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TOTAL NUMBER OF PAGES 18
INDEX TO EXHIBITS AT PAGE 18
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 October 2, 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 October 2, 1998 there were 11,694,197 shares of the Registrant's Common
Stock outstanding.
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HARMONIC LIGHTWAVES, INC.
Index
Page
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at October 2, 1998
and December 31, 1997........................................................................ 3
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended October 2, 1998 and September 26, 1997................................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
October 2, 1998 and September 26, 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 5. Other Items........................................................................... 16
Item 6. Exhibits and Reports on Form 8-K...................................................... 16
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
OCTOBER 2, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 8,215 $ 13,670
Accounts receivable, net 17,343 16,458
Inventories 20,658 15,474
Prepaid expenses and other assets 1,557 1,774
-------- --------
Total current assets 47,773 47,376
Note receivable -- 1,300
Property and equipment, net 10,400 10,077
Intangibles and other assets 1,390 134
-------- --------
$ 59,563 $ 58,887
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,392 $ 3,708
Accrued liabilities 9,594 4,896
Borrowings under short term credit facilities 382 --
-------- --------
Total current liabilities 16,368 8,604
-------- --------
Other liabilities 462 352
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;
11,694,197 and 10,414,297 shares issued and outstanding 12 10
Capital in excess of par value 70,825 55,917
Accumulated deficit (28,100) (6,019)
Currency translation (4) 23
-------- --------
Total stockholders' equity 42,733 49,931
-------- --------
$ 59,563 $ 58,887
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 22,382 $ 17,545 $ 56,760 $ 57,092
Cost of sales 13,948 9,646 36,574 30,466
-------- -------- -------- --------
Gross profit 8,434 7,899 20,186 26,626
-------- -------- -------- --------
Operating expenses:
Research and development 3,507 2,852 10,173 8,519
Sales and marketing 4,436 3,332 13,305 9,907
General and administrative 1,535 1,355 5,234 3,597
Acquired in-process technology charge -- -- 14,000 --
-------- -------- -------- --------
Total operating expenses 9,478 7,539 42,712 22,023
-------- -------- -------- --------
Income (loss) from operations (1,044) 360 (22,526) 4,603
Interest and other income, net 213 126 445 514
-------- -------- -------- --------
Income (loss) before income taxes (831) 486 (22,081) 5,117
Provision for income taxes -- 73 -- 768
-------- -------- -------- --------
Net income (loss) $ (831) $ 413 $(22,081) $ 4,349
======== ======== ======== ========
Net income (loss) per share
Basic $ (0.07) $ 0.04 $ (1.91) $ 0.42
======== ======== ======== ========
Diluted $ (0.07) $ 0.04 $ (1.91) $ 0.38
======== ======== ======== ========
Weighted average shares
Basic 11,674 10,384 11,573 10,321
======== ======== ======== ========
Diluted 11,674 11,588 11,573 11,573
======== ======== ======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
OCTOBER 2, SEPTEMBER 26,
1998 1997
-------- --------
Cash flows from operating activities:
Net income (loss) $(22,081) $ 4,349
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation and amortization 3,290 2,496
In-process technology charge 14,000 --
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable (737) (9,352)
Inventories (4,660) 422
Prepaid expenses and other assets 895 (494)
Accounts payable 2,045 (879)
Accrued and other liabilities 4,238 (152)
-------- --------
Net cash used in operating activities (3,010) (3,610)
Cash flows used in investing activities:
Acquisition of property and equipment (3,251) (4,161)
Acquisition of New Media Communication; net of
cash received (272) --
-------- --------
Net cash used in investing activities (3,523) (4,161)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 1,487 1,290
Repayments under bank line and term loan, net of borrowings (418) --
-------- --------
Net cash provided by financing activities 1,069 1,290
Effect of exchange rate changes on cash
and cash equivalents 9 9
-------- --------
Net decrease in cash and cash equivalents (5,455) (6,472)
Cash and cash equivalents at beginning of period 13,670 16,410
-------- --------
Cash and cash equivalents at end of period $ 8,215 $ 9,938
======== ========
Supplemental schedule of cash flow information:
Income taxes paid during the period $ 99 $ 288
Interest paid during the period $ 48 $ --
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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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 NEW MEDIA COMMUNICATION LTD.
