1
TOTAL NUMBER OF PAGES 16
INDEX TO EXHIBITS AT PAGE 16
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended April 3, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to _______
Commission File No. 0-25826
HARMONIC LIGHTWAVES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0201147
(State of incorporation) (I.R.S. Employer Identification No.)
549 Baltic Way
Sunnyvale, CA 94089
(408) 542-2500
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive
offices)
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 April 3, 1998 there were 11,526,695 shares of the Registrant's Common
Stock outstanding.
1
2
HARMONIC LIGHTWAVES, INC.
Index
PART I - FINANCIAL INFORMATION Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at April 3, 1998
and December 31, 1997.......................................................................3
Condensed Consolidated Statements of Operations for the Three Months
Ended April 3, 1998 and March 28, 1997......................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
April 3, 1998 and March 28, 1997............................................................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
Item 6. Exhibits and Reports on Form 8-K....................................................16
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 3, DECEMBER 31,
1998 1997
-------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 12,483 $ 13,670
Accounts receivable, net 14,397 16,458
Inventories 16,269 15,474
Prepaid expenses and other assets 1,885 1,774
-------- --------
Total current assets 45,034 47,376
Note receivable -- 1,300
Property and equipment, net 10,070 10,077
Intangibles and other assets 1,571 134
-------- --------
$ 56,675 $ 58,887
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,981 $ 3,708
Accrued liabilities 5,212 4,896
Borrowings under short-term credit facilities 615 --
-------- --------
Total current liabilities 10,808 8,604
-------- --------
Other liabilities 420 352
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 5,000,000 shares
authorized; no shares issued or outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares authorized;
11,526,695 and 10,414,297 shares issued and outstanding 12 10
Capital in excess of par value 69,816 55,917
Accumulated deficit (24,384) (6,019)
Currency translation 3 23
-------- --------
Total stockholders' equity 45,447 49,931
-------- --------
$ 56,675 $ 58,887
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
4
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
------------------------
APRIL 3, MARCH 28,
1998 1997
-------- -------
Net sales $ 16,204 $19,033
Cost of sales 11,114 10,042
-------- -------
Gross profit 5,090 8,991
-------- -------
Operating expenses:
Research and development 3,423 2,791
Sales and marketing 4,072 2,863
General and administrative 2,148 1,110
Acquired in-process technology charge 14,000 --
-------- -------
Total operating expenses 23,643 6,764
-------- -------
Income (loss) from operations (18,553) 2,227
Interest and other income, net 188 241
-------- -------
Income (loss) before income taxes (18,365) 2,468
Provision for income taxes -- 370
-------- -------
Net income (loss) $(18,365) $ 2,098
======== =======
Net income (loss) per share
Basic $ (1.60) $ 0.21
======== =======
Diluted $ (1.60) $ 0.18
======== =======
Weighted average shares
Basic 11,475 10,210
======== =======
Diluted 11,475 11,568
======== =======
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
5
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-------------------------
APRIL 3, MARCH 28,
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $(18,365) $ 2,098
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization 1,080 763
Acquired in-process technology charge 14,000 --
Changes in assets and liabilities, net of effects
of acquisition:
Accounts receivable 2,209 (1,675)
Inventories (262) (2,169)
Prepaid expenses and other assets 454 113
Accounts payable 634 255
Accrued and other liabilities (186) (261)
-------- --------
Net cash used in operating activities (436) (876)
Cash flows used in investing activities:
Acquisition of property and equipment (761) (1,466)
Acquisition of New Media Communication; net of cash received (272) --
-------- --------
Net cash used in investing activities (1,033) (1,466)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 478 480
Repayments under short-term credit facilities (185) --
-------- --------
Net cash provided by financing activities 293 480
Effect of exchange rate changes on cash
and cash equivalents (11) --
Net decrease in cash and cash equivalents (1,187) (1,862)
Cash and cash equivalents at beginning of period 13,670 16,410
-------- --------
Cash and cash equivalents at end of period $ 12,483 $ 14,548
======== ========
Supplemental schedule of cash flow information:
Income taxes paid during the period $ 68 $ 145
Interest paid during the period $ 9 $ --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
6
HARMONIC LIGHTWAVES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
all adjustments (consisting only of normal recurring adjustments) which Harmonic
Lightwaves, Inc. (the "Company") considers necessary for a fair presentation of
the results of operations for the unaudited interim periods covered and the
consolidated financial condition of the Company at the date of the balance
sheets. The quarterly financial information is unaudited. This Quarterly Report
on Form 10-Q should be read in conjunction with the Company's audited
consolidated financial statements contained in the Company's Annual Report on
Form 10-K which was filed with the Securities and Exchange Commission on March
31, 1998. The interim results presented herein are not necessarily indicative of
the results of operations that may be expected for the full fiscal year ending
December 31, 1998, or any other future period.
