<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, 2000
[ ] 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, 2000, there were 28,668,193 shares of Common Stock, $.0034 par
value per share, outstanding.
<PAGE> 2
MRV COMMUNICATIONS, INC.
Form 10-Q March 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 (audited) 3
Condensed Consolidated Statements of Operations
for the Three Months ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (unaudited) for
the Three Months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
PART II OTHER INFORMATION 20
Item 6. Exhibits and Reports on Form 8-K. 20
SIGNATURE 20
</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,
2000 1999
(unaudited) (audited)
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash & cash equivalents $ 19,467 $ 34,330
Short-term investments 10,344 10,141
Accounts receivable 54,374 60,637
Inventories 37,569 35,392
Refundable income taxes 3,789 3,216
Deferred income taxes 6,800 6,907
Other current assets 6,211 6,336
--------- ---------
Total current assets 138,554 156,959
PROPERTY AND EQUIPMENT - At cost,
net of depreciation and amortization 17,226 19,600
OTHER ASSETS:
Goodwill 26,201 27,214
U.S. Treasury notes 96,253 97,704
Investments in partner companies 24,258 4,232
Deferred income taxes 5,479 5,324
Loan financing costs and other 3,143 3,500
--------- ---------
$ 311,114 $ 314,533
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of capital lease obligations $ 122 $ 198
Accounts payable 23,789 33,455
Accrued liabilities 15,690 15,403
Deferred revenue 1,041 1,478
--------- ---------
Total current liabilities 40,642 50,534
LONG-TERM LIABILITIES
Convertible debentures 90,000 90,000
Capital lease obligations, net of current portion 1,268 1,481
Deferred income taxes 281 281
Other long-term liabilities 1,942 2,647
--------- ---------
Total long term liabilities 93,491 94,409
MINORITY INTERESTS 2,394 2,775
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 and
28,668 shares outstanding in 2000
and 28,117 shares outstanding in 1999 126 124
Additional paid-in capital 204,841 191,440
Treasury Stock (133) (133)
Retained earnings (deficit) (24,241) (18,377)
Accumulated other comprehensive loss (6,006) (6,239)
--------- ---------
Total stockholders' equity 174,587 166,815
--------- ---------
$ 311,114 $ 314,533
--------- ---------
</TABLE>
See accompanying notes
3
<PAGE> 4
MRV COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
March 31, March 31,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
REVENUES, net $ 65,072 $ 70,116
-------- --------
COSTS AND EXPENSES:
Cost of goods sold 42,736 46,366
Research and development expenses 6,060 7,256
Research and development expenses of consolidated
development stage enterprises 5,831 2,336
Selling, general and administrative expenses 16,028 14,718
-------- --------
Operating (loss) (5,583) (560)
Interest expense related to convertible notes 1,125 1,125
Other income, net (1) 637 1,403
Provision (credit) for income taxes (494) 627
Minority interests 287 --
-------- --------
NET (LOSS) $ (5,864) $ (909)
-------- --------
NET (LOSS) PER SHARE - BASIC $ (0.21) $ (0.03)
NET (LOSS) PER SHARE - DILUTED $ (0.21) $ (0.03)
-------- --------
SHARES USED IN PER - SHARE CALCULATION - BASIC 28,425 26,650
SHARES USED IN PER - SHARE CALCULATION - DILUTED 28,425 26,650
-------- --------
</TABLE>
*(1) INCLUDES COST OF UNCONSOLIDATED DEVELOPMENT STAGE ENTERPRISES OF $486 IN
2000
See accompanying notes
4
<PAGE> 5
MRV COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (9,354) $ 253
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in partner companies (9,680) --
Purchases of property and equipment, net of sales 590 (1,801)
Purchases of investments (7,266) (767)
Proceeds from sale or maturity of investments 9,000 4,101
-------- --------
Net cash provided by (used in) investing activities (7,356) 1,533
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,903 178
Principal payments on capital lease obligations (289) (353)
-------- --------
Net cash provided by (used in) financing activities 1,614 (175)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH AND CASH EQUIVALENTS 233 (561)
-------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (14,863) 1,050
CASH AND CASH EQUIVALENTS,
beginning of period 34,330 20,692
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 19,467 $ 21,742
======== ========
</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
accounting principles generally accepted in the United States. These statements
should be read in conjunction with the audited consolidated financial statements
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999.
