and serve multiple
workgroups.
Product Name Application and Functionality
- ------------ -----------------------------
MegaSwitch II This cost-effective stackable switch is a 12 port, high
performance switch which provides an uplink to ATM and
Gigabit Ethernet backbones, supports Ethernet/Fast Ethernet
traffic by automatically configuring for 10 Mbps/100 Mbps,
provides for zero packet loss even at extended network
links of up to 110 km and incorporates VLAN capability.
This switch can be used as an upgrade for an existing
workgroup or as a fully configured enterprise switch.
MegaSwitch I These stackable switches, with up to 13 ports provide a
migration path to upgrade from a legacy 10 Mbps LAN to a
100 Mbps network. These switches provide segmentation of 10
Mbps shared LAN and higher speed server or backbone
connections enabling interconnection of workgroups or
high-speed workstations.
Hubs and Network Management. To implement network segments, the
Company offers GigaHub, a multi-platform switchable hub, and MegaStack, a
stackable hub; and, to enable management and control of its switching products
and hub products, MRV has developed and offers MegaVision.
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Product Name Application and Functionality
------------ -----------------------------
GigaHub This enterprise network solution for medium to large
corporate networks requiring both shared and switched
connectivity in a mixed protocol environment, provides a 12
Gbps modular enterprise switching hub, supporting Ethernet,
Fast Ethernet, FDDI, ATM and Token Ring, as well as voice
and point-to-point protocols, and allowing integration of
LAN distribution and switching in a single hub.
MegaStack This high-speed stackable hub system implements Ethernet
and Fast Ethernet LAN segments, provides performance for
mission-critical and bandwidth-intensive applications,
connects from 12 to 180 users, is stackable with fiber
optic connectivity to remote locations and offers
plug-and-play convenience and built-in auto-partitioning
for instant isolation of network failures.
MegaVision This full-featured network management system provides
affordable and comprehensive management and control of all
MegaSwitch and MegaStack products and automatically detects
and monitors any SNMP compliant devices. It operates on all
major NMS platforms including Windows 3.1, Windows 95,
Windows NT Client, Novell NMS, HP/Open View for Windows or
UNIX.
Related Networking Products. The Company also offers a number of
other products supporting network connectivity. Examples of such products are
summarized in the table below.
Products Description and Functionality
-------- -----------------------------
Fiber Optic These products consist of Ethernet and Fast Ethernet fiber
Transceivers and optic transceivers that enable campus or metropolitan
Converters deployment of Ethernet or Fast Ethernet networks through
fiber optic interconnection of LANs to a distance of over
100 km, and multimode to single mode fiber converters for
FDDI, ATM and SONET that extend the range of FDDI, ATM and
SONET via fiber.
Token Ring These products consist of multimedia Token Ring hubs with
fiber, coax, UTP and STP connectivity which extends the
distance between segments of Token Ring networks, and fiber
optic transceivers with multimode and single mode fiber,
which allow flexible implementation of IBM midrange and
mainframe terminal connectivity.
Midrange These products consist of Twinax Star panels, multiplexers
Connectivity and repeaters which allow flexible implementation of IBM
mid-range and mainframe terminal connectivity.
The Company's Recent Advance in Gigabit Ethernet. Gigabit Ethernet
aims to support the extension of Ethernet and Fast Ethernet standards to higher
speeds while insuring full interoperability with existing networks. The Company
recently developed an advance in Gigabit technology which it proposed to the
IEEE Gigabit Ethernet task force and which proposal was accepted in November
1996. The Company's proposal maximizes bandwidth utilization and doubles the
span of the network while also providing for delay sensitive applications such
as video. At the core of this technology is the ability to "save" one frame
during a collision event. This way, at least one frame transmitted will reach
its destination, thereby doubling throughput. The key advantages to the
Company's Gigabit Ethernet implementation include guaranteed bandwidth
utilization not influenced by collision, multimedia support and superior quality
of service.
Direct IP Switching. "Internet Protocol" ("IP") has become the
preferred network protocol for directing information across intranets. Because
of the rapid increase in high bandwidth intranet applications, current router
based IP rates have been unable to keep pace with network requirements. The
Company has developed, and introduced in the first quarter of 1997 as part of
its MegaSwitch product line, a series of DirectIP switching products that
provide the control and security of traditional routing with the performance of
switching. Furthermore, DirectIP switching allows full interoperability with
all standard based hubs, switches and NICs, thereby providing a cost-effective
solution to intranet router bottlenecks. In addition, management believes that
distributing the routing function over a number of DirectIP switches will
virtually eliminate the possibility that a single point of failure may occur in
any given network, thereby reducing operating costs.