NOTE 2 - ACQUISITION OF N.M. NEW MEDIA COMMUNICATION LTD.
In January 1998, the Company acquired N.M. New Media Communication Ltd. ("NMC"),
a privately held supplier of broadband, high-speed data delivery software and
hardware, in exchange for the issuance of 1,037,911 shares of Harmonic common
stock and the assumption of all outstanding NMC stock options. The acquisition
was accounted for using the purchase method of accounting. Accordingly, the
results of operations of NMC have been included in the consolidated financial
statements of the Company from the date of the acquisition. The purchase price
of $17.6 million was allocated to the acquired assets, in-process technology and
goodwill. A one-time charge of $14.0 million was recorded in the first quarter
of 1998 for in-process technology acquired. Goodwill of $1.5 million is being
amortized over the estimated useful life of five years.
The following table sets forth the pro-forma net sales, net income and net
income per share of the Company for the quarter ended March 28, 1997, giving
effect to the acquisition of NMC as if it had occurred on January 1, 1997:
THREE MONTHS ENDED
------------------
MARCH 28,
1997
- - -------------------------------------------- ------------------
IN THOUSANDS, EXCEPT PER SHARE DATA (UNAUDITED)
Net sales $ 19,232
Net income $ 1,754
Net income per share
Basic $ 0.16
Diluted $ 0.14
Weighted average shares
Basic 11,248
Diluted 12,606
6
7
NOTE 3 - INVENTORIES
APRIL 3, DECEMBER 31,
1998 1997
- - ------------------------------------------------------------------------------------ ------------
IN THOUSANDS (UNAUDITED) (UNAUDITED)
Raw materials $ 4,556 $ 4,356
Work-in-process 3,355 3,127
Finished goods 8,358 7,991
------------ ------------
$ 16,269 $ 15,474
============ ============
NOTE 4 - NET INCOME (LOSS) PER SHARE
During the quarter ended December 31, 1997, the Company adopted and
retroactively applied the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128") to all periods
presented. SFAS No. 128 requires presentation of both Basic EPS and Diluted EPS
on the face of the statement of operations. Basic EPS, which replaces primary
EPS, is computed by dividing net income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Unlike the computation of primary EPS, Basic
EPS excludes the dilutive effect of stock options and warrants. Diluted EPS
replaces fully diluted EPS and gives effect to all dilutive potential common
shares outstanding during a period. In computing Diluted EPS, the average price
for the period is used in determining the number of shares assumed to be
purchased from exercise of stock options and warrants rather than the higher of
the average or ending price as used in the computation of fully diluted EPS.
Net income per share for all prior periods presented has been restated to
conform to the provisions of SFAS 128.