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 (LOSS) PER SHARE
Net (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. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." For year-end financial statements, SFAS No. 130 requires that net
income (loss) and all other non-owner changes in equity be displayed in a
financial statement with the same prominence as other consolidated financial
statements. In addition, the standard requires companies to display the
components of comprehensive income.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
Net (loss) $(5,864) $ (909)
Change in foreign currency
translation 233 (561)
------- -------
Comprehensive loss $ 5,631 $ 1,470
======= =======
</TABLE>
4. INVENTORIES
Inventories consist of the following as of March 31, 2000 and December 31, 1999
(in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Raw materials $13,758 $ 8,475
Work-in-process 8,288 8,083
Finished goods 15,523 18,834
------- -------
$37,569 $35,392
======= =======
</TABLE>
5. STATEMENT OF CASH FLOWS
In March 2000, the Company issued 75,000 shares of common stock with a value of
approximately $11,500,000, along with $5,000,000 in cash, to establish its
equity interest in a partner company.
6. STOCK DISTRIBUTION
On March 16, 2000, the Company announced a two-for-one stock split, which is to
be distributed on May 26, 2000 to stockholders of record on May 11, 2000. The
effect of this stock split has not been reflected in the accompanying condensed
consolidated financial statements.
6
<PAGE> 7
7. SEGMENT REPORTING
The Company has adopted a business model of creating and managing several
start-up companies and forming independent business units in order to take them
public. These companies fall into two segments, operating entities or
development stage enterprises. Segment information is therefore being provided
on this basis which differs from prior presentations of portions of the
operating entities as segments.
Development stage enterprises that the Company has created or invested in, are
developing optical components, subsystems and networks and products for the
infrastructure of the Internet.
Operating entities of the Company design, manufacture and distribute optical
components, optical subsystems, optical networking solutions, Internet
infrastructure products and provide IT system integration services.
BUSINESS SEGMENT NET REVENUES for the three months ended March 31, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
2000 1999
------- -------
<S> <C> <C>
Operating entities $65,072 $70,116
Development stage enterprises - -
------- -------
Total revenues $65,072 $70,116
======= =======
</TABLE>
There were no inter-segment sales in the three months ended March 31, 2000 and
1999.
BUSINESS SEGMENT PROFIT (LOSS) for the three months ended March 31, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------
2000 1999
------- -------
<S> <C> <C>
Operating income (loss):
Operating entities $ 248 $ 1,776
Development stage enterprises (5,831) (2,336)
Other income (expense):
Interest expense related to convertible notes (1,125) (1,125)
Interest income 1,347 1,601
Interest expense (224) (198)
Development stage enterprises (486) --
------- -------
Income (loss) before taxes and minority interest $(6,071) $ (282)
======= =======
</TABLE>
7
<PAGE> 8
8. SUBSEQUENT EVENTS
On April 24, 2000, the Company completed the acquisition of approximately 97% of
the outstanding capital stock of Fiber Optic Communications, Inc. (FOCI), a
Republic of China corporation. The acquisition was accounted for under the
purchase method in accordance with Accounting Principles Board Opinion No. 16
(APB No. 16) and related Securities and Exchange Commission (SEC)
pronouncements. Under the terms of the purchase agreement, FOCI shareholders
received approximately $48.6 million in cash and approximately 2.33 million
shares of common stock. FOCI is a manufacturer of passive fiber optic components
for Wavelength Division Multiplexing.
On April 27, 2000, the Company entered into definitive purchase agreements with
Optronics International Corporation (OIC) and Quantum Optech, Inc. (QOI). The
agreements provide for the exchange of approximately 2.0 million and 570,000
share of common stock and warrants to purchase shares of common stock of the
Company for all of the outstanding shares of OIC and QOI, respectively. The
agreements also provide for a guaranteed portion of the purchase price through
the issuance of additional shares of common stock. These acquisitions will be
accounted for under the purchase method in accordance with APB No. 16 and
related SEC pronouncements, and are expected to be completed during the second
quarter of fiscal year 2000. OIC, a Republic of China corporation, is a
manufacturer of high temperature semiconductor lasers, transceivers and
detectors for optical networks. QOI, a Republic of China corporation, is a
manufacturer of optical thin film coating and filters for Dense Wavelength
Division Multiplexing.
On May 1, 2000, the Company completed the acquisition of Jolt Ltd., based in
Jerusalem, Israel. The acquisition was accounted for under the purchase method
in accordance with APB No. 16 and related Securities and Exchange Commission
(SEC) pronouncements. Under the terms of the purchase agreement, Jolt Ltd.
shareholders received in total approximately 830,000 shares common stock and
warrants to purchase shares common stock for all outstanding shares of Jolt Ltd.
stock. Jolt is a pioneer in cost effective and reliable multi-point wireless
optics communication.
