<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 March 31, 1999
[ ] 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.)
8943 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 March 31, 1999, there were 26,671,831 shares of Common Stock, $.0034 par
value per share, outstanding.
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MRV COMMUNICATIONS, INC.
Form 10-Q March 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 (audited) 3
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) (unaudited) for the Three Months
ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Three Months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION 20
Item 6. Exhibits and Reports on Form 8-K. 20
SIGNATURE 21
</TABLE>
As used in this Report, "MRV" or the "Company" refers to MRV Communications,
Inc. and its consolidated subsidiaries.
2
<PAGE> 3
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 21,742 $ 20,692
Short-term investments 26,395 30,493
Accounts receivable, net of
reserves of $8,561 in 1999 and $8,489 in 1998 57,975 54,596
Inventories 48,007 47,467
Other current assets 9,713 10,543
- ------------------------------------------------------------------------------------------------------
Total current assets 163,832 163,791
PROPERTY AND EQUIPMENT - At cost,
net of depreciation and amortization 19,496 19,357
OTHER ASSETS:
Goodwill 25,955 26,666
Investments, principally U.S. Treasuries 100,905 100,138
Other 10,544 10,240
- ------------------------------------------------------------------------------------------------------
$ 320,732 $ 320,192
- ------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of financing lease obligations $ 127 $ 185
Accounts payable 35,503 29,757
Accrued liabilities 12,484 13,688
Deferred revenue 3,022 4,398
Income taxes payable 91 445
- ------------------------------------------------------------------------------------------------------
Total current liabilities 51,227 48,473
LONG-TERM LIABILITIES
Convertible notes 90,000 90,000
Other long-term liabilities 3,392 4,317
- ------------------------------------------------------------------------------------------------------
Total long term liabilities 93,392 94,317
MINORITY INTERESTS 2,976 2,973
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value:
1,000 shares authorized no shares outstanding -- --
Common stock, $0.0034 par value:
80,000 shares authorized;
26,672 shares outstanding in 1999
and 26,639 shares outstanding in 1998 88 88
Additional paid-in capital 180,834 180,656
Treasury stock (133) (133)
Retained earnings (deficit) (6,380) (5,471)
Accumulated other comprehensive income (loss) (1,272) (711)
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 173,137 174,429
- ------------------------------------------------------------------------------------------------------
$ 320,732 $ 320,192
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
3
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MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
- ---------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES, net $ 70,116 $ 60,826
- ---------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 46,366 34,005
Research and development
expenses 8,465 5,243
Selling, general and
administrative expenses 15,845 11,600
Purchased technology in progress -- 20,633
Restructuring costs -- 23,194
- ---------------------------------------------------------------------------------------------
Operating (loss) income (560) (33,849)
Interest expense related to convertible notes 1,125 --
Other income (expense), net 1,403 684
Provision (credit) for income taxes 627 (3,168)
Minority interests -- 224
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) (909) (30,221)
- ---------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustment (561) (80)
- ---------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (1,470) $ (30,301)
- ---------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.03) $ (1.15)
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.03) $ (1.15)
- ---------------------------------------------------------------------------------------------
SHARES USED IN PER - SHARE CALCULATION - BASIC 26,650 26,387
SHARES USED IN PER - SHARE CALCULATION - DILUTED 26,650 26,387
- ---------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
4
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MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 31, March 31,
1999 1998
(unaudited) (unaudited)
------------ ------------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 253 $ (7,233)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,801) (4,028)
Purchases of investments (767) --
Proceeds from sale or maturity of investments 4,101 48,717
Cash used in acquisitions, net of cash received -- (41,936)
------------ ------------
Net cash provided by (used in) investing activities 1,533 2,753
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 178 248
Principal payments on capital lease obligations (353) (58)
------------ ------------
Net cash provided by (used in) financing activities (175) 190
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS (561) (61)
------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,050 (4,351)
CASH AND CASH EQUIVALENTS,
beginning of period 20,692 19,428
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 21,742 $ 15,077
============ ============
</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, 1998.