The following table presents a reconciliation of the numerators and denominators
of the Basic and Diluted EPS computations for the periods presented below:
THREE MONTHS ENDED
---------------------------------
APRIL 3, MARCH 28,
1998 1997
- - ---------------------------------------------------------------------------- -------------
IN THOUSANDS (UNAUDITED) (UNAUDITED)
Net income (loss) (numerator) $ (18,365) $ 2,098
=========== ============
Shares calculation (denominator):
Average shares outstanding - basic 11,475 10,210
Effect of Dilutive Securities:
Potential Common Stock relating
to stock options and warrants -- 1,358
----------- ------------
Average shares outstanding - diluted 11,475 11,568
=========== ============
Net income (loss) per share - basic $ (1.60) $ 0.21
=========== ============
Net income (loss) per share - diluted $ (1.60) $ 0.18
=========== ============
Options and warrants to purchase 980,018 shares of Common Stock at prices
ranging from $0.30 to $22.75 per share were outstanding during the quarter
ended April 3, 1998, but were not included in the computation of diluted EPS as
a result of the loss incurred by the Company for the quarter ended April 3,
1998, since such potential common shares were antidilutive.
7
8
NOTE 5 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130). SFAS No. 130
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
income by their nature in an annual financial statement. For example, other
comprehensive income may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive income was as follows:
THREE MONTHS ENDED
-------------------------------
APRIL 3, MARCH 28,
1998 1997
- - --------------------------------------------------------------------------------------------------
IN THOUSANDS (UNAUDITED) (UNAUDITED)
Net income (loss) $(18,365) $ 2,098
Other comprehensive loss (20) --
---------- --------
Total comprehensive income (loss) $ (18,385) $ 2,098
========== ========
8
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") designs, manufactures
and markets digital and lightwave based communications systems that deliver
video, audio and data over hybrid fiber/coax ("HFC"), satellite and wireless
networks. The Company's advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high-speed Internet access and video-on-demand. The
Company offers a broad range of fiber optic transmission and digital headend
products for HFC networks, and through its acquisition of N.M. New Media
Communication Ltd. ("NMC") in January 1998, expanded its product offerings to
include high-speed data delivery software and hardware.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding future revenues,
gross margins, and expense levels, future capital expenditures and future cash
flows. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
set forth under "Factors That May Affect Future Results of Operations" below and
elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
Net Sales
The Company's net sales decreased 15% from $19.0 million in the first quarter of
1997 to $16.2 million in the first quarter of 1998. This decrease in net sales
was attributable to lower shipments to international cable customers caused
primarily by severe weather conditions in Canada and the uncertain financial
situation in Asia. International sales were down 47% compared to the first
quarter of 1997 and represented 43% of net sales in the first quarter of 1998
compared to 70% of net sales in the first quarter of 1997. The lower
international sales were partially offset by higher domestic sales, which
increased by 58% over the level achieved in the first quarter of 1997, and a
modest revenue contribution by NMC.
Gross Profit
Gross profit decreased from $9.0 million (47% of net sales) in the first quarter
of 1997 to $5.1 million (31% of net sales) in the first quarter of 1998. The
decrease in gross profit was due to lower sales volume and corresponding lower
factory absorption of fixed costs, less favorable geographic and product mix,
and pricing pressure for certain products. In addition, in the first quarter of
1998, the Company increased its inventory reserves for certain existing products
following the introduction of several new products. The Company expects gross
margins for 1998 to be lower than 1997 gross margins due to new product
introductions, continuing softness in certain international markets and pricing
pressures in some markets.
Research and Development
Research and development expenses increased from $2.8 million (15% of net sales)
in the first quarter of 1997 to $3.4 million (21% of net sales) in the first
quarter of 1998. The increase in spending was principally attributable to
increased headcount, particularly at the Company's subsidiary in Caesarea,
Israel which is developing Harmonic's TRANsend digital headend products, and to
higher prototype expenses in connection with the PWRBlazer Scaleable Node,
PWRLink II transmitter and TRANsend development programs. In addition, the
inclusion of NMC's research and development expenses in the first quarter of
1998 contributed to the increase. The increase in research and development
expenses as a percentage of net sales was also due to the lower sales level in
the first quarter of 1998 compared to the first quarter of 1997. The Company
anticipates that research and development expenses will continue to increase
substantially in absolute dollars, although such expenses may vary as a
percentage of net sales.