8
<PAGE> 9
9. SUPPLEMENT PRO FORMA FINANCIAL DATA
PRO FORMA STATEMENTS OF OPERATIONS (excluding non-recurring items) (In
thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 31, March 31,
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
AMORTIZATION OF INTANGIBLES
FROM ACQUISITIONS, net of tax effects $1,014 $ 791
DEVELOPMENT STAGE ENTERPRISES,
net of tax effects 5,640 2,014
NET INCOME BEFORE AMORTIZATION
OF ACQUISITION INTANGIBLES AND
RECOGNIZED DEVELOPMENT
STAGE ENTERPRISE COSTS 790 1,896
EARNINGS PER SHARE BEFORE
AMORTIZATION OF ACQUISITION
INTANGIBLES AND RECOGNIZED
DEVELOPMENT STAGE ENTERPRISE
COSTS - BASIC $ 0.03 $ 0.07
EARNINGS PER SHARE BEFORE
AMORTIZATION OF ACQUISITION
INTANGIBLES AND RECOGNIZED
DEVELOPMENT STAGE ENTERPRISE
COSTS - DILUTED $ 0.03 $ 0.06
SHARES USED IN PER -
SHARE CALCULATION - BASIC 28,425 26,650
SHARES USED IN PER -
SHARE CALCULATION - DILUTED 31,581 30,207
</TABLE>
9
<PAGE> 10
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,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
REVENUES, net 100.0% 100.0%
COSTS AND EXPENSES:
Cost of goods sold 65.7 66.1
Research and development
expenses 9.3 10.3
Research and development
expenses of consolidated
development stage enterprises 9.0 3.3
Selling, general and
administrative expenses 24.6 21.0
Operating (loss) (8.6) (0.8)
Interest expense related
to convertible notes 1.7 1.6
Other income (expense), net(a) 1.0 2.0
Provision (credit) for income taxes (0.8) 0.9
Minority interests 0.4 0.0
NET (LOSS) (9.0)% (1.3)%
</TABLE>
Revenues
Revenues for the three months ended March 31, 2000 were $65,072,000 as compared
to revenues for the three months ended March 31, 1999 of $70,116,000. The
change represented decreases of $5,044,000 or 7.2% for the quarter ended March
31, 2000 over the quarter ended March 31, 1999. Revenues decreased principally
as result of the Company's decision to exit the LAN switching business.
International sales accounted for approximately 58.6% of revenues for the
quarter ended March 31, 2000 as compared to 59.1% of revenues for the quarter
ended March 31, 1999.
Gross Profit
Gross profit for the quarter ended March 31, 2000 was $22,336,000 compared to
gross profit of $23,750,000 for the quarter ended March 31, 1999. The changes
represented decreases of $1,414,000 or approximately 6.0% for the quarter ended
March 31, 2000 over the quarter ended March 31, 1999. Gross Profit as a
percentage of
10
<PAGE> 11
revenues increased from 33.9% during the quarter ended March 31, 1999 to 34.3%
during the quarter ended March 31, 2000.
Research and Development
Research and development ("R&D") expenses were $6,060,000 and represented 9.3%
of revenues for the quarter ended March 31, 2000. R&D expenses were $7,256,000
and represented 10.3% of revenues for the three months ended March 31, 1999. The
decreases of $1,196,000 or 16.5% in R&D spending during the quarter ended March
31, 2000 over the comparable period in 1999 was attributable to the Company's
decision to end further development of LAN switching products.
R&D expenses of consolidated development stage enterprises reflects the costs
incurred by consolidated development stage enterprises. These expenses were
$5,831,000 or 9.0% of revenues for the three months ended March 31, 2000 as
compared to $2,336,000 or 3.3% of revenue for the three months ended March 31,
1999. The increase of $3,495,000 or 150% in R&D expenses of consolidated
development stage enterprises is the result of increased development activities
at existing enterprises and new ones initiated during the current quarter.
The Company intends to continue to invest in the research and development of
new products both in its operating entities and in new and existing development
stage enterprises. Management believes that the ability of the Company to
foster such development and commercialize new products is an important
competitive factor.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses increased to $16,028,000
for the quarter ended March 31, 2000 from $14,718,000 for the quarter ended
March 31, 1999. As a percentage of revenues, SG&A increased from 21.0% for the
quarter ended March 31, 1999 to 24.6% for the quarter ended March 31, 2000. The
increases in SG&A expenses both in dollar amounts and as a percentage of
revenues were due primarily to substantially increased marketing efforts as well
as the addition of personnel
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 expenses of $1,125,000 for each
of the three months ended March 31, 2000 and 1999.
Other Income
Other income (expense), net decreased from $1,403,000 during the first quarter
of 1999 to $637,000 during the first quarter of 2000. As a percentage of
revenues, other income decreased from 2.0% for the quarter ended March 31, 1999
to 1.0% for the quarter ended March 31, 2000. The decrease in other income
resulted primarily from the Company's equity in the costs of development stage
enterprises which it does not consolidate.
Income Taxes
The Company recorded a credit of $494,000 for income taxes during the quarter
ended March 31, 2000 as compared to a provision for income taxes of $627,000
during the quarter ended March 31, 1999. The differences between tax amounts in
2000 and 1999 have to do with the variance in the amount of income at loss
realized by the Company in the various countries in which it operates and the
varying tax rates that are applicable in those countries.