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OPTICAL TRANSMISSION PRODUCTS
The Company offers a family of optical transmission components and
modules designed for transmission over fiber optic cable. These products address
transmission of voice, data and video across fiber and are also used in optical
fiber test equipment. The Company's products include discrete components, such
as laser diodes and LEDs and integrated components such as transmitters,
receivers and transceivers. The Company's components are used in data networks,
telecommunication transmission and access networks. Management believes that the
Company is benefitting from two major demand trends in this area: first, the
growth of the market, especially computer networking and the access networks, by
both LECs and cable TV providers; and second, as transmission speed and capacity
grow, a larger portion of all networks traffic is transmitted via fiber optic
versus copper wires.
Discrete Components. Discrete components include laser diodes and
LEDs. Every fiber optic communication system utilizes semiconductor laser diodes
or LEDs as its source of optical power. Laser diodes and LEDs are solid state
semiconductor devices that efficiently convert electronic signals into pulses of
light of high purity and brightness. The Company believes that its lasers and
LEDs, which can carry data over distances in excess of 20 km are among the most
powerful in their wavelength range in terms of optical power coupled into single
mode fiber.
Integrated Components. The Company's integrated components include an
LED and laser based transmitter/receiver product line, designed for computer
networking applications and the Company has recently introduced data link
products designed for SONET and ATM transmission standards. This product line
consists of products compatible with single mode fiber optic cable, which is
more suitable for long distance and high-speed transmission than multimode fiber
optic cable. As most currently available data link modules are designed for
multimode fiber optic cable, the Company has designed its products to be
adaptable, providing for easy conversion from a multimode type data link to a
single mode optical fiber.
Products for the Access Network. The Company has recently introduced
a line of products that addresses the rapidly growing deployment of the access
network. These products include fiber optic transmission by both LECs and cable
TV providers to address the increasing demand for telephony, Internet access and
interactive cable TV services.
The following is a brief description of these products.
FTTC: Telephone and High-speed Internet Access. Recently, the Company
started volume shipments of a new "Bi-directional" optical
transmission and reception module for two-way simultaneous
transmission of telephony and data over one fiber instead of the two
fibers normally used to transmit and receive information. This
product is integrated into the DISC system currently deployed by Bell
South in one of the largest FTTC projects in the United States.
Downstream Cable TV. The Company has recently engaged in new business
opportunities for linear lasers and receivers for cable TV and
believes its products are well positioned to serve this market. The
Company further believes that the upgrade of existing cable networks
and the deployment of fiber by the telephone companies to provide
cable TV delivery services is expected to increase the demand for the
Company's products.
Return Path Laser Transmitters. The Company's return path laser
transmitters send video, voice and data signals from the end user to
the cable TV operator. For interactive applications such as cable
modems and Fast Internet access, a cable network must have two-way
optical transmitters and receivers in place before those services can
be offered. Most of today's cable networks still have just a one-way
downstream path.
DFB Laser Module for Cable TV (Narrowcasting). The Company offers DFB
laser modules with high power and stable analog transmission which
enable cable TV operators to send different signals to individual end
users, a capability known as narrowcasting.
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PRODUCT DEVELOPMENT
All of the Company's research and development projects are geared
toward technological advances with the goal of enabling the Company to introduce
innovative products early to market. New networking and fiber optic components
are constantly introduced to the market. This product introduction is driven by
a combination of rapidly evolving technology and standards, as well as changing
customer needs. MRV's research and product development strategy emphasizes
continuing evaluation of emerging trends and technical challenges in order to
identify new markets and product opportunities. The Company believes that its
success is due in part to its ability to maintain sophisticated technology
research programs while simultaneously focusing on practical applications to its
customers' strategic needs.
In order to meet its customers' price and performance demands, MRV
has focused on developing custom ASICs to implement its core switching
technologies. The Company spends significant resources to maintain and extend
its comprehensive ASIC design and test expertise. All custom ASICs are developed
internally using third party state-of-the-art design tools and the Company's
proprietary methodologies. The Company's ASIC expertise in conjunction with its
innovative product architectures and firmware enable the Company to develop
products characterized by high performance, reliability and low cost.
From its product development programs the Company expects to
introduce a number of new products within the next 12 months. One new product is
JavaMan, a platform independent, Internet-ready Network Management System
("NMS") which the Company created to expand the reach of MegaVision over the
Internet. All necessary software is expected to reside on MegaSwitch II,
pre-configured prior to customer delivery. JavaMan's use of existing Web
standards provides remote manageability in both Internet and intranet
environments
The Company also has a number of other new networking product
development programs underway, including Gigabit Ethernet switching and ATM
uplink modules. These products are being developed in response to current
technological trends and end user demands for greater bandwidth and product
flexibility. The Company is in the process of consolidating Fibronics' research
and development projects with its own programs. Among initial projects, the
Company is focusing on the integration of the GigaHub with MegaSwitch II
technology, including Gigabit Ethernet. The Company has recently announced a
GigaFrame product strategy for 1997, the architecture for which will consist of
a Gigabit Ethernet Switch, a GigaHub enterprise switch, MegaSwitch II and two
new low cost 10 Mbps to 100 Mbps stackable switches.
