-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UBe/GBavbBdDXwncsEzyow5i5mVPUH2IGRmq/kGPG9Ow9fu6c+fs1AQLKMNRm3Zh luilhiFp8BzCkGuJcrKrIA== 0000950148-98-002485.txt : 19981116 0000950148-98-002485.hdr.sgml : 19981116 ACCESSION NUMBER: 0000950148-98-002485 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MRV COMMUNICATIONS INC CENTRAL INDEX KEY: 0000887969 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 061340090 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11174 FILM NUMBER: 98747620 BUSINESS ADDRESS: STREET 1: 8943 FULLBRIGHT AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8187679044 MAIL ADDRESS: STREET 1: 8943 FULLBRIGHT AVE CITY: CHATSWORTH STATE: CA ZIP: 91311 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 1998 [ ] 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 September 30, 1998, there were 26,646,121 shares of Common Stock, $.0034 par value per share, outstanding. 2 MRV COMMUNICATIONS, INC. Form 10-Q September 30, 1998 INDEX
PAGE NUMBER ----------- PART I FINANCIAL INFORMATION Item 1: Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 (audited) 3 Condensed Consolidated Statements of Operations (unaudited) for the Nine Months and Three Months ended September 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements 6 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II OTHER INFORMATION 11 Item 6: Exhibits and Reports on Form 8-K 11 SIGNATURE 12
As used in this Report, "MRV" or the "Company" refers to MRV Communications, Inc. and its consolidated subsidiaries. 2 3 MRV COMMUNICATIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
- ------------------------------------------------------------------------------------------------------- September 30, December 31, 1998 1997 (unaudited) (audited) - ------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash & cash equivalents $ 24,104 $ 19,428 Short-term investments 32,008 36,413 Accounts receivable, net of reserves of $7,016 in 1998 and $4,252 in 1997 57,232 47,258 Inventories 49,711 41,689 Deferred income taxes 8,315 2,280 Other current assets 5,320 7,248 - ------------------------------------------------------------------------------------------------------- Total current assets 176,690 154,316 PROPERTY AND EQUIPMENT - At cost, net of depreciation and amortization 20,903 8,183 OTHER ASSETS: Goodwill 21,139 5,077 Investments 101,105 62,382 Deferred income taxes 6,112 6,231 Loan acquisition costs and other 4,736 47 - ------------------------------------------------------------------------------------------------------- $ 330,685 $ 236,236 - ------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of financing lease obligations $ 214 $ 111 Accounts payable 31,165 30,439 Accrued liabilities 12,665 8,429 Accrued restructuring costs 8,253 -- Deferred revenue 4,024 293 Income taxes payable 1,213 3,485 - ------------------------------------------------------------------------------------------------------- Total current liabilities 57,534 42,757 LONG-TERM LIABILITIES Convertible debentures 100,000 -- Capital lease obligations, net of current portion 982 788 Deferred income taxes 378 -- Other long-term liabilities 3,571 2,065 - ------------------------------------------------------------------------------------------------------- Total long term liabilities 104,931 2,853 MINORITY INTERESTS 2,762 657 STOCKHOLDERS' EQUITY: Preferred stock, $0.01 par value: 1,000 shares authorized no shares outstanding -- -- Common stock, $0.0034 par value: 40,000 shares authorized and 26,646 shares outstanding in 1998 and 26,360 shares outstanding in 1997 91 88 Additional paid-in capital 180,994 175,874 Treasury stock (60) -- Retained earnings (deficit) (15,096) 14,635 Cumulative translation adjustments (471) (628) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 165,458 189,969 - ------------------------------------------------------------------------------------------------------- $ 330,685 $ 236,236 - -------------------------------------------------------------------------------------------------------
See accompanying notes 3 4 MRV COMMUNICATIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Nine Months Ended Three Months Ended - ------------------------------------------------------------------------- ------------------------------ September 30, September 30, September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) - ------------------------------------------------------------------------- ------------------------------ REVENUES, net $ 189,192 $ 117,071 $ 62,624 $ 41,979 - ------------------------------------------------------------------------- ------------------------------ COSTS AND EXPENSES: Cost of goods sold 109,098 66,866 38,344 23,805 Research and development expenses 17,337 9,094 6,812 3,305 Selling, general and administrative expenses 39,223 18,745 15,642 6,738 