part 2
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John
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 is enabling MRV to expand its product lines with
products that have WAN and remote access capabilities, permitting the Company to
offer both discrete networking products and complete LAN/WAN end-to-end
solutions not only to MRV's own existing base of customers, but also to the
customer base added by Xyplex. The acquisition of Xyplex has also increased
MRV's sales force, distribution channels and customer support and service
capabilities.
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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 the computer 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 computer
networking, telecommunications and fiber optic communication industries are
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions, any of which could render the Company's
existing products obsolete. The Company's success will depend upon its ability
to enhance existing products and to introduce new products to meet changing
customer requirements and emerging industry standards. The Company will be
required to devote continued efforts and financial resources to develop and
enhance its existing products and conduct research to develop new products. The
development of new, technologically advanced products is a complex and uncertain
process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be able to identify, develop, manufacture, market or support
new or enhanced products successfully or on a timely basis, that new Company
products will gain market acceptance or that the Company will be able to respond
effectively to product announcements by competitors, technological changes or
emerging industry standards. Furthermore, from time to time, the Company may
announce new products or product enhancements, capabilities or technologies that
have the potential to replace or shorten the life cycle of the Company's
existing product offerings and that may cause customers to defer purchasing
existing Company products or cause customers to return products to the Company.
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 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
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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 network products are intensely competitive and subject to
frequent product introductions with improved price/performance characteristics,
rapid technological change and the continual emergence of new industry
standards. The Company competes and will compete with numerous types of
companies including companies which have been established for many years and
have considerably greater financial, marketing, technical, human and other
resources, as well as greater name recognition and a larger installed customer
base, than the Company. This may give such competitors certain advantages,
including the ability to negotiate lower prices on raw materials and components
than those available to the Company. In addition, many of the Company's large
competitors offer customers broader product lines which provide more
comprehensive solutions than the Company currently offers. The Company expects
that other companies will also enter markets in which the Company competes.
Increased competition could result in significant price competition, reduced
profit margins or loss of market share. There can be no assurance that the
Company will be able to compete successfully with existing or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect the business, operating results and financial condition of the
Company. 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
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.
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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 $17,526,000 for the year ended December 31, 1994,
to $39,202,000 for the year ended December 31, 1995, $88,815,000 for the year
ended December 31, 1996, $165,471,000 for the years ended December 31, 1997 and
$264,075,000 for the year ended December 31, 1998. 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.
Risks Associated With Recent Acquisitions. On September 26, 1996, the
Company completed the Fibronics Acquisition from Elbit of certain of the assets
and selected liabilities of Fibronics related to Fibronics' computer networking
and telecommunications businesses in Germany, the United States, the United
Kingdom, the Netherlands and Israel. The assets acquired included Fibronics'
technology in progress and existing technology, its marketing channels, its
GigaHub family of computer networking products and other rights. The purchase
price for the Fibronics Business was approximately $22,800,000, which was paid
using a combination of cash and Common Stock of the Company. During the years
ended December 31, 1994 and 1995, and the period from January 1, 1996 through
September 25, 1996 (the day the Fibronics Business was acquired by the Company),
the Fibronics Business reported net revenues of $33,355,000, $35,003,000 and
$19,481,000, respectively, and net income (losses) of $(11,557,000), $79,000 and
$(6,143,000), respectively. In connection with the Fibronics Acquisition, the
Company incurred charges of $17,795,000, $6,974,000 and $5,200,000 for purchased
technology, restructuring and interest expense related to financing,
respectively. These charges caused the Company to incur a net loss of $9,654,000
for the year ended December 31, 1996.
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 have been reconsidered in light of very recent Securities and
Exchange Commission guidance regarding valuation methodology. Based on this new
valuation methodology, MRV has reduced the value of the purchased technology in
progress related to the Xyplex Acquisition to $20,633,000 and has increased the
amount of goodwill
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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 charges of approximately $828,000 annually as
these intangibles are amortized through January 2010.
Recent actions and comments from the Securities and Exchange Commission
have indicated that the Commission is reviewing the current valuation
methodology of purchased in-process research and development related to business
combinations. Unlike the case of many other companies, 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 has been 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 will not review MRV's accounting for the
Xyplex Acquisition and seek to apply retroactively new guidance and further
reduce 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 53%, 60% and 59%, respectively, of the Company's
net revenues for the years ended December 1996, 1997 and 1998, respectively,
were from sales to customer |