11
<PAGE> 12
Minority Interests
Minority interests represent ownership by third parties in some of the
Company's partner companies that are consolidated.
Net Loss
The Company incurred a net loss of $5,864,000 during the three months ended
March 31, 2000 compared to a net loss of $909,000 during the three months ended
March 31, 1999. Net income for the three months ended March 31, 2000 and 1999
would have been $790,000 and $1,896,000, respectively, before the amortization
of intangibles principally resulting from the Company's acquisition of Xyplex in
1998 and costs recognized in connection with the Company's investments in
consolidated and unconsolidated development state enterprises.
In April 2000, the Company completed the acquisition of approximately 97% of the
outstanding capital stock of Fiber Optic Communications, Inc. a Republic of
China corporation ("FOCI"). The purchase price paid to the shareholders of FOCI,
which was arrived at as the result of arms' length negotiations, consisted of
approximately $48.6 million in cash and approximately 2.33 million shares of the
Company's common stock having a value of approximately $248 million based on the
average closing price of the Company's common stock during the five days before
and five days after the announcement of this acquisition. The Company expects
that this acquisition will add approximately $6,500,000 of goodwill amortization
per quarter.
In April 2000, the Company also signed definitive agreements to acquire Jolt
Ltd., a company engaged in optical wireless communications, Optronics
International Corp., a manufacturer of laser diodes and transceivers and Quantum
Optech Inc., a manufacturer of optical thin film coating and filters for DWDM,
an industry acronym for dense wavelength division multiplexing. If all of these
acquisitions are successfully completed, the Company expects to add an estimated
additional $6,500,000 of goodwill amortization per quarter.
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. Interest on the
Notes is at 5% per annum and is payable semi-annually on June 15 and December 15
of each year. The Notes have a five-year term and are not callable until June
15, 2001. The premiums payable to call the Notes will be 102% of the outstanding
principal amount during the 12 months ending June 14, 2002 and 101% during the
12 months ending June 14, 2003, plus accrued interest to the date of redemption.
Cash and cash equivalents were $19,467,000 at March 31, 2000 as compared to
$34,330,000 at December 31, 1999. Net cash used in investing activities for the
three months ended March 31, 2000 was $7,356,000. The cash was primarily used to
establish or increase ownership in partner companies and to help fund their
capital needs. Net cash provided by financing activities for the three months
ended March 31, 2000 was $1,614,000. The cash was provided primarily by the
issuance of common stock in connection with investments in partner companies and
the exercise of warrants and options.
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.
12
<PAGE> 13
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 non-dollar-denominated currencies, which are sensitive to
foreign currency exchange rate fluctuations. The non-dollar-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 deutsch marks 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 currently installed computer systems and software products are coded to
accept only two-digit entries in date code fields. Beginning in the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. The Company does not believe that
the Year 2000 problem had or will have a material adverse effect on the
Company's business or results of operations.
CERTAIN RISK FACTORS THAT COULD AFFECT FUTURE RESULTS
OUR PERFORMANCE MAY BE MATERIALLY ADVERSELY AFFECTED BY TECHNOLOGICAL CHANGES
AND PRODUCT DEVELOPMENT DELAYS.
We are 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 our new products. Market acceptance of our products will depend, in large
part, upon our ability to demonstrate performance and cost advantages and
cost-effectiveness of our products over competing products and the success of
our and our customers' sales efforts. We can give no assurance that we will be
able to continue to market our technology successfully, or that any of our
current products will continue to, or that our 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 our existing products obsolete. Our success will
depend upon our ability to enhance existing products and to introduce new
products to meet changing customer requirements and emerging industry standards.
We are and will be required to devote continued efforts and financial resources
to develop and enhance our existing products and con-duct research to develop
new products. The development of new, technologically advanced products is a
complex and uncertain process requiring high levels of innovation. It also
requires the accurate anticipation of technological and market trends. We can
give no assurance that we will be able to identify, develop, manufacture, market
or support new or enhanced products successfully or on a timely basis. Nor can
we give assurances that new products we introduce will gain market acceptance or
that we will be able to respond effectively to product announcements by
13
<PAGE> 14
competitors, technological changes or emerging industry standards. Furthermore,
from time to time, we may announce new products or product enhancements,
capabilities or technologies that have the potential to replace or shorten the
life cycle of our existing product offerings. This may cause customers to defer
purchasing our existing products or cause customers to return products to us.
DEFECTS IN OUR PRODUCT RESULTING FROM THEIR COMPLEXITY OR OTHERWISE COULD HURT
OUR FINANCIAL PERFORMANCE.
Complex products, such as those we offer, may contain undetected software or
hardware errors when we first introduce them or when we release new versions.
