10k
The Annual Report on Form 10-K contains forward-looking statements.
These statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in the Section under Item 1 Description
of Business -- Risk Factors.
Readers should not place undue reliance on forward-looking statements,
which reflect management's view only as of the date of this Report. The Company
undertakes no obligation to publicly revise these forward-looking statements to
reflect subsequent events or circumstances. Readers should also carefully review
the risk factors described in other documents the Company files from time to
time with the Securities and Exchange Commission.
As used in this Report, "MRV" or the "Company" refers to MRV
Communications, Inc., and its consolidated subsidiaries, except where the
context otherwise indicates. EdgeGuardian, Fiber Driver, GigaHub, MAXserver, MRV
Communications, NBase, Network 3000, Network 9000, RouteRunner, West Hills LAN
Systems, and Xyplex are trademarks or trade names of the Company. Trademarks of
other companies are also used in this Report and are the property of their
respective owners.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
MRV is in the business of creating and managing growth companies in
optical technology and Internet infrastructure. The Company has created several
start-up companies and formed independent business units in the optical
technology and Internet infrastructure area. The Company's core operations
include the design, manufacture and sale of two groups of products: (i) optical
networking and internet infrastructure products, primarily subscribers'
management, Network Element Management, and physical layer, switching and
routing management systems in fiber optic metropolitan networks and (ii) fiber
optic components for the transmission of voice, video and data across
enterprise, telecommunications and cable TV networks. The Company's advanced
optical networking and Internet infrastructure solutions greatly enhance the
functionality of carrier and network service provider networks. The Company's
fiber optic components incorporate proprietary technology, which delivers high
performance under demanding environmental conditions.
The Company's business units offer active optical components, optical
networking and Internet infrastructure products, including network element
management and physical layer management in fiber optic metropolitan networks.
MRV's In-Reach product line manages Internet elements through secure remote
monitoring of large service providers' sites. MRV's Optical Networks family of
products consist of multi-layer traffic management: at Layer 1 with the Fiber
Driver, at Layer 2 with the OptiSwitch and at Layer 3 and above, with the
OSR8000, Linux Router. The Company complements its optical networking and
Internet infrastructure products with a family of optical transmission
components and modules designed for transmission over fiber optic cable. These
products enable the transmission of voice, data, and video across fiber and are
also used in optical fiber test equipment. The Company's products include
discrete components, such as laser diodes and LEDs, and integrated components
such as transmitters, receivers and transceivers. The Company's components are
used in data networks, telecommunication transmission and access networks. Upon
completion of the Company's pending acquisition of Fiber Optic Communications,
Inc., MRV will offer passive optical components.
MRV has also initiated and funded start-up companies including Zaffire,
Inc (formerly known as New Access Communications), Charlotte's Networks,
Hyperchannel and Zuma Networks.
The Company's principal executive offices are located at 8943 Fullbright
Avenue, Chatsworth, California 91311 and its telephone and fax numbers are (818)
773-9044 and (818) 773-0906, respectively. The Company maintains Web
2
sites at "http://www.mrv.com" and "http://www.nbase-xyplex.com. Information
contained in the Company's Web sites shall not be deemed part of this Report.
BACKGROUND
The Company was organized in July 1988 as MRV Technologies, Inc., a
California corporation and reincorporated in Delaware in April 1992, at which
time it changed its name to MRV Communications, Inc.
On May 1, 1995, the Company acquired certain assets and the distribution
business of Galcom Networking, Ltd. ("Galcom"), a network equipment company
located in Israel. The purchase price paid by the Company was approximately
$900,000 in cash and the assumption of approximately $1,800,000 in liabilities
and debt. In connection with the acquisition of assets from Galcom, the Company
issued to Galcom and certain of its employees five-year warrants to purchase an
aggregate of 300,000 shares at prices ranging from $4.25 to $7.38 per share.
On June 29, 1995, the Company acquired certain assets and the
distribution business of Ace 400 Communications Ltd. ("Ace"), a network
equipment company also located in Israel. The purchase price paid by the Company
was approximately $4,477,000 comprised of $100,000 in cash, the assumption of
approximately $467,000 in liabilities and debt and the issuance of approximately
855,000 shares of Common Stock valued at approximately $3,910,000 and extended a
right to Ace to sell to the Company up to $400,000 of Ace's inventory. In
connection with the acquisition of assets from Ace, the Company issued to the
trustee and an employee of Ace five-year warrants to purchase an aggregate of
330,000 shares of Common Stock at prices ranging from $4.57 to $4.67 per share.