Purchased technology in progress 30,571 -- -- -- Restructuring costs 23,194 -- -- -- - ------------------------------------------------------------------------- ------------------------------ Operating (loss) income (30,231) 22,366 1,826 8,131 Interest expense related to 1,370 427 1,370 -- convertible debt Other income (expense), net 3,282 460 1,908 341 Provision for income taxes 1,042 6,840 679 2,535 Minority interests 370 85 130 15 - ------------------------------------------------------------------------- ------------------------------ NET (LOSS) INCOME $ (29,731) $ 15,474 $ 1,555 $ 5,922 - ------------------------------------------------------------------------- ------------------------------ NET (LOSS) EARNINGS PER SHARE BASIC $ (1.12) $ 0.68 $ 0.06 $ 0.25 DILUTED $ (1.12) $ 0.61 $ 0.06 $ 0.23 - ------------------------------------------------------------------------- ------------------------------ SHARES USED IN PER SHARE CALCULATION BASIC 26,497 22,779 26,609 23,321 DILUTION 26,497 25,576 27,390 26,119 - ------------------------------------------------------------------------- ------------------------------
See accompanying notes 4 5 MRV COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited in thousands)
Nine Months Ended - -------------------------------------------------------------------------------------------------- September 30, September 30, 1998 1997 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) (29,731) 15,474 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 3,489 1,167 Interest related to convertible debentures and acquisition -- 427 Purchased technology in progress 30,571 -- Minority interests' share of income 370 85 Changes in assets and liabilities, net of effects from acquisitions Decrease (increase) in: Accounts receivable 12,193 (10,815) Inventories 1,209 (5,734) Deferred income taxes (5,431) 1,580 Other assets 381 579 Increase (decrease) in: Accounts payable (18,417) 5,730 Accrued liabilities (9,702) (3,245) Accrued restructuring 8,253 -- Income taxes payable (4,328) 14 Deferred revenue 86 (1,324) Accrued severance pay 1,381 -- - --------------------------------------------------------------------------------------------------- Net cash (used in) provided by operating activities (9,676) 3,938 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (5,277) (740) Purchases of investments (132,574) (131,044) Proceeds from sale of investments 98,255 28,912 Cash used in acquisitions, net of cash received (44,007) -- - --------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (83,603) (102,872) - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock 1,226 98,908 Repurchase of common stock (60) (4,230) Proceeds from issuance of convertible debentures, net of loan acquisition costs 96,423 -- Principal payments on capital lease obligations 203 (217) Other (13) 212 - --------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 97,779 94,673 - --------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 176 (271) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,676 (4,532) CASH AND CASH EQUIVALENTS, beginning of period 19,428 14,641 - --------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period 24,104 10,109 - ---------------------------------------------------------------------------------------------------
See accompanying notes 5 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, 1997. 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) EARNINGS PER SHARE The following schedule summarizes the information used to compute net income per common share for the nine months and three months ended September 30, 1998 and 1997 (in thousands):
Nine Months Ended Three Months Ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------- ----------- ----------- ---------- Weighted number of common shares used to compute basic earnings (loss) per share 26,497 22,779 26,609 23,321 Weighted common share equivalents -- 2,797 781 2,798 ------ ------ ------ ------ Weighted number of common shares used to compute diluted earnings (loss) per share 26,497 25,576 27,390 26,119 ====== ====== ====== ======
The effect of the convertible subordinated debentures issued on June 26, 1998, for the nine months and three months ended September 30, 1998 would be anti-dilutive and is therefore excluded. 3. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." For year-end financial statements, SFAS 130 requires the display of comprehensive income, which is the total of net income and all other non-owner changes in equity, in a financial statement with the same prominence as other consolidated financial statements. In addition, the standard encourages companies to display the components of other comprehensive income below the total for net income. The following schedule summarizes comprehensive income for the nine months and three months ended September 30, 1998 and 1997 (in thousands):