9
10
Sales and Marketing
Sales and marketing expenses increased from $2.9 million (15% of net sales) in
the first quarter of 1997 to $4.1 million (25% of net sales) in the first
quarter of 1998. The increase in expenses was primarily due to higher headcount
and costs associated with expansion of the direct sales force, technical support
and marketing organizations, as well as higher promotional expenses. In
addition, the inclusion of NMC's sales and marketing expenses in the first
quarter of 1998 contributed to the increase. The increase in sales and marketing
expenses as a percentage of net sales was also due to the lower sales level in
the first quarter of 1998 compared to the first quarter of 1997. The Company
anticipates that sales and marketing expenses will continue to increase
substantially in absolute dollars, although such expenses may vary as a
percentage of net sales.
General and Administrative
General and administrative expenses increased from $1.1 million (6% of net
sales) in the first quarter of 1997 to $2.1 million (13% of net sales) in the
first quarter of 1998. The increase in expenses was principally attributable to
adjustments to accounts receivable reserve levels as a result of the financial
situation in Asia, which has impacted certain of the Company's distributors, and
the inclusion of NMC's expenses in the first quarter of 1998. The increase in
general and administrative expenses as a percentage of net sales was also due to
the lower sales level in the first quarter of 1998 compared to the first quarter
of 1997. The Company expects to incur higher levels of general and
administrative costs in the future, although such expenses may vary as a
percentage of net sales.
Interest and Other Income
Interest and other income, consisting principally of interest income, was $0.2
million in both the first quarter of 1997 and the first quarter of 1998.
Income Taxes
No provision for income, taxes was recorded for the first quarter of 1998 due to
the net loss for the quarter. A provision of $370K was recorded for the first
quarter of 1997 based on an estimated effective annual tax rate of 15%.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations was approximately $0.9 million and $0.4 million for the
first quarters of 1997 and 1998, respectively. The decrease in cash used in
operations was primarily due to improved customer collections and lower
inventory levels partially offset by a net loss in the first quarter of 1998
compared to net income in the comparable period of 1997.
Additions to property, plant and equipment were approximately $1.5 million and
$0.6 million in the first quarters of 1997 and 1998, respectively. The decrease
in 1998 compared to 1997 was due principally to higher expenditures incurred in
the first quarter of 1997 for leasehold improvements and furniture and fixtures
for the Company's research and development facility in Caesarea, Israel. The
Company expects to spend approximately $5.0 million on capital expenditures in
1998, primarily for manufacturing and test equipment.
As of April 3, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $12.5 million and a bank line of credit which provides
for up to $12.0 million in borrowings and expires in December 1998. The line of
credit bears interest at the bank's prime rate or LIBOR plus 2.0%.The Company
has guaranteed certain borrowing facilities of its subsidiaries totaling $1.4
million via letters of credit issued under this credit facility. The Company
also has a $3.0 million term loan facility to be used for the purchase of
capital equipment. This loan facility expires in December 1998 and bears
interest at the bank's prime rate plus 0.5%. Outstanding borrowings under credit
facilities were $615,000 as of April 3, 1998. The Company expects that it will
be able to renew or replace the line of credit and equipement term loan upon
their expiration on terms acceptable to the Company.
10
11
The Company believes that its existing liquidity sources and anticipated funds
from operations will satisfy its cash requirements for at least the next twelve
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Future Operating Results
The Company's operating results have fluctuated and may continue to fluctuate in
the future, on an annual and a quarterly basis, as a result of a number of
factors, many of which are outside of the Company's control, including the level
of capital spending in the cable television industry both in the U.S. and
foreign markets, changes in the regulatory environment, changes in market
demand, the timing of customer orders, competitive market conditions, lengthy
sales cycles, new product introductions by the Company or its competitors,
market acceptance of new or existing products, the cost and availability of
components, the mix of the Company's customer base and sales channels, the mix
of products sold, development of custom products, the level of international
sales and general economic conditions. In addition, in each quarter of 1997 and
the first quarter of 1998, the Company recognized a substantial portion of its
revenues in the last month of the quarter. The Company establishes its
expenditure levels for product development and other operating expenses based on
projected sales levels, and expenses are relatively fixed in the short term.