The Galcom and Ace acquisitions provided the Company with experienced
personnel and technology for the Token Ring LAN, IBM Connectivity and
Multi-Platform, Network Management IBM NetView and HP OpenView markets.
Following the acquisitions, the Company consolidated these operations in Israel
with its networking operations in the U.S.
On September 26, 1996, the Company completed an acquisition (the
"Fibronics Acquisition") from Elbit Ltd. ("Elbit") of certain of the assets and
selected liabilities of Elbit's wholly-owned subsidiary, Fibronics Ltd. and its
subsidiaries (collectively "Fibronics") related to Fibronics' computer
networking and telecommunications businesses (the "Fibronics Business") in
Germany, the United States, the United Kingdom, the Netherlands and Israel. The
assets acquired included Fibronics' technology in progress and existing
technology, its marketing channels, its GigaHub family of computer networking
products and other rights. The purchase price for the Fibronics Business was
approximately $22,800,000. The purchase price was paid using a combination of
cash and shares of Common Stock, all of which Elbit subsequently resold in the
open market.
The Fibronics Business enabled MRV to enhance the development of Fast
Ethernet and Gigabit Ethernet functions through the Fibronics GigaHub family of
products, to offer a broader range of networking products and to benefit from
combined distribution channels and sales in both the United States and Europe
and greater product development capability.
On January 30, 1998, MRV completed an acquisition from Whittaker
Corporation ("Whittaker") of all of the outstanding capital stock of Whittaker
Xyplex, Inc. a Delaware corporation (the "Xyplex Acquisition"). Whittaker
Xyplex, Inc. (whose name the Company has since changed to NBase Xyplex, Inc.),
is a holding corporation owning all of the outstanding capital stock of Xyplex,
Inc., a Massachusetts corporation ("Xyplex"). Xyplex is a leading provider of
access solutions between enterprise networks and wide area network and/or
Internet service providers ("ISPs"). The purchase price paid to Whittaker
consisted of $35,000,000 in cash and three-year warrants to purchase up to
421,402 shares of Common Stock of the Company at an exercise price of $35 per
share.
The Xyplex Acquisition enabled MRV to expand its product lines with
products that have wide area network ("WAN") and remote access capabilities,
permitting the Company to offer these solutions not only to MRV's own existing
base of customers, but also to the customer base added by Xyplex. The
acquisition of Xyplex also increased MRV's sales force, distribution channels
and customer support and service capabilities.
3
On February 22, 2000, MRV announced plans to acquire Fiber Optic
Communications Inc. ("FOCI"), headquartered in Science-Based Industrial Park,
Hsinchu, Taiwan. FOCI designs, develops, manufactures and markets fiber optic
components, subsystems and systems, and installations of fiber optic related
products including fiber optic passive components, fiber optic testing systems,
fiber optic instruments, fiber optic network installations and fiber optic
sensing systems that serve to manage and increase the capacity, or bandwidth of
fiber optic telecommunications and data communications networks. The purchase
price to be paid to acquire FOCI will consist of $50,000,000 in cash and 2.4
million shares of MRV Common Stock.