New products under development in the area of fiber optics include
transmission products for cellular and personal communication systems which
allow transmission over fiber optic cable between sites. The Company is also
developing fiberoptic components that will improve the system performance for
cable TV transmission. MRV also has research and development projects underway
seeking to enhance various of its fiber optic transmission products and is
participating in Bell South's FTTC project.
There can be no assurance that the technologies and applications
under development by the Company will be successfully developed, or, if they are
successfully developed, that they will be successfully marketed and sold to the
Company's existing and potential customers.
At December 31, 1996, the Company had 54 employees dedicated to
research and product development. Research and development expenditures totaled
approximately $2,100,000, $4,000,000 and $8,201,000 for years ended December 31,
1994, 1995 and 1996, respectively.
CUSTOMERS
The Company has sold its products worldwide to over 500 diverse
customers a wide range of industries, primarily; data communications,
telecommunications and cable TV. The Company anticipates that these customers
will continue to purchase its products in the foreseeable future. No customer
accounted for more than 10% of the Company's revenues in 1994, 1995 or 1996.
Current customers include:
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NETWORK SWITCHING
-----------------
COMPUTERS AND ELECTRONICS GOVERNMENT AGENCIES
------------------------- -------------------
- AMP Incorporated - Ealing (Borough of London)
- Data General Corporation - Federal Bureau of Investigation
- Fujitsu Ltd. (Japan) - MITI (Japan)
- International Business - National Security Administration
Machines Corporation - Police Department of
- Intel Corporation Berlin/Potsdam
- Matsushita (Germany) - Social Security Administration
- U B Networks - US Coast Guard
BANKING, FINANCE AND INSURANCE DIVERSIFIED AND OTHER
------------------------------ ---------------------
- Bankhaus Rinderknecht (Zurich) - Bayer AG
- GE Capital - The Walt Disney Co.
- NationsBank - Eastman Kodak
- Trans America Corporation - Tele-Communications, Inc.
FIBER OPTIC COMPONENTS
----------------------
DATA COMMUNICATIONS TELECOMMUNICATIONS
-------------------- ------------------
- Bay Networks, Inc. - Asea Brown Boveri
- Canoga Perkins - Broadband Network Inc.
- Cisco Systems, Inc. - Crosscom
- Connectware - Lucent Technologies Inc.
- Network Systems Corporation - Photon Technology (China)
- Nortel - Reltec
- Optical Data Systems - Transcom
VIDEO AND VOICE COMMUNICATIONS INSTRUMENTATION
------------------------------ ---------------
- Augat Communication Products Inc. - EXFO
- C-Cor - GN Nettest
- General Instrument - Kingfisher International
- Optelecom, Inc. - Noyes Fiber Systems
- Tektronix - 3M
MARKETING
The Company markets and sells its products under the NBase
Communications, NBase Switch Communications, MRV Communications and West Hills
LAN System brand names. Each product line has a dedicated sales and marketing
organization. The Company employs various methods, such as public relations,
advertising, and trade shows to build awareness of its 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.
The Company also establishes working relationships with trade
analysts, testing facilities and high visibility corporate accounts. Since the
results obtained by these organizations can often influence customers' purchase
decisions, a positive response from these organizations regarding the Company's
technology is important to product acceptance and purchase. Other activities
include attendance at technology seminars, preparation of competitive analyzes,
sales training, publication of technical and educational articles, maintenance
of a Web site and direct mailing of company literature. The Company also
believes that its participation in high-profile interactive projects such as
Bell South's FTTC project significantly enhances its reputation and name
recognition among existing and potential customers.
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SALES AND DISTRIBUTION
The Company continually seeks to expand its distribution capability
to capitalize on its technological expertise and production capacity and to
augment and increase distribution channels to accelerate its growth. Products
are sold through VARs, systems integrators, distributors, manufacturer's
representatives and OEM customers. The Company's sales and distribution
divisions are organized along four primary lines: OEM sales and partnerships;
VARs and systems integrators; manufacturer's representatives; and domestic and
international distributors.
Direct Sales. The Company employs a worldwide direct sales force
primarily to sell its products to large OEM accounts and to a lesser extent to
end users of the Fibronics product line. MRV believes 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. The
direct sales staff is located across the United States, Europe and Israel. The
integration of the Fibronics Business has more than doubled the Company's sales
force immediately preceding the acquisition.