In January 1998, the Company acquired 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. NMC has been a
development stage company since its founding in 1996 and its revenues through
October 2, 1998 were not material in relation to those of the Company.
The following table sets forth the pro-forma net sales, net income and net
income per share of the Company for the nine month periods ended October 2, 1998
and September 26, 1997, giving effect to the acquisition of NMC as if it had
occurred on January 1, 1997:
PRO FORMA
NINE MONTHS ENDED NINE MONTHS ENDED
----------------- -----------------
OCTOBER 2, SEPTEMBER 26,
1998 1997
-------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA (UNAUDITED)
Net sales $ 56,760 $ 57,685
Net income (loss) $(22,081) $ 2,678
Net income (loss) per share
Basic $ (1.91) $ 0.24
Diluted $ (1.91) $ 0.21
Weighted average shares
Basic 11,573 11,359
Diluted 11,573 12,611
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NOTE 3 - INVENTORIES
OCTOBER 2, DECEMBER 31,
1998 1997
------- -------
IN THOUSANDS (UNAUDITED)
Raw materials $ 3,657 $ 4,356
Work-in-process 3,704 3,127
Finished goods 13,297 7,991
------- -------
$20,658 $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 three and nine month periods
ended October 2, 1998 and September 26, 1997:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ---------------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
Net income (loss) (numerator) $ (831) $ 413 $ (22,081) $ 4,349
============== ============== ============== ==============
Shares calculation (denominator):
Average shares outstanding - basic 11,674 10,384 11,573 10,321
Effect of Dilutive Securities:
Potential Common Stock relating
to stock options and warrants -- 1,204 -- 1,252
-------------- -------------- -------------- --------------
Average shares outstanding - diluted 11,674 11,588 11,573 11,573
============== ============== ============== ==============
Net income (loss) per share - basic $ (0.07) $ 0.04 $ (1.91) $ 0.42
============== ============== ============== ==============
Net income (loss) per share - diluted $ (0.07) $ 0.04 $ (1.91) $ 0.38
============== ============== ============== ==============
Options and warrants to purchase approximately 3.0 million shares of Common
Stock at prices ranging from $0.30 to $22.75 per share were outstanding during
the three and nine month periods ended October 2, 1998, but were not
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included in the computation of diluted EPS as a result of the loss incurred by
the Company or because the option's exercise price was greater than the average
market price of the Common Shares.
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 NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 26, OCTOBER 2, SEPTEMBER 26,
1998 1997 1998 1997
-------- -------- -------- --------
IN THOUSANDS (UNAUDITED)
Net income (loss) $ (831) $ 413 $(22,081) $ 4,349
Other comprehensive income (loss) (29) 29 (27) 9
-------- -------- -------- --------
Total comprehensive income (loss) $ (860) $ 442 $(22,108) $ 4,358
======== ======== ======== ========
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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 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 revenue
and expense levels, future capital expenditures, future cash flows, and future
borrowing capability. 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 increased 28% from $17.5 million in the third quarter of
1997 to $22.4 million in the third quarter of 1998. Net sales decreased from
$57.1 million in the first nine months of 1997 to $56.8 million in the first
nine months of 1998. The growth in net sales in the third quarter of 1998
compared to the third quarter of 1997 was attributable to the sale of new
products which began shipment during the second quarter of 1998 including the
TRANsend digital headend products, MetroLink DWDM systems and PWRBlazer
Scaleable Node, and an increase in domestic cable industry spending. Domestic
and international sales increased 48% and 10%, respectively, in the third
quarter of 1998 compared to the third quarter of 1997. International sales
represented 46% of net sales in the third quarter of 1998 compared to 54% in the
third quarter of 1997. The decrease in sales for the nine month period of 1998
compared to the nine month period of 1997 was due to lower international sales
particularly in Canada, Latin America and Asia, partially offset by increased
domestic sales.
