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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] Quarterly report under section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended SEPTEMBER 30, 2002
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act for the transition period from ____________ to _______________
Commission file number 0-25678
---------
MRV COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1340090
(State or other jurisdiction (I.R.S. Employer
incorporation or organization) identification No.)
20415 NORDHOFF STREET, CHATSWORTH, CA 91311
(Address of principal executive offices, Zip Code)
Issuer's telephone number, including area code: (818) 773-0900
Indicate by check mark, whether the issuer (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
9134 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 1, 2002, there were 94,453,402 shares of Common Stock,
$.0017 par value per share, outstanding.
MRV COMMUNICATIONS, INC.
FORM 10-Q, SEPTEMBER 30, 2002
INDEX
Page Number
-----------
PART I Financial Information 3
Item 1. Financial Statements: 3
Consolidated Condensed Statements of Operations (unaudited) for the 4
three and nine months ended September 30, 2002 and 2001
Consolidated Condensed Balance Sheets as of September 30, 2002 5
(unaudited) and December 31, 2001
Consolidated Condensed Statements of Cash Flows (unaudited) for the 7
nine months ended September 30, 2002 and 2001
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results 17
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
Item 4. Controls and Procedures 33
PART II Other Information 45
Item 2. Changes in Securities and Use of Proceeds 45
Item 6. Exhibits and Reports on Form 8-K 45
Signatures 46
Certifications Pursuant to Rule 13a-14:
Certification of the Chief Executive Officer 47
Certification of the Chief Financial Officer 48
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to 49
Section 906 of the Sarbanes-Oxley Act of 2002
As used in this Report, "we, "us," "our," "MRV" or the "Company" refer to MRV
Communications, Inc. and its consolidated subsidiaries.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have
been prepared by MRV, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although MRV
believes that the disclosures are adequate to make the information presented
not misleading. It is suggested that these condensed financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in MRV's latest annual report on Form 10-K.
In the opinion of MRV, these unaudited statements contain all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position of MRV Communications, Inc. and Subsidiaries as
of September 30, 2002, and the results of their operations and their cash flows
for the three and nine months then ended.
3
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED Nine Months Ended
------------------------------- ----------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
NET REVENUE $ 60,833 $ 69,730 $ 184,878 $ 259,364
Cost of goods sold 43,377 57,621 127,205 212,777
------------- -------------- ------------- -------------
GROSS PROFIT 17,456 12,109 57,673 46,587
OPERATING COSTS AND EXPENSES:
Product development and engineering 11,681 19,307 41,726 70,094
Selling, general and administrative 21,365 51,252 69,224 133,375
Amortization of intangibles 29 27,218 86 84,385
Impairment loss on long-lived assets 16,516 - 16,516 -
Impairment loss on goodwill and other intangibles 72,697 - 72,697 -
------------- -------------- ------------- -------------
Total operating costs and expenses 122,288 97,777 200,249 287,854
------------- -------------- ------------- -------------
OPERATING LOSS (104,832) (85,668) (142,576) (241,267)
Other expense, net 374 1,410 10,328 4,303
------------- -------------- ------------- -------------
LOSS BEFORE MINORITY INTEREST, PROVISION FOR TAXES AND
CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (105,206) (87,078) (152,904) (245,570)
Minority interest 43 (3,646) 145 (10,085)
Provision for taxes 11,869 6,215 12,911 2,593
-------------- -------------- ------------- -------------
LOSS BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (117,118) (89,647) (165,960) (238,078)
Cumulative effect of an accounting change - - 296,355 -
-------------- -------------- ------------- -------------
NET LOSS $ (117,118) $ (89,647) $ (462,315) $ (238,078)
============== ============== ============= =============
EARNINGS PER SHARE:
Basic and diluted loss per share:
Loss before cumulative effect of an accounting change $ (1.24) $ (1.16) $ (1.85) $ (3.13)
Cumulative effect of an accounting change $ - $ - $ (3.30) $ -
NET LOSS $ (1.24) $ (1.16) $ (5.15) $ (3.13)
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic and diluted 94,351 77,404 89,800 75,973
============== ============== ============= =============
The accompanying notes are an integral part of these consolidated condensed
financial statements
4
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30,
2002 December 31, 2001
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,675 $ 164,676
Short-term marketable securities 22,911 46,696
Time deposits 3,092 9,341
Accounts receivable, net 40,571 55,106
Inventories 39,389 57,308
Assets held for sale 36,322 -
Other current assets 8,848 10,044
---------- ----------
TOTAL CURRENT ASSETS 231,808 343,171
PROPERTY, PLANT AND EQUIPMENT, NET 35,599 72,012
GOODWILL AND OTHER INTANGIBLES 29,869 395,312
LONG-TERM MARKETABLE SECURITIES 1,359 -
DEFERRED INCOME TAXES 11,749 23,229
INVESTMENTS 5,741 16,937
OTHER NON-CURRENT ASSETS 5,893 13,834
---------- ----------
$ 322,018 $ 864,495
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 684 $ 52,226
Convertible subordinated notes 39,918 -
Short-term obligations 1,869 18,679
Accounts payable 39,997 48,586
Accrued liabilities 30,552 39,035
Liabilities held for sale 23,614 -
Other current liabilities 6,694 9,277
---------- ----------
TOTAL CURRENT LIABILITIES 143,328 167,803
LONG-TERM DEBT 614 8,871
CONVERTIBLE SUBORDINATED NOTES - 89,646
OTHER LONG-TERM LIABILITIES 3,792 3,737
MINORITY INTEREST 7,311 9,762
COMMITMENTS AND CONTINGENCIES
5
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUES)
SEPTEMBER 30, December 31,
2002 2001
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
Authorized -- 1,000 shares; no shares issued or outstanding - -
Common stock, $0.0017 par value:
Authorized -- 160,000 shares
Issued -- 95,634 shares in 2002 and 82,824 in 2001
Outstanding -- 95,016 shares in 2002 and 82,776 in 2001 161 141
Additional paid-in capital 1,148,737 1,118,942
Accumulated deficit (959,998) (497,683)
Deferred stock compensation, net (9,859) (26,344)
Treasury stock, 618 shares in 2002 and 48 shares in 2001 (679) (133)
Accumulated other comprehensive loss (11,389) (10,247)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 166,973 584,676
------------ ------------
$ 322,018 $ 864,495
============ ============
The accompanying notes are an integral part of these consolidated condensed
balance sheets
6
MRV COMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Nine Months Ended
---------------------------------
SEPTEMBER 30, September 30,
2002 2001
- -------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET CASH USED IN OPERATING ACTIVITIES $ (10,346) $ (86,151)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (5,939) (3,528)
Proceeds from sale or maturity of investments 22,353 16,267
Investments in unconsolidated equity method subsidiaries - (3,457)
Cash used in acquisition, net of cash received (490) -
Proceeds from sale of property, plant and equipment 75 36
---------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 15,999 9,318
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 134 18,989
Payment to terminate interest rate swap (3,198) -
Extinguishment of convertible subordinated notes (19,732) -
Purchase of treasury shares (547) -
Payments on short-term obligations (62,861) (16,860)
Borrowings on short-term obligations 57,453 18,307
Payments on long-term obligations (51,978) (1,856)
Borrowings on long-term obligations - 2,890
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (80,729) 21,470
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (4,340) 483
---------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (79,416) (54,880)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD (1) 160,091 266,261
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 80,675 $ 211,381
========== ==========
(1) Includes the reclassification of assets and liabilities held for sale
as of January 1, 2002. See Note 15 to consolidated condensed financial
statements.
The accompanying notes are an integral part of these consolidated condensed
financial statements
7
MRV COMMUNICATIONS, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. EARNINGS PER SHARE
Basic earnings per common share are computed using the weighted
average number of common shares outstanding during the period. Diluted earnings
per common share include the incremental shares issuable upon the assumed
exercise of stock options, warrants and conversion of the convertible
subordinated notes. The effect of the assumed conversion of $39.9 million and
$89.6 million of convertible subordinated notes for the three and nine months
ended September 30, 2002 and 2001, respectively, have not been included in the
loss per share computation, as it would be anti-dilutive. The dilutive effect
of all of MRV's stock options and warrants outstanding for the three and nine
months ended September 30, 2002 and 2001, respectively, have not been included
in the loss per share computation as their effect would be anti-dilutive.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
MRV adopted Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," effective January 1, 2002. In
accordance with SFAS No. 142, goodwill and intangible assets with indefinite
lives will no longer be amortized, but instead will be measured for impairment
at least annually, or when events indicate that impairment exists. Intangible
assets that are determined to have definite lives will continue to be amortized
over their useful lives.
As required by SFAS No. 142, MRV performed transitional impairment
tests on goodwill and other intangibles assets with indefinite lives, which
consisted of patents and assembled work forces, as of January 1, 2002. As a
result of the impairment tests, MRV recorded a $296.4 million cumulative effect
of an accounting change. Under SFAS No. 142, goodwill impairment exists if the
net book value of a reporting unit exceeds its fair value. MRV estimated the
fair value of its reporting units using a combination of discounted cash flow
analyses and comparisons with the market values of similar publicly-traded
companies.
Included in MRV's $296.4 million impairment was a $247.3 million charge
related to the impairment of the goodwill associated with the Foreign Optical
Components and Free-Space Optics reporting units. The Foreign Optical Components
reporting unit included the goodwill generated from the FOCI Fiber Optic
Communications, Inc. ("FOCI") and Quantum Optech, Inc. ("QOI") acquisitions (see
Note 15, Subsequent Event). The optical components, active and passive, markets
continued to deteriorate and have contracted significantly. As a result, MRV
determined that a significant portion of the goodwill acquired had been
impaired. The goodwill impairment in the Free-Space Optics reporting unit
reflected the significantly lower fair value calculated on the basis of reduced
operating revenues and income as a result of a depressed market for those
products.
The remaining $49.1 million of impairment charge related to patents
and assembled work forces associated with the Free Space Optics reporting unit.
The impairment of these patents and assembled work forces reflected the same
circumstances as described above.
During the third quarter of 2002 and in addition to the transitional
impairment testing, MRV reviewed its remaining goodwill and other intangible
assets as required annually pursuant to SFAS No. 142. MRV has determined that
the annual impairment test will be performed on October 1st of each year. As a
result of these reviews, the amount of the impairment was available prior to the
issuance of the financial statements and, as the impairment existed as of
September 30, 2002, the impairment was recognized during the third quarter of
2002. This impairment reduced the carrying value of goodwill and other
intangible assets by recording an impairment charge of $72.7 million, which
consisted of $70.4 million relating to goodwill and $2.3 million relating to
patents. MRV estimated the fair value of its reporting units using a combination
of discounted cash flow analyses and comparisons with the market values of
similar publicly-traded companies.
8
The following table summarizes MRV's identifiable intangible assets
and goodwill balances as of September 30, 2002 and December 31, 2001 (in
thousands):
SEPTEMBER 30, 2002 December 31, 2001
----------------------------------------- ----------------------------------------
GROSS NET Gross Net
CARRYING ACCUM. CARRYING Carrying Accum. Carryng
AMOUNT AMORT. AMOUNT Amount Amort. Amount
---------- ----------- ------------ ---------- ------------ -----------
INTANGIBLE ASSETS SUBJECT
TO AMORTIZATION:
Patents $ 21,331 $ (21,331) $ - $ 64,600 $ (14,445) $ 50,155
Assembled work forces 805 (805) - 1,790 (537) 1,253
Customer contracts 720 (720) - 720 (720) -
Other 243 (86) 157 - - -
---------- ---------- ---------- ---------- ---------- ----------
$ 23,099 $ (22,942) $ 157 $ 67,110 $ (15,702) $ 51,408
========== ========== ========== ========== ========== ----------
INTANGIBLE ASSETS NOT
SUBJECT TO AMORTIZATION:
Goodwill $ 196,234 $ (166,522) $ 29,712 $ 510,426 $ (166,522) $ 343,904
========== ========== ========== ========== ========== ==========
The results for the three and nine months ended September 30, 2001 do
not reflect the provisions of SFAS No. 142. Had MRV adopted SFAS 142 on January
1, 2001, the reported loss before cumulative effect of an accounting change and
the related net loss per share would have been presented as follows (in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
--------------------------- --------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
------------ ------------- ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE:
Reported loss before cumulative
effect of an accounting change $ (117,118) $ (89,647) $ (165,960) $ (238,078)
Amortization of intangibles - 27,218 - 84,385
Impairment loss of goodwill and
other intangibles 72,697 - 72,697 -
----------- ----------- ----------- -----------
Adjusted loss before cumulative
effect of an accounting change $ (44,421) $ (62,429) $ (93,263) $ (153,693)
=========== =========== =========== ===========
BASIC AND DILUTED EARNINGS PER SHARE:
Reported loss before cumulative
effect of an accounting change $ (1.24) $ (1.16) $ (1.85) $ (3.13)
Amortization of intangibles - 0.35 - 1.11
Impairment of loss goodwill and
other intangibles 0.77 - 0.81 -
----------- ----------- ----------- -----------
Adjusted loss before cumulative effect
of an accounting change $ (0.47) $ (0.81) $ (1.04) $ (2.02)
=========== =========== =========== ===========
9
3. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) were as follows (in
thousands):
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss $ (117,118) $ (89,647) $ (462,315) $ (238,078)
Realized loss on interest rate swap - - 3,198 -
Unrealized gain (loss) on interest
rate swap - (1,049) - (3,429)
Foreign currency translation (934) 1,394 (4,340) 483
----------- ----------- ----------- -----------
$ (118,052) $ (89,302) $ (463,457) $ (241,024)
=========== =========== =========== ===========
4. CASH AND CASH EQUIVALENTS, TIME DEPOSITS AND MARKETABLE SECURITIES
MRV considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Investments with maturities of less
than one year are considered short-term. Time deposits represent investments,
which are restricted as to withdrawal or use based on maturity terms.