The occurrence of such errors in the future, and our inability to correct such
errors quickly or at all, could result in the delay or loss of market acceptance
of our products. It could also result in material warranty expense, diversion of
engineering and other resources from our product development efforts and the
loss of credibility with our customers, system integrators and end users. Any of
these or other eventualities resulting from defects in our products could have a
material adverse effect on our business, operating results and financial
condition.
OUR GROWTH RATE MAY BE LOWER THAN HISTORICAL LEVELS AND OUR RESULTS COULD
FLUCTUATE SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our revenues may grow at a slower rate in the future than we have experienced in
previous periods and, that, on a quarter-to-quarter basis, our growth in revenue
may be significantly lower than our historical quarterly growth rates. Our
operating results for a particular quarter are extremely difficult to predict.
Our revenue and operating results could fluctuate substantially from quarter to
quarter and from year to year. This could result from any one or a combination
of factors such as
- - the cancellation or postponement of orders,
- - the timing and amount of significant orders from our largest customers,
- - our success in developing, introducing and shipping product enhancements
and new products,
- - the mix of products we sell,
- - adverse effects to our financial statements resulting from, or
necessitated by, past and future acquisitions,
- - new product introductions by our competitors,
- - pricing actions by us or our 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 we receive during a quarter are
difficult to forecast. From time to time, our customers encounter uncertain and
changing demand for their products. Customers generally order based on their
forecasts. If demand falls below such forecasts or if customers do not control
inventories effectively, they may cancel or reschedule shipments previously
ordered from us. Our expense levels during any particular period are based, in
part, on expectations of future sales. If sales in a particular quarter do not
meet expectations, our operating results could be materially adversely affected.
Furthermore, in certain instances, sales cycles are becoming longer and more
uncertain as we bid on larger projects. As a result, we are finding it more
difficult to predict the timing of the awards of contracts and the actual
placement of orders stemming from awards. We can give no assurance that these
factors or others, such as those discussed below regarding the risks we face
from our international operations or the risks discussed immediately below,
would not cause future fluctuations in operating results. Further, there can be
no assurance that we will be able to continue profitable operations.
THE PRICES OF OUR SHARES HAVE BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE.
Historically, the market price of our shares has been extremely
volatile. The market price of our common sock is likely to continue to be highly
volatile and could be significantly affected by factors such as
14
<PAGE> 15
- - actual or anticipated fluctuations in our operating results,
- - announcements of technological innovations or new product introductions
by us or our competitors,
- - changes of estimates of our future operating results by securities
analysts,
- - developments with respect to patents, copyrights or proprietary rights,
and
- - general market conditions and other factors.
In addition, the stock market has 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 our common stock. For example, during
the period of less than 30 days from March 7, 2000 to April 4, 2000, our stock
price ranged from a high of $193.88 to a low of $60. In addition, it is possible
that in a future fiscal quarter, our results of operations will fail to meet the
expectations of securities analysts or investors and, in such event, the market
price of our common stock would be materially adversely affected. For example,
as a result of weaker than anticipated demand for our networking products,
especially in Europe, and delays in transitions to next generation, higher
margin, networking products, in August 1998, we announced that we expected
operating results in the third quarter of 1998 to be adversely affected.
Following that announcement, the market price of our common stock dropped
substantially. Similarly, in February 1999, following our re-lease of fourth
quarter and 1998 financial results, we announced that we did not expect revenues
in the first quarter of 1999 to be as strong as revenues reported for the fourth
quarter of 1998. Following that announcement, the market price of our stock
again dropped significantly. See the section of this prospectus captioned "Price
Range of Common Stock" below.
OUR STOCK PRICE MIGHT SUFFER AS A CONSEQUENCE OF OUR INVESTMENTS IN PARTNER
COMPANIES.
We have created several start-up companies and formed independent business units
in the optical technology and Internet infrastructure areas. We account for
these investments in affiliates according to the equity or cost methods as
required by accounting principles generally accepted in the United States. The
market value of these investments may vary materially from the amounts shown as
a result of business events specific to these entities or their competitors or
market conditions. Actual or perceived changes in the market value of these
investments could have a material impact on our share price and in addition
could contribute significantly to volatility of our share price.
OUR BUSINESS IS INTENSELY COMPETITIVE AND THE EVIDENT TREND OF CONSOLIDATIONS IN
OUR INDUSTRY COULD MAKE IT MORE SO.