Each of the Company's OEM partners resells the products under its own
name. The Company believes that the OEM partnerships enhance its ability to sell
its products in significant quantities to large organizations. Since these OEM
partners provide their own technical and sales support to their customers, the
Company is able to focus on other sales channels. The Company customarily enters
into contracts with OEM customers to establish the terms and conditions of sales
made pursuant to orders from OEMs. These OEMs incorporate the Company's product
into systems or sub-systems, which are then sold to end users via various
distribution channels. The Company has established OEM relationships in
connection with its switching equipment with leading communications and
networking companies including U B Networks, Fujitsu and Intel. The Company's
fiber optic components are sold only to OEMs.
To complement its direct sales effort the Company utilizes the
following indirect sales channels:
Domestic and International Distributors. The Company works with
distributors domestically and internationally and has recently begun selling
products through Tech Data. Geographic exclusivity is normally not awarded
unless the distributor has exceptional performance. Distributors must
successfully complete the Company's 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. The
Company uses stocking distributors, which purchase the Company's product and
stock it in their warehouse for immediate delivery, and non-stocking
distributors, which purchase the Company's product after the receipt of an
order. Internationally, the Company sells through approximately 80 distributors
in Asia, Africa, Europe, Australia, the Middle East, Canada and Latin America.
Value-Added Resellers. MRV uses a select group of VARs in the U.S.
which are generally selected for their ability to offer the Company's products
in combination with related products and services, such as system design,
integration and support. Such specialization allows the Company to penetrate
targeted vertical markets such as telecommunications and cable TV. Generally,
the Company uses a two-tier distribution system to reach a broader range of
customers, however VARs may purchase the product directly from the Company if
the volume warrants a direct relationship.
Manufacturers' Representatives. To supplement the Company's direct
sales efforts, manufacturer's representatives are assigned by territory in the
U.S. and work exclusively on commission.
Customer Support and Service. The Company is committed to providing
strong technical support to its customers. MRV operates a customer service
group, and provides support through its engineering group, sales staff,
distributors, OEMs and VARs. Customer support personnel are currently located at
the Company's offices in California, Maryland and Israel.
International Sales. International sales accounted for approximately
19%, 45% and 53% of the Company's net revenues in 1994, 1995 and 1996
respectively.
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MANUFACTURING
The Company has developed proprietary ASICs to implement high level
component integration in its networking product development process. To develop
ASICs successfully, the Company must transfer a code of instructions to a single
mask from which low cost duplicates can be made. Each iteration of a mask
involves a substantial up-front cost, which costs can adversely affect the
Company's result of operations and financial condition if errors or "bugs" occur
following multiple duplication of the masks. While the Company has not
experienced material expenses to date as a result of errors discovered in ASIC
masks, because of the complexity of the duplication process and the difficulty
in detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single foundry
to fabricate its ASICs and does not have long-term supply contract with this
supplier, any other ASIC vendor or any other of its limited source vendors,
purchasing all of such components on a purchase order basis. While the Company
believes it would be able to obtain alternative sources of supply for the ASICs
or other key components, a change in ASIC or other key suppliers of key
components could require a significant lead time and, therefore, could result in
a delay in product shipments. While the Company has not experienced delays in
the receipt of ASICs or other key components, any future difficulty in obtaining
any of these key components could result in delays or reductions in product
shipments which, in turn, could have material adverse effect on the Company's
business, operating results business and financial condition.
The Company outsources the assembly, test and quality control of its
computer networking products to third party contract manufacturers, thereby
allowing it to react quickly to market demand, to avoid the significant capital
investment required to establish and maintain manufacturing and assembly
facilities and to concentrate its resources on product design and development.
Final assembly, burn-in, final testing and pack-out are performed by the Company
to maintain quality control. The Company's manufacturing team is 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. Although
there are a large number of contract manufacturers which the Company can use for
its outsourcing, MRV has elected to use one vendor for a significant portion of
its board assembly requirements in order to foster consistency in quality of the
products. This independent third party manufacturer also provides these 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 the
Company's contract manufacturer fails to deliver products in the future on a
timely basis, or at all, it would be extremely difficult for the Company to
obtain adequate supplies of products from other sources on short notice. There
can be no assurance that the Company's third party manufacturer will provide
adequate supplies of quality products on a timely basis, or at all. The Company
can outsource with another vendor or vendors; however, such a change in vendors
may require significant time and result in shipment delays and expenses. The
inability to obtain such products on a timely basis, the loss of such vendor or
a change in the terms and conditions of the outsourcing would have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company relies exclusively on its own production capability for
critical semiconductor lasers and LEDs used in its products. The Company's
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, wirebond, substrate
attachment and fiber coupling. The Company also conducts tests throughout its
manufacturing process using commercially available and in-house built testing
systems that incorporate proprietary procedures. The Company performs final
product tests on all of its products prior to shipment to customers. Many of the
key processes used in the Company's products are proprietary; and, therefore,
many of the key components of the Company's products are designed and produced
internally. Because the Company manufactures these and other key components of
its products at its own facility and such components are not readily available
from other sources, any interruption of the Company's manufacturing process
could have a material adverse effect on the Company's operations. Furthermore,
the Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of any of whom could
result in the Company's 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, performance
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of the manufacturing equipment, defects in the masks used to print circuits on
the wafer and the level of contaminants in the manufacturing environment. There
can be no assurance that the Company 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, the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company believes that it has sufficient
manufacturing capacity for growth in the coming years.