Furthermore, MRV maintains cash balances and investments in highly qualified
financial institutions. At various times such amounts are in excess of
federally insured limits.
MRV accounts for its investments under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." As of
September 30, 2002 and 2001, short-term investments consisted principally of
U.S. Treasury Bonds, Municipal Bonds and Corporate Bonds. As defined by SFAS
No. 115, MRV has classified these investments in debt securities as
"held-to-maturity" investments and all investments are recorded at their
amortized cost basis, which approximated their fair market value at September
30, 2002 and 2001.
5. INVENTORIES
Inventories are stated at the lower of cost or market and consist of
materials, labor and overhead. Cost is determined by the first-in, first-out
method. Inventories consisted of the following (in thousands):
SEPTEMBER 30, December 31,
2002 2001
------------- ------------
Raw materials $ 8,976 $ 15,444
Work-in process 5,896 19,230
Finished goods 24,517 22,634
------------- ------------
$ 39,389 $ 57,308
============= ============
6. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION
MRV operates under a business model that includes its operating
divisions as well as start-up enterprises. These companies provide network
infrastructure products and services and fall into two business segments:
operating enterprises and development stage enterprises. Segment information is
therefore being provided on this basis.
10
MRV's operating enterprises design, manufacture and distribute optical
components, optical subsystems, optical networking solutions and Internet
infrastructure products. The primary activities of operating enterprises are to
provide solutions which enable high-speed broadband communications. Development
stage enterprises, which MRV has created or invested in, focus on core routing,
network transportation, switching and IP services, and fiber optic components
and systems. The primary activities of development stage enterprises have been
to develop solutions and technologies from which significant revenues have yet
to be earned.
The accounting policies of the segments are the same as those
described in the summary of significant accounting polices in MRV's latest
annual report on Form 10-K. MRV evaluates segment performance based on revenues
and operating income (loss) of each segment. As such, there are no separately
identifiable segment assets nor are there any separately identifiable
statements of operations data below operating income.
Business segment net revenues for the three and nine months ended
September 30, 2002 and 2001 were generated from operating enterprises. For the
three and nine months ended September 30, 2002, there were no significant net
revenues generated by development stage enterprises. There were no
inter-segment sales during the three and nine months ended September 30, 2002
and 2001. Net revenues by product group for the three and nine months ended
September 30, 2002 and 2001 were as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ ------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- ---------- ---------
Optical passive components $ 8,758 $ 8,454 $ 24,084 $ 32,102
Optical active components 11,098 13,315 39,590 83,100
Switches and routers 13,286 15,869 37,698 54,656
Remote device management 4,448 6,103 13,083 14,070
Network physical infrastructure 14,508 15,714 41,890 47,347
Services 3,982 6,955 15,088 16,545
Other network products 4,753 3,320 13,445 11,544
--------- --------- ---------- ----------
$ 60,833 $ 69,730 $ 184,878 $ 259,364
========= ========= ========== ==========
For the three and nine months ended and as of September 30, 2002 and
2001, MRV had no single customer that accounted for more than 10% of net
revenues or accounts receivable, respectively. A summary of external net
revenues by geographical region is as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ -------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- ---------- ----------
United States $ 13,980 $ 21,597 $ 50,529 $ 93,789
Asia Pacific 10,646 7,872 24,392 35,118
Europe 35,688 39,963 108,766 127,563
Other 519 298 1,191 2,894
--------- --------- ---------- ----------
$ 60,833 $ 69,730 $ 184,878 $ 259,364
========= ========= ========== ==========
11
Business segment operating loss for the three and nine months ended
September 30, 2002 and 2001 was as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ ------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Operating enterprises $ (99,077) $(72,061) $(121,493) $(199,419)
Development stage enterprises (5,755) (13,607) (21,083) (41,848)
--------- -------- --------- ---------
$(104,832) $(85,668) $(142,576) $(241,267)
========= ======== ========= =========
Loss before provision for income taxes for the three and nine months
ended September 30, 2002 and 2001 was as follows (in thousands):
Three Months Ended Nine Months Ended
------------------------ ------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
--------- --------- --------- ---------
United States $ (33,321) $(43,567) $(129,738) $(126,385)
Foreign (71,928) (39,865) (319,666) (109,100)
--------- -------- --------- ---------
$(105,249) $(83,432) $(449,404) $(235,485)
========= ======== ========= =========
7. RESTRUCTURING CHARGES
From November 9, 2000 through December 28, 2001, MRV owned
approximately 92% of Luminent, Inc. and approximately 8% of Luminent's shares
were publicly traded. During the second quarter of 2001, Luminent's management
approved and implemented a restructuring plan in order to adjust operations and
administration as a result of the dramatic slowdown in the communications
equipment industry generally and the optical components sector in particular.
Major actions primarily involved the reduction of workforce, the abandonment of
certain assets and the cancellation and termination of purchase commitments.
These actions are expected to realign the business based on current and
near-term growth rates. All of these actions are expected to be completed by the
end of the second quarter of fiscal year 2003.
Employee severance costs and related benefits of $1.3 million are
related to approximately 750 layoffs through September 30, 2002, bringing
Luminent's total workforce to approximately 950 employees as of September 30,
2002. Affected employees came from all divisions and areas of Luminent. The
majority of affected employees were in the manufacturing group.
12
A summary of the restructuring costs and the remaining liability
through and as of September 30, 2002 is as follows (in thousands):
2001 SEPT. 30,
Provision Utilized Adjustment 2002
--------- -------- ---------- ---------
EXIT COSTS:
Asset impairment $10,441 $10,441 $ - $ -
Closed and abandoned facilities 2,405 537 - 1,868
Purchase commitments 6,173 1,977 797 3,399
------- ------- ---- ------
19,019 12,955 797 5,267
Employee severance costs 1,281 736 - 545
------- ------- ---- ------
$20,300 $13,691 $797 $5,812
======= ======= ==== ======
A summary of the restructuring costs by line item for the nine months
ended September 30, 2002 and 2001 is as follows (in thousands):
Nine Months Ended
-------------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
EXIT COSTS:
Cost of goods sold $(797) $ 4,628
Selling, general and administrative - 12,376
Product development and engineering - 501
Other income, net - 16
----- -------
$(797) $17,521
===== =======
8. INCOME TAXES
MRV records valuation allowances against its deferred tax assets, when
necessary, in accordance with SFAS No. 109, "Accounting for Income Taxes."
Realization of deferred tax assets (such as net operating loss carryforwards and
income tax credits) is dependent on future taxable earnings and is therefore
uncertain. At least quarterly, MRV assesses the likelihood that its deferred tax
asset balance will be recovered from future taxable income. To the extent
management believes that recovery is unlikely, MRV establishes a valuation
allowance against its deferred tax asset, increasing its income tax expense in
the period such determination is made. The provision for taxes for the nine
months ended September 30, 2002 was $12.9 million, compared to a provision for
taxes of $2.6 million for the nine months ended September 30, 2001. During 2002,
MRV recorded an additional valuation allowance (tax expense) totaling $11.9
million relating to the expected realization of its deferred income tax assets
based on likely future recovery. MRV's tax expense fluctuates primarily due to
the tax jurisdictions where it currently has operating facilities and the
varying tax rates in those jurisdictions. For 2002, there was no benefit
provided for net operating losses.
13
9. INTEREST RATE SWAP
MRV entered into an interest rate swap (the "Swap") in the second
quarter of 2000 to effectively change the interest rate characteristics of its
$50.0 million variable-rate term loan presented in long-term debt, with the
objective of fixing its overall borrowing costs. The Swap was considered to be
100% effective and was therefore recorded using the short-cut method. The Swap
was designated as a cash flow hedge and changes in fair value of the debt were
generally offset by changes in fair value of the related security, resulting in
negligible net impact. The gain or loss from the change in fair value of the
Swap as well as the offsetting change in the hedged fair value of the long-term
debt were recognized in other comprehensive loss. In February 2002, MRV paid off
the long-term debt of $50.0 million (see Note 9, Long-term Debt and Convertible
Subordinated Notes) and terminated the Swap. The realized loss on the Swap of
$3.2 million has been recorded as interest expense and is included in other
expense, net in the accompanying consolidated condensed statements of
operations.
10. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES
In February 2002, MRV paid off a $50.0 million term loan. Additionally,
during the three months ended September 30, 2002, MRV acquired $21.4 million in
convertible subordinated notes (the "Notes") in exchange for $19.7 million in
cash. During the six months ended June 30, 2002, MRV acquired $28.3 million in
convertible subordinated notes (the "Notes") in exchange for MRV's issuance of
7.8 million shares of its common stock to the holders of the Notes. In
connection with these acquisitions, MRV recognized a gain of $5.3 million, net
of associated taxes, for the nine months ended September 30, 2002. MRV retired
all Notes acquired.
11. STOCK REPURCHASE PROGRAM
On June 13, 2002, MRV announced that its Board of Directors had
approved a program to repurchase up to 7.0 million shares of its common stock.
As of September 30, 2002, MRV had repurchased 570,000 shares of its common stock
at a cost of $546,000 under this program.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. MRV has reviewed this statement and does not expect a material
impact on its financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. MRV adopted this statement on January 1, 2002 (see Note 15,
Subsequent Event).
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement No. 4,
early application is encouraged. MRV has adopted this statement for the nine
months ended September 30, 2002, and the immediate impact of its application was
the reclassification of the gain on the extinguishment of debt (see Note 9,
Long-term Debt and Convertible Subordinated Notes) from an extraordinary item to
other income.
14
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-3, a liability is recognized at
the date an entity commits to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. The
provisions of SFAS No. 146 will be effective for any exit and disposal
activities initiated after December 31, 2002. MRV has reviewed this statement
and does not expect a material impact on its financial position, results of
operations or cash flows.
13. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
Nine Months Ended
-------------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
SUPPLEMENTAL STATEMENT OF CASH FLOW
INFORMATION (IN THOUSANDS):
Cash paid during period for interest $2,087 $6,937
====== ======
Cash paid during period for taxes $2,039 $3,144
====== ======
During the nine months ended September 30, 2002, MRV exchanged $28.3
million in convertible subordinated notes for 7.8 million shares of its common
stock. This non-cash transaction has been excluded from the accompanying
statements of cash flows.
14. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
15. SUBSEQUENT EVENT
On October 15, 2002, MRV's wholly-owned subsidiary Luminent, Inc.
("Luminent"), in a single transaction, sold (i) 53.4 million shares of the
capital stock of FOCI amounting to approximately 78% of the total issued and
outstanding share capital of FOCI and (ii) 19.0 million shares of the capital
stock of QOI, representing approximately 99% of the total issued and outstanding
share capital of QOI. The purchasers consisted of employees of FOCI, including
its President. Luminent continues to hold approximately 19.5% of the outstanding
share capital of FOCI and no remaining ownership in QOI.
The consideration received by Luminent for the sale of the FOCI and QOI
shares, which was determined through arms' length negotiations between Luminent
and MRV on the one hand, and the purchasers on the other, consisted of $8.0
million in cash and $2.0 million in credit against future purchases of
components. These assets have been included in MRV's Operating Enterprises
segment.
15
In accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," MRV has classified the assets and liabilities
sold as "assets held for sale" and "liabilities held for sale" in the
accompanying balance sheet. For the nine months ended September 30, 2002, MRV
recorded an impairment loss on long-lived assets totaling $15.9 million measured
based on the lower of its carrying amount or fair value less cost to sell. The
fair value less cost to sell was based on the sale price described above. The
adjusted carrying amounts of the major classes of assets and liabilities sold as
of September 30, 2002 and the historical carrying amounts as of December 31,
2001 were as follows (in thousands):
SEPTEMBER 30, December 31,
2002 2001
------------- ------------
ASSETS HELD FOR SALE
Cash and cash equivalents $ 2,265 $ 4,585
Marketable securities 85 72
Time deposits 4,907 4,708
Accounts receivable, net 5,924 5,615
Inventories 4,722 8,184
Property, plant and equipment 12,480 28,792
Goodwill and other intangibles, net 597 193,650
Other current and non-current assets 5,342 5,440
------- --------
$36,322 $251,046
======= ========
LIABILITIES HELD FOR SALE
Short-term obligations $10,430 $ 9,711
Accounts payable 1,499 3,009
Accrued liabilities 2,087 3,126
Long-term debt 8,259 9,512
Other current and non-current liabilities 1,339 1,464
------- --------
$23,614 $ 26,822
======= ========
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with Consolidated Condensed Financial
Statements and Notes thereto included elsewhere in this Report. In addition to
historical information, the discussion in this Report contains certain
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated by these forward-looking
statements due to factors, including but not limited to, those set forth in the
following and elsewhere in this Report. We assume no obligation to update any of
the forward-looking statements after the date of this Report.
OVERVIEW
We design, develop, manufacture, market and sell optical components and
optical network systems. Our optical components are aimed towards the metro and
residential access markets with our three product segments: extended-reach long
wavelength transceivers, metro access CWDM/DWDM and deep fiber residential
access (FTTX). We also provide intelligent network infrastructure systems and
elements for enterprise campus and metro networks. Our integrated solutions
include optical transport elements (using both fiber optics and Free-Space
Optics), metro Ethernet aggregation and remote presence management.