Accordingly, variations in timing of sales can cause significant fluctuations in
operating results. In addition, because a significant portion of the Company's
business is derived from orders placed by a limited number of large customers,
the timing of such orders can also cause significant fluctuations in the
Company's operating results. If sales are below expectations in any given
quarter, the adverse impact of the shortfall on the Company's operating results
may be magnified by the Company's inability to adjust spending to compensate for
the shortfall.
Dependence on Cable Television Industry Capital Spending
To date, substantially all of the Company's sales have been derived, directly or
indirectly, from sales to cable television operators. Demand for the Company's
products depends to a significant extent upon the magnitude and timing of
capital spending by cable television operators for constructing, rebuilding or
upgrading their systems. The capital spending patterns of cable television
operators are dependent on a variety of factors, including access to financing,
cable television operators' annual budget cycles, the status of federal, local
and foreign government regulation of telecommunications and television
broadcasting, overall demand for cable television services, competitive
pressures (including the availability of alternative video delivery technologies
11
12
such as satellite broadcasting), discretionary customer spending patterns and
general economic conditions. In addition, cable television capital spending can
be subject to the effects of seasonality, with fewer construction and upgrade
projects typically occurring in winter months and otherwise being affected by
inclement weather. The Company's net sales in the second half of 1997 and the
first quarter of 1998 were adversely affected by a slow-down in spending by
cable television operators in the U.S. and in foreign markets. The factors
contributing to this slow capital spending include consolidation and system
exchanges by domestic cable customers, which generally has had the effect of
delaying certain system upgrades, uncertainty related to development of industry
standards for digital transmission, evaluation by many cable customers of
alternative advanced services and system architectures and emphasis on marketing
and customer service strategies by certain international customers rather than
continued construction of networks. The Company is unable to predict when cable
television industry capital spending will increase.
Dependence on Key Customers and End Users
Historically, a substantial majority of the Company's sales have been to
relatively few customers. Sales to the Company's ten largest customers in 1996,
1997 and the first quarter of 1998 accounted for approximately 72%, 56% and 65%,
respectively, of its net sales. Due in part to the consolidation of ownership of
domestic cable television systems, the Company expects that sales to relatively
few customers will continue to account for a significant percentage of net sales
for the foreseeable future. Harmonic has adopted a strategy to sell to major
domestic customers through its own direct sales force and, as a result, domestic
OEM and distributor revenues were a smaller percentage of net sales in 1997 and
the first quarter of 1998 than they were in prior periods. Substantially all of
the Company's sales are made on a purchase order basis, and none of the
Company's customers has entered into a long-term agreement requiring it to
purchase the Company's products. The loss of, or any reduction in orders from, a
significant customer would have a material adverse effect on the Company's
business and operating results.
Highly Competitive Industry
The market for cable television transmission equipment is extremely competitive
and has been characterized by rapid technological change. Most of the Company's
competitors are substantially larger and have greater financial, technical,
marketing and other resources than the Company. Many of such large competitors
are in a better position to withstand any significant reduction in capital
spending by cable television operators. In addition, many of the Company's
competitors have more long standing and established relationships with domestic
and foreign cable television operators than does the Company. There can be no
assurance that the Company will be able to compete successfully in the future or
that competition will not have a material adverse effect on the Company's
business and operating results.