The Company is 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 the
Company's ability to expand its operations. Any failure by the Company 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 the Company to substantial liability or could cause
its manufacturing operations to be suspended. Such liability or suspension of
manufacturing operations could have a material adverse effect on the Company's
operating results. To date such laws and regulations have not had a material
adverse effect on the Company's operating results.
COMPETITION
The communications equipment and component industry is intensely
competitive. The Company competes directly with a number of established and
emerging computer, communications and networking device companies. Direct
competitors in network switching include Bay Networks, Inc., Cabletron Systems,
Inc., Cisco Systems Inc., Digital Equipment Corporation, FORE Systems, Inc.,
Hewlett-Packard Company, International Business Machines Corporation and 3Com
Corporation. In addition, direct competitors in fiber optic transmission
products include AMP Incorporated, Fujitsu, Hewlett-Packard Company, Lucent
Technologies Inc., Mitsubishi, NEC Electronics Inc., Ortel Corporation, Phillips
Semiconductors and Siemens Components, Inc. Many of the Company's competitors
have significantly greater financial, technical, marketing, distribution and
other resources and larger installed customer bases than the Company. 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. The ability to
act as a single source vendor and provide a customer with an enterprise-wide
networking solution has increasingly become an important competitive factor. In
addition, there are a number of early stage companies which are developing Fast
Ethernet, Gigabit Ethernet switching and alternative solutions. If developed
successfully, these solutions could be higher in performance or more
cost-effective than the Company's products.
Moreover, there are also several alternative network technologies.
For example, in the local access market, the Company's products compete with
telephone network technology known as "ADSL." In this technology, digital
signals are transmitted through existing telephone lines from the central office
to the home. The Company also expects that competitive pricing pressures could
result in price declines for the Company's and its competitors' products. Such
increased competition could result in reduced margins and loss of market share
which would materially and adversely affect the Company's business, operating
results and financial condition.
The networking industry has become increasingly concentrated in
recent years as a result of consolidation. This consolidation is likely to
permit the Company's 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. The Company
expects 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, the Company has relied principally upon copyrights and trade
secrets to protect its proprietary technology. The Company generally enters into
confidentiality agreements with its employees and key suppliers and otherwise
seeks to limit access to and distribution of the source code to its software and
other proprietary information. There can be no assurance that such steps will be
adequate to prevent misappropriation of the Company's technology or that a third
party will not independently develop technology similar or superior to the
Company's technology. The Company has patent applications pending. There can
be no assurance that patents will be issued with respect to the
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pending applications or that, if issued, such patents will be upheld as valid or
will prevent the development of competitive products. In addition, the laws of
some foreign countries may not permit the protection of the Company's
proprietary rights to the same extent as do the laws of the United States.
There has been substantial industry litigation regarding intellectual
property rights involving technology companies. In the future, litigation may be
necessary to protect trade secrets and other intellectual property rights owned
by the Company, to enforce any patents issued to the Company, to defend the
Company 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 management's attention, which could have a
material adverse effect on the Company's 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 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. While to date the
Company has not received any communications alleging that the Company's products
infringe on the intellectual property rights of others, there can be no
assurance that the Company will not be subject to such claims in the future.
EMPLOYEES
As of December 31, 1996, the Company had 352 full-time employees,
including six executive officers, 153 in production, 105 in marketing and sales,
54 in research and development and 34 in general administration. None of the
Company's employees are represented by a union or governed by a collective
bargaining agreement, and the Company believes its relationship with its
employees is good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research
and development and manufacturing facility is located in Chatsworth, California.
The facility covers approximately 17,700 square feet and is leased from an
unaffiliated third party at an annual base rent of approximately $106,000 (plus
local taxes) for a lease term expiring in March 1999. In addition, the Company
leases space in two buildings near its primary facility in Chatsworth,
consisting of approximately 5,000 square feet and approximately 12,800 square
feet from unaffiliated third parties at annual base rentals of approximately
$43,000 and $91,000 (plus local taxes), respectively. Both of these lease terms
also expire in March 1999.
The Company also leases space in German Town, Maryland for its sales
office and warehouses. This facility covers approximately 4,800 square feet and
is leased from an unaffiliated third party at an annual base rent of
approximately $35,000 per year (plus local taxes) for a lease term expiring
August 2000.
