<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1997
[ ] 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 of other jurisdiction (IRS Employer
of incorporation or organization) identification no.)
8917 Fullbright Ave., Chatsworth, CA 91311
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (818) 773-9044
Check whether the issuer:(1)has filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act 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 October 22, 1997, there were 26,563,802 shares of Common Stock, $.0034 par
value per share, outstanding.
<PAGE> 2
MRV COMMUNICATIONS, INC.
Form 10-Q September 30, 1997
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 (audited) 3
Condensed Consolidated Statements of Operations (unaudited)
for the Nine and Three Months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the Nine Months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
SIGNATURE 11
</TABLE>
As used in this Report, "MRV" or the "Company" refers to MRV Communications,
Inc. and its wholly owned consolidated subsidiaries.
2
<PAGE> 3
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
September 30, December 31,
1997 1996
(unaudited) (audited)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & Cash Equivalents $ 10,109 $ 14,641
Short-term investments 46,767 17,659
Accounts receivable, net of
reserves of $2,534 in 1997 and $2,404 in 1996 35,111 24,296
Inventories 23,972 18,238
Deferred income taxes 2,832 2,660
Other current assets 3,777 4,377
- -------------------------------------------------------------------------------------------------
Total current assets 122,568 81,871
PROPERTY AND EQUIPMENT - At cost,
net of depreciation and amortization 6,099 6,248
OTHER ASSETS:
Goodwill 2,510 2,788
Investments 73,024 --
Deferred income taxes 4,284 6,036
OTHER 21 --
- -------------------------------------------------------------------------------------------------
$ 208,506 $ 96,943
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capital lease obligations $ 36 $ 119
Accounts payable 17,058 11,328
Accrued liabilities 6,440 6,389
Accrued restructuring costs 253 3,549
Customer Deposits 176 1,500
Income taxes payable 2,027 2,013
- -------------------------------------------------------------------------------------------------
Total current liabilities 25,990 24,898
LONG-TERM LIABILITIES
Convertible debentures -- 17,325
Capital lease obligations, net of current portion 901 1,035
Other long-term liabilities 744 532
- -------------------------------------------------------------------------------------------------
Total long term liabilities 1,645 18,892
MINORITY INTERESTS 937 852
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
no shares outstanding -- --
Common stock, $0.0033 par value:
40,000,000 shares authorized and
26,222,109 shares outstanding in 1997
and 21,745,481 shares outstanding in 1996 87 72
Additional paid-in capital 172,579 60,164
Retained earnings (Deficit) 7,524 (7,950)
Cumulative translation adjustments (256) 15
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 179,934 52,301
- -------------------------------------------------------------------------------------------------
$ 208,506 $ 96,943
- -------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
3
<PAGE> 4
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
------------------------------- --------------------------------
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES, net $ 117,071 $ 57,779 $ 41,979 $ 22,664
- --------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 66,866 33,682 23,805 13,282
Research and development
expenses 9,094 5,787 3,305 2,111
Selling, general and
administrative expenses 18,745 8,808 6,738 3,713
Purchased technology in progress -- 17,795 -- 17,795
Restructuring costs -- 6,974 -- 6,974
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) 22,366 (15,267) 8,131 (21,211)
Interest expense related to convertible
debentures and acquistion 427 2,236 -- 2,236
Other income, net 460 296 341 132
Provision (credit) for
income taxes 6,840 (5,982) 2,535 (7,865)
Minority interests 85 117 15 54
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 15,474 $ (11,342) $ 5,922 $ (15,504)
- --------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE: $ 0.62 $ (0.59) $ 0.23 $ (0.79)
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING: 25,049,905 19,312,171 25,901,567 19,686,685
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
4
<PAGE> 5
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1997 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,474 $(11,342)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,167 493
Purchased technology in progress -- 17,795
Interest related to convertible
debentures and acquisition 427 2,236
Provision for losses on accounts receivable 130 822
Minority interest in subsidiary 85 117
Change in assets and liabilities:
(Decrease) increase in:
Accounts receivable (10,945) (8,012)
Inventories (5,734) (4,735)
Deferred income taxes 1,580 (7,977)
Other assets 579 (1,932)
Increase (decrease) in:
Accounts payable 5,730 1,257
Accrued liabilities and restructuring costs (3,245) 6,546
Income taxes payable 14 339
Customer deposits (1,324) --
Deferred rent -- (8)
- ----------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 3,938 (4,401)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (740) (2,494)
Purchases of investments (131,044) (21,449)
Redemption of investments 28,912 10,749
Restricted cash -- 1,202
Net cash used in acquisitions -- (13,282)
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (102,872) (25,274)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 98,908 3,744
Proceeds from issuance of convertible debentures -- 30,000
Repurchase of common stock (4,230) --
Repayment of capital lease obligation (217) --
Other long-term liabilities 212 115
- ----------------------------------------------------------------------------------------
Net cash provided by financing activities 94,673 33,859
- ----------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (271) 41
Net (decrease) increase in cash and cash equivalents (4,532) 4,225
Cash and cash equivalents at beginning of period 14,641 1,951
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10,109 $ 6,176
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
5
<PAGE> 6
MRV COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Basis of Presentation - The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the requirements of
Form 10-Q and, therefore, do not include all information and footnotes which
would be presented if such financial statements were prepared in accordance with
generally accepted accounting principles. These statements should be read in
conjunction with the audited financial statements presented in the Company's
Annual Report or Form 10-K for the year ended December 31, 1996.