RISK FACTORS
The Company may from time to time make written or oral forward-looking
statements. Written forward-looking statements may appear in documents filed
with the Securities and Exchange Commission, in press releases, and in reports
to shareholders. The Private Securities Reform Act of 1995 contains a safe
harbor for forward-looking statements on which the Company relies in making such
disclosures. In connection with this "safe harbor" the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statements made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements:
Risks of Technological Change; Development Delays. The Company is
engaged in the design and development of devices for data networking,
telecommunications and fiber optic communication industries. As with any new
technologies, there are substantial risks that the marketplace may not accept
the Company's new products. Market acceptance of the Company's products will
depend, in large part, upon the ability of the Company to demonstrate
performance and cost advantages and cost-effectiveness of its products over
competing products and the success of the sales efforts of the Company and its
customers. There can be no assurance that the Company will be able to continue
to market its technology successfully or that any of the Company's current or
future products will be accepted in the marketplace. Moreover, the data
networking, telecommunications and fiber optic communication industries are
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions, any of which could render the Company's
existing products obsolete. The Company's success will depend upon its ability
to enhance existing products and to introduce new products to meet changing
customer requirements and emerging industry standards. The Company will be
required to devote continued efforts and financial resources to develop and
enhance its existing products and conduct research to develop new products. The
development of new, technologically advanced products is a complex and uncertain
process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be able to identify, develop, manufacture, market or support
new or enhanced products successfully or on a timely basis, that new Company
products will gain market acceptance or that the Company will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Furthermore, from time to time, the Company may
announce new products or product enhancements, capabilities or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings and that may cause customers to defer purchasing
existing Company products or cause customers to return products to the Company.
Complexity of Product and Product Defects. Complex products, such as
those offered by the Company, may contain undetected software or hardware errors
when first introduced or when new versions are released. While the Company has
not experienced such errors in the past, the occurrence of such errors in the
future, and the inability to correct such errors, could result in the delay or
loss of market acceptance of the Company's products, material warranty expense,
diversion of engineering and other resources from the Company's product
development efforts and the loss of credibility with the Company's customers,
system integrators and end users, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Potential Fluctuations in Operating Results. The Company expects that in
the future it revenues may grow at a slower rate than was experienced in
previous periods and that on a quarter-to-quarter basis, the Company's growth in
revenue may be significantly lower than its historical quarterly growth rates.
As a consequence, operating results for a particular quarter are extremely
difficult to predict. The Company's revenue and operating results could
fluctuate
4
substantially from quarter to quarter and from year to year. This could result
from any one or a combination of factors such as the cancellation or
postponement of orders, the timing and amount of significant orders from the
Company's largest customers, the Company's success in developing, introducing
and shipping product enhancements and new products, the product mix sold by the
Company, adverse effects to the Company's financial statements resulting from,
or necessitated by, past and possible future acquisitions, new product
introductions by the Company's competitors, pricing actions by the Company or
its competitors, the timing of delivery and availability of components from
suppliers, changes in material costs and general economic conditions. Moreover,
the volume and timing of orders received during a quarter are difficult to
forecast. From time to time, the Company's customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from the Company. The Company's expense levels during any particular
period are based, in part, on expectations of future sales. If sales in a
particular quarter do not meet expectations, operating results could be
materially adversely affected. Moreover, in certain instances, sales cycles are
becoming longer and more uncertain as MRV bids on larger projects. As a result,
MRV is finding it more difficult to predict the timing of the awards of
contracts and the actual placement of orders stemming from awards. There can be
no assurance that these factors or others, such as those discussed in
"International Operations" or those discussed immediately below would not cause
future fluctuations in operating results. Further, there can be no assurance
that the Company will be able to continue profitable operations.
Share Prices Have Been and May Continue to Be Highly Volatile.
Historically, the market price of the Company's Common Stock has been extremely
volatile. The market price of the Common Stock is likely to continue to be
highly volatile and could be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcement of
technological innovations or new product introductions by the Company or its
competitors, changes of estimates of the Company's future operating results by
securities analysts, developments with respect to patents, copyrights or
proprietary rights, general market conditions and other factors. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. In addition, it is
possible that in a future fiscal quarter, the Company's results of operations
will fail to meet the expectations of securities analysts or investors and, in
such event, the market price of the Company's Common Stock would be materially
adversely affected. For example, as a result of some of the factors discussed in
"Potential Fluctuations in Operating Results" above, specifically, weaker
than anticipated demand for its networking products, especially in Europe, and
delays in its transitions to next generation, higher margin, networking
products, in August 1998, MRV announced that it expected operating results in
the third quarter of 1998 to be adversely affected. Following that announcement,
the market price of the Company's Common Stock dropped substantially. Similarly,
in February 1999 following its release of fourth quarter and 1998 financial
results, the Company announced it did not expect revenues in the first quarter
of 1999 to be as strong as revenues reported for the fourth quarter of 1998 and
the market price of the Company's Common Stock again dropped significantly. See
Item 5. Market for Common Equity and Related Stockholder Matters.