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 INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding. Common Stock equivalents were not
considered in the calculation as their effect would be antidilutive.
3. INVENTORIES
Inventories consist of the following as of March 31, 1999 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- -------------
<S> <C> <C>
Raw materials $ 18,506 $ 17,409
Work-in-process 11,945 10,118
Finished goods 17,556 19,940
-------- --------
$ 48,007 $ 47,467
======== ========
</TABLE>
4. SEGMENT REPORTING
The Company designs, manufactures and sells computer networking products and
fiber optic components and modules. Each of these is a business segment with its
respective financial performance detailed in this report.
Computer networking consists of Ethernet LAN routing switches and WAN and remote
access devices. These products are sold to end user customers, distributors and
value added resellers.
Fiber optic components and modules include discrete components such as lazer
diodes and light emitting diodes and integrated components such as transmitters,
receivers and transceivers. These products are sold primarily to
original-equipment manufactures and through distributors.
BUSINESS SEGMENT NET REVENUES for the three months ended March 31, 1999 and
1998(in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Computer networking $ 55,839 $ 49,865
Fiber optic components and modules 14,277 10,961
-------- --------
$ 70,116 $ 60,826
======== ========
</TABLE>
Intersegment sales from fiber optic components and modules to computer
networking were $1,368,000 and $576,000 in the three months ended March 31, 1999
and 1998, respectively.
6
<PAGE> 7
BUSINESS SEGMENT PROFIT (LOSS) for the three months ended March 31, 1999 and
1998 (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating income (loss):
Computer networking $ (2,657) $ (36,203)
Fiber optic components and modules 2,097 2,354
Other income (expense):
Interest expense related to convertible notes 1,125 837
Interest income 1,601 153
Interest expense 198 824
Other -- --
-------- ---------
Income (loss) before taxes and other comprehensive income (loss) $ (282) $ (33,389)
========= ==========
</TABLE>
5. PRO FORMA FINANCIAL DATA
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 following unaudited pro forma summary sets forth results of operations
excluding the non-recurring charges for purchased technology in progress and
restructuring resulting from the Xyplex Acquisition:
PRO FORMA STATEMENTS OF OPERATIONS (excluding non-recurring items)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
- -----------------------------------------------------------------------------------------------
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES, net $ 70,116 $ 60,826
- -----------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods sold 46,366 34,005
Research and development
expenses 8,465 5,243
Selling, general and
administrative expenses 15,845 11,600
- -----------------------------------------------------------------------------------------------
Operating (loss) income (560) 9,978
Interest expense related to convertible notes 1,125 --
Other income (expense), net 1,403 684
Provision (credit) for income taxes 627 3,099
Minority interests -- 224
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (909) $ 7,339
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE - BASIC $ (0.03) $ 0.28
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.03) $ 0.26
- -----------------------------------------------------------------------------------------------
SHARES USED IN PER - SHARE CALCULATION - BASIC 26,650 26,387
SHARES USED IN PER - SHARE CALCULATION - DILUTED 26,650 28,582
- -----------------------------------------------------------------------------------------------
NOTE: PRO FORMA STATEMENTS ABOVE EXCLUDE THE FOLLOWING
Purchased technology in progress -- 20,633
Restructuring costs -- 23,194
</TABLE>
7
<PAGE> 8
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>
Three Months Ended
----------------------------
March 31, March 31,
1999 1998
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
REVENUES, net 100.0% 100.0%
COSTS AND EXPENSES:
Cost of goods sold 66.1 55.9
Research and development
expenses 12.1 8.6
Selling, general and
administrative expenses 22.6 19.1
Purchased technology in progress -- 33.9
Restructuring costs -- 38.1
---------- ----------
Operating (loss) income (0.8) (55.6)
Interest expense related to convertible notes 1.6 --
Other income (expense), net 2.0 1.1
Provision (credit) for income taxes 0.9 (5.2)
Minority interests -- 0.4
---------- ----------
NET INCOME (LOSS) (1.3)% (49.7)%
========== ==========
</TABLE>
Revenues
Revenues for the three months ended March 31, 1999 were $70,116,000 as compared
to revenues for the three ended March 31, 1998 of $60,826,000. The change
represented increases of $9,290,000 or 15.3% for the quarter ended March 31,
1999 over the quarter ended March 31, 1998. Revenues increased as a result of a
larger sales force, greater marketing efforts and greater market acceptance of
the Company's products, both domestically and internationally. International
sales accounted for approximately 59.1% of revenues for the quarter ended March
31, 1999 as compared to 63.2% of revenues for the quarter ended March 31, 1998.