The Company's administrative, sales and marketing, research and
development and manufacturing operations in Israel are located in Yokneam,
Israel in facilities that cover approximately 23,400 square feet, are leased for
total annual base rents of approximately $206,000 for a lease term expiring in
January 2002.
The Company leases approximately 5,200 square feet of space from an
unaffiliated third party in Basingstoke, England which it uses for sales,
marketing and warehousing. The premises are leased for total annual base rents
of approximately $75,000 for a lease term expiring in August 1999.
The Company leases approximately 1,600 square feet of space from an
unaffiliated third party in Frankfurt, Germany, which it uses for sales,
marketing and warehousing. The premises are leased for total annual base rents
of approximately $221,000 for a lease term expiring in August 1999.
The Company also occupies space under a capital lease with an
unaffiliated third party in Milan, Italy which it uses for sales offices and
warehousing. Annual payments under the lease are approximately $220,000 and the
lease runs through March 2004.
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The Company believes that its present facilities are sufficient to
meet its current needs and that adequate additional space will be available for
lease when required.
ITEM 3. LEGAL PROCEEDINGS
In July 1996, R. Douglas Sherrod, a former employee of the Company
who was terminated in August 1994, filed an action in Superior Court of Los
Angeles County, California against the Company and three of its executive
officers and directors, Mr. Noam Lotan, Dr. Shlomo Margalit and Dr. Zeev
Rav-Noy. The complaint seeks compensatory and punitive damages in unspecified
amounts, together with attorneys fees and costs of suit, for alleged wrongful
termination, breach of contract, negligent misrepresentation and fraud. The
bases of the complaint are Mr. Sherrod's claims that he was terminated
supposedly in retaliation for having informed the Company of its alleged use of
proprietary information of a third party and claimed that he insisted that such
information be destroyed; that he was purportedly induced by the defendants to
join the Company by the entry into a stock option agreement which the Company
allegedly had no intention of performing; and that the Company allegedly
breached the stock option agreement. Management believes that the complaint is
without merit and intends to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The 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 the
Common Stock for the periods indicated as reported by The Nasdaq National Market
(as adjusted for the 3-for-2 stock split effected May 20, 1996 and the 2-for-1
stock split effected July 29, 1996).
1995: HIGH LOW
----- ---- ---
First Quarter .................................. $ 4.92 $ 3.59
Second Quarter.................................. $ 4.46 $ 3.63
Third Quarter................................... $ 7.13 $ 4.25
Fourth Quarter.................................. $ 8.46 $ 5.50
1996
----
First Quarter................................... $ 17.67 $ 8.42
Second Quarter.................................. $ 37.13 $ 15.63
Third Quarter................................... $ 27.94 $ 15.00
Fourth Quarter ................................. $ 24.88 $ 17.00
At April 4, 1997 the Company had 250 stockholders of record, as
indicated on the records of the Company's transfer agent who held, management
believes, for approximately 13,350 beneficial holders.
The Company has never declared or paid cash dividends on the Common
Stock since its inception. The Company currently intends to retain all of its
earnings, if any, for use in the operation and expansion of its business and
does not intend to pay any cash dividends to its stockholders in the foreseeable
future.
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Recent Sales of Unregistered Securities
During August and September 1996, the Company sold an aggregate of
$30 million principal amount 5% convertible subordinated debentures due August
6, 1999 (the "Debentures") and warrants to purchase up to 600,000 shares of
Common Stock at a weighted average exercise price of $26.67 per share for three
years to a total of 14 investors in a private financing, receiving proceeds
aggregating $30 million. The Debentures were convertible into Common Stock of
the Company at any time at the option of the holders at a discount from the
market price of the Common Stock at the time of conversion that decreased over
the life of the Debentures until it reached a floor. Through December 31, 1996,
$12,675,000 principal amount of Debentures and $178,000 of accrued interest had
been converted into approximately 812,000 shares of Common Stock.
On September 26, 1996, as part of the purchase price connection with
the acquisition from Elbit of the Fibronics Business, the Company issued
458,991 shares of Common Stock of Elbit.
On November 26, 1996, the Company completed a private placement of
200,000 shares of Common Stock to Intel Corporation ("Intel") for $4,000,000
($20.00 per share). As part of the private placement, the Company issued to
Intel three-year warrants to purchase up to 500,000 additional shares of Common
Stock at $20.00 per share. Of such warrants, warrants to purchase 200,000 shares
of Common Stock are exercisable under certain conditions.