Competition and Industry Consolidation. The markets for fiber optic
components, and telecommunication and data 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. The Company competes and will continue to
compete with numerous types of companies including companies which have been
established for many years and have considerably greater financial, marketing,
technical, human and other resources, as well as greater name recognition and a
larger installed customer base, than the Company. This may give such competitors
certain advantages, including the ability to negotiate lower prices on raw
materials and components than those available to the Company. In addition, many
of the Company's large competitors offer customers broader product lines which
provide more comprehensive solutions than the Company currently offers. The
Company expects that other companies will also enter markets in which the
Company competes. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. There can be no
assurance that the Company will be able to compete successfully with existing or
future competitors or that competitive pressures faced by the Company will not
materially and adversely affect the business, operating results and financial
condition of the Company. In particular, the Company expects that prices on many
of its products will continue to decrease in the future and that the pace and
magnitude of such price decreases may have an adverse impact on the results of
operations or
5
financial condition of the Company.
There has been a trend toward industry consolidation for several years.
The Company expects this trend toward industry consolidation to continue as
companies attempt to strengthen or hold their market positions in an evolving
industry. The Company believes that industry consolidation may provide stronger
competitors that are better able to compete. This could have a material adverse
effect on the Company's business, operating results and financial condition.
Management of Growth. The Company has grown rapidly in recent years,
with revenues increasing from $39,202,000 for the year ended December 31, 1995,
to $88,815,000 for the year ended December 31, 1996, $165,471,000 for the year
ended December 31, 1997, $264,075,000 for the year ended December 31, 1998, and
$288,524,000 for the year ended December 31, 1999. The Company's recent growth,
both internally and through the acquisitions it has made since January 1, 1995,
has placed a significant strain on the Company's financial and management
personnel and information systems and controls, and the Company must implement
new and enhance existing financial and management information systems and
controls and must add and train personnel to operate such systems effectively.
While the strain placed on the Company's personnel and systems has not had a
material adverse effect on the Company to date, there can be no assurance that a
delay or failure to implement new and enhance existing systems and controls will
not have such an effect in the future. The Company's recent growth through the
acquisitions of the Fibronics Business and Xyplex discussed in "Risks Associated
with Recent Acquisitions" below and its intention to continue to pursue its
growth strategy through efforts to increase sales of existing and new products
can be expected to place even greater pressure on the Company's existing
personnel and compound the need for increased personnel, expanded information
systems, and additional financial and administrative control procedures. There
can be no assurance that the Company will be able to successfully manage
expanding operations.
On January 30, 1998, MRV completed the Xyplex Acquisition from
Whittaker. Xyplex is a leading provider of access solutions between enterprise
networks and WAN and/or Internet service providers ("ISPs"). The purchase price
paid to Whittaker consisted of $35,000,000 in cash and three-year warrants to
purchase up to 421,402 shares of Common Stock of the Company at an exercise
price of $35 per share. During the year ended December 31, 1995, the period from
January 1, 1996 through April 9, 1996 (the day Xyplex was acquired by
Whittaker), the period from April 10, 1996 through October 31, 1996 and the
fiscal year ended October 31, 1997, Xyplex reported net revenues of
$107,617,000, $28,100,000, $52,021,000, and $75,663,000, respectively, and net
losses of $37,360,000, $2,269,000, $13,353,000 and $80,309,000, respectively. In
connection with the Xyplex Acquisition, the Company incurred charges of
$20,633,000 and $15,671,000 for purchased technology and restructuring during
the year ended December 31, 1998. While the Xyplex Acquisition added 11 months
of Xyplex' revenues to those of the Company, the charges resulting from the
Xyplex Acquisition resulted in MRV incurring a net loss of $20,106,000 or $0.86
per share during the year ended December 31, 1998.
MRV originally recorded charges of $30,571,000 related to research and
development projects in progress at the time of the Xyplex Acquisition. Although
MRV reported these charges and its first, second and third quarter results of
1998 in accordance with established accounting practice and valuations of
Xyplex' purchased technology in progress provided by independent valuators,
these valuations were reconsidered in light of more recent Securities and
6
Exchange Commission guidance regarding valuation methodology. Based on the new
valuation methodology, MRV reduced the value of the purchased technology in
progress related to the Xyplex Acquisition to $20,633,000 and increased the
amount of goodwill by $9,938,000. This has resulted in additional charges during
1998 of $759,000 for amortization of intangibles, including goodwill, resulting
from the Xyplex Acquisition and will result in additional charges of
approximately $828,000 annually as these intangibles are amortized through
January 2010.