We market and sell our products world-wide, through a variety of
channels, which include a dedicated direct sales force, manufacturers'
representatives, value-added-resellers, distributors and systems integrators. In
addition, we maintain subsidiaries in France, Italy, Switzerland and Sweden,
which are involved in sales, distribution and services. The activities of these
subsidiaries include system design, integration and support as well as product
sales to enterprise customers and service providers. Products sold include
products manufactured by MRV, as well as products manufactured by third party
vendors. Such specialization enhances access to customers and allows us to
penetrate targeted vertical and regional markets.
Revenues for the three and nine months ended September 30, 2002 were
$60.8 million and $184.9 million, respectively, compared to $69.7 million and
$259.4 million, respectively for the three and nine months ended September 30,
2001, a decrease of 13% and 29%, respectively. We reported a net loss of $117.1
million and $89.6 million for the three months ended September 30, 2002 and
2001, respectively. A significant portion of these losses were due to the
impairment of goodwill and other intangibles in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 142, "Accounting for Goodwill and
Other Intangible Assets," amortization of goodwill and other intangibles and
deferred stock compensation related to our acquisitions in 2000 and our
employment arrangements with Luminent's former President and its former Chief
Financial Officer. We will continue to amortize deferred stock compensation
through 2004 relating to these acquisitions. Effective January 1, 2002, we
adopted SFAS No. 142, and we no longer amortize goodwill and intangibles with
indefinite lives, but instead goodwill and intangibles will be measured for
impairment at least annually, or when events indicate that impairment exists.
Intangible assets that are determined to have definite lives will continue to be
amortized over their useful lives. As required by SFAS No. 142, we performed the
transitional impairment test on goodwill and other intangibles, which consisted
of patents and assembled work forces. As a result of the transitional impairment
test, we recorded a $296.4 million cumulative effect of an accounting change. In
addition to the transitional impairment test, we reviewed our remaining goodwill
and other intangibles as required annually pursuant to SFAS No. 142. We will
perform our annual impairment review as of October 1st each year, commencing
with this review. As a result of the annual review, we further reduced the
carrying amount of goodwill and other intangibles by recording an impairment
charge of $72.7 million in the third quarter of 2002. For the nine months ended
September 30, 2002, we recorded impairment charges of $7.6 million in connection
with certain equity method investments as the fair value of these assets was
less than their carrying value. As a consequence of deferred stock compensation
charges and potential impairment charges, we do not expect to report net income
in the foreseeable future.
17
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations following are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.
We believe that the estimates, assumptions and judgments involved in
the accounting policies described below have the greatest potential impact on
our financial statements, so we consider these to be our critical accounting
policies. Because of the uncertainty inherent in these matters, actual results
could differ from the estimates we use in applying the critical accounting
policies. Certain of these critical accounting policies affect working capital
account balances, including the policies for revenue recognition, allowance for
doubtful accounts, inventory reserves and income taxes. These policies require
that we make estimates in the preparation of our financial statements as of a
given date. However, since our business cycle is relatively short, actual
results related to these estimates are generally known within the six-month
period following the financial statement date. Thus, these policies generally
affect only the timing of reported amounts across two to three quarters.
Within the context of these critical accounting policies, we are not
currently aware of any reasonably likely events or circumstances that would
result in materially different amounts being reported.
Revenue Recognition. We generally recognize product revenue, net of
sales discounts and allowances, when persuasive evidence of an arrangement
exists, delivery has occurred and all significant contractual obligations have
been satisfied, the fee is fixed or determinable and collection is considered
probable. Products are generally shipped "FOB shipping point" with no right of
return. Sales with contingencies, such as right of return, rotation rights,
conditional acceptance provisions and price protection are rare and
insignificant and are deferred until the contingencies have been satisfied or
the contingent period has lapsed. We generally warrant our products against
defects in materials and workmanship for one year. The estimated costs of
warranty obligations and sales returns and other allowances are recognized at
the time of revenue recognition based on contract terms and prior claims
experience. Our major revenue-generating products consist of: passive and active
optical components; switches and routers; remote device management; and network
physical infrastructure. Revenue generated through the sales of services and
systems support has been insignificant.
Allowance for Doubtful Accounts. We make ongoing estimates relating to
the collectibility of our accounts receivable and maintain a reserve for
estimated losses resulting from the inability of our customers to meet its
financial obligations to us. In determining the amount of the reserve, we
consider our historical level of credit losses and make judgments about the
creditworthiness of significant customers based on ongoing credit evaluations.
Since we cannot predict future changes in the financial stability of our
customers, actual future losses from uncollectible accounts may differ from our
estimates. If the financial condition of our customers were to deteriorate,
resulting in their inability to make payments, a larger reserve might be
required. In the event we determined that a smaller or larger reserve was
appropriate, we would record a credit or a charge to selling and administrative
expense in the period in which we made such a determination.
Inventory Reserves. We also make ongoing estimates relating to the
market value of inventories, based upon our assumptions about future demand and
market conditions. If we estimate that the net realizable value of our inventory
is less than the cost of the inventory recorded on our books, we record a
reserve equal to the difference between the cost of the inventory and the
estimated market value. This reserve is recorded as a charge to cost of goods
sold. If changes in market conditions result in reductions in the estimated
market value of our inventory below our previous estimate, we would increase our
reserve in the period in which we made such a determination and record a charge
to cost of goods sold.
Income Taxes. As part of the process of preparing our consolidated
financial statements, we are required to estimate our income taxes in each of
the jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred revenue, for tax
and accounting purposes. These differences result in deferred tax assets and
18
liabilities, which are included in our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations.
Significant management judgment is required in determining our
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets. Management
continually evaluates its deferred tax asset as to whether it is likely that the
deferred tax assets will be realized. If management ever determined that its
deferred tax asset was not likely to be realized, a write-down of that asset
would be required and would be reflected in the provision for taxes in the
accompanying period.
TRANSACTIONS WITH STOCK OF SUBSIDIARIES
In November 2000, Luminent completed the initial public offering of its
common stock, selling 12.0 million shares at $12.00 per share for net proceeds
of approximately $132.3 million. Luminent designs, manufactures and sells a
comprehensive line of fiber optic components that enable communications
equipment manufacturers to provide optical networking equipment for the
metropolitan and access segments of the communications networks. While we had
planned to distribute all of our shares of Luminent common stock to our
stockholders, unfavorable business and economic conditions in the fiber optic,
data networking and telecommunications industries and the resulting adverse
effects on the market prices of our common stock and Luminent common stock,
caused us to determine to abandon the distribution and effect a short-form
merger of Luminent into one of our wholly-owned subsidiaries, thereby
eliminating public ownership of Luminent. This merger was completed on December
28, 2001.
In July 2000, we and Luminent, entered into employment agreements with
Luminent's former President and Chief Executive Officer and its former Vice
President of Finance and Chief Financial Officer. The agreements provide for
annual salaries, performance bonuses and combinations of stock options to
purchase shares of our common stock and Luminent's common stock. The stock
options were granted to Luminent's executives at exercise prices below market
value, resulting in deferred stock compensation. Luminent's President and Chief
Executive Officer resigned in September 2001 and its Vice President of Finance
and Chief Financial Officer resigned in June 2002. The resignations were
considered by the parties to be terminations other than for cause under the
employment agreements, providing severance benefits based on the employment
agreements, and the vesting of all of the unvested Luminent options. The MRV and
Luminent stock options are now exercisable at various dates through June 2004.
RESTRUCTURING CHARGES
In the second quarter of 2001, when Luminent's common stock was still
publicly traded, Luminent's management approved and implemented a restructuring
plan and other actions in order to adjust operations and administration as a
result of the dramatic slowdown in the communications equipment industry
generally and the optical components sector in particular. Major actions
primarily involved the reduction of facilities in the U.S. and in Taiwan, the
reduction of workforce, the abandonment of certain assets and the cancellation
and termination of purchase commitments. These actions are expected to realign
Luminent's business based on current and near term growth rates. All of these
actions are expected to be completed by the end of the second quarter of fiscal
year 2003.
Employee severance costs and related benefits of $1.3 million were
associated with approximately 750 layoffs through September 30, 2002, bringing
Luminent's total workforce to approximately 950 employees as of September 30,
2002. Affected employees came from all divisions and areas of Luminent. The
majority of affected employees were in the manufacturing group.
19
A summary of the restructuring costs and the remaining liability
through and as of September 30, 2002 is as follows (in thousands):
2001 SEPT. 30,
Provision Utilized Adjustment 2002
--------- -------- ---------- ---------
EXIT COSTS:
Asset impairment $10,441 $10,441 $ - $ -
Closed and abandoned facilities 2,405 537 - 1,868
Purchase commitments 6,173 1,977 797 3,399
------- ------- ---- ------
19,019 12,955 797 5,267
Employee severance costs 1,281 736 - 545
------- ------- ---- ------
$20,300 $13,691 $797 $5,812
======= ======= ==== ======
A summary of the restructuring costs by line item for the nine months
ended September 30, 2002 and 2001 is as follows (in thousands):
Nine Months Ended
--------------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
EXIT COSTS:
Cost of goods sold $(797) $ 4,628
Selling, general and administrative - 12,376
Product development and engineering - 501
Other income, net - 16
----- -------
$(797) $17,521
===== =======
MARKET CONDITIONS AND CURRENT OUTLOOK
Macroeconomic factors, such as an economic slowdown in the U.S. and
abroad, have detrimentally impacted demand for optical components and network
infrastructure products and services. The unfavorable economic conditions and
reduced capital spending has detrimentally affected sales to service providers,
network equipment companies, e-commerce and Internet businesses, and the
manufacturing industry in the United States during 2002 to date, and may
continue to affect them for the remainder of 2002 and thereafter. Announcements
by industry participants and observers indicate there is a slowdown in industry
spending and participants are seeking to reduce existing inventories.
20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, our
statements of operations data expressed as a percentage of net revenues.
Three Months Ended Nine Months Ended
----------------------- ------------------------
SEPT. 30, Sept. 30, SEPT. 30, Sept. 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
NET REVENUES 100% 100% 100% 100%
Cost of goods sold 71 83 69 82
GROSS PROFIT 29 17 31 18
OPERATING COSTS AND EXPENSES:
Product development and engineering 19 28 23 27
Selling, general and administrative 35 74 37 51
Amortization of intangibles - 39 - 33
Impairment loss of long-lived assets 27 - 9 -
Impairment loss of goodwill and other intangibles 120 - 39 -
Total operating costs and expenses 201 140 108 111
OPERATING LOSS (172) (123) (77) (93)
Other expense, net 1 2 6 2
LOSS BEFORE MINORITY INTEREST,
PROVISION FOR TAXES AND CUMULATIVE
EFFECT OF AN ACCOUNTING CHANGE (173) (125) (83) (95)
Minority interest - (5) - (4)
Provision for taxes 20 9 7 1
LOSS BEFORE CUMULATIVE EFFECT OF AN ACCOUNTING CHANGE (193) (129) (90) (92)
Cumulative effect of an accounting change - - 160 -
NET LOSS (193) (129) (250) (92)
The following management discussion and analysis refers to and analyzes
our results of operations into two segments as defined by our management. These
two segments are Operating Enterprises and Development Stage Enterprises, which
includes all start-up activities.
21
THREE MONTHS ENDED SEPTEMBER 30, 2002 ("2002") COMPARED
TO THREE MONTHS ENDED SEPTEMBER 30, 2001 ("2001")
NET REVENUES
Operating Enterprises. Revenues for 2002 decreased $8.9 million, or
13%, to $60.8 million from $69.7 million for 2001. Overall, the communications
equipment industry continued to be depressed, as were the end markets that we
serve. Our revenues by product group for 2002 and 2001 were as follows (in
thousands):
Three Months Ended
--------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
Optical passive components $ 8,758 $ 8,454
Optical active components 11,098 13,315
Switches and routers 13,286 15,869
Remote device management 4,448 6,103
Network physical infrastructure 14,508 15,714
Services 3,982 6,955
Other network products 4,753 3,320
------- -------
$60,833 $69,730
======= =======
Revenues generated from optical passive and active components decreased
$1.9 million, or 9%, to $19.9 million for 2002 as compared to $21.8 million for
2001. The decrease in optical components revenues was a result of the downturn
in the communications equipment industry and specifically the optical
components sector. Revenues generated from our switches and routers decreased
$2.6 million, or 16%, to $13.3 million for 2002 as compared to $15.9 million
for 2001. Revenues generated from our remote device management products
decreased $1.7 million, or 27%, to $4.4 million for 2002 as compared to $6.1
million for 2001. Revenues generated from our network physical infrastructure
products decreased $1.2 million, or 8%, to $14.5 million for 2002 as compared
to $15.7 million for 2001. Revenues generated from services decreased $3.0
million, or 43%, during 2002 to $4.0 million from $7.0 million for 2001.
Our revenues by geographical region for 2002 and 2001 were as follows
(in thousands):
Three Months Ended
--------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
United States $13,980 $21,597
Asia Pacific 10,646 7,872
Europe 35,688 39,963
Other 519 298
------- -------
$60,833 $69,730
======= =======
Revenues to the United States decreased $7.6 million, or 35%, for 2002,
to $14.0 million as compared to $21.6 million for 2001. Revenues in the United
States decreased primarily due to the decrease in revenues from optical
components. Revenues to Asia Pacific increased $2.8 million, or 35%, for 2002
to $10.6 million as compared to $7.8 million for 2001. Revenues to Asia Pacific
increased due to the completion of a project with a foreign government which
was originally anticipated to be completed during the fourth quarter of 2002.
We were able to ship the products during the end of the third quarter of 2002
and satisfied all of our obligations relating to such products. Revenue to
Europe decreased $4.3 million, or 11%, for 2002 to $35.7 million as compared to
$40.0 million for 2001.