In the opinion of management, these interim financial statements reflect all
normal and recurring adjustments necessary for a fair presentation of the
financial position and results of operations for each of the periods presented.
The results of operations and cash flows for such periods are not necessarily
indicative of results to be expected for the full year.
2. NET EARNINGS PER SHARE
Net earnings per share are based upon the weighted average number of shares
outstanding during each of the periods, including the dilutive effect of common
stock equivalents. Weighted average shares outstanding include the common stock
equivalents of the convertible debentures, stock options and warrants
outstanding during the period and net income for the purpose of calculating
earnings per share is consequently adjusted for the interest payable to
debenture holders.
6
<PAGE> 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statements of
operations data of the Company expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September September September September
30, 30, 30, 30,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES, net 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
COSTS AND EXPENSES:
Cost of goods sold 57.1 58.3 56.7 58.6
Research and development
expenses 7.8 10.0 7.9 9.3
Selling, general and
administrative expenses 16.0 15.2 16.1 16.4
Purchased technology in
progress 0.0 30.8 0.0 78.5
Restructuring costs 0.0 12.1 0.0 30.8
Other income, net 0.4 0.5 0.8 0.6
Provision (credit) for
income taxes 5.8 (10.4) 6.0 (34.7)
Minority interests 0.1 0.2 0.0 (0.2)
----- ----- ----- -----
NET INCOME 13.2% (19.6)% 14.1% (68.4)%
----- ----- ----- -----
</TABLE>
Revenues
Revenues for the three and nine months ended September 30, 1997 were $41,979,000
and $117,071,000, respectively, as compared to revenues for the three and nine
months ended September 30, 1996 of $22,664,000 and $57,779,000, respectively.
The changes represented increases of $19,315,000 or 85% for the quarter ended
September 30, 1997 over the quarter ended September 30, 1996 and $59,292,000 or
103% for the nine months ended September 30, 1997 over the nine months ended
September 30, 1996. Revenues increased as a result of greater marketing efforts
and greater market acceptance of the Company's products, both domestically and
internationally. International sales accounted for approximately 58% of revenues
for the quarter and nine months ended September 30, 1997, as compared to 56% and
50% of revenues for the quarter and nine months ended September 30, 1996,
respectively. International sales, as a percentage of total revenues, increased
mainly as a result of increased sales, marketing and support resources in place
in Europe and increased sales to the Pacific Rim region. Sales of networking
products represented approximately 76% and 75% of total sales during the quarter
and nine months ended September 30, 1997, respectively, compared to
approximately 70% and 67% for the quarter and nine months ended September 30,
1996.
Gross Profit
Gross profit for the quarter and nine months ended September 30, 1997 were
$18,174,000 and $50,205,000, respectively, compared to gross profit for the
quarter and nine months ended September 30, 1996 of $9,382,000 and $24,097,000
for the quarter and nine months ended September 30, 1996, respectively. The
changes represented increases of $8,792,000 or 93.7% for the quarter ended
September 30, 1997 over the quarter ended September 30, 1996 and $26,108,000 or
108% for the nine months ended September 30, 1997 over the nine months ended
September 30, 1996. Gross Profit as a percentage of revenues increased from
41.4% and 41.7% during the quarter and nine months ended September 30, 1996,
respectively, to 43.3% and 42.9%
7
<PAGE> 8
during the quarter and nine months ended September 30, 1997 as a result of
increased sales of higher margin products such as the MegaSwitch family of
products as well as lower cost production techniques.