The above-described sales of securities were not effected through
any broker-dealer, and no underwriting discounts or commissions were paid in
connection with such sales. Exemption from registration requirements is claimed
under the Securities Act of 1933 (the "Securities Act") in reliance on Section
4(2) of the Securities Act, Regulation D promulgated thereunder or Section
3(a)(9) of the Securities Act. No brokers' commissions or fees were paid in
connection with any of the foregoing transactions. The recipients of securities
in each such transaction represented their intention to acquire the securities
for investment only and not with a view to, or for sale in connection with, any
distribution thereof and appropriate legends were affixed to the certificates
evidencing the securities in such transactions. All recipients had adequate
access to information about the Company. No consideration or other remuneration
was paid or given, and no solicitation was made, in connection with the
conversion of the Debentures.
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the three
years in the period ended December 31, 1996 and the balance sheet data as of
December 31, 1995 and 1996 are derived from the financial statements and notes
thereto included elsewhere herein audited by Arthur Andersen LLP, independent
public accountants, as set forth in their report also incorporated by reference
herein. The selected statement of operations data for the three years in the
period ended December 31, 1993 and the balance sheet data as of December 31,
1992, 1993 and 1994 were derived from audited financial statements of the
Company not included herein. 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 STATEMENT OF OPERATIONS DATA:
Year ended December 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In thousands, except per share amounts)
Revenues, net .................................................. $ 4,422 $ 7,426 $17,526 $39,202 $88,815
Cost of goods sold ............................................. 2,280 3,936 10,328 22,608 51,478
Research and development expenses .............................. 589 1,103 2,144 4,044 8,201
Selling, general and administrative expenses ................... 631 1,259 2,615 6,799 14,025
------- ------- ------- ------- -------
Operating income before non-recurring charges(1)................ 922 1,128 2,439 5,751 15,111
Purchased technology in progress(1) ............................ - - - 6,211 17,795
Restructuring costs(1) ......................................... - - - 1,465 6,974
------- ------- ------- ------- -------
Operating income (loss) ........................................ 922 1,128 2,439 (1,925) (9,658)
Other income (expense) ......................................... (122) 198 162 654 153
Interest expense related to convertibles debentures
and acquisition ............................................. - - - - (4,357)
------- ------- ------- ------- -------
Income (loss) before provision for income taxes,
minority interests and extraordinary items .................. 800 1,326 2,601 (1,271) (13,862)
Provision (credit) for income taxes ............................ 282 487 983 2 (4,404)
Minority interests ............................................. - - - - 196
Extraordinary item-debt restructuring .......................... 42 - - - --
------- ------- ------- ------- -------
Net income (loss) .............................................. $ 560 $ 839 $ 1,618 $(1,273) $(9,654)
======= ======= ======= ======= =======
Net income (loss) per share ................................... $ 0.08 $ 0.07 $ 0.13 $(0.07) $(0.49)
======= ======= ======= ======= =======
Weighted average common and common equivalent shares
outstanding(2) .............................................. 7,636 12,050 12,567 18,377 19,739
CONSOLIDATED BALANCE SHEET DATA:
At December 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(In thousands)
Working capital ................................................ $ 3,773 $ 3,514 $ 11,303 $ 22,019 $ 56,973
Total assets ................................................... 6,389 7,328 16,667 33,307 96,943
Total liabilities .............................................. 1,437 1,537 3,761 8,049 43,790
Long-term debt, net of current portion ........................ 34 - - 271 18,892
Stockholders' equity (deficit) ................................. 4,952 5,791 12,906 25,258 52,301
- -----------
(1) Non-recurring charges consist of purchased technology in progress
and restructuring charges incurred as a result of the Ace and Galcom
acquisitions in 1995 and the Fibronics Acquisition in 1996 as well as
interest expense related to the Fibronics Acquisition in 1996.
Purchased technology in progress for the year ended December 31, 1995
was $6,211,000. The purchased technology is for R&D projects in
progress at the time of acquisition of assets from Ace and Galcom.
Restructuring costs during the year ended December 31, 1995 were
$1,465,000 and are associated with a plan adopted by the Company in
1995 calling for the merger of the newly acquired subsidiaries and
the Company's LAN product division. The plan also called for the
closure of some facilities, termination of redundant employees and
cancellation of representation agreements. Excluding the
non-recurring charges, net of their tax effects, net income would
have increased to $4,345,000 ($0.22 per share) for the year ended
December 31, 1995. Purchased technology in progress for the year
ended December 31, 1996 was $17,795,000 and was in conjunction with
the
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acquisition of assets from subsidiaries of Elbit. Restructuring costs
during the year ended December 31, 1996 were $6,974,000 and are
associated with a plan adopted by the Company on September 30, 1996
calling for the reduction of workforce, closing of certain
facilities, retraining of certain employees and elimination of
particular product lines due to this acquisition. Interest expense
related to acquisition for the year ended December 31, 1996 was
$4,357,000 and was connected with the private placement of
$30,000,000 principal amount of Debentures, proceeds from which the
Company used to finance the cash portion of the purchase price for
the Fibronics Business. Excluding the non-recurring charges, net of
their tax effects, net income would have been $10,555,000 or $0.46
per Share for the year ended December 31, 1996.