22
Development Stage Enterprises. No significant revenues were generated
by these entities for 2002 and 2001.
GROSS PROFIT
Gross profit is equal to our net revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method.
Operating Enterprises. Gross profit for 2002 was $17.5 million,
compared to gross profit of $12.1 million for the 2001. Gross profit increased
$5.4 million for 2002 as compared to 2001.
Our gross margins (defined as gross profit as a percentage of net
revenues) are generally affected by price changes over the life of the products
and the overall mix of products sold. Higher gross margins are generally
expected from new products and improved production efficiencies as a result of
increased utilization. Conversely, prices for existing products generally will
continue to decrease over their respective life cycles.
Our gross margin increased to 29% for 2002, compared to gross margin
of 17% for 2001. The improvement in gross margin was partially attributed to
the write-off of inventory and other market-related one-time charges of
$863,000 taken by Luminent during 2001. Prior to deferred stock compensation
amortization of $659,000 and $3.3 million for 2002 and 2001, respectively, and
Luminent's inventory write-downs and other market-related charges of $863,000
for 2001, gross margins would have been $18.1 million, or 30% of net revenues
and $16.3 million, or 23% of net revenues, respectively.
Development Stage Enterprises. No significant gross margins were
produced by these entities for 2002 and 2001.
PRODUCT DEVELOPMENT AND ENGINEERING
Product development and engineering expenses decreased 39%, to $11.7
million for 2002 as compared to $19.3 million for 2001.
Operating Enterprises. Product development and engineering expenses
from our operating enterprises were $7.7 million, or 13% of net revenues, for
2002, as compared to $8.2 million, or 12% of net revenues, for 2001. This
represents a decrease of $478,000, or 6%, for 2002. Prior to deferred stock
compensation amortization charges of $1.2 million and $(554,000) million for
2002 and 2001, respectively, product development and engineering expenses would
have decreased by 26% to $6.5 million, or 11% of net revenues, from $8.8
million, or 13% of net revenues, for 2002 and 2001, respectively.
Development Stage Enterprises. Product development and engineering
expenses of the development stage enterprises were $4.0 million, or 7% of net
revenues, for 2002, as compared to $11.1 million, or 16% of net revenues, for
2001. This represents a decrease of $7.1 million, or 64%, for 2002. This
decrease was substantially due to cost reduction efforts resulting in
reductions in the burn rate.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses decreased $29.9 million to $21.4 million for 2002,
compared to $51.3 million for 2001. SG&A expenses were 35% and 74% of net
revenues 2002 and 2001, respectively. Prior to deferred stock compensation
amortization charges of $1.1 million and $25.4 million for 2002 and 2001,
respectively, and Luminent's restructuring and other market-related charges of
$2.4 million, SG&A would have decreased 16% to $20.3 million from $24.2 million
for 2001. As a percentage of net revenue, SG&A prior to deferred stock
compensation amortization expenses and restructuring and other market-related
charges would have been 33% for 2002 and 35% for 2001.
23
Operating Enterprises. SG&A expenses decreased 58% over the prior
period to $20.5 million for 2002. SG&A expenses were 34% and 69% of our net
revenue for 2002 and 2001, respectively. Prior to deferred stock compensation
amortization charges of $1.1 million and $24.2 million for 2002 and 2001,
respectively, and Luminent's restructuring and other market-related charges of
$2.4 million, SG&A would have decreased 9% to $19.4 million for 2002, as
compared to $21.4 million for 2001. As a percentage of net revenues, SG&A prior
to deferred stock compensation charges and restructuring and other
market-related charges would have been 32% for 2002, as compared to 31% for
2001. These decreases are mainly due to the reduction of overhead expenses to
align operations to current revenue levels.
Development Stage Enterprises. SG&A expenses decreased 69% over the
prior period to $898,000 for 2002, as compared to $2.9 million for 2001. SG&A
expenses for these entities also decreased due to reductions in overhead
expenses.
AMORTIZATION OF INTANGIBLES
Operating Enterprises. Amortization of intangibles decreased to $29,000
for 2002, as compared to $27.2 million for 2001. The decrease of $27.2 million
was the result of the adoption of SFAS No. 142. Effective January 1, 2002, we
adopted SFAS No. 142, and we no longer amortize goodwill and intangibles with
indefinite lives, but instead goodwill and intangibles will be measured for
impairment at least annually, or when events indicate that impairment exists.
Intangible assets that are determined to have definite lives will continue to be
amortized over their useful lives. As required by SFAS No. 142, we performed the
transitional impairment test on goodwill and other intangibles, which consisted
of patents and assembled work forces. As a result of the transitional impairment
test, we recorded a $296.4 million cumulative effect of an accounting change. In
addition to the transitional impairment test, we reviewed our remaining goodwill
and other intangibles as required annually pursuant to SFAS No. 142. We will
perform our annual impairment review as of October 1st each year, commencing
with this review. As a result of the annual review, we further reduced the
carrying amount of goodwill and other intangibles by recording an impairment
charge of $72.7 million in the third quarter of 2002.
Development Stage Enterprises. No significant amortization of
intangibles was recorded for these entities for 2002 and 2001.
OTHER EXPENSE, NET
In June 1998, we issued $100.0 million principal amount of 5%
convertible subordinated notes (the Notes) due in June 2003. The Notes were
offered in a 144A private placement to qualified institutional investors at the
stated amount, less a selling discount of 3%. During the third quarter of 2002,
we acquired $21.4 million in Notes in exchange for $19.7 million in cash. In
connection with the acquisition and retirement of these Notes, we recognized a
gain of $1.5 million, net of associated taxes. This gain has been reported in
other expense, net in the accompanying consolidated condensed statements of
operations. We incurred $730,000 and $1.3 million in interest expense relating
to the Notes for 2002 and 2001, respectively.
We account for certain unconsolidated subsidiaries using the equity
method. The decrease in other expense from $1.4 million to $374,000 for 2002
is primarily attributable to a reduction in our share of losses from our
unconsolidated subsidiaries. Our share of losses from our unconsolidated
investments was $617,000 for 2002, as compared to $3.5 million for 2001.
24
PROVISION FOR TAXES
We record valuation allowances against our deferred tax assets, when
necessary, in accordance with SFAS No. 109, "Accounting for Income Taxes."
Realization of deferred tax assets (such as net operating loss carryforwards and
income tax credits) is dependent on future taxable earnings and is therefore
uncertain. At least quarterly, we assess the likelihood that our deferred tax
asset balance will be recovered from future taxable income. To the extent we
believe that recovery is unlikely, we establish a valuation allowance against
our deferred tax asset, increasing our income tax expense in the period such
determination is made. The provision for taxes for 2002 was $11.9 million,
compared to a provision for taxes of $6.2 million for 2001. During 2002, we
recorded an additional valuation allowance (tax expense) totaling $11.9 million
relating to the expected realization of our deferred income tax assets based on
likely future recovery. Our tax expense fluctuates primarily due to the tax
jurisdictions where we currently have operating facilities and the varying tax
rates in those jurisdictions. For 2002, there was no benefit provided for net
operating losses.
NINE MONTHS ENDED SEPTEMBER 30, 2002 ("2002") COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 2001 ("2001")
NET REVENUES
Operating Enterprises. Revenues for 2002 decreased $74.5 million, or
29%, to $184.9 million from $259.4 million for 2001. Our revenues by product
group for 2002 and 2001 were as follows (in thousands):
Nine Months Ended
--------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
Optical passive components $ 24,084 $ 32,102
Optical active components 39,590 83,100
Switches and routers 37,698 54,656
Remote device management 13,083 14,070
Network physical infrastructure 41,890 47,347
Services 15,088 16,545
Other network products 13,445 11,544
-------- --------
$184,878 $259,364
======== ========
Revenues generated from optical passive and active components decreased
$51.5 million, or 45%, to $63.7 million for 2002 as compared to $115.2 million
for 2001. The decrease in optical components revenues was a result of the
downturn in the communications equipment industry and specifically the optical
components sector. Revenues generated from our switches and routers decreased
$17.0 million, or 31%, to $37.7 million for 2002 as compared to $54.7 million
for 2001. Revenues generated from our remote device management products
decreased $1.0 million, or 7%, to $13.1 million for 2002 as compared to $14.1
million for 2001. Revenues generated from our network physical infrastructure
products decreased $5.5 million, or 12%, to $41.9 million for 2002 as compared
to $47.3 million for 2001. Revenues generated from services decreased $1.5
million, or 9%, during 2002 to $15.1 million from $16.5 million for 2001.
25
Our revenues by geographical region for 2002 and 2001 were as follows
(in thousands):
Nine Months Ended
--------------------
SEPT. 30, Sept. 30,
2002 2001
--------- ---------
United States $ 50,529 $ 93,789
Asia Pacific 24,392 35,118
Europe 108,766 127,563
Other 1,191 2,894
-------- --------
$184,878 $259,364
======== ========
Revenues to the United States decreased $43.3 million, or 46%, for
2002, to $50.5 million as compared to $93.8 million for 2001. Revenues to Asia
Pacific decreased $10.7 million, or 31%, for 2002 to $24.4 million as compared
to $35.1 million for 2001. Revenue to Europe decreased $18.8 million, or 15%,
for 2002 to $108.8 million as compared to $127.6 million for 2001.
Development Stage Enterprises. No significant revenues were generated
by these entities for 2002 and 2001.
GROSS PROFIT
Gross profit is equal to our net revenues less our cost of goods sold.
Our cost of goods sold includes materials, direct labor and overhead. Cost of
inventory is determined by the first-in, first-out method.
Operating Enterprises. Gross profit for 2002 was $57.7 million,
compared to gross profit of $46.6 million for 2001. Gross profit improved $11.1
million for 2002 as compared to 2001.
Our gross margins (defined as gross profit as a percentage of net
revenues) are generally affected by price changes over the life of the products
and the overall mix of products sold. Higher gross margins are generally
expected from new products and improved production efficiencies as a result of
increased utilization. Conversely, prices for existing products generally will
continue to decrease over their respective life cycles.
Our gross margin increased to 31% for 2002, compared to gross margin of
18% for 2001. The improvement in gross margin was attributed to improved
operating efficiencies and the write-off of inventory and other market-related
one-time charges of $30.2 million taken by Luminent during 2001. Prior to
deferred stock compensation amortization of $2.8 million and $7.5 million for
2002 and 2001, respectively, and Luminent's inventory write-downs and other
market-related charges of $30.2 million for 2001, gross margins would have been
$60.4 million, or 33% of net revenues and $84.3 million, or 33% of net revenues,
respectively.
Development Stage Enterprises. No significant gross margins were
produced by these entities for 2002 and 2001.
PRODUCT DEVELOPMENT AND ENGINEERING
Product development and engineering expenses decreased 40%, to $41.7
million for 2002 as compared to $70.1 million for 2001.
26
Operating Enterprises. Product development and engineering expenses
from our operating enterprises were $26.8 million, or 15% of net revenues, for
2002, as compared to $47.2 million, or 18% of net revenues, for 2001. This
represents a decrease of $20.4 million, or 43%, for 2002. Prior to deferred
stock compensation amortization charges of $5.4 million and $9.3 million for
2002 and 2001, respectively, and Luminent's restructuring and other
market-related charges of $501,000, product development and engineering expenses
would have decreased by 43% to $21.4 million, or 12% of net revenues, from $37.4
million, or 14% of net revenues, for 2002 and 2001, respectively. The decrease
is due to cost reduction efforts in line with current operations.
Development Stage Enterprises. Product development and engineering
expenses of the development stage enterprises were $14.9 million, or 8% of net
revenues, for 2002, as compared to $22.9 million, or 9% of net revenues, for
2001. This represents a decrease of $8.0 million, or 35%, for 2002. The decrease
is due to cost reduction efforts and reductions in the burn rate.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
SG&A expenses decreased $64.2 million to $69.2 million for 2002,
compared to $133.4 million for 2001. SG&A expenses were 37% and 51% of net
revenues for 2002 and 2001, respectively. Prior to deferred stock compensation
amortization charges of $6.9 million and $45.3 million for 2002 and 2001,
respectively, and Luminent's restructuring and other market-related charges of
$13.0 million, SG&A would have decreased 17% to $62.4 million from $75.1 million
for 2001. As a percentage of net revenue, SG&A prior to deferred stock
compensation amortization expenses and restructuring and other market-related
charges would have been 34% for 2002 and 29% for 2001.
Operating Enterprises. SG&A expenses decreased 50% over the prior
period to $64.5 million for 2002. SG&A expenses were 35% and 49% of our net
revenue for 2002 and 2001, respectively. Prior to deferred stock compensation
amortization charges of $6.9 million and $45.3 million for 2002 and 2001,
respectively, and Luminent's restructuring and other market-related charges of
$13.0 million, SG&A would have decreased 17% to $57.6 million for 2002, as
compared to $69.8 million for 2001. As a percentage of net revenues, SG&A prior
to deferred stock compensation charges and restructuring and other
market-related charges would have been 31% for 2002, as compared to 27% for
2001. These decreases are mainly due to the reduction of overhead expenses to
align operations with current revenue levels.
Development Stage Enterprises. SG&A expenses decreased 11% over the
prior period to $4.8 million for 2002, as compared to $5.3 million for 2001.
SG&A expenses for these entities decreased due to reductions in overhead
expenses.