Sales of networking products represented approximately 79.6% of total sales
during the quarter ended March 31, 1999 compared to approximately 82.0% or the
quarter ended March 31, 1998.
Gross Profit
Gross profit for the quarter ended March 31, 1999 was $23,750,000 compared to
gross profit of $26,821,000 for the quarter ended March 31, 1998. The changes
represented decreases of $3,071,000 or 11.5% for the quarter ended March 31,
1999 over the quarter ended March 31, 1998. Gross Profit as a percentage of
revenues decreased from 44.1% during the quarter ended March 31, 1998 to 33.9%
during the quarter ended March 31, 1999. The decreases in gross profit margin
resulted from continuing intense price competition for networking products.
While elements of its suite of enterprise products that were expected to improve
margins did begin shipping in the latter part of 1998 and the first quarter of
1999, the Company has not yet seen meaningful contributions to revenue and
gross margins from them. Moreover, the Company's inability to ship a growing
volume of orders for light wave components also adversely affected margins.
Research and Development
Research and development ("R&D") expenses were $8,465,000 and represented 12.1%
of revenues for the quarter ended March 31, 1999. R&D expenses were $5,243,000
and represented 8.6% of revenues for the three months ended March 31, 1998. The
increases of $3,222,000 or 61.5% in R&D spending during the quarter ended March
31, 1999 over the comparable period in 1998 was attributable to the continued
development of new products, as well as to new projects
9
<PAGE> 9
involving the Company's networking and fiber optic products. The Company intends
to continue to invest in the research and development of new products and
expects that R&D expenses will increase, both in absolute dollars and as a
percentage of revenues, for at least the next two quarters. Management believes
that the ability of the Company to develop and commercialize new products is an
important competitive factor.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $15,845,000
for the quarter ended March 31, 1999 from $11,600,000 for the quarter ended
March 31, 1998. As a percentage of revenues, SG&A increased from 19.1% for the
quarter ended March 31, 1998 to 22.6% for the quarter ended March 31, 1999. The
increases in SG&A expense, both in dollar amounts and as a percentage of sales
were due primarily to substantially increased marketing efforts as well as the
addition of personnel and overhead costs in additional and expanded locations.
Purchased Technology in Progress and Restructuring Costs.
Purchased technology in progress for the quarter ended March 31, 1998 was
$20,633,000 and related to R&D projects of Xyplex in progress at the time of the
Xyplex Acquisition on January 30, 1998 for which there was no alternative future
use. Restructuring costs during the quarter ended March 31, 1998 were
$23,194,000. The restructuring costs in the first quarter of 1998 were
associated with a plan adopted by the Company in March, 1998 calling for the
reduction of workforce, closing of certain facilities, settlement of
distribution agreements and other costs. The Company did not incur these charges
in first quarter of 1999.
Interest expense related to convertible notes.
In June 1998, the Company sold $100,000,000 principal amount of 5% convertible
subordinated notes due 2003 (the "Notes") in a 144A private placement to
qualified institutional investors at 100% of their principal amount, less a
selling discount of 3% of the principal amount. The principal amount of the
Notes was reduced to $90,000,000 when the Company repurchased $10,000,000
principal amount of the Notes at a discount from par during the last quarter of
1998. The outstanding Notes resulted in interest expense of $1,125,000 for the
three months ended March 31, 1999.
Net Loss (Income).