Gross Profit
Gross profit increased from $7.9 million in the third quarter of 1997 to $8.4
million in the third quarter of 1998 due primarily to an increase in net sales
but decreased as a percentage of net sales from 45% in the third quarter of 1997
to 38% in the third quarter of 1998. However, gross profit decreased from $26.6
million (47% of net sales) in the first nine months of 1997 to $20.2 million
(36% of net sales) in the first nine months of 1998. The decreases in gross
profit as a percentage of net sales ("gross margins") were principally due to
less favorable geographic and product mix and pricing pressure for certain
products. In addition, gross margins were negatively impacted by continuing
start-up costs associated with new product introductions and an increase in
inventory reserves for existing products following the introduction of new
products. The Company expects gross margins to continue to be below 1997 levels
for the foreseeable future 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 $2.9 million (16% of net sales)
in the third quarter of 1997 to $3.5 million (16% of net sales) in the third
quarter of 1998. For the nine month periods, research and development expenses
increased from $8.5 million in 1997 (15% of net sales) to $10.2 million in 1998
(18% of net sales). The
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increases in spending in both periods were 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 the inclusion of
NMC's research and development expenses starting in January 1998. The Company
anticipates that research and development expenses will continue to increase in
absolute dollars, although such expenses may vary as a percentage of net sales.
Sales and Marketing
Sales and marketing expenses increased from $3.3 million (19% of net sales) in
the third quarter of 1997 to $4.4 million (20% of net sales) in the third
quarter of 1998. For the nine month periods, sales and marketing expenses
increased from $9.9 million in 1997 (17% of net sales) to $13.3 million in 1998
(23% of net sales). The increases in expenses were primarily due to higher
headcount and costs associated with expansion of the direct sales force,
technical support and marketing organizations, including expenses incurred in
connection with the opening of new international sales and technical support
centers, as well as higher promotional expenses. In addition, the inclusion of
NMC's sales and marketing expenses starting in January 1998 contributed to the
increases. The Company anticipates that sales and marketing expenses will
continue to increase in absolute dollars, although such expenses may vary as a
percentage of net sales.
General and Administrative
General and administrative expenses increased from $1.4 million in the third
quarter of 1997 to $1.5 million in the third quarter of 1998, but decreased as a
percentage of net sales from 8% in the third quarter of 1997 to 7% in the third
quarter of 1998. For the nine month periods, general and administrative expenses
increased from $3.6 million in 1997 (6% of net sales) to $5.2 million in 1998
(9% of net sales). The increases in expenses were attributable to costs of
supporting the Company's growth in headcount, establishment of international
sales and support offices, and the inclusion of NMC's expenses starting in
January 1998. In addition, for the nine month period the increase also was due
to adjustments to accounts receivable reserve levels as a result of the
financial situation in Asia, which adversely affected certain of the Company's
distributors. The Company expects general and administrative costs will continue
to increase 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, increased
from $0.1 million in the third quarter of 1997 to $0.2 million in the third
quarter of 1998 and decreased from $0.5 million for the nine month period of
1997 to $0.4 million for the nine month period of 1998. The increase in the
third quarter of 1998 was due to higher other income partially offset by lower
interest income while the decrease for the nine month period of 1998 was
primarily due to lower interest income.
Income Taxes
No provision for income taxes was recorded for the three and nine month periods
of 1998 due to the net losses incurred. The provisions for income taxes for the
three and nine month periods of 1997 were based on an effective annual tax rate
of 15%.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations was approximately $3.6 million for the nine months ended
September 26, 1997 compared to $3.0 million for the nine months ended October 2,
1998. The decrease in cash used by operations was primarily due to higher
inventory levels and a net loss in the first nine months of 1998 compared to net
income in the comparable period of 1997, partially offset by improved customer
collections and higher accounts payable and accrued liabilities.
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Additions to property, plant and equipment were approximately $4.2 million and
$3.3 million in the first nine months of 1997 and 1998, respectively. The
decrease in 1998 compared to 1997 was principally due to 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.
As of October 2, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $8.2 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 borrowings of its subsidiaries totaling $2.2
million via letters of credit and has total letters of credit issued under this
credit facility of $3.2 million. 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 $0.4 million as of October
2, 1998. The Company expects that it will be able to renew or replace the line
of credit upon its expiration on terms acceptable to the Company.