Nine Months Ended Three Months Ended ------------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ------------- ------------- Net (loss) income $(29,731) $15,474 $ 1,555 $ 5,922 Translation adjustment 157 (271) 91 (95) -------- ------- ------- ------- Comprehensive (loss) income $(29,574) $15,203 $ 1,646 $ 5,887 ======== ======= ======= =======
The cumulative translation adjustment at September 30, 1998 was $(471,000). 4. 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 networks and/or Internet service providers ("ISPs"). The purchase price paid to Whittaker consisted of $35,000,000 in cash and three- 6 7 year warrants to purchase up to 500,000 shares of Common Stock of the Company at an exercise price of $35 per share. As a result of the acquisition, the Company adopted a restructuring plan in March 1998. The plan calls for reduction of workforce, closing of certain facilities, elimination of particular product lines, settlement of distribution agreements and other costs. The Company provided $23,194,000 for the costs of the restructuring. Management estimates that $30,571,000 of the purchase price represents purchased technology in process that has not yet reached technological feasibility and has no alternative future use. Accordingly, this amount was expensed in the Consolidated Statement of Operations upon consummation of the acquisition. The following unaudited pro forma summary sets forth results of operations of excluding the non-recurring charges for purchased technology in progress and restructuring resulting from the Xyplex Acquisition as if the acquisition took place at the beginning of each period presented (in thousands, except per share information): SELECTED PRO FORMA INFORMATION (prior to non-recurring charges)
Nine Months Ended Three Months Ended ------------------------------ ----------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) - ---------------------------------------------------------------------------- ----------------------------- OPERATING INCOME $23,534 $22,366 $ 1,826 $ 8,131 NET INCOME $17,768 $15,474 $ 1,555 $ 5,922 NET INCOME PER SHARE - BASIC $ 0.67 $ 0.68 $ 0.06 $ 0.25 NET INCOME PER SHARE - DILUTED $ 0.64 $ 0.61 $ 0.06 $ 0.23 - ---------------------------------------------------------------------------- ----------------------------- SHARES USED IN PER SHARE CALCULATION BASIC 26,497 22,779 26,609 23,321 DILUTED 27,771 25,576 27,390 26,119 - ---------------------------------------------------------------------------- -----------------------------
7 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.
Nine Months Ended Three Months Ended ----------------------------- ------------------------------ September 30, September 30, September 30, September 30, 1998 1997 1998 1997 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ----------------------------- ------------------------------ REVENUES, net 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------- ------------------------------ COSTS AND EXPENSES: Cost of goods sold 57.7 57.1 61.2 56.7 Research and development expenses 9.2 7.8 10.9 7.9 Selling, general and administrative expenses 20.7 16.0 25.0 16.1 Purchased technology in progress 16.2 -- -- -- Restructuring costs 12.3 -- -- -- - -------------------------------------------------------------------------- ------------------------------ Operating (loss) income (16.0) 19.1 2.9 19.4 Interest expense related to convertible debt 0.7 0.4 2.2 -- Other income (expense), net 1.7 0.4 3.0 0.8 Provision for income taxes 0.6 5.8 1.1 6.0 Minority interests 0.2 0.1 0.2 0.0 - -------------------------------------------------------------------------- ------------------------------ NET (LOSS) INCOME (15.7)% 13.2% 2.5% 14.1% ========================================================================== ==============================
Revenues Revenues for the three and nine months ended September 30, 1998 were $62,624,000 and $189,192,000, respectively, as compared to revenues for the three and nine months ended September 30, 1997 of $41,979,000 and $117,071,000, respectively. The changes represented increases of $20,645,000 or 49.2% for the quarter ended September 30, 1998 over the quarter ended September 30, 1997 and $72,121,000 or 61.6% for the nine months ended September 30, 1998 over the nine months ended September 30, 1997. 