The Company incurred a net loss of $909,000 during the three months ended March
31, 1999 compared to a net loss of $30,221,000 during the three months ended
March 31, 1998. Net income for the three months ended March 31, 1998 would have
been $7,339,000, excluding $43,827,000 of charges, associated with the Xyplex
Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
In June 1998, the Company sold an aggregate $100,000,000 principal amount of 5%
convertible subordinated notes due 2003 (the "Notes") in a private placement
raising net proceeds of $96,423,000. The Notes are convertible into Common Stock
of the Company at a conversion price of $27.0475 per share (equivalent to a
conversion rate of approximately 36.97 shares per $1,000 principal amount of
notes), representing an initial conversion premium of 24%, for a total of
approximately 3.7 million shares of Common Stock of the Company. The Notes have
a five-year term and are not callable for the first three years. Interest on the
Notes is at 5% per annum and is payable semi-annually on June 15 and December
15, commencing on December 15, 1998.
Cash and cash equivalents were $21,742,000 at March 31, 1999 as compared to
$20,692,000 at December 31, 1998. Net cash provided by investing activities for
the year three months ended March 31, 1999 was $1,533,000. Net proceeds from the
sale of United States treasury securities accounted for the cash provided by
investing activities offset by cash used in the purchase of plant and capital
equipment.
10
<PAGE> 10
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation in the
United States 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. However,
in view of the Company's recent expansion of operations in Israel, which has
experienced substantial inflation, there can be no assurance that inflation in
Israel will not have a materially adverse effect on the Company's operating
results in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As a global enterprise, the Company faces exposure to adverse movements in
foreign currency exchange rates. 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 Company's foreign currency exposures
may change over time as the level of activity in foreign markets grows and could
have an adverse impact upon the Company's financial results.
Certain of the Company's assets, including certain bank accounts and accounts
receivable, exist in nondollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The nondollar-denominated
currencies are principally Italian lire, Swedish krona and French francs.
Additionally, certain of the Company's current and long-term liabilities are
denominated principally in Italian lire, German deutschmarks and Swedish krona,
which are also sensitive to foreign currency exchange rate fluctuations.
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.
POST-RETIREMENT BENEFITS
The Company does not provide post-retirement benefits affected by SFAS 106.
YEAR 2000
Many existing computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the upcoming change in the century.
If not corrected, these computer applications and systems could fail or create
erroneous results by, at, or after the year 2000. The Company is currently
conducting a company-wide Year 2000 compliance program ("Y2K Program"). The Y2K
Program is addressing the issue of computer programs and embedded computer chips
being unable to distinguish between the year 1900 and the year 2000. Therefore,
some computer hardware and software will need to be modified prior to the Year
2000 in order to remain functional. The Company anticipates that Year 2000
compliance will be substantially complete by September 1999.
11
<PAGE> 11
The Company's Y2K Program is divided into four major sections: Company
manufactured products, internal information systems, non-information technology
systems, and third-party suppliers and customers. The general phases common to
all sections are: (1) inventorying Year 2000 items; (2) assessing the Year 2000
compliance of items determined to be material to the Company; and (3) repairing
or replacing material items that are determined not to be Year 2000 compliant.
The Company has completed the review of all its products for Year 2000
compliance purposes. The Company believes that its products are either Year 2000
compliant or at the election of the customer can be upgraded to be Year 2000
compliant.
The Company is currently evaluating and addressing Year 2000 issues associated
with its internal information systems. Most of the Company's information
computer systems are already Year 2000 compliant. The Company expects to finish
the evaluation by April 1999. Other internal information systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by
September 1999.
The Company is currently evaluating and addressing Year 2000 issues associated
with its non-information technology systems. Most of these systems are already
Year 2000 compliant. The Company expects to finish the evaluation by April 1999.
Those non-information technology systems that are not Year 2000 compliant will
be repaired or replaced September 1999.
The Company is currently assessing the possible effects on the Company's
operations of the Year 2000 compliance of its key suppliers and contract
manufacturers. The Company expects this assessment will be completed by April
1999. The Company's reliance on suppliers and contract manufacturers and,
therefore, on the proper functioning of their information systems and software,
means that failure to address Year 2000 issues could have a material impact on
the Company's operations and financial results. However, the potential impact
and related costs are not known at this time.