The markets for fiber optic components and networking products are intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, rapid technological change and the continual
emergence of new industry standards. We compete and will compete with numerous
types of companies including companies that have been established for many years
and have considerably greater financial, marketing, technical, human and other
resources, as well as greater name recognition and a larger installed customer
base, than we do. This may give such competitors certain advantages, including
the ability to negotiate lower prices on raw materials and components than those
available to us. In addition, many of our large competitors offer customers
broader product lines, which provide more comprehensive solutions than our
current offerings. We expect that other companies will also enter markets in
which we compete. Increased competition could result in significant price
competition, reduced profit margins or loss of market share. We can give no
assurance that we will be able to compete successfully with existing or future
competitors or that the competitive pressures we face will not materially and
adversely affect our business, operating results and financial condition. In
particular, we expect that prices on many of our products will continue to
decrease in the future and that the pace and magnitude of such price decreases
may have an ad-verse impact on our results of operations or financial condition.
There has been a trend toward industry consolidation for several years. We
expect this trend toward industry consolidation to continue as companies attempt
to strengthen or hold their market positions in an evolving
15
<PAGE> 16
industry. We believe that industry consolidation may provide stronger
competitors that are better able to compete. This could have a material adverse
effect on our business, operating results and financial condition.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH.
We have grown rapidly in recent years, with revenues increasing from $39,202,000
for the year ended December 31, 1995, to $288,524,000 for the year ended
December 31, 1999. Our recent growth, both internally and through the
acquisitions we have made since January 1, 1995, has placed a significant strain
on our financial and management personnel and information systems and controls.
As a consequence, we must implement new and enhance existing financial and
management information systems and controls and must add and train personnel to
operate such systems effectively. Our delay or failure to implement new and
enhance existing systems and controls as needed could have a material adverse
effect on our results of operations and financial condition in the future. Our
intention to continue to pursue a growth strategy can be expected to place even
greater pressure on our existing personnel and to compound the need for
increased personnel, expanded information systems, and additional financial and
administrative control procedures. We can give no assurance that we will be able
to successfully manage operations if they continue to expand.
WE HAVE SUFFERED ADVERSE FINANCIAL CONSEQUENCES AS A RESULT OF A RECENT
ACQUISITION.
On January 30, 1998, we completed the Xyplex acquisition from Whittaker
Corporation. Xyplex is a leading provider of access solutions between enterprise
networks and WAN and/or Internet service providers. 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 our common stock at an exercise price of $35 per share.
In connection with the Xyplex acquisition, we 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 our revenues, the charges resulting from the Xyplex acquisition
resulted in our incurring a net loss of $20,106,000 or $0.86 per share during
the year ended December 31, 1998.
We originally recorded charges of $30,571,000 related to research and
development projects in progress at the time of the Xyplex acquisition. Although
we reported these charges in our 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, we
reconsidered these valuations in light of subsequent SEC guidance regarding
valuation methodology. Based on this newer valuation methodology, we reduced the
value of the purchased technology in progress related to the Xyplex acquisition
to $20,633,000 and increased the amount of goodwill by $9,938,000. This has
resulted in additional charges during 1998 of $759,000 and charges during 1999
of approximately $828,000 for amortization of intangibles, including goodwill,
resulting from the Xyplex acquisition charges and will continue to result in
annual charges of approximately $828,000 after 1999 as these intangibles are
amortized through January 2010.
Recent actions and comments from the SEC have indicated that the SEC 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 SEC has not notified us of any plans to review our methodology
for valuing purchased in-process research and development. Our action in 1998 to
reconsider that valuation of in process research and development related to the
Xyplex acquisition was voluntary. We believe we are in compliance with all of
the rules and related guidance as they currently exist. However, there can be no
assurance that the SEC will not review our accounting for the Xyplex acquisition
and seek to apply retroactively new guidance and further reduce the amount of
purchased in-process research and development we have expensed. This would
result in an additional restatement of our previously filed financial statements
and could have a material adverse impact on our financial results for periods
subsequent to the acquisition.
16
<PAGE> 17
WE FACE RISKS FROM OUR INTERNATIONAL OPERATIONS.
International sales have become an increasingly important segment of our
operations. The following table sets forth the percentage of our total net
revenues from sales to customers in foreign countries for the last three years:
<TABLE>
<CAPTION>
Year ended Percent of total revenue
December 31, from foreign sales
------------ ------------------
<S> <C>
1997 60%
1998 59
1999 58
</TABLE>
We have offices in, and conduct a significant portion of our operations in and
from, Israel. We are, therefore, directly influenced by the political and
economic conditions affecting Israel. Any major hostilities involving Israel,
the interruption or curtailment of trade between Israel and its trading partners
or a substantial downturn in the economic or financial condition of Israel could
have a material adverse effect on our operations. 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 we have not experienced any material
difficulties in this regard to date, we can give no assurance that we will not
experience material difficulties in the future.