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.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" or "Y2K" requirements.
The Company has established a corporate-wide program to address the Y2K issue.
This program encompasses product, internal systems and supplier and business
partner compliance. The project is comprised of identification of risks,
assessment of risks, development of remediation or contingency plans and
implementation and testing.
Based upon the assessments to date, all hardware products currently under
development or released, and all software products currently under development
are Y2K compliant. Certain software products currently installed at customer
sites are not Y2K compliant and the Company is working with its customers to
provide migration paths for each product. The Company's significant internal
systems have been purchased from outside vendors and are already Y2K compliant.
The Company is in the process of upgrading internal systems that are not
currently Y2K compliant, and expects to have this process completed by mid-1999.
The Company currently does not have a contingency plan to address Y2K issues
related to its products and internal systems, but will develop a contingency
plan by mid-1999 if its products and internal systems are not yet Y2K compliant.
In addition, the Company is working with its suppliers and business partners to
identify at what stage they are in the process of identifying and addressing the
Y2K issue and to assess the resulting risks and develop appropriate contingency
plans. The Company will continue to perform compliance reviews and tests to
ensure compliance on an ongoing basis. The Company currently does not anticipate
that the cost of its Y2K program will be material to its financial condition and
results of operations.
Although the Company has established and commenced its program to address Y2K
issues, the failure of the Company's products to operate properly with regard to
the Year 2000 requirements could (i) cause the Company to incur unanticipated
expenses to remedy any problems, (ii) cause a reduction in sales and (iii)
expose the Company to related litigation by its customers, each of which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company and third parties with whom it
conducts business may utilize equipment or software that may not be Y2K
compliant. Failure of the Company's or any such third party's equipment or
software to operate properly with regard to the Year 2000 requirements could
cause, among other things, the Company or any such third party to incur
unanticipated expenses or efforts to remedy any problems, which could have a
material adverse effect on its or their respective business, operating results
and financial condition. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to evaluate and to correct their equipment or software for
Y2K compliance and as they simultaneously evaluate the preparedness of the third
parties with whom they deal. These expenditures may result in reduced funds
available to purchase
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products and services such as those offered by the Company, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
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 in
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 three quarters 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, and advanced
broadband services, competitive pressures (including the availability of
alternative video delivery technologies such as satellite broadcasting),
discretionary customer spending patterns and general economic conditions. 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 which advanced services and
system architectures to provide and use, and emphasis on marketing and customer
service strategies by certain international customers rather than continued
construction of networks. While the Company's net sales increased in the second
and third quarters of 1998 from the levels achieved in the first quarter of 1998
due to improved U.S. cable spending, spending by international cable television
operators remained weak. The Company is unable to predict when international
cable television spending will increase and whether U.S. cable television
spending will continue to grow. 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.
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 nine months of 1998 accounted for approximately 72%, 56% and
63%, respectively, of its net sales. Due in part to the consolidation of
ownership of domestic
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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. In this regard, sales to Tele-Communications, Inc. (TCI)
represented approximately 22% of the Company's net sales in the third quarter of
1998. 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 in a timely manner, products that will
facilitate the processing and transmission of digital signals over optical
networks. While the Company began volume shipments of its digital headend
products during the second quarter of 1998, there can be no assurance that these
products will achieve commercial acceptance or that the Company will
successfully complete development of, or successfully introduce other products
for digital headend 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.
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. Further, newly introduced products may have lower gross margins than
the Company's other products, which would have an adverse effect on the
Company's historic margin levels.
Management of Growth
13
14
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. The Company's ability to manage any future growth effectively
will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations, to retain
key employees and to continue to improve its operational, financial and
management systems. Any failure by the Company to manage its future growth
effectively could have an adverse effect on the Company's business and operating
results.