Through December 31, 1998 the Company spent approximately $200,000 to implement
the Year 2000 compliance program. That amount has been expensed as incurred. The
Company estimates that it may spend up to an additional $500,000 for other
replacements or upgrades and for communicating with key suppliers and customers.
That amount will also be expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material key suppliers and customers. The Company believes that, with the
implementation of new business systems and completion of the Y2K Program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced. The Company does not have a contingency plan to address the
Year 2000 problem.
Year 2000 compliance is an issue for virtually all businesses whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from networking or fiber
optic solutions. Such changes in customers' spending patterns could have a
material adverse impact on the Company's sales, operating results or financial
condition.
12
<PAGE> 12
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
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 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
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<PAGE> 13
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.
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. 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 acquisitions and its
intention to continue to pursue its growth strategy through efforts to increase
sales of existing and new products can be expected to place even greater
pressure on the Company's existing personnel and compound the need for increased
personnel, expanded information systems, and additional financial and
administrative control procedures. There can be no assurance that the Company
will be able to successfully manage expanding operations.
Risks Associated With Recent Acquisition.
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. 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
14
<PAGE> 14
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 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.
Risks Associated with International Operations.
International sales have become an increasingly important segment of the
Company's operations. 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 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.
As a global enterprise, the Company faces exposure to adverse movements in
foreign currency exchange rates. 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 Company's foreign currency exposures
may change over time as the level of activity in foreign markets grows and could
have an adverse impact upon the Company's financial results.
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.
15
<PAGE> 15
Certain of the Company's assets, including certain bank accounts and accounts
receivable, exist in nondollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The nondollar-denominated
currencies are principally Italian lire, Swedish krona and French francs.
Additionally, certain of the Company's current and long-term liabilities are
denominated principally in Italian lire, German deutschmarks and Swedish krona,
which are also sensitive to foreign currency exchange rate fluctuations.
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
networking industry. In 1997 and 1998, industry growth was below historical
rates according to industry reports. There can be no assurance that the
networking industry will continue to grow or that it will achieve higher growth
rates. The Company's business, operating results or financial condition may be
adversely affected by any further 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.
Manufacturing and Dependence on Suppliers and Third Party Manufacturers.
The Company uses internally developed Application Specific Integrated Circuits
("ASICs"), which provide the functionality of multiple integrated circuits in
one chip, in the manufacture of its LAN switching products. To develop ASICs
successfully, the Company must transfer a code of instructions to a single mask
from which low cost duplicates can be made. Each iteration of a mask involves a
substantial up-front cost, which costs can adversely affect the Company's result
of operations and financial condition if errors or "bugs" occur following
multiple duplication of the masks. While the Company has not experienced
material expenses to date as a result of errors discovered in ASIC masks,
because of the complexity of the duplication process and the difficulty in
detecting errors, the Company could suffer a material adverse effect to its
operating results and financial condition if errors in developing ASICs were to
occur in the future. Moreover, the Company currently relies on a single,
unaffiliated foundry, Chip Express, to fabricate its ASICs. The Company does not
have a long-term supply contract with Chip Express, any other ASIC vendor or any
other of its limited source vendors, purchasing all of such components on a
purchase order basis under standard terms of sale. While the Company believes it
would be able to obtain alternative sources of supply for the ASICs or other key
components, a change in ASIC or other suppliers of key components could require
a significant lead time and, therefore, could result in a delay in product
shipments. Although the Company has not experienced delays in the receipt of
ASICs or other key components, any future difficulty in obtaining any of these
key components could result in delays or reductions in product shipments which,
in turn, could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company outsources the board-level assembly, test and quality control of
material, components, subassemblies and systems relating to its networking
products to third party contract manufacturers. Though there are a large number
of contract manufacturers which the Company can use for its outsourcing, it has
elected to use a limited number of vendors for a significant portion of board
assembly requirements in order to foster consistency in quality of the products.