AMORTIZATION OF INTANGIBLES
Operating Enterprises. Amortization of intangibles decreased to $86,000
for 2002, as compared to $84.4 million for 2001. The decrease of $84.3 million
was the result of the adoption of SFAS No. 142. Effective January 1, 2002, we
adopted SFAS No. 142, and we no longer amortize goodwill and intangibles with
indefinite lives, but instead will be measured for impairment at least annually,
or when events indicate that impairment exists. Intangible assets that are
determined to have definite lives will continue to be amortized over their
useful lives. For information on how are adoption of SFAS 142 has affected us,
see "Three Months Ended September 30, 2002 ("2002") Compared to Three Months
Ended September 30, 2001 ("2001") - Amortization of Intangibles - Operating
Enterprises."
Development Stage Enterprises. No significant amortization of
intangibles was recorded for these entities for 2002 and 2001.
27
OTHER EXPENSE, NET
In June 1998, we issued $100.0 million principal amount of 5%
convertible subordinated notes (the Notes) due in June 2003. The Notes were
offered in a 144A private placement to qualified institutional investors at the
stated amount, less a selling discount of 3%. During 2002, we acquired $49.7
million in Notes in exchange for $19.7 million in cash and the issuance of 7.8
million shares of our common stock to the holders of the Notes. In connection
with the acquisition and retirement of these Notes, we recognized a gain of $5.3
million, net of associated taxes. This gain has been reported in other expense,
net in the accompanying consolidated condensed statements of operations. We
incurred $2.8 million and $3.9 million in interest expense relating to the Notes
for 2002 and 2001, respectively.
We account for certain unconsolidated subsidiaries using the equity
method. The increase in other expense from $4.3 million to $10.3 million for
2002 is primarily attributable to impairment charges of $7.6 million on our
investments in these subsidiaries, $3.1 million from our share of losses from
our unconsolidated subsidiaries and interest expense of $3.2 million associated
with the termination of our interest rate swap, partially offset by interest
income. Our share of losses from our unconsolidated subsidiaries was $6.5
million for 2001.
PROVISION FOR TAXES
We record valuation allowances against our deferred tax assets, when
necessary, in accordance with SFAS No. 109, "Accounting for Income Taxes."
Realization of deferred tax assets (such as net operating loss carryforwards and
income tax credits) is dependent on future taxable earnings and is therefore
uncertain. At least quarterly, we assess the likelihood that our deferred tax
asset balance will be recovered from future taxable income. To the extent we
believe that recovery is unlikely, we establish a valuation allowance against
our deferred tax asset, increasing our income tax expense in the period such
determination is made. The provision for taxes for 2002 was $12.9 million,
compared to a provision for taxes of $2.6 million for 2001. During 2002, we
recorded an additional valuation allowance (tax expense) totaling $11.9 million
relating to the expected realization of our deferred income tax assets based on
likely future recovery. Our tax expense fluctuates primarily due to the tax
jurisdictions where we currently have operating facilities and the varying tax
rates in those jurisdictions. For 2002, there was no benefit provided for net
operating losses.
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which the
obligation is incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized costs are depreciated over the useful life of the related
asset. This statement is effective on January 1, 2003 with earlier application
encouraged. We have reviewed this statement and do not expect a material impact
on our financial position, results of operations or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. We adopted this statement on January 1, 2002, see "Note 15 -
Subsequent Event."
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement is effective for fiscal years beginning after May
15, 2002. For certain provisions, including the rescission of Statement No. 4,
early application is encouraged. We adopted this statement for the nine months
ended September 30, 2002 and the immediate impact of its application was the
reclassification of our gain on the extinguishment of debt from an extraordinary
item to other income.
28
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement supercedes Emerging
Issues Task Force (EITF) Issue No. 94-3 "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF 94-3, a liability is recognized at
the date an entity commits to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. The
provisions of SFAS No. 146 will be effective for any exit and disposal
activities initiated after December 31, 2002. We have reviewed this statement
and do not expect a material impact on our financial position, results of
operations or cash flows.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $80.7 million as of September 30, 2002,
a decrease of $84.0 million from cash and cash equivalents of $164.7 million as
of December 31, 2001. The decrease in cash and cash equivalent is substantially
the result of paying off $50.0 million of long-term debt, $19.7 million of
convertible subordinated notes, terminating our interest rate swap for $3.2
million, net payments on short-term obligations of $5.4 million and the
repurchase of our common stock of $547,000. The following table illustrates our
current cash position, which we define as cash, cash equivalents, time deposits
and short-term and long-term marketable securities, as it relates our current
debt position, which we define as all short-term and long-term obligations
including our convertible subordinated notes, as of September 30, 2002 and
December 31, 2001 (in thousands):
SEPTEMBER 30, December 31,
2002 2001
------------- ------------
CASH
Cash and cash equivalents $ 80,675 $ 164,676
Short-term marketable securities 22,911 46,696
Time deposits 3,092 9,341
Long-term marketable securities 1,359 -
--------- ---------
108,037 220,713
DEBT
Current portion of long-term debt 684 52,226
Convertible subordinated notes 39,918 89,646
Short-term obligations 1,869 18,679
Long-term debt 614 8,871
--------- ---------
43,085 169,422
--------- ---------
EXCESS CASH VERSUS DEBT $ 64,952 $ 51,291
========= =========
RATIO OF CASH VERSUS DEBT 2.5 to 1 1.3 to 1
========= =========
Working capital as of September 30, 2002 was $88.5 million compared to
$175.4 million as of December 31, 2001. Our ratio of current assets to current
liabilities as of September 30, 2002 was 1.6 to 1.0 compared to 2.0 to 1.0 as of
December 31, 2001. The decrease in working capital is substantially attributed
to our consolidated net operating losses and the classification, beginning at
June 30, 2002, of our convertible subordinated notes, which are due in June
2003, as a current liability. As of September 30, 2002 and December 31, 2001, we
did not have any "off-balance sheet" financing arrangements.
29
Cash used in operating activities was $10.3 million for the nine months
ended September 30, 2002, as compared to cash used in operating activities of
$86.2 million for the nine months ended September 30, 2001. Cash used in
operating activities is a result of our net operating loss of $462.3 million,
adjusted for non-cash items such as the cumulative effect of an accounting
change, depreciation and amortization, deferred stock compensation charges,
deferred income taxes, and offset by cash generated from operating assets and
liabilities. Cash used in operating activities were positively affected by
decreased time deposits, accounts receivables, inventories and other assets
partially offset by decreases in accounts payable and accrued liabilities,
during the period. The decrease in accounts receivable is due to lower revenue
volumes coupled with increased collection efforts, while the decrease in
inventory is primarily the result of the utilization of inventories on hand.
Decreases in accounts payable and accrued liabilities are the result of dramatic
slowdown in the communications equipment industry and reductions in overhead
expenses.
Cash flows generated from investing activities were $16.0 million for
the nine months ended September 30, 2002, compared to cash used in investing
activities of $9.3 million for the nine months ended September 30, 2001. Cash
flows generated from investing activities for the nine months ended September
30, 2002 were the result of the maturity of short and long-term investments of
$22.4 million offset by capital expenditures of $5.9 million. As of September
30, 2002, there were no plans for major capital expenditures. Cash flows used in
investing activities for the prior period resulted from the net cash used for
capital expenditures and investments in consolidated equity method subsidiaries,
offset by the net cash provided by the maturity of investments.
Cash flows used in financing activities were $80.7 million for the nine
months ended September 30, 2002, as compared to cash provided in financing
activities of $21.5 million for the nine months ended September 30, 2001. Cash
used in financing activities was primarily the result of paying off $52.0
million of long-term debt, paying off $19.7 million of convertible subordinated
notes, terminating our interest rate swap for $3.2 million, net payments on
short-term obligations of $5.4 million and the repurchase of our common stock of
$547,000, offset by proceeds received from the exercise of stock options of
$134,000. Cash flows provided by financing activities in the prior period
represent the cash received through borrowings on our short-term obligations and
the exercise of stock options, offset by payments on our short-term and
long-term obligations.
On November 10, 2000, Luminent completed the initial public offering of
its common stock, selling 12.0 million shares at $12 per share. Their initial
public offering raised net proceeds of approximately $132.3 million. In December
2001, we reacquired, through a short-form merger, the minority interest of
Luminent representing approximately 8% of Luminent's outstanding common stock
(see the discussion above). Following this merger, we increased our liquidity
based on Luminent's cash, cash equivalents, restricted cash and cash equivalents
and short-term investments on hand as of the consummation of the merger, or
$107.7 million at December 31, 2001.
In June 1998, we issued $100.0 million principal amount of 5%
Convertible Subordinated Notes (the Notes) due in June 2003, in a private
placement raising net proceeds of $96.4 million. The share (equivalent to a
conversion rate of approximately 73.94 share per $1,000 principal amount of
notes), representing an initial conversion premium of 24% for a total of
approximately 7.4 million shares of our common stock. The notes bear interest at
5% per annum, which is payable semi-annually on June 15 and December 15 of each
year. The notes have a five-year term and have been callable by us since June
15, 2001. The premiums payable to call these notes are 102% of the outstanding
principal amount during the 12 months ending June 14, 2002 and 101% during the
12 months ending June 14, 2003, plus accrued interest through the date of
redemption. During the nine months ended September 30, 2002, we acquired $49.7
million in Notes in exchange for $19.7 million in cash and the issuance of 7.8
million shares of our common stock to the holders of the Notes. In connection
with the acquisition and retirement of these Notes, we recognized a gain of $5.3
million, net of associated taxes.
30
The following table illustrates our total contractual cash obligations
as of September 30, 2002 (in thousands):
Less than 1
Cash Obligations TOTAL Year 1 - 3 Years 4 - 5 Years After 5 Years
- ------------------------------- ------- ----------- ----------- ----------- -------------
Short-term obligations $ 1,869 $ 1,869 $ - $ - $ -
Long-term debt 1,298 684 333 270 11
Convertible subordinated
notes 39,918 39,918 - - -
Unconditional purchase
obligations 8,437 6,924 1,437 76 -
Operating leases 17,322 3,022 6,208 4,222 3,870
Investments 1,150 716 434 - -
------- ------- ------ ------ ------
Total contractual cash
obligations $69,994 $53,133 $8,412 $4,568 $3,881
======= ======= ====== ====== ======
Our total contractual cash obligations as of September 30, 2002, were
$70.0 million, of which, $53.1 million are due within the next 12 months. These
total contractual cash obligations primarily consist of short-term obligations,
long-term financing obligations including our convertible subordinated notes,
operating leases for our equipment and facilities, unconditional purchase
obligations for necessary raw materials and funding commitments for certain
development stage enterprises. Historically, these obligations have been
satisfied through cash generated from our operations or other avenues (see
discussion below), and we expect that this will continue to be the case.
Our remaining short-term obligations of $53.1 million consist
primarily of $39.9 million in remaining convertible subordinated notes, $1.9
million for short-term obligations, $3.0 million for operating leases, $6.9
million for unconditional purchase obligations and $716,000 for funding
commitments for our development stage enterprises. Our unconditional purchase
obligations are to secure the necessary raw goods for production of our
products. As part of Luminent's restructure plan (see our discussion above and
the Footnotes to our Consolidated Condensed Financial Statements), $3.4 million
in unconditional purchase obligations have been recorded as a liability and
Luminent is in negotiations to cancel or renegotiate contracts that are no
longer required due to its significantly reduced orders for optical components
and sales projections. The remaining purchase commitments are part of our
ordinary course of business.
Our remaining long-term obligations as of September 30, 2002 of $16.9
million consist primarily of $614,000 million of long-term financing
obligations, $1.5 million for unconditional purchase obligations, $14.3 million
in operating leases for our equipment and facilities and $434,000 for funding
commitments for certain development stage enterprises. Our remaining long-term
financing obligations consist of financing obtained for capital expenditures
and production expansion. Our operating leases expire at various dates through
2049.
We believe that our cash on hand and cash flows from operations will be
sufficient to satisfy our working capital, capital expenditures and research and
development requirements for at least the next 12 months. However, we may choose
to obtain additional debt or equity financing if we believe it appropriate. Our
future capital requirements will depend on many factors, including acquisitions,
our rate of revenue growth, the timing and extent of spending to support
development of new products and expansion of sales and marketing, the timing of
new product introductions and enhancements to existing products and market
acceptance of our products.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
Market risk represents the risk of loss that may impact our
Consolidated Financial Statements through adverse changes in financial market
prices and rates and inflation. Our market risk exposure results primarily from
fluctuations in interest rates and foreign exchange rates. We manage our
exposure to these market risks through our regular operating and financing
activities and have not historically hedged these risks through the use of
derivative financial instruments. The term hedge is used to mean a strategy
designed to manage risks of volatility in prices or interest and foreign
exchange rate movements on certain assets, liabilities or anticipated
transactions and creates a relationship in which gains or losses on derivative
instruments are expected to counter-balance the losses or gains on the assets,
liabilities or anticipated transactions exposed to such market risks.
Interest Rates. We are exposed to interest rate fluctuations on our
investments, short-term borrowings and long-term obligations. Our cash and
short-term investments are subject to limited interest rate risk, and are
primarily maintained in money market funds and bank deposits. Our variable-rate
short-term borrowings are also subject to limited interest rate risk due to
their short-term maturities. Our long-term obligations were entered into with
fixed and variable interest rates. In connection with our $50.0 million
variable-rate term loan due in 2003, we entered into a specific hedge, an
interest rate swap, to modify the interest characteristics of this instrument.
The interest rate swap was used to reduce our cost of financing and the
fluctuations in the aggregate interest expense. The notional amount, interest
payment and maturity dates of the swap match the principal, interest payment and
maturity dates of the related debt. Accordingly, any market risk or opportunity
associated with this swap is offset by the opposite market impact on the related
debt. In February 2002, we paid off our $50.0 million term loan and terminated
our interest rate swap for $3.2 million. To date, we have not entered into any
other derivative instruments, however, as we continue to monitor our risk
profile, we may enter into additional hedging instruments in the future.