Rapid Technological Change
The market for the Company's products is relatively new, making it difficult to
accurately predict the market's future growth rate, size and technological
direction. In view of the evolving nature of this market, there can be no
assurance that cable television operators, telephone companies or other
suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has announced and demonstrated initial products for digital
applications, there can be no assurance that the Company will successfully
complete development of, or successfully introduce, products for digital
applications, or that such products will achieve commercial acceptance. In
addition, in order to successfully develop and market its planned products for
digital applications, the Company may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing to enter into such technology development or licensing
agreements, there can be no assurance that such agreements will be negotiated on
terms acceptable to the Company, or at all. The failure to enter into technology
development or licensing agreements, when necessary, could limit the Company's
ability to develop and market new products and could have a material adverse
effect on the Company's business and operating results.
The failure of the Company to successfully develop and introduce new products
that address the changing needs of the broadband communications market could
have a material adverse effect on the Company's business and operating results.
In addition, there can be no assurance that the successful introduction by the
Company of new products will not have an adverse effect on the sales of the
Company's existing products. For
12
13
instance, an emerging trend in the domestic market toward narrowcasting
(targeted delivery of advanced services to small groups of subscribers) is
causing changes in the network architectures of some cable operators. This may
have the effect of changing the Company's product mix toward lower price
transmitters, which could adversely affect the Company's gross margins.
Risks Associated with the Acquisition of NMC
The growth in the Company's business has placed, and is expected to continue to
place, a significant strain on the Company's limited personnel, management and
other resources. Through its acquisition of NMC in January 1998, the Company
increased the scope of its product line to include broadband, high-speed data
delivery software and hardware and increased the scope of its international
operations in Israel. The acquisition of NMC involves numerous risks and
challenges, including: difficulties in the assimilation of operations, research
and development efforts, products, personnel and cultures of Harmonic
Lightwaves and NMC; the potential adverse effects of the acquisition on
relationships with customers, distributors, suppliers and other business
partners of the two companies; the dependence on the evolution and growth of
the market for wireless and satellite broadband services; regulatory
developments; rapid technological change; the highly competitive nature of the
telecommunications industry; the Company's ability to successfully develop,
manufacture and gain market acceptance of the products of NMC; the ability to
manage geographically remote units; the integration of NMC's management
information systems with those of the Company; potential adverse short-term
effects on the Company's operating results; the amortization of acquired
intangible assets; the risk of entering emerging markets in which the Company
has limited or no direct experience; and the potential loss of key employees of
NMC. The Company's future operating results will be significantly affected by
its ability to successfully integrate NMC, to implement operating,
manufacturing and financial procedures and controls, to improve coordination
among different operating functions, to strengthen management information and
telecommunications systems and to continue to attract, train and motivate
additional qualified personnel in all areas. There can be no assurance that the
Company will be able to manage these activities and implement these additional
systems and controls successfully, and any failure to do so could have a
materially adverse effect upon the Company's operating results. The acquisition
of NMC has resulted in significant additional working capital requirements.
While the Company believes that it currently has sufficient funds to finance
its operations for at least the next twelve months, to the extent that such
funds are insufficient to fund the Company's activities, including any
potential acquisitions, the Company may need to raise additional funds through
public or private equity or debt financing from other sources. The sale of
additional equity or convertible debt may result in additional dilution to the
Company's stockholders and such securities may have rights, preferences or
privileges senior to those of the Common Stock. There can be no assurance that
additional equity or debt financing will be available or that if available it
can be obtained on terms favorable to the Company or its stockholders.
Sole or Limited Sources of Supply
Certain components and subassemblies necessary for the manufacture of the
Company's products are obtained from a sole supplier or a limited group of
suppliers. The reliance on sole or limited suppliers, particularly foreign
suppliers, and the Company's increasing reliance on subcontractors involve
several risks, including a potential inability to obtain an adequate supply of
required components or subassemblies and reduced control over pricing, quality
and timely delivery of components or subassemblies. Certain key elements of the
Company's digital headend products are expected to be provided initially by a
sole foreign supplier. The Company does not maintain long-term agreements with
any of its suppliers or subcontractors. An inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply could affect the Company's ability to ship its
products on a timely basis, which could damage relationships with current and
prospective customers and could have a material adverse effect on the Company's
business and operating results. The Company believes that investment in
inventories will constitute a significant portion of its working capital in the
future. As a result of such investment in inventories, the Company may be
subject to an increasing risk of inventory obsolescence in the future, which
would materially and adversely affect its business and operating results.