Recent actions and comments from the Securities and Exchange Commission
(the Commission) have indicated that the Commission continues to review the
current valuation methodology of purchased in-process research and development
related to business combinations. The Commission has not notified MRV of any
plans to review MRV's methodology for valuing purchased in-process research and
development. The Company's action to reconsider that valuation of in process
research and development related to the Xyplex Acquisition was voluntary. The
Company believes it is in compliance with all of the rules and related guidance
as they currently exist. However, there can be no assurance that the Commission,
in the future, will not review MRV's accounting for the Xyplex Acquisition and
seek to apply retroactively new guidance and change the amount of purchased
in-process research and development expensed by the Company. This would result
in an additional restatement of previously filed financial statements of the
Company and could have a material adverse impact on financial results for
periods subsequent to the acquisition.
International Operations. International sales have become an
increasingly important segment of the Company's operations, with the
acquisitions of Galcom and Ace in 1995, the Fibronics Business in 1996 and
Xyplex in 1998. Approximately 60%, 59% and 58%, respectively, of the Company's
net revenues for the years ended December 1997, 1998 and 1999, respectively,
were from sales to customers in foreign countries. The Company has offices in,
and conducts a significant portion of its operations in and from Israel. MRV is,
therefore, directly influenced by the political and economic conditions
affecting Israel. Any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners or a substantial
downturn in the economic or financial condition of Israel could have a material
adverse effect on the Company's operations. Sales to foreign customers are
subject to government controls and other risks associated with international
sales, including difficulties in obtaining export licenses, fluctuations in
currency exchange rates, inflation, political instability, trade restrictions
and changes in duty rates. Although the Company has not experienced any material
difficulties in this regard to date, there can be no assurance that it will not
experience any such material difficulties in the future. The Company's sales are
currently denominated in U.S. dollars and to date its business has not been
significantly affected by currency fluctuations or inflation. However, the
Company conducts business in several different countries and thus fluctuations
in currency exchange rates could cause the Company's products to become
relatively more expensive in particular countries, leading to a reduction in
sales in that country. In addition, inflation or fluctuations in currency
exchange rates in such countries could increase the Company's expenses. The
Single European Currency (Euro) was introduced on January 1, 1999 with complete
transition to this new currency required by January 2002. The Company has made
and expects to continue to make changes to its internal systems in order to
accommodate doing business in the Euro. Any delays in the Company's ability to
be Euro-compliant could have an adverse impact on the Company's results of
operations or financial condition. To date, the Company has not hedged against
currency exchange risks. In the future, the Company may engage in foreign
currency denominated sales or pay material amounts of expenses in foreign
currencies and, in such event, may experience gains and losses due to currency
fluctuations. The Company's operating results could be adversely affected by
such fluctuations or as a result of inflation in particular countries where
material expenses are incurred. Moreover, the Company's operating results could
also be adversely affected by seasonality of international sales, which are
typically lower in Asia in the first calendar quarter and in Europe in the third
calendar quarter. These international factors could have a material adverse
effect on future sales of the Company's products to international end-users and,
consequently, the Company's business, operating results and financial condition.
Slowdown in Industry Growth Rates. The Company's success is dependent,
in part, on the overall growth rate of the data networking and fiber optic
industries and the growth of the Internet. In 1997 and 1998, industry growth was
below historical rates according to industry reports. There can be no assurance
that the data networking and fiber optic industries will continue to grow or
that they will achieve higher growth rates. The Company's business, operating
results or financial condition may be adversely affected by any decrease in
industry growth rates. In addition, there can be no assurance that the Company's
results in any particular period will fall within the ranges for growth forecast
by market researchers.
7
Dependence on Third Party Contract Manufacturers and Risks from Internal
Manufacturing. The Company outsources the board-level assembly, test and quality
control of material, components, subassemblies and systems relating to its data
networking products to third party contract manufacturers. Though there are a |