Foreign Exchange Rates. We operate on an international basis with a
portion of our revenues and expenses being incurred in currencies other than
the U.S. dollar. Fluctuation in the value of these foreign currencies in which
we conduct our business relative to the U.S. dollar will cause U.S. dollar
translation of such currencies to vary from one period to another. We cannot
predict the effect of exchange rate fluctuations upon future operating results.
However, because we have expenses and revenues in each of the principal
functional currencies, the exposure to our financial results to currency
fluctuations is reduced. We have not historically attempted to reduce our
currency risks through hedging instruments; however, we may do so in the future.
Inflation. We believe that the relatively moderate rate of inflation
in the United States over the past few years has not had a significant impact
on our sales or operating results or on the prices of raw materials. However,
in view of our recent expansion of operations in Taiwan, Israel and other
countries, which have experienced greater inflation than the United States,
there can be no assurance that inflation will not have a material adverse
effect on our operating results in the future.
32
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 of the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's Exchange
Act filings.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
From time to time we may make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to stockholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making
such disclosures. In connection with this "safe harbor" we are hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:
WE INCURRED NET LOSSES IN THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001,
YEARS ENDED DECEMBER 31, 2001 AND 2000, PRIMARILY AS A RESULT OF THE IMPAIRMENT
AND AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES AND DEFERRED COMPENSATION
CHARGES FROM RECENT ACQUISITIONS. WE EXPECT TO CONTINUE TO INCUR NET LOSSES FOR
THE FORESEEABLE FUTURE.
We reported net losses of $462.3 million and $238.1 million for the
nine months ended September 30, 2002 and 2001, respectively, $326.4 million for
the year ended December 31, 2001 and $153.0 million for the year ended December
31, 2000. A major contributing factor to the net losses was the cumulative
effect of an accounting change and the impairment of goodwill and other
intangibles in accordance with SFAS No. 142, the amortization of goodwill and
intangibles and deferred stock compensation related to our acquisitions of Fiber
Optic Communications, Jolt, Quantum Optech, AstroTerra and Optronics and our
employment arrangements with Luminent's former President and Luminent's Chief
Financial Officer. We will continue to record deferred stock compensation
relating to these acquisitions and the employment arrangements with these
executives going forward. Effective January 1, 2002, we adopted SFAS No. 142,
and we no longer amortize goodwill and intangibles with indefinite lives, but
instead goodwill and intangibles will be measured for impairment at least
annually, or when events indicate that impairment exists. Intangible assets that
are determined to have definite lives will continue to be amortized over their
useful lives. As required by SFAS No. 142, we performed the transitional
impairment test on goodwill and other intangibles, which consisted of patents
and assembled work forces. As a result of the transitional impairment test, we
recorded a $296.4 million cumulative effect of an accounting change. In addition
to the transitional impairment test, we reviewed our remaining goodwill and
other intangibles as required annually pursuant to SFAS No. 142. We will perform
our annual impairment review as of October 1st each year, commencing with this
review. As a result of the annual review, we further reduced the carrying amount
of goodwill and other intangibles by recording an impairment charge of $72.7
million in the third quarter of 2002. We expect to record impairment charges in
the future from time to time as a result of this standard. As a consequence of
deferred stock compensation charges and potential impairment charges, we do not
expect to report net income in the foreseeable future.
33
OUR BUSINESS HAS BEEN ADVERSELY IMPACTED BY THE WORLDWIDE ECONOMIC SLOWDOWN AND
RELATED UNCERTAINTIES.
Weaker economic conditions worldwide, particularly in the U.S. and
Europe, have contributed to the current technology industry slowdown and
impacted our business resulting in:
- reduced demand for our products, particularly Luminent's
fiber optic components;
- increased risk of excess and obsolete inventories;
- increased price competition for our products;
- excess manufacturing capacity under current market
conditions; and
- higher overhead costs, as a percentage of revenues.
These unfavorable economic conditions and reduced capital spending in
the telecommunications industry detrimentally affected sales to service
providers, network equipment companies, e-commerce and Internet businesses, and
the manufacturing industry in the United States, during 2001 and the first nine
months of 2002, appear to continue to affect these industries in the third
quarter of 2002 and may affect them for the balance of 2002 and thereafter.
Announcements by industry participants and observers indicate there is a
slowdown in industry spending and participants are seeking to reduce existing
inventories and we are experiencing these reductions in our business. As a
result of these factors, we recorded, during the year ended December 31, 2001,
consolidated charges from our subsidiary, Luminent, which include the write-off
of inventory, purchase commitments, asset impairment, workforce reduction,
restructuring costs and other unusual items. The aggregate charges recorded
during the year ended December 31, 2001 were $49.5 million. These charges are
the result of the lower demand for Luminent's products and pricing pressures
stemming from the continuing downturn in the communications equipment industry
generally and the optical components sector in particular.
Additionally, these economic conditions are making it very difficult
for MRV and our other companies, our customers and our vendors to forecast and
plan future business activities. This level of uncertainty severely challenges
our ability to operate profitably or to grow our businesses. In particular, it
is difficult to develop and implement strategy, sustainable business models and
efficient operations, and effectively manage manufacturing and supply chain
relationships. We lost a key member of our management team in the terrorists
attacks on the World Trade Center of September 11, 2001 and thus the attacks
have already had adverse consequences on our business. However, we do not know
how the consequences of these attacks will additionally affect our business. It
is possible that a decrease in business and consumer confidence in the economy
and the financial markets may lead to delays or reductions in capital
expenditures by our customers and potential customers. Concerns over accounting
practices of service providers and faltering growth prospects among equipment
manufactures could delay the economic recovery in the telecommunications
industry beyond 2002. In addition, further disruptions of the air transport
system in the United States and abroad may negatively impact our ability to
deliver products to customers, visit potential customers, to provide support
and service to our existing customers and to obtain components in a timely
fashion. If the economic or market conditions continue to languish or further
deteriorate, or if the economic downturn is exacerbated as a result of
political, economic or military conditions associated with current domestic and
world events, our businesses, financial condition and results of operations
could be further impaired.
34
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE, AND TO COMPETE
EFFECTIVELY, WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We expect that new technologies will emerge as
competition and the need for higher and more cost effective transmission
capacity, or bandwidth, increases. Our future performance will depend on the
successful development, introduction and market acceptance of new and enhanced
products that address these changes as well as current and potential customer
requirements. The introduction of new and enhanced products may cause our
customers to defer or cancel orders for existing products. We have in the past
experienced delays in product development and these delays may occur in the
future. Therefore, to the extent customers defer or cancel orders in the
expectation of a new product release or there is any delay in development or
introduction of our new products or enhancements of our products, our operating
results would suffer. We also may not be able to develop the underlying core
technologies necessary to create new products and enhancements, or to license
these technologies from third parties. Product development delays may result
from numerous factors, including:
- changing product specifications and customer requirements;
- difficulties in hiring and retaining necessary technical
personnel;
- difficulties in reallocating engineering resources and
overcoming resource limitations;
- difficulties with contract manufacturers;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
The development of new, technologically advanced products is a complex
and uncertain process requiring high levels of innovation and highly skilled
engineering and development personnel, as well as the accurate anticipation of
technological and market trends. In order to compete, we must be able to
deliver products to customers that are highly reliable, operate with its
existing equipment, lower the customer's costs of acquisition, installation and
maintenance, and provide an overall cost-effective solution. We cannot assure
you that we will be able to identify, develop, manufacture, market or support
new or enhanced products successfully, if at all, or on a timely basis.
Further, we cannot assure you that our new products will gain market acceptance
or that we will be able to respond effectively to product announcements by
competitors, technological changes or emerging industry standards. Any failure
to respond to technological changes would significantly harm our business.
DEFECTS IN OUR PRODUCTS RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those our companies and we offer, may contain
undetected software or hardware errors when we first introduce them or when we
release new versions. The occurrence of these errors in the future, and our
inability to correct these errors quickly or at all, could result in the delay
or loss of market acceptance of our products. It could also result in material
warranty expense, diversion of engineering and other resources from our product
development efforts and the loss of credibility with, and legal actions by, our
customers, system integrators and end users. For instance, during late 2000, we
were informed that certain Luminent transceivers sold to Cisco were experiencing
field failures. Through discussions with Cisco through September 2001,
Luminent's management agreed to replace the failed units, which we believe
resolves this issue. We expect the ultimate replacement of these failed
transceivers will cost approximately $2.6 million which has been fully reserved.
Any of these or other eventualities resulting from defects in our products could
cause our sales to decline and have a material adverse effect on our business,
operating results and financial condition.
35
OUR OPERATING RESULTS COULD FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our operating results for a particular quarter are extremely difficult
to predict. Our revenue and operating results could fluctuate substantially
from quarter to quarter and from year to year. This could result from any one
or a combination of factors such as:
- the cancellation or postponement of orders,
- the timing and amount of significant orders from our largest
customers,
- our success in developing, introducing and shipping product
enhancements and new products,
- the mix of products we sell,
- software, hardware or other errors in the products we sell
requiring replacements or increased warranty reserves,
- adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions or deferred
compensation charges,
- new product introductions by our competitors,
- pricing actions by our competitors or us,
- the timing of delivery and availability of components from
suppliers,
- changes in material costs, and
- general economic conditions.
Moreover, the volume and timing of orders we receive during a quarter
are difficult to forecast. From time to time, our customers encounter uncertain
and changing demand for their products. Customers generally order based on
their forecasts. If demand falls below these forecasts or if customers do not
control inventories effectively, they may cancel or reschedule shipments
previously ordered from us. Our expense levels during any particular period are
based, in part, on expectations of future sales. If sales in a particular
quarter do not meet expectations, our operating results could be materially
adversely affected.
Our success is dependent, in part, on the overall growth rate of the
fiber optic components and networking industry. We can give no assurance that
the Internet or the industries that serve it will continue to grow or that we
will achieve higher growth rates. Our business, operating results or financial
condition may be adversely affected by any decreases in industry growth rates.
In addition, we can give no assurance that our results in any particular period
will fall within the ranges for growth forecast by market researchers.
Because of these and other factors, you should not rely on
quarter-to-quarter comparisons of our results of operations as an indication of
our future performance. It is possible that, in future periods, our results of
operations may be below the expectations of public market analysts and
investors. This failure to meet expectations could cause the trading price of
our common stock to decline. Similarly, the failure by our competitors or
customers to meet or exceed the results expected by their analysts or investors
could have a ripple effect on us and cause our stock price to decline.
THE LONG SALES CYCLES FOR OUR PRODUCTS MAY CAUSE REVENUES AND OPERATING RESULTS
TO VARY FROM QUARTER TO QUARTER, WHICH COULD CAUSE VOLATILITY IN OUR STOCK
PRICE.
The timing of our revenue is difficult to predict because of the
length and variability of the sales and implementation cycles for our products.
We do not recognize revenue until a product has been shipped to a customer, all
significant vendor obligations have been performed and collection is considered
probable. Customers often view the purchase of our products as a significant
and strategic decision. As a result, customers typically expend significant
effort in evaluating, testing and qualifying our products and our manufacturing
process. This customer evaluation and qualification process frequently results
in a lengthy initial sales cycle of, depending on the products, many months or
more. In addition, some of our customers require that our products be subjected
to lifetime and reliability testing, which also can take months or more. While
our customers are evaluating our products and before they place an order with
us, we may incur substantial sales and marketing and research and development
expenses to customize our products to the customer's needs. We may also expend
significant management efforts, increase manufacturing capacity and order long
lead-time components or materials prior to receiving an order. Even after this
evaluation process, a potential customer may not purchase our products. Even
36
after acceptance of orders, our customers often change the scheduled delivery
dates of their orders. Because of the evolving nature of the optical networking
and network infrastructure markets, we cannot predict the length of these
sales, development or delivery cycles. As a result, these long sales cycles may
cause our net sales and operating results to vary significantly and
unexpectedly from quarter-to-quarter, which could cause volatility in our stock
price.
THE PRICES OF OUR SHARES MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely
volatile. The market price of our common stock is likely to continue to be
highly volatile and could be significantly affected by factors such as:
- actual or anticipated fluctuations in our operating results,
- announcements of technological innovations or new product
introductions by us or our competitors,
- changes of estimates of our future operating results by
securities analysts,
- developments with respect to patents, copyrights or
proprietary rights, and
- general market conditions and other factors.
In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies in particular, and that have been unrelated to
the operating performance of these companies. These factors, as well as general
economic and political conditions, may materially adversely affect the market
price of our common stock in the future. Similarly, the failure by our
competitors or customers to meet or exceed the results expected by their
analysts or investors could have a ripple effect on us and cause our stock price
to decline. Additionally, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, all of
whom have been granted stock options.
OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN AFFILIATES.
We have created several start-up companies and formed independent
business units in the optical technology and Internet infrastructure areas. We
account for these investments in affiliates according to the equity or cost
methods as required by accounting principles generally accepted in the United
States. The market value of these investments may vary materially from the
amounts shown as a result of business events specific to these entities or
their competitors or market conditions. Actual or perceived changes in the
market value of these investments could have a material impact on our share
price and in addition could contribute significantly to volatility of our share
price.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking products are
intensely competitive and subject to frequent product introductions with
improved price/performance characteristics, rapid technological change and the
continual emergence of new industry standards. We compete and will compete with
numerous types of companies including companies that have been established for
many years and have considerably greater financial, marketing, technical, human
and other resources, as well as greater name recognition and a larger installed
customer base, than we do. This may give these competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to us. In addition, many of our large competitors offer
customers broader product lines, which provide more comprehensive solutions than
our current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of these price decreases
may have an adverse impact on our results of operations or financial condition.