Our sales are currently denominated in U.S. dollars and to date our business has
not been significantly affected by currency fluctuations or inflation. However,
as we conduct business in several different countries, fluctuations in currency
exchange rates could cause our products to become relatively more expensive in
particular countries, leading to a reduction in sales in that country. In
addition, inflation or fluctuations in currency exchange rates in such countries
could increase our expenses. The Single European Currency (Euro) was introduced
on January 1, 1999 with complete transition to this new currency required by
January 2002. We have made and expect to continue to make changes to our
internal systems in order to accommodate doing business in the Euro. Any delays
in our ability to be Euro-compliant could have an adverse impact on our results
of operations or financial condition. Due to numerous uncertainties, we cannot
reasonably estimate at this time the effects a common currency will have on
pricing within the European Union and the resulting impact, if any, on our
financial condition or results of operations.
To date, we have not hedged against currency exchange risks. In the future, we
may en-gage 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. Our operating results could be adversely
affected by such fluctuations or as a result of inflation in particular
countries where material expenses are incurred. Moreover, our 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 our products to international end users and,
consequently, our business, operating results and financial condition.
THE SLOWDOWN IN GROWTH RATES IN OUR INDUSTRY COULD ADVERSELY AFFECT OUR GROWTH.
Our success is dependent, in part, on the overall growth rate of the Internet
and the industries that serve it. We can give no assurance that the Internet or
the industries that serve it will continue to grow or that the Company will
achieve higher growth rates. Our business, operating results or financial
condition may be adversely affected by any further decrease in industry growth
rates. In addition, we can give no assurance that our results in any particular
period will fall within the ranges for growth forecast by market researchers.
17
<PAGE> 18
WE FACE RISKS INVOLVED IN THE MANUFACTURE AND SUPPLY OF CRITICAL COMPONENTS FOR
OUR PRODUCTS.
We outsource the board-level assembly, test and quality control of material,
components, subassemblies and systems relating to our networking products to
third-party contract manufacturers. Though there are a large number of contract
manufacturers that we can use for outsourcing, we have elected to use a limited
number of vendors for a significant portion of our board assembly requirements
in order to foster consistency in quality of the products. These in-dependent
third-party manufacturers also provide the same services to other companies.
Risks associated with the use of independent manufacturers include
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. If our contract
manufacturers failed to deliver needed components timely, we could face
difficulty in obtaining adequate supplies of products from other sources in the
near term. We can give no assurance that our third party manufacturers will
provide us with adequate supplies of quality products on a timely basis, or at
all. While we could outsource with other vendors, a change in vendors may
require significant lead-time and may result in shipment de-lays and expenses.
Our inability to obtain such products on a timely basis, the loss of a vendor or
a change in the terms and conditions of the outsourcing would have a material
adverse effect on our business, operating results and financial condition.
We rely heavily on our own production capability for critical semiconductor
lasers and light emitting diodes used in our products. Because we manufacture
these and other key components at our own facility and such components are not
readily available from other sources, any interruption of our manufacturing
process could have a material adverse effect on our operations. Furthermore, we
have a limited number of employees dedicated to the operation and maintenance of
our wafer fabrication equipment, the loss of any of whom could result in our
inability to effectively operate and service 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. We can give no assurance that we
will be able to maintain acceptable production yields and avoid product shipment
delays. In the event adequate production yields are not achieved, resulting in
product shipment delays, our business, operating results and financial condition
could be materially adversely affected.
FUTURE HARM COULD RESULT FROM ADDITIONAL ACQUISITIONS.
An important element of our strategy is to review acquisition prospects that
would complement our existing products, augment our market coverage and
distribution ability or enhance our technological capabilities. For example, in
April 2000 we completed the acquisition of approximately 97% of the outstanding
capital stock of Fiber Optic Communications, Inc. a Republic of China
corporation ("FOCI"). The purchase price we paid to the shareholders of FOCI
consisted of approximately $48.6 million in cash and approximately 2.33 million
shares of our common stock having a value of approximately $248 million based on
the average closing price of the common stock during the five days before and
five days after the announcement of this acquisition. We expect that this
acquisition will add approximately $6,500,000 of goodwill amortization charges
per quarter. In April 2000, we also signed definitive agreements to acquire Jolt
Ltd., a company engaged in optical wireless communications, Optronics
International Corp., a manufacturer of laser diodes and transceivers and Quantum
Optech Inc., a manufacturer of optical thin film coating and filters for DWDM,
an industry acronym for dense wavelength division multiplexing. If all of these
acquisitions are successfully completed, we expect to add an estimated
additional $6,500,000 of goodwill amortization charges per quarter.
In addition to the amortization of expenses related to goodwill and other
intangible assets, these acquisitions and future acquisitions could have a
material adverse effect on our business, financial condition and results of
operations because of the
- - possible charges to operations similar to those incurred in connection
with the Xyplex acquisition,
- - potentially dilutive issuances of equity securities,
- - incurrence of debt and contingent liabilities,
18
<PAGE> 19
- - difficulties assimilating the acquired operations, technologies and
products,
- - diversion of management's attention to other business concerns,
- - risks of entering markets in which we have no or limited prior
experience,
- - potential loss of key employees of acquired organizations, and
- - difficulties in honoring commitments made to customers by management of
the acquired entity prior to the acquisition.