In addition, the success of the Company will depend to a significant extent upon
a number of key technical and management employees. While employees are required
to sign standard agreements concerning confidentiality and ownership of
inventions, Company employees are generally not otherwise subject to employment
agreements or to noncompetition covenants. The loss of services of any key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Associated with the Acquisition of NMC
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
14
15
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 nine
months of 1998 represented 57%, 59% and 44% 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 quarters, certain Asian
currencies have devalued significantly in relation to the U.S. dollar. The
Company believes that financial developments in Asia in recent quarters were a
major factor contributing to the Company's lower net sales in Asia in the first
nine months of 1998 than in the first nine months 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. In addition, the Company has
received purchase orders from customers in China which represent a significant
percentage of the Company's backlog at October 2, 1998. Given the current
economic uncertainties in China and throughout Asia, there can be no assurance
that shipment of these orders will be made as scheduled, or at all. 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.
Year 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish twenty-first century dates
from twentieth century dates. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" or "Y2K" requirements.
The Company has established a corporate-wide program to address the Y2K issue.
This program encompasses product, internal systems and supplier and business
partner compliance. The project is comprised of identification of risks,
assessment of risks, development of remediation or contingency plans and
implementation and testing.
Based upon the assessments to date, all hardware products currently under
development or released, and all software products currently under development
are Y2K compliant. Certain software products currently installed at customer
sites are not Y2K compliant and the Company is working with its customers to
provide migration paths for each product. The Company's significant internal
systems have been purchased from outside vendors and are already Y2K compliant.
The Company is in the process of upgrading internal systems that are not
currently Y2K compliant, and expects to have this process completed by mid-1999.
The Company currently does not have a contingency plan to address Y2K issues
related to its products and internal systems, but will develop a contingency
plan by mid-1999 if its products and internal systems are not yet Y2K compliant.
In addition, the Company is working with its suppliers and business partners to
identify at what stage they are in the process of identifying and addressing the
Y2K issue and to assess the resulting risks and develop appropriate contingency
plans. The Company will continue to perform compliance reviews and tests to
ensure compliance on an ongoing basis. The Company currently does not anticipate
that the cost of its Y2K program will be material to its financial condition and
results of operations.
15
16
Although the Company has established and commenced its program to address Y2K
issues, the failure of the Company's products to operate properly with regard to
the Year 2000 requirements could (i) cause the Company to incur unanticipated
expenses to remedy any problems, (ii) cause a reduction in sales and (iii)
expose the Company to related litigation by its customers, each of which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company and third parties with whom it
conducts business may utilize equipment or software that may not be Y2K
compliant. Failure of the Company's or any such third party's equipment or
software to operate properly with regard to the Year 2000 requirements could
cause, among other things, the Company or any such third party to incur
unanticipated expenses or efforts to remedy any problems, which could have a
material adverse effect on its or their respective business, operating results
and financial condition. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to evaluate and to correct their equipment or software for
Y2K compliance and as they simultaneously evaluate the preparedness of the third
parties with whom they deal. These expenditures may result in reduced funds
available to purchase products and services such as those offered by the
Company, which could have a material adverse effect on the Company's business,
operating results and financial condition.
PART II
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, the
proxies provided to management shall confer on management discretionary
authority to vote with respect to any non Rule 14a-8 stockholder proposals
raised at the Company's annual meeting of stockholders, without any discussion
of the matter in the proxy statement, unless a stockholder has notified the
Company of such a proposal at least 45 days prior to the month and day on which
the Company mailed its prior year's proxy statement. Since the Company mailed
its proxy statement for the 1998 annual meeting of stockholders on March 27,
1998, the deadline for receipt of any such stockholder proposal for the 1999
annual meeting of stockholders is February 10, 1999.
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
None
16
17
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: November 13, 1998
HARMONIC LIGHTWAVES, INC.
(Registrant)
By: /s/ Robin N. Dickson
-------------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
17
18
HARMONIC LIGHTWAVES, INC.
Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule
18
5
9-MOS
DEC-31-1998
JAN-01-1998
OCT-02-1998
8,215
0
17,343
0
20,658
47,773
10,400
0
59,563
16,368
0
0
0
70,837
(28,104)
59,563
56,760
56,760
36,574
36,574
0
0
0
(22,081)
0
0
0
0
0
(22,081)
(1.91)
1.91