37
There has been a trend toward industry consolidation for several
years. We expect this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in an evolving
industry. We believe that industry consolidation may provide stronger
competitors that are better able to compete. This could have a material adverse
effect on our business, operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR BUSINESSES.
Our growth in recent years, both internally and through the
acquisitions we have made has placed a significant strain on our financial and
management personnel and information systems and controls. As a consequence, we
must continually implement new and enhance existing financial and management
information systems and controls and must add and train personnel to operate
these systems effectively. Our delay or failure to implement new and enhance
existing systems and controls as needed could have a material adverse effect on
our results of operations and financial condition in the future. Our intention
to continue to pursue a growth strategy can be expected to place even greater
pressure on our existing personnel and to compound the need for increased
personnel, expanded information systems, and additional financial and
administrative control procedures. We can give no assurance that we will be
able to successfully manage operations if they continue to expand.
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of
our operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the periods indicated
below:
Nine Months Ended Year Ended
------------------------ --------------------------------------------------
Sept. 30, Sept. 30, December 31, December 31, December 31,
2002 2001 2001 2000 1999
--------- --------- ------------ ------------ ------------
Percent of total revenue
from foreign sales 73% 64% 67% 63% 58%
We have companies and offices in, and conduct a significant portion of
our operations in and from, Israel. We are, therefore, directly influenced by
the political and economic conditions affecting Israel. Any major hostilities
involving Israel, the interruption or curtailment of trade between Israel and
its trading partners or a substantial downturn in the economic or financial
condition of Israel could have a material adverse effect on our operations. In
addition, the recent acquisition of operations in Taiwan and People's Republic
of China has increased both the administrative complications we must manage and
our exposure to political, economic and other conditions affecting Taiwan and
People's Republic of China. Luminent has a large manufacturing facility in the
People's Republic of China in which it manufactures passive fiber optic
components and both Luminent and we make sales of our products in the People's
Republic of China. Our total sales in the People's Republic of China amounted
to approximately $10.4 million during the year ended December 31, 2001 and $2.7
million during the year ended December 31, 2000. Currently there is significant
political tension between Taiwan and People's Republic of China, which could
lead to hostilities. Risks we face due to international sales and the use of
overseas manufacturing include:
- greater difficulty in accounts receivable collection and
longer collection periods;
- the impact of recessions in economies outside the United
States;
- unexpected changes in regulatory requirements;
- seasonal reductions in business activities in some parts of
the world, such as during the summer months in Europe or in
the winter months in Asia when the Chinese New Year is
celebrated;
- certification requirements;
- potentially adverse tax consequences;
- unanticipated cost increases;
- unavailability or late delivery of equipment;
- trade restrictions;
- limited protection of intellectual property rights;
- unforeseen environmental or engineering problems; and
- personnel recruitment delays.
38
The majority of our sales are currently denominated in U.S. dollars
and to date our business has not been significantly affected by currency
fluctuations or inflation. However, as we conduct business in several different
countries, fluctuations in currency exchange rates could cause our products to
become relatively more expensive in particular countries, leading to a
reduction in sales in that country. In addition, inflation or fluctuations in
currency exchange rates in these countries could increase our expenses.
To date, we have not hedged against currency exchange risks. In the
future, we may engage in foreign currency denominated sales or pay material
amounts of expenses in foreign currencies and, in that event, may experience
gains and losses due to currency fluctuations. Our operating results could be
adversely affected by currency fluctuations or as a result of inflation in
particular countries where material expenses are incurred.
WE DEPEND ON THIRD-PARTY CONTRACT MANUFACTURERS FOR NEEDED COMPONENTS AND
THEREFORE COULD FACE DELAYS HARMING OUR SALES.
We outsource the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to our networking
products to third-party contract manufacturers. Though there are a large number
of contract manufacturers that we can use for outsourcing, we have elected to
use a limited number of vendors for a significant portion of our board assembly
requirements in order to foster consistency in quality of the products and to
achieve economies of scale. These independent third-party manufacturers also
provide the same services to other companies. Risks associated with the use of
independent manufacturers include unavailability of or delays in obtaining
adequate supplies of products and reduced control of manufacturing quality and
production costs. If our contract manufacturers failed to deliver needed
components timely, we could face difficulty in obtaining adequate supplies of
products from other sources in the near term. We can give no assurance that our
third party manufacturers will provide us with adequate supplies of quality
products on a timely basis, or at all. While we could outsource with other
vendors, a change in vendors may require significant lead-time and may result in
shipment delays and expenses. Our inability to obtain these products on a timely
basis, the loss of a vendor or a change in the terms and conditions of the
outsourcing would have a material adverse effect on our business, operating
results and financial condition.
WE MAY LOSE SALES IF SUPPLIERS OF OTHER CRITICAL COMPONENTS FAIL TO MEET OUR
NEEDS.
Our companies currently purchase several key components used in the
manufacture of our products from single or limited sources. We depend on these
sources to meet our needs. Moreover, we depend on the quality of the products
supplied to us over which we have limited control. We have encountered shortages
and delays in obtaining components in the past and expect to encounter shortages
and delays in the future. If we cannot supply products due to a lack of
components, or are unable to redesign products with other components in a timely
manner, our business will be significantly harmed. We have no long-term or
short-term contracts for any of our components. As a result, a supplier can
discontinue supplying components to us without penalty. If a supplier
discontinued supplying a component, our business may be harmed by the resulting
product manufacturing and delivery delays.
OUR INABILITY TO ACHIEVE ADEQUATE PRODUCTION YIELDS FOR CERTAIN COMPONENTS WE
MANUFACTURE INTERNALLY COULD RESULT IN A LOSS OF SALES AND CUSTOMERS.
We rely heavily on our own production capability for critical
semiconductor lasers and light emitting diodes used in our products. Because we
manufacture these and other key components at our own facilities and these
components are not readily available from other sources, any interruption of
our manufacturing processes could have a material adverse effect on our
operations. Furthermore, we have a limited number of employees dedicated to the
operation and maintenance of our wafer fabrication equipment, the loss of any
of whom could result in our inability to effectively operate and service this
equipment. Wafer fabrication is sensitive to many factors, including variations
and impurities in the raw materials, the fabrication process, performance of
the manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. We can
give no assurance that we will be able to maintain acceptable production yields
and avoid product shipment delays. In the event adequate production yields are
not achieved, resulting in product shipment delays, our business, operating
results and financial condition could be materially adversely affected.
39
WE MAY BE HARMED BY OUR FAILURE TO PURSUE ACQUISITIONS AND IF WE DO PURSUE
ACQUISITIONS HARM COULD RESULT.
An important element of our strategy has been to review acquisition
prospects that would complement our existing companies and products, augment our
market coverage and distribution ability or enhance our technological
capabilities. We expect that our acquisitions of businesses or product lines
will decrease in comparison to historical levels. The networking business is
highly competitive and our failure to pursue future acquisitions could hamper
our ability to enhance existing products and introduce new products on a timely
basis. If we do choose to pursue acquisitions, they could have a material
adverse effect on our business, financial condition and results of operations
because of the following:
- possible charges to operations for purchased technology and
restructuring similar to those incurred in connection with our
acquisition of Xyplex in 1998;
- potentially dilutive issuances of equity securities;
- incurrence of debt and contingent liabilities;
- incurrence of amortization expenses and impairment charges
related to goodwill and other intangible assets and deferred
compensation charges similar to those arising with the
acquisitions of Fiber Optic Communications, Optronics, Quantum
Optech, Jolt and AstroTerra in 2000 (see Recently Issued
Accounting Standards);
- difficulties assimilating the acquired operations,
technologies and products;
- diversion of management's attention to other business
concerns;
- risks of entering markets in which we have no or limited prior
experience;
- potential loss of key employees of acquired organizations; and
- difficulties in honoring commitments made to customers by
management of the acquired entity prior to the acquisition.
- We can give no assurance as to whether we can successfully
integrate the companies, products, technologies or personnel
of any business that we might acquire in the future.
IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE ABLE
TO COMPETE.
We rely on a combination of trade secret laws and restrictions on
disclosure and patents, copyrights and trademarks to protect our intellectual
property rights. We cannot assure you that our pending patent applications will
be approved, that any patents that may be issued will protect our intellectual
property or that third parties will not challenge any issued patents. Other
parties may independently develop similar or competing technology or design
around any patents that may be issued to us. We cannot be certain that the steps
we have taken will prevent the misappropriation of our intellectual property,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. Any of this kind of litigation,
regardless of outcome, could be expensive and time consuming, and adverse
determinations in any of this kind of litigation could seriously harm our
business.
40
WE ARE CURRENTLY, AND COULD IN THE FUTURE BECOME, SUBJECT TO LITIGATION
REGARDING INTELLECTUAL PROPERTY RIGHTS, WHICH COULD BE COSTLY AND SUBJECT US TO
SIGNIFICANT LIABILITY.
From time to time, third parties, including our competitors, may assert
patent, copyright and other intellectual property rights to technologies that
are important to us. We expect we will increasingly be subject to license offers
and infringement claims as the number of products and competitors in our market
grows and the functioning of products overlaps. In this regard:
- In March 1999, we received a written notice from Lemelson
Foundation Partnership in which Lemelson claimed to have
patent rights in our vision and automatic identification
operations, which are widely used in the manufacture of
electronic assemblies.
- In April 1999, we received a written notice from Rockwell
Automation Technologies Corporation in which Rockwell claimed
to have patent rights in certain technology related to our
metal organic chemical vapor deposition, or MOCVD, processes
and this claim initially resulted in litigation, which has
since been dismissed pending the results of litigation not
directly involving us.
- In October 1999, we received written notice from Lucent
Technologies, Inc. in which Lucent claimed we have violated
certain of Lucent's patents falling into the general category
of communications technology, with a focus on networking
functionality.
- In October 1999, we received a written notice from Ortel
Corporation, which has since been acquired by Lucent, in which
Ortel claimed to have patent rights in certain technology
related to our photodiode module products. In January 2001, we
were advised that Lucent had assigned certain of its rights
and claims to Agere Systems, Inc., including the claim made on
the Ortel patent. To date, we have not been contacted by Agere
regarding this patent claim. In July 2000, we received written
notice from Nortel Networks, which claimed we violated
Nortel's patent relating to technology associated with local
area networks.
- In May 2001, we received written notice from IBM, which claims
that several of our optical components and Internet
infrastructure products make use of inventions covered by
certain patents claimed by IBM. We are evaluating the patents
noted in the letters.
Aggregate net sales potentially subject to the foregoing claims
amounted to approximately 28% of our total sales during the year ended December
31, 2001 and 30% of our total sales during the year ended December 31, 2000.
Others' patents, including Lemelson's, Rockwell's, Lucent's, Agere's, Nortel's
and IBM's, may be determined to be valid, or some of our products may
ultimately be determined to infringe the Lemelson, Rockwell, Lucent, Agere,
Nortel or IBM patents, or those of other companies.
As was the case with Rockwell, Lemelson, Lucent, Agere, Nortel or IBM,
or other companies may pursue litigation with respect to these or other claims.
The results of any litigation are inherently uncertain. In the event of an
adverse result in any litigation with respect to intellectual property rights
relevant to our products that could arise in the future, we could be required
to obtain licenses to the infringing technology, to pay substantial damages
under applicable law, to cease the manufacture, use and sale of infringing
products or to expend significant resources to develop non-infringing
technology. Licenses may not be available from third parties, including
Lemelson, Rockwell, Lucent, Ortel, Nortel or IBM, either on commercially
reasonable terms or at all. In addition, litigation frequently involves
substantial expenditures and can require significant management attention, even
if we ultimately prevail. Accordingly, any infringement claim or litigation
against us could significantly harm our business, operating results and
financial condition.
41
IN THE FUTURE, WE MAY INITIATE CLAIMS OR LITIGATION AGAINST THIRD PARTIES FOR
INFRINGEMENT OF OUR PROPRIETARY RIGHTS TO PROTECT THESE RIGHTS OR TO DETERMINE
THE SCOPE AND VALIDITY OF OUR PROPRIETARY RIGHTS OR THE PROPRIETARY RIGHTS OF
COMPETITORS. THESE CLAIMS COULD RESULT IN COSTLY LITIGATION AND THE DIVERSION OF
OUR TECHNICAL AND MANAGEMENT PERSONNEL.
Necessary licenses of third-party technology may not be available to
us or may be very expensive, which could adversely affect our ability to
manufacture and sell our products. From time to time we may be required to
license technology from third parties to develop new products or product
enhancements. We cannot assure you that third-party licenses will be available
to us on commercially reasonable terms, if at all. The inability to obtain any
third-party license required to develop new products and product enhancements
could require us to obtain substitute technology of lower quality or
performance standards or at greater cost, either of which could seriously harm
our ability to manufacture and sell our products.
WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.
We are substantially dependent upon Dr. Shlomo Margalit, our Chairman
of the Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered into
employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary
of key man life insurance policies in the amounts of $1.0 million each on their
lives. However, we can give no assurance that the proceeds from these policies
will be sufficient to compensate us in the event of the death of either of
these individuals, and the policies are not applicable in the event that either
of them becomes disabled or is otherwise unable to render services to us.
OUR BUSINESS REQUIRES US TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.