We can give no assurance as to whether we can successfully integrate the
products, technologies or personnel of any business that we might acquire in the
future.
WE PRESENTLY HAVE NO PATENTS AND ARE DEPENDENT ON PROPRIETARY TECHNOLOGY.
We currently hold no patents. We have filed two patent applications and a
provisional patent application in the United States with respect to certain
aspects of our technology. With the Xyplex acquisition, we acquired five
additional provisional patent applications filed by Xyplex on certain aspects of
its technology. We currently rely on copyrights, trade secrets and unpatented
proprietary know-how, which may be duplicated by others. We employ various
methods, including confidentiality agreements with employees and suppliers, to
protect our proprietary know-how. Such methods may not afford complete
protection, however, and others could independently develop such know-how or
obtain access to it or independently develop technologies that are substantially
equivalent or superior to our technology. In the event that protective measures
are not successful, our business, operating results and financial condition
could be materially and adversely affected. In addition, the laws of some
foreign countries do not protect our proprietary rights to the same extent, as
do the laws of the United States. We can give 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 us with meaningful protection from competition. In addition, we can give
no assurance that any patents issued to us or Xyplex will not be challenged,
invalidated or circumvented.
The electronics industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and companies in the
electronics industry have employed intellectual property litigation to gain a
competitive advantage. United States patent applications are presently
maintained in secrecy until the patents issue and the publication of inventions
in technical or patent literature tends to lag behind such patent application
filings by several months. Accordingly, we cannot be certain that we were the
first inventor of inventions covered by pending United States patent
applications or that we are not infringing on the patents of others. Litigation
may be necessary to enforce any patents that may be issued to us or to enforce
our other intellectual property rights, to protect our 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 our business, financial condition and results of operations regardless
of the final outcome of such litigation. In the event that any of our products
are found to infringe on the intellectual property rights of third parties, we
would be required to seek a license with respect to such patented technology, or
incur substantial costs to redesign the infringing products. We can give no
assurance that any such license would be available on acceptable terms or at
all, that any of our products could be redesigned on an economical basis or at
all, or that any such redesigned products would be competitive with the products
of our competitors.
WE ARE DEPENDENT ON CERTAIN MEMBERS OF OUR SENIOR MANAGEMENT.
We are substantially dependent upon Dr. Shlomo Margalit, our Chairman of the
Board of Directors and Chief Technical Officer, and Mr. Noam Lotan, our
President and Chief Executive Officer. The loss of the services of either of
these officers could have a material adverse effect on us. We have entered into
employment agreements with Dr. Margalit and Mr. Lotan and are the beneficiary of
key man life insurance policies in the amounts of $1,000,000 each on their
lives. However, we can give no assurance that the proceeds from these policies
will be sufficient to compensate us in the event of the death of any of these
individuals, and the policies are not applicable in the event that any of them
becomes disabled or is otherwise unable to render services to us.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 2. Change in Securities
(a) Not applicable
(b) Not applicable
(c) During the three months ended March 31, 2000, in connection with its
investment in one of its partner companies, Registrant issued an aggregate
of 75,000 shares of its Common Stock.
The issuance of the shares was not effected through a broker-dealer,
and no underwriting discounts or commissions were paid in connection with such
issuance. Exemption from registration requirements is claimed under the
Securities Act of 1933 (the "Securities Act") in reliance on Section 4(2) of
the Securities Act or Regulation D promulgated thereunder. The purchaser
represented its intention to acquire the securities for investment only and
not with a view to, or for sale in connection with, any distribution thereof
and appropriate legends were affixed to the certificates evidencing the
securities in such transaction. The purchaser had adequate access to
information about the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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 an events occurring on February 22, 2000, reported matters
under Item 5.
20
<PAGE> 21
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1,000
<CASH> 19,467
<SECURITIES> 10,344
<RECEIVABLES> 62,574
<ALLOWANCES> 8,200
<INVENTORY> 37,569
<CURRENT-ASSETS> 138,554
<PP&E> 36,021
<DEPRECIATION> 18,795
<TOTAL-ASSETS> 311,114
<CURRENT-LIABILITIES> 40,642
<BONDS> 90,000
0
0
<COMMON> 126
<OTHER-SE> 174,461
<TOTAL-LIABILITY-AND-EQUITY> 311,114
<SALES> 65,072
<TOTAL-REVENUES> 65,072
<CGS> 42,736
<TOTAL-COSTS> 27,919
<OTHER-EXPENSES> (861)
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 1,349
<INCOME-PRETAX> (6,358)
<INCOME-TAX> (494)
<INCOME-CONTINUING> (5,864)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,864)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