(2) Fully diluted earnings per share information differs from primary
earnings per share information for the year ended December 31, 1994.
The number of shares included 147,480 common share equivalents
resulting from outstanding warrants.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Report contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following and elsewhere in this
Report. The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
GENERAL
Since its inception in 1988, the Company has manufactured and
marketed semiconductor optical transmission products for the fiber optics
communications industry. In 1993, the Company expanded its product line to
include products incorporating Ethernet switching technology that improved
network throughput and enhanced efficiency of LANs and introduced its first
switch marketed under the NBase trademark in the fourth quarter of 1993. During
1994, the Company expanded commercial shipments of its LAN switching products.
In 1995, the Company augmented its networking products with the acquisitions of
certain assets of Galcom and Ace, which resulted in charges of $6,211,000 and
$1,465,000 for purchased technology in progress and restructuring, respectively.
Net revenues from sales of networking products and semiconductor optical
transmission products were 60% and 40%, respectively, during the year ended
December 31, 1995 and approximately 69% and 31%, respectively, during the year
ended December 31, 1996.
In September 1996, the Company completed the Fibronics Acquisition,
acquiring assets related to Fibronics' computer networking and
telecommunications businesses in Germany, the United States, the United Kingdom,
the Netherlands and Israel. The assets acquired included Fibronics' technology
in progress and existing technology, its marketing channels, its GigaHub family
of computer networking products and other rights. This acquisition also resulted
in charges in the amount $17,795,000 and $6,974,000 for purchased technology in
progress and restructuring, respectively.
In September 1996, the Company completed a private placement of an
aggregate of $30,000,000 principal amount of 5% convertible subordinated
debentures due August 6, 1999 (the "Debentures"). Proceeds from this private
placement were used to purchase the Fibronics Business. The Debentures were
convertible into Common Stock of the Company at any time at the option of the
holders at a discount from the market price of the Common Stock at the time of
conversion that decreased over the life of the Debentures until it reached a
floor. At a meeting of the Emerging Issues Task Force held on March 13, 1997,
the staff of the Securities and Exchange Commission ("SEC") announced its
position on the accounting treatment for the issuance of convertible preferred
stock and debt securities with a beneficial conversion feature such as that
contained in the Debentures. As announced, the SEC requires that a beneficial
conversion feature attached to instruments such as the Debentures that are
convertible into equity be recognized and measured by allocating a portion of
the proceeds equal to the intrinsic value of that feature to additional paid-in
capital and charging it to interest expense. As a result of this position, the
Company added a non-recurring, non-cash charge to its results of operations for
the year ended December 31, 1996 related to the issuance of the Debentures in
the amount of $4,357,000. The Company also plans to report additional
non-recurring charges over the quarters ending March 31, 1997 and June 30, 1997
totaling approximately $250,000, more than $200,000 of which will be reported in
the quarter ending March 31, 1997. The Company will not need to report future
charges relating to the issuance of the Debentures beyond the second quarter of
1997 as the outstanding principal and accrued interest were paid in full at
April 4, 1997 through conversion into Common Stock. See "Liquidity and Capital
Resources" below.
The Company's international sales are not concentrated in any
specific country. The estimated operating profit from international sales for
the years ended December 31, 1996, 1995 and 1994 and 1993 were $8,009,000,
$2,646,000, and $466,000, respectively. The amounts for the years ended December
31, 1996 and 1995 are before non-recurring charges. At December 31, 1995 and
1996, 16% and 14% of the Company's assets were located in the Middle East and at
December 31, 1996, 17% of the Company's assets were located in the European
Community. Except for such assets, there were no significant assets located in
geographic regions outside of the U.S. at December 31, 1995 or 1996. In years
prior to 1995, substantially all the assets were located in the U.S.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement
of operations data of the Company expressed as a percentage of revenues (except
for revenue growth rates).
Year ended December 31,
-------------------------------------------------
1994 1995 1996
----- ----- -----
Revenues, net ...................................................... 100.0% 100.0% 100.0%
Revenue growth rate from prior period .............................. 136.0 124.0 126.6
Cost of goods sold ................................................. 58.9 57.7 58.0
----- ----- -----
Gross profit ....................................................... 41.1 42.3 42.0
Operating expenses:
Research and development expenses ............................... 12.2 10.3 9.2
Selling, general and administrative expenses .................... 14.9 17.3 15.8
----- ----- -----
Operating income before non-recurring charges ...................... 13.9 14.7 17.0
Purchased technology in progress ................................ - 15.8 20.0
Restructuring costs ............................................. - 3.7 7.9
----- ----- -----
Operating income ................................................... 13.9 (4.9) (10.9)
Other income (expense), net ........................................ 0.9 1.7