These independent third party manufacturers also provide these services to other
companies. Risks associated with the use of independent manufacturers include
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. If the Company's
contract manufacturers fail to deliver products in the future on a timely basis,
or at all, it could be difficult for the Company to obtain adequate supplies of
products from other sources in the near term. There can be no assurance that the
Company's third party manufacturers will
16
<PAGE> 16
provide adequate supplies of quality products timely or at all. While the
Company could outsource with other vendors, a change in vendors may require
significant lead-time and may result in shipment delays and expenses. MRV's
inability to obtain such products timely, its loss of a vendor or a change in
the terms and conditions of its outsourcing arrangements could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company relies almost exclusively on its own production capability for
critical semiconductor lasers and light-emitting diodes ("LEDs") used in its
products. Because the Company manufactures these and other key components of its
products at its own facility and such components are not readily available from
other sources, any interruption of the Company's manufacturing process could
have a material adverse effect on the Company's operations. Furthermore, the
Company has a limited number of employees dedicated to the operation and
maintenance of its wafer fabrication equipment, the loss of any of whom could
result in the Company's inability to effectively operate and service such
equipment. Wafer fabrication is sensitive to many factors, including variations
and impurities in the raw materials, the fabrication process, performance of the
manufacturing equipment, defects in the masks used to print circuits on the
wafer and the level of contaminants in the manufacturing environment. There can
be no assurance that the Company will be able to maintain acceptable production
yields and avoid product shipment delays. In the event adequate production
yields are not achieved, resulting in product shipment delays, the Company's
business, operating results and financial condition could be materially
adversely affected.
Risks Associated with Potential Future Acquisitions.
An important element of management's strategy is to review acquisition prospects
that would complement the Company's existing products, augment its market
coverage and distribution ability or enhance its technological capabilities.
Accordingly, the Company may acquire additional businesses, products or
technologies in the future. Future acquisitions by the Company could result in
charges similar to those incurred in connection with the Xyplex Acquisition,
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect the Company's
business, financial condition and results of operations. Acquisitions entail
numerous risks, including the assimilation of the acquired operations,
technologies and products, diversion of management's attention to other business
concerns, risks of entering markets in which the Company has no or limited prior
experience, the 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. There can be no assurance as to the
ability of the Company to successfully integrate the products, technologies or
personnel of any business that might be acquired in the future, and the failure
of the Company to do so could have a material adverse effect on the Company's
business, financial condition and results of operations.
Present Lack of Patent Protection; Dependence on Proprietary Technology.
The Company holds no patents and only recently has filed two patent applications
and a provisional patent application in the United States with respect to
certain aspects of its technology. With the Xyplex Acquisition, MRV acquired
five additional provisional patent applications filed by Xyplex on certain
aspects of its technology. The Company currently relies on copyrights, trade
secrets and unpatented proprietary know-how, which may be duplicated by others.
The Company employs various methods, including confidentiality agreements with
employees and suppliers, to protect its proprietary know-how. Such methods may
not afford complete protection, however. For example, others could independently
develop such know-how or obtain access to it or independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In the event that protective measures are not successful, the
Company's business, operating results and financial condition could be
materially and adversely affected. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent, as
do the laws of the United States. There can be no assurance that any patents
will be issued as a result of the pending applications, including the
provisional patent application, or any future patent applications, or, if
issued, will provide the Company with meaningful protection from competition. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented. The electronics industry has
been characterized by extensive litigation regarding patents and other
intellectual
17
<PAGE> 17
property rights, and companies in the electronics industry have employed
intellectual property litigation to gain a competitive advantage. Since United
States patent applications are presently maintained in secrecy until patents
issue and since the publication of inventions in technical or patent literature
tends to lag behind such patent application filings by several months, the
Company cannot be certain that it was the first inventor of inventions covered
by pending United States patent applications or that the Company is not
infringing on the patents of others. Litigation may be necessary to enforce any
patents that may be issued to the Company or other intellectual property rights
of the Company, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company's
business, financial condition and results of operations regardless of the final
outcome of such litigation. In the event that any of the Company's products are
found to infringe on the intellectual property rights of third parties, the
Company would be required to seek a license with respect to such patented
technology, or incur substantial costs to redesign the infringing products.