Our ability to develop, manufacture and market our products, run our
companies and our ability to compete with our current and future competitors
depends, and will depend, in large part, on our ability to attract and retain
qualified personnel. Competition for executives and qualified personnel in the
networking and fiber optics industries is intense, and we will be required to
compete for that personnel with companies having substantially greater financial
and other resources than we do. To attract executives, we have had to enter into
compensation arrangements, which have resulted in substantial deferred
compensation charges and adversely affected our results of operations. We may
enter into similar arrangements in the future to attract qualified executives If
we should be unable to attract and retain qualified personnel, our business
could be materially adversely affected. We can give no assurance that we will be
able to attract and retain qualified personnel.
ENVIRONMENTAL REGULATIONS APPLICABLE TO OUR MANUFACTURING OPERATIONS COULD LIMIT
OUR ABILITY TO EXPAND OR SUBJECT US TO SUBSTANTIAL COSTS.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used during our
manufacturing processes. Further, we are subject to other safety, labeling and
training regulations as required by local, state and federal law. Any failure
by us to comply with present and future regulations could subject us to future
liabilities or the suspension of production. In addition, these kinds of
regulations could restrict our ability to expand our facilities or could
require us to acquire costly equipment or to incur other significant expenses
to comply with environmental regulations. We cannot assure you that these legal
requirements will not impose on us the need for additional capital expenditures
or other requirements. If we fail to obtain required permits or otherwise fail
to operate within these or future legal requirements, we may be required to pay
substantial penalties, suspend our operations or make costly changes to our
manufacturing processes or facilities.
42
IF WE FAIL TO ACCURATELY FORECAST COMPONENT AND MATERIAL REQUIREMENTS FOR OUR
MANUFACTURING FACILITIES, WE COULD INCUR ADDITIONAL COSTS OR EXPERIENCE
MANUFACTURING DELAYS.
We use rolling forecasts based on anticipated product orders to
determine our component requirements. It is very important that we accurately
predict both the demand for our products and the lead times required to obtain
the necessary components and materials. Lead times for components and materials
that we order vary significantly and depend on factors such as specific
supplier requirements, the size of the order, contract terms and current market
demand for the components. For substantial increases in production levels, some
suppliers may need nine months or more lead-time. If we overestimate our
component and material requirements, we may have excess inventory, which would
increase our costs. If we underestimate our component and material
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. Any of these
occurrences would negatively impact our net sales.
Current softness in demand and pricing in the communications market
have necessitated a review of our inventory, facilities and headcount. As a
result, we and Luminent recorded in the year ended December 31, 2001 one-time
charges to write down inventory to realizable value and inventory purchase
commitments of approximately $35.4 million.
WE ARE AT RISK OF SECURITIES CLASS ACTION OR OTHER LITIGATION THAT COULD RESULT
IN SUBSTANTIAL COSTS AND DIVERT MANAGEMENT'S ATTENTION AND RESOURCES.
In the past, securities class action litigation has been brought
against a company following periods of volatility in the market price of its
securities. Due to the volatility and potential volatility of our stock price
or the volatility of Luminent's stock price following its initial public
offering, we may be the target of securities litigation in the future.
Additionally, while Luminent and we informed investors that we were under no
obligation to, and might not, make the distribution to our stockholders of our
Luminent common stock and that we could and might eliminate public ownership of
Luminent through a short-form merger with us, our decisions to abandon our
distribution of Luminent's common stock to our stockholders or to eliminate
public ownership of Luminent's common stock through the merger of Luminent into
one of our wholly-owned subsidiaries may result in securities or other
litigation. Securities or other litigation could result in substantial costs
and divert management's attention and resources.
DEPENDING ON OUR FUTURE ACTIVITIES OR AS A RESULT OF THE POSSIBLE SALE OF ONE OR
MORE OF OUR PORTFOLIO COMPANIES, WE COULD BE FORCED TO INCUR SIGNIFICANT COSTS
TO AVOID INVESTMENT COMPANY STATUS AND MAY SUFFER ADVERSE CONSEQUENCES IF DEEMED
TO BE AN INVESTMENT COMPANY.
In the past through 2000, we embarked upon a business strategy of
creating, acquiring and managing companies in the optical technology and
Internet infrastructure areas, with a view toward creating equity growth by
operating or investing in these companies and then potentially spinning them
off, taking them public or selling them or our interest in them. If this
strategy proved successful, we were concerned that we might incur significant
costs to avoid investment company status and would suffer other adverse
consequences if deemed to be an investment company under the Investment Company
Act of 1940. The Investment Company Act of 1940 requires registration for
companies that are engaged primarily in the business of investing, reinvesting,
owning, holding or trading in securities. A company may be deemed to be an
investment company if it owns investment securities with a value exceeding 40%
of the value of its total assets (excluding government securities and cash
items) on an unconsolidated basis, unless an exemption or safe harbor applies.
Securities issued by companies other than majority-owned subsidiaries are
generally counted as investment securities for purposes of the Investment
Company Act. Investment companies are subject to registration under, and
compliance with, the Investment Company Act unless a particular exclusion or
safe harbor provision applies. If we were to be deemed an investment company,
we would become subject to the requirements of the Investment Company Act. As a
consequence, we would be prohibited from engaging in business or issuing our
securities as we have in the past and might be subject to civil and criminal
penalties for noncompliance. In addition, certain of our contracts might be
voidable.
43
As a result of the current economic slowdown in the communications
industry generally and the fiber optic components industry particularly, we
have abandoned plans to spin-off Luminent, one of our subsidiaries, and
withdrawn the initial public offering of Optical Access, another of our
subsidiaries. The economic slowdown and its consequences have caused us to
reevaluate our strategy and to focus currently on holding and operating our
existing businesses. This current focus makes it less likely that we would
attain investment company status. However, if economic and market conditions
recover to the point at which they existed prior to the fourth quarter of 2000,
we may return to our prior strategy which, depending on future events, might
again subject us to the potential risks associated with investment company
status, including registration as an investment company.
Moreover, although our portfolio of investment securities currently
comprises substantially less than 40% of our total assets, fluctuations in the
value of these securities or of our other assets as a result of future economic
conditions or events, or, more likely, the sale of one or more of companies in
exchange for the securities of the purchaser, may cause this limit to be
exceeded. In any case where our investment securities resulting from a sale of
one or more of our companies or otherwise were in excess of the 40% limit, we
would have to attempt to reduce our investment securities as a percentage of our
total assets unless an exclusion or safe harbor was available to us. This
reduction could be attempted in a number of ways, including the disposition of
investment securities and the acquisition of non-investment security assets. If
we were required to sell investment securities, we may sell them sooner than we
otherwise would. These sales may be at depressed prices and we may never realize
anticipated benefits from, or may incur losses on, these investments. We may be
unable to sell some investments due to contractual or legal restrictions or the
inability to locate a suitable buyer. Moreover, we may incur tax liabilities
when we sell assets. We may also be unable to purchase additional investment
securities that may be important to our operating strategy. If we decide to
acquire non-investment security assets, we may not be able to identify and
acquire suitable assets and businesses or the terms on which we are able to
acquire these assets may be unfavorable. The mere existence of these issues
could cause us to forego a transaction, which might otherwise have been
beneficial to us.
IF THE PRICE OF OUR COMMON STOCK AGAIN TRADES BELOW $1.00 PER SHARE FOR A
PROLONGED PERIOD, OUR COMMON STOCK MAY BE DELISTED FROM NASDAQ.
The National Association of Securities Dealers, Inc., or NASD, has
established certain standards for the continued listing of a security on the
Nasdaq National Market and the Nasdaq SmallCap Market. The standards for
continued listing on either market require, among other things, that the
minimum bid price for the listed common stock be at least $1.00 per share. A
deficiency in the bid price maintenance standard will be deemed to exist if the
issuer fails the minimum bid-price requirement for 30 consecutive trading days,
within a 90-day cure period, with respect to the Nasdaq National Market, and a
180-day cure period with respect to the Nasdaq SmallCap Market.
From September 19, 2002 to October 25, 2002, a period of 27
consecutive trading days, our common stock traded at less than $1.00 per share
and thus we just avoided receiving notice from The Nasdaq Stock Market, Inc. of
a failure to comply with the $1.00 minimum bid price per share requirement.
While, except for one trading day since October 25, 2002, the price per share
of our common stock has exceeded the $1.00 per share minimum bid requirement,
because of current economic or market conditions or other factors the price of
our common stock may again fall below $1.00 per share. If that shortfall were
sustained for a prolonged period, it could result in our common stock being
delisted from The Nasdaq Stock Market. In that event, public trading, if any,
in our common stock would be limited to the over-the-counter markets in the
so-called "pink sheets" or the NASD's OTC Electronic Bulletin Board.
Consequently, the liquidity of our common stock could be impaired and the
ability of holders to sell our stock could be adversely affected.
IF THE NASDAQ STOCK MARKET DELISTED OUR COMMON STOCK WE COULD BECOME SUBJECT
TO THE SEC'S PENNY STOCK RULES. IN THAT EVENT, BECAUSE OF THE BURDEN PLACED ON
BROKER-DEALERS TO COMPLY WITH THE RULES APPLICABLE TO PENNY STOCKS, INVESTORS
MAY HAVE DIFFICULTY SELLING OUR COMMON STOCK IN THE OPEN MARKET.
If The Nasdaq Stock Market delisted our common stock, our common stock
could become subject to Rule 15g-9 under the Securities Exchange Act of 1934.
This rule imposes additional sales practice requirements on broker-dealers who
sell so-called "penny" stocks to persons other than established customers and
"accredited investors." Subject to some exceptions, the SEC's regulations
define a "penny stock" to be any non-Nasdaq or non-exchange listed equity
security that has a market price of less than $5.00 per share. Generally,
accredited investors are individuals with a net worth more than $1,000,000 or
annual incomes exceeding $200,000 (or $300,000 together with their spouses).
For transactions covered by this rule, a broker-dealer must, among other
requirements, make a special suitability determination for the purchaser and
have received the purchaser's written consent to the transaction before sale.
Consequently, the rule may adversely affect the interest or ability of
broker-dealers in selling our shares in the secondary market and this in turn
could adversely affect both the market liquidity for our common stock and the
ability of holders to sell our stock.
DELAWARE LAW AND OUR ABILITY TO ISSUE PREFERRED STOCK MAY HAVE ANTI-TAKEOVER
EFFECTS THAT COULD PREVENT A CHANGE IN CONTROL, WHICH MAY CAUSE OUR STOCK PRICE
TO DECLINE.
We are authorized to issue up to 1,000,000 shares of preferred stock.
This preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the board of directors without
further action by stockholders. The terms of any series of preferred stock may
include voting rights (including the right to vote as a series on particular
matters), preferences as to dividend, liquidation, conversion and redemption
rights and sinking fund provisions. No preferred stock is currently
outstanding. The issuance of any preferred stock could materially adversely
affect the rights of the holders of our common stock, and therefore, reduce the
value of our common stock. In particular, specific rights granted to future
holders of preferred stock could be used to restrict our ability to merge with,
or sell our assets to, a third party and thereby preserve control by the
present management. We are also subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibit us from
engaging in a business combination with an interested stockholder for a period
of three years after the date of the transaction in which the person became an
interested stockholder unless the business combination is approved in the
manner prescribed under Section 203. These provisions of Delaware law also may
discourage, delay or prevent someone from acquiring or merging with us, which
may cause the market price of our common stock to decline.
44
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable.
(b) Not applicable.
(c) During the three months ended September 30, 2002, registrant:
(i) On July 9, 2002, issued 3,862,825 shares of its common
stock to American Transfer & Trust Co., as escrow
agent for Perroque Hold LTD., a Cyprus corporation, as
partial consideration for the purchase by registrant
of the remaining 25% portion of the outstanding
capital stock of Maadne Investment LTd., not
theretofore owned by registrant. Maadne Investment
LTd., is a Cyprus holding corporation that owns 100%
of the outstanding capital of RDS Communications AB, a
Swedish corporation.
(ii) On July 29, 2002, issued 1,133,348 shares of its
common stock to American Transfer & Trust Co., as
escrow agent for the minority shareholders of one of
the registrants' subsidiaries as partial consideration
for the purchase by registrant from such minority
shareholders of the remaining 29.5% portion of the
outstanding capital stock of the subsidiary, not
theretofore owned by registrant.
Exemption from the registration requirements is claimed under the
Securities Act of 1933 (the "Securities Act") for each of the above transactions
in reliance on Section 4(2) of the Securities Act or Regulation D promulgated
thereunder. The purchasers 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 each person was an accredited investor. No brokers or
dealers were involved in the transaction and no commissions were paid.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of per share earnings - See Note 1 of Notes to Unaudited Consolidated Condensed
Financial Statements.
(b) Reports on Form 8-K
None.
45
SIGNATURE
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant certifies that it has duly
caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on November 13, 2002.
MRV COMMUNICATIONS, INC
By: /s/ Noam Lotan
------------------------------
Noam Lotan
President and Chief Executive Officer
By: /s/ Shay Gonen
------------------------------
Shay Gonen
Chief Financial Officer
46
CERTIFICATION
I, Noam Lotan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MRV
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Noam Lotan
------------------------------
Noam Lotan
President and Chief Executive Officer
47
CERTIFICATION
I, Shay Gonen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MRV
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Shay Gonen
------------------------------
Shay Gonen
Chief Financial Officer
48
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of MRV Communications, Inc.
(the "Company") on Form 10-Q for the period ended September 30, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
each of the undersigned, in the capacities and on November 13, 2002, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
MRV COMMUNICATIONS, INC
By: /s/ Noam Lotan
------------------------------
Noam Lotan
President and Chief Executive Officer
By: /s/ Shay Gonen
------------------------------
Shay Gonen
Chief Financial Officer
49