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 58% and 60% of revenues for the quarter and nine months ended September 30, 1998, respectively, as compared to 58% of revenues for both the quarter and nine months ended September 30, 1997. Sales of networking products represented approximately 81% and 82% of total sales during the quarter and nine months ended September 30, 1998 compared to approximately 76% and 75% of total sales during the quarter and nine months ended September 30, 1997, respectively. The increase in sales of networking products during the quarter and 8 9 nine months ended September 30, 1998 over the comparable periods in 1997 was the result of an increased number of networking products available for sale and a larger sales, marketing and customer support organization to support such sales. Gross Profit Gross profit for the quarter and nine months ended September 30, 1998 were $24,280,000 and $80,094,000, respectively, compared to a gross profit of $18,174,000 and $50,205,000 for the quarter and nine months ended September 30, 1997, respectively. The changes represented increases of $6,106,000 or 33.6% and $29,889,000 or 59.5% for the quarter and nine months ended September 30, 1998, respectively, over the quarter and nine months ended September 30, 1997. Gross profit as a percentage of revenues decreased from 43.3% and 42.9% during the quarter and nine months ended September 30, 1997, respectively, to 38.8% and 42.3% during the quarter and nine months ended September 30, 1998 as a result of intense price competition from competitors. The Company had planned to compensate for such price competition by introducing new lower cost products during the quarter; however, it was unable to complete those products in time. Research and Development Research and development ("R&D") expenses were $6,812,000 and $17,337,000, and represented 10.9% and 9.2% of revenues, for the quarter and nine months ended September 30, 1998, respectively. R&D expenses were $3,305,000 and $9,094,000, and represented 7.9% and 7.8% of revenues for the quarter and nine months ended September 30, 1997, respectively. The increases of $3,507,000 or 106.1% and $8,243,000 or 90.6% in R&D spending during the quarter and nine months ended September 30, 1998 over the comparable periods in 1997 were attributable to the continued development of, as well as for new projects involving, the Company's networking and fiber optic products. The Company intends to continue to invest in the research and development of new products. Management believes that the ability of the Company to develop and commercialize new products is an important competitive factor. Selling, General and Administrative Selling, general and administrative ("SG&A") expenses increased to $15,642,000 and $39,223,000 for the quarter ended and nine months ended September 30, 1998 from $6,738,000 and $18,745,000 for the quarter and nine months ended September 30, 1997. As a percentage of revenues, SG&A increased from 16.1% and 16.0% for the quarter and nine months ended September 30, 1997, respectively, to 25.0% and 20.7% for the quarter and nine months ended September 30, 1998, respectively. The increases in SG&A expense, both in dollar amounts and as a percentage of sales, are due primarily to substantially increased marketing efforts as well as increased personnel and overhead costs in expanded locations. Purchased Technology in Progress and Restructuring Costs Purchased technology in progress for the nine months ended September 30, 1998 of $30,571,000 was related to R&D projects of Xyplex in progress at the time of the Xyplex Acquisition on January 30, 1998, which had not yet reached technological feasibility and for which the Company had no alternative future use. Restructuring costs during the nine months ended September 30, 1998 were $23,194,000. The restructuring costs in the first nine months of 1998 were associated with a plan adopted by the Company in March 1998 calling for the reduction of workforce, closing of certain facilities, elimination of particular product lines, settlement of distribution agreements and other costs. The Company did not incur these charges in the quarter ended September 30, 1998 or quarter and nine months ended September 30, 1997. Interest Expense Related to Convertible Debt On June 26, 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. This resulted in interest expense of $1,370,000 for both the three and nine months ended September 30, 1998. The Company incurred a charge of $427,000 during the nine months ended September 30, 1997 as additional interest expense related to the issuance in 1996 of convertible subordinated debentures (the "Debentures"), proceeds from which were used to finance the Company's acquisition of the Fibronics business in 1996. The Company did not report charges relating to the issuance of the Debentures for the quarter ended September 30, 1997 as the outstanding principal and accrued interest were paid in full at April 4, 1997 through their conversion into Common Stock. 