There can be no assurance that any such license would be available on terms
acceptable to the Company or at all, that any of the Company's products could be
redesigned on an economical basis or at all, or that any such redesigned
products would be competitive with the products of the Company's competitors.
Risks From Year 2000 Issues.
Many existing computer programs, including some programs used by the Company,
use only two digits to identify a year in the date field. These programs were
designed without considering the impact of the upcoming change in the century.
If not corrected, these computer applications and systems could fail or create
erroneous results by, at, or after the year 2000. Based on the Company's
investigation to date, management believes that Year 2000 readiness compliance
will occur before January 1, 2000 and does not anticipate that the Company will
incur material operating expenses or be required to incur material costs to be
year 2000 compliant. See Year 2000 Issues above. The dates on which the Company
believes the Year 2000 Compliance Program ("Y2K Program") will be completed are
based on management's estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no assurance that all Year 2000 issues have been identified and would be
addressed by the Y2K Program, that the estimates of the Y2K Program will be
achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Y2K Program. Specific factors that might cause
differences between the estimates and actual results include, but are not
limited to, the availability and cost of personnel trained in these areas, the
ability to locate and correct all relevant computer code, timely responses to
and corrections by third-parties and suppliers of their Year 2000 issues and
similar uncertainties. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-parties and the interconnection of global businesses, the Company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
Year 2000 compliance is an issue for virtually all businesses whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications and divert spending away from networking or fiber
optic solutions. Such changes in customers' spending patterns could have a
material adverse impact on the Company's sales, operating results or financial
condition.
Dependence on Key Personnel.
The Company is substantially dependent upon a number of key employees, including
Dr. Shlomo Margalit, its Chairman of the Board of Directors and Chief Technical
Officer, Dr. Zeev Rav-Noy, its Chief Operating Officer, and Noam Lotan, its
President and Chief Executive Officer. The loss of the services of any one or
more of these officers could have a material adverse effect on the Company. The
Company has entered into employment agreements with each officer and owns and is
the beneficiary of key man life insurance policies in the amounts of $1,000,000
each on the lives of Drs. Margalit and Rav-Noy and Mr. Lotan. There can be no
assurance that the proceeds from these policies will be sufficient to compensate
the Company in the event of the death of any of these individuals, and the
policies do not cover the
18
<PAGE> 18
Company in the event that any of them becomes disabled or is otherwise unable to
render services to the Company.
Attraction and Retention of Qualified Personnel.
The Company's ability to develop, manufacture and market its products and its
ability to compete with its current and future competitors depends, and will
depend, in large part, on its ability to attract and retain qualified personnel.
Competition for qualified personnel in the networking and fiber optics
industries is intense, and the Company will be required to compete for such
personnel with companies having substantially greater financial and other
resources than the Company. If the Company should be unable to attract and
retain qualified personnel, the business of the Company could be materially
adversely affected. There can be no assurance that the Company will be able to
attract and retain qualified personnel.
19
<PAGE> 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
One report on Form 8-K was filed during the quarter covered by this
Report. This report, reporting events occurring on February 16, 1999, reported
matters under Item 5.
Two amended reports on Form 8-K were filed during the quarter covered by
this Report. Both were filed on March 9, 1999.
One of the amended reports amended the Report referred to in the
first paragraph of this Item.
The other amended a Report on Form 8-K filed on February 13,
1998, as amended on April 17, 1998 reporting information on the Xyplex
Acquisition. Specifically, the amended Report on Form 8-K filed an amended
Unaudited Pro Forma Consolidated Financial Statements.
20
<PAGE> 20
SIGNATURES
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 May 14, 1999.
MRV COMMUNICATIONS, INC.
By: /s/ EDMUND GLAZER
---------------------------------------------
Edmund Glazer
Vice President of Finance and Administration
and Chief Financial Officer
21
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