Research and Development
Research and development ("R&D") expenses were $3,305,000 and $2,111,000 and
represented 7.9% and 9.3% of revenues for the quarters ended September 30, 1997
and 1996, respectively. R&D expenses were $9,094,000 and $5,787,000 and
represented 7.8% and 10.0% of revenues for the nine months ended September 30,
1997 and 1996, respectively. In the case of absolute dollars, the 57% increases
in R&D spending during the quarter and nine months ended September 30, 1997 over
the comparable periods in 1996 were attributable to the continued development of
the Company's networking and fiber optic products including Ethernet/Fast
Ethernet/Gigabit Ethernet switches, Gigahub modules and fiber optic components.
Additional costs were also associated with the hiring of additional research and
development personnel and consultants. R&D expenses as a percentage of revenues
declined from 9.3% and 10.0% of revenues during the quarter and nine months
ended September 30, 1996, respectively, to 7.9% and 7.8% of revenues for the
quarter and nine months ended September 30, 1997. These decreases were primarily
caused because the Company's revenues during the periods increased at a faster
rate than R&D expenses. The Company intends to continue to invest in the
research and development of new products. Management believes that the ability
of the Company to develop and commercialize new products is a key competitive
factor.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $6,738,000
for the quarter ended September 30, 1997 from $3,713,000 for the quarter ended
September 30, 1996. As a percentage of revenues, SG&A decreased from 16.4% for
the quarter ended September 30, 1996 to 16.1% for the quarter ended September
30, 1997. SG&A expenses increased to $18,745,000 for the nine months ended
September 30, 1997 from $8,808,000 for the nine months ended September 30, 1996.
As a percentage of revenues, SG&A increased from 15.2% for the nine months ended
September 30, 1996 to 16.0% for the nine months ended September 30, 1997. The
increases in SG&A expense, both in dollar amounts and as a percentage of sales
during the nine months ended September 30, 1997, were due primarily to
substantially increased marketing efforts as well as additional personnel and
overhead costs in additional and expanded locations. The decrease in SG&A as a
percentage of revenues during the three months ended September 30, 1997 from the
three months ended September 30, 1996 was because the Company's revenues during
the three months ended September 30, 1997 increased at a faster rate than SG& A
expenses during the quarter.
Interest Expense Related to Convertible Debentures and Acquisition
In September 1996, the Company completed a private placement of $30,000,000
principal amount of convertible Debentures. See "Liquidity and Capital
Resources," below. To give effect to the accounting treatment announced by the
staff of the Securities and Exchange Commission at the March 13, 1997 meeting of
the Emerging Issues Task Force relevant to the Company's issuance of the
Debentures having "beneficial conversion" features, the value of the fixed
discount has been reflected in the Company's financial statements at and for the
quarter and nine months ended September 30, 1996 and the nine months ended
September 30, 1997 as additional interest expense and such fixed discount was
accreted through the first possible conversion date of the respective issuance.
The Company did not need to report charges relating to the issuance of the
Debentures in the quarter ended September 30, 1997 as the outstanding principal
and accrued interest were paid in full at April 4, 1997 through conversion into
Common Stock. See "Liquidity and Capital Resources" below.
Net Income
Net income increased to $5,922,000 and $15,474,000 for the quarter and nine
months ended September 30, 1997, respectively, from net losses of $15,504,000
and $11,342,000 for the quarter and nine months ended September 30, 1996,
respectively. Net losses during the quarter and nine months ended September 30,
1996 were the result of aggregate charges of $27,005,000 during each of the
periods related to the Company's acquisition of Fibronics from Elbit,
8
<PAGE> 9
including charges from purchased technology in progress, restructuring costs and
the interest on the Debentures.