9 10 Net Income (Loss) The Company reported net income (loss) of $1,555,000 and ($29,731,000) during the three and nine months ended September 30, 1998, respectively, compared to net income of $5,922,000 and $15,474,000 during the three and nine months ended September 30, 1997. Net income decreased by $4,367,000 for the three months ended September 30, 1998 over the three months ended September 30, 1997. Net income for the nine months ended September 30, 1998 would have been $17,768,000, excluding $53,765,000 of charges, associated with the Xyplex Acquisition, as compared to net income of $15,474,000. LIQUIDITY AND CAPITAL RESOURCES In September 1997, the Company completed a follow-on public offering of 2,785,000 shares of Common Stock raising net proceeds of approximately $93,320,000. 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 "1998 Private Placement"). 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 and short-term investments totaled approximately $56,112,000 at September 30, 1998. Such cash and cash equivalents and short-term investments, as well as cash flow from operations, are the Company's principal sources of liquidity. Net cash used in operating activities for the nine months ended September 30, 1998 was $9,676,000. The funds were used primarily to purchase technology in progress and for restructuring costs in connection with the Xyplex Acquisition. Net cash used in investing activities for the nine months ended September 30, 1998 was $83,603,000. Cash used in the Xyplex Acquisition accounted for most of the cash used in investing activities for the nine months ended September 30, 1998 and cash provided by the sale of investments to finance the Xyplex Acquistion accounted for most of the cash provided by investing activities for the same period. The sale of the Notes in the 1998 Private Placement accounted for substantially all of the $97,779,000 of cash provided by financing activities during the nine months ended September 30, 1998. Accounts receivable were $ 57,232,000 at September 30, 1998 as compared to $47,258,000 at December 31, 1997. The increase in accounts receivable was primarily attributable to the increase in overall sales in Europe where terms of sale are traditionally longer than in the United States. Inventories were $49,711,000 at September 30, 1998 as compared to $41,689,000 at December 31, 1997. The increase in inventories was primarily attributable to the Company's decision to add larger inventories to shorten lead times for customers and the Xyplex Acquisition. Management believes that the Company's inventory levels at various points in time may not necessarily be comparable to those of many other companies in its industry. This is because MRV conducts significant in-house manufacturing of various components used in its products and thus carries substantial raw materials and work-in-progress in addition to finished products in its inventories. In contrast, many competitors outsource to turnkey contract manufacturers substantial portions of their production requirements and thus do not include material amounts of raw materials or work in progress in inventories and may in some circumstances not even include finished products in inventory if the contract manufacturer ships directly to the competitors' customers. EFFECTS OF INFLATION AND CURRENCY EXCHANGE RATES 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. 10 11 The Company's sales are currently denominated in U.S. dollars and to date its business has not been significantly affected by currency fluctuations or inflation. However, the Company conducts business in several different countries and thus fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive in particular countries, leading to a reduction in sales in that country. In addition, inflation in such countries could increase the Company's expenses. 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. 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. Based on the Company's investigation to date, management does not anticipate that the Company will incur material operating expenses or be required to incur material costs to be year 2000 compliant. To the extent the Company's systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results or operations and business prospects. PART II - OTHER INFORMATION Item 6. Exhibits and Reports of Form 8-K. (b) No reports on Form 8-K were filed during the quarter for which this report was filed. 11 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant certifies that it has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on November 13, 1998. MRV COMMUNICATIONS, INC. By: /s/ EDMUND GLAZER ----------------------------------- Edmund Glazer Vice President of Finance and Administration and Chief Financial Officer 12 EX-27 2 EXHIBIT 27
5 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 24,104 133,113 64,248 7,016 49,711 176,690 26,053 5,150 330,685 57,534 100,000 0 0 91 165,367 330,685 189,192 189,192 109,098 56,560 53,765 1,641 1,370 (28,689) 1,042 (29,731) 0 0 0 (29,731) (1.12) (1.12)
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