Risks of International Operations
Sales to customers outside of the United States in 1996, 1997 and the first
quarter of 1998 represented 57%, 59% and 43% of net sales, respectively, and the
Company expects that international sales will continue to represent a
substantial portion of its net sales for the foreseeable future. International
operations are subject to a number of risks, including changes in foreign
government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable, difficulty in
staffing and managing foreign operations and political and economic instability.
While international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. Payment cycles for
international customers are typically longer than those for customers in the
United States. There can be no assurance that foreign markets will continue to
develop or that the Company will receive additional orders to supply its
products for use in foreign broadband systems. In recent months, certain Asian
currencies have devalued significantly in relation to the U.S. dollar. The
Company believes that recent financial developments in Asia were a major factor
contributing to the Company's lower net sales in Asia in the first quarter of
1998 than in the first quarter of 1997. In addition, the uncertain financial
situation in Asia has put financial pressure on some of the Company's
distributors. In response, the Company increased its accounts receivable
reserves in the first quarter of 1998. The Company is continuing to evaluate the
effect of recent financial developments in Asia, including efforts to stabilize
economic conditions, on the Company's business. There can be no assurance that
the Company's sales and payment cycles in Asia will not continue to be
materially adversely affected by the uncertain financial climate.
Risks of Information Systems
The Company has commenced, for all its information systems, a Year 2000 date
conversion project to address all necessary changes to be Year 2000 compliant.
The Company is expensing the costs of addressing the "Year 2000 issue" as
incurred. The Company does not expect that Year 2000 issues from its own
information systems will have a material adverse impact on its financial
position or results of operations. However, the Company could be adversely
affected by Year 2000 issues faced by major customers and suppliers and other
organizations with which the Company interacts. The Company is in the process of
determining the impact that third parties who are not Year 2000 compliant may
have on the operations of the Company.
13
14
PART II
ITEM 2. CHANGES IN SECURITIES
In January 1998, the Company acquired N.M. New Media Communication Ltd.
("NMC") in exchange for the issuance of 1,037,911 shares of Common Stock of the
Company, payment of $1,000 in cash and the assumption of all outstanding NMC
stock options. The issuances of securities of the Company were deemed exempt
from registration under the Securities Act of 1933, as amended, in reliance on
Section 4(2) of the Act as transactions by an issuer not involving any public
offering. The recipients of the securities represented their intentions 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 share certificates issued in such transactions. All recipients had adequate
access to information regarding the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit # Description of Document
27.1 Financial Data Schedule
B. Reports on Form 8-K
In a Report dated January 6, 1998, the Company reported the closing and
the principal terms of the acquisition of N.M. New Media Communication Ltd.
(NMC) which was consummated on January 5, 1998. The Company filed an amended
Report dated March 23, 1998, which included financial statements, pro-forma
financial information and certain exhibits in connection with the acquisition of
NMC.
14
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 18, 1998
HARMONIC LIGHTWAVES, INC.
(Registrant)
By: /s/ Robin N. Dickson
------------------------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting Officer)
15
16
HARMONIC LIGHTWAVES, INC.
Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- - ---------- -----------------------
27.1 Financial Data Schedule
16
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
APR-03-1998
12,483
0
14,397
0
16,269
45,034
10,070
0
56,675
10,808
0
0
0
69,828
(24,381)
56,675
16,204
16,204
11,114
11,114
0
0
0
(18,365)
0
0
0
0
0
(18,365)
(1.60)
(1.60)