LIQUIDITY AND CAPITAL RESOURCES
In September 1996, the Company completed a private placement of $30,000,000
principal amount of Debentures. The Debentures were convertible into Common
Stock at a discount from the market price at the time of conversion. At April 4,
1997, principal and accrued interest on the Debentures had been paid in full
through their conversion into a total of 1,816,159 shares of Common Stock at an
average conversion rate of $16.77 per share. As part of the private placement,
the Company also issued to the investors three-year warrants to purchase an
aggregate of up to 600,000 shares of Common Stock at a weighted average exercise
price of $26.67 per share.
In September 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 of the Company. The cash was provided from a
portion of the proceeds of the private placement of Debentures. Elbit
subsequently resold the shares of Common Stock it received from the Company in
the open market.
Net cash provided by operating activities for the nine months ended September
30, 1997 was $3,938,000. Net cash provided by financing activities for the nine
months ended September 30, 1997 were $94,673,000. The cash provided by financing
activities came principally from the proceeds from the issuance of 2,785,000
shares of Common Stock upon completion of a follow-on public offering which were
partially offset by the repurchase of the Common Stock from Elbit. Net cash used
in investing activities for the nine months ended September 30, 1997 was
$102,872,000. The cash used in investing activities was primarily used to
purchase investments in U.S. Government securities.
In November 1996, the Company completed a private placement of 200,000 shares of
Common Stock to Intel Corporation ("Intel") for $4,000,000 ($20.00 per share).
As part of the private placement, the Company issued to Intel three-year
warrants to purchase up to an additional 500,000 shares of Common Stock at
$20.00 per share. Of such warrants, warrants to purchase 200,000 shares of
Common Stock are currently exercisable under certain conditions.
In December 1996, Datapoint Corporation ("Datapoint") brought an action against
NBase Communications, Inc., a subsidiary of the Company ("NBase") and several
other defendants in the United States District Court for the Eastern District of
New York alleging infringement of two of Datapoint's patents related to LANs,
more particularly to claimed improved LANs which interoperatively combines
additional enhanced capability and/or which provides multiple different
operational capabilities. In the same lawsuit, Datapoint alleges that other
defendants including Dayna Communications, Inc., Sun Microsystems, Inc.,
Adaptec, Inc., International Business Machines Corporation, Lantronix and SVEC
America Computer Corporation have infringed the same two patents. The Company
has been advised that several other companies, including Intel Corporation and
Cisco Systems, Inc. have also had actions brought against them by Datapoint with
respect to the same two patents. The action against NBase and its codefendants
seeks, among other things, an injunction against the manufacture or sale or
products which embody the inventions set forth in the two patents and single and
treble damages for the alleged infringement. Datapoint's complaint also seeks to
have the court determine that the named defendants shall serve as
representatives of a defendant class of manufacturers, vendors and users of
products allegedly infringing on Datapoint's claimed patents from which
defendant class Datapoint seeks the same relief as from the individual
defendants. The Company is cooperating with several of the defendants in pursuit
of common defenses and believes it has meritorious defenses to this action. If a
conclusion unfavorable to the Company is reached, however, Datapoint's claim
could materially affect the business, operating results and financial condition
of the Company.
9
<PAGE> 10
In September 1997, the Company received proceeds of approximately $93,492,000
from the issuance of 2,785,000 shares of Common Stock upon completion of a
follow-on public offering.
INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's sales or
operating results, or on the prices of raw materials.
10
<PAGE> 11
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, 1997.
MRV COMMUNICATIONS, INC.
By: /s/ Edmund Glazer
--------------------------------
Edmund Glazer
Vice President of Finance and
Administration and Chief Financial
Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED
BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,109
<SECURITIES> 119,791
<RECEIVABLES> 37,645
<ALLOWANCES> 2,534
<INVENTORY> 23,972
<CURRENT-ASSETS> 122,568
<PP&E> 8,446
<DEPRECIATION> 2,347
<TOTAL-ASSETS> 208,506
<CURRENT-LIABILITIES> 25,990
<BONDS> 0
0
0
<COMMON> 87
<OTHER-SE> 179,847
<TOTAL-LIABILITY-AND-EQUITY> 208,506
<SALES> 117,071
<TOTAL-REVENUES> 117,071
<CGS> 66,866
<TOTAL-COSTS> 27,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 130
<INTEREST-EXPENSE> 427
<INCOME-PRETAX> 22,366
<INCOME-TAX> 6,840
<INCOME-CONTINUING> 15,474
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,474
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
