<PAGE> 1
TOTAL NUMBER OF PAGES 17
INDEX TO EXHIBITS AT PAGE 17
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 July 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 July 3, 1998 there were 11,665,508 shares of the Registrant's Common Stock
outstanding.
<PAGE> 2
HARMONIC LIGHTWAVES, INC.
Index
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at July 3, 1998
and December 31, 1997........................................................................3
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended July 3, 1998 and June 27, 1997.........................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
July 3, 1998 and June 27, 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 4. Submission of Matters to a Vote of Security Holders..................................14
Item 6. Exhibits and Reports on Form 8-K.....................................................15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1998 1997
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,237 $ 13,670
Accounts receivable, net 13,425 16,458
Inventories 18,700 15,474
Prepaid expenses and other assets 1,367 1,774
-------- --------
Total current assets 46,729 47,376
Note receivable -- 1,300
Property and equipment, net 10,653 10,077
Intangibles and other assets 1,502 134
-------- --------
$ 58,884 $ 58,887
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 6,941 $ 3,708
Accrued liabilities 8,270 4,896
Borrowings under short term credit facilities 152 --
-------- --------
Total current liabilities 15,363 8,604
-------- --------
Other liabilities 442 352
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;
11,665,508 and 10,414,297 shares issued and outstanding 12 10
Capital in excess of par value 70,311 55,917
Accumulated deficit (27,269) (6,019)
Currency translation 25 23
-------- --------
Total stockholders' equity 43,079 49,931
-------- --------
$ 58,884 $ 58,887
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 18,174 $ 20,514 $ 34,378 $ 39,547
Cost of sales 11,512 10,778 22,626 20,820
-------- -------- -------- --------
Gross profit 6,662 9,736 11,752 18,727
-------- -------- -------- --------
Operating expenses:
Research and development 3,243 2,876 6,666 5,667
Sales and marketing 4,797 3,712 8,869 6,575
General and administrative 1,551 1,132 3,699 2,242
Acquired in-process technology charge -- -- 14,000 --
-------- -------- -------- --------
Total operating expenses 9,591 7,720 33,234 14,484
-------- -------- -------- --------
Income (loss) from operations (2,929) 2,016 (21,482) 4,243
Interest and other income, net 44 147 232 388
-------- -------- -------- --------
Income (loss) before income taxes (2,885) 2,163 (21,250) 4,631
Provision for income taxes -- 325 -- 695
-------- -------- -------- --------
Net income (loss) $ (2,885) $ 1,838 $(21,250) $ 3,936
======== ======== ======== ========
Net income (loss) per share
Basic $ (0.25) $ 0.18 $ (1.85) $ 0.38
======== ======== ======== ========
Diluted $ (0.25) $ 0.16 $ (1.85) $ 0.34
======== ======== ======== ========
Weighted average shares
Basic 11,591 10,295 11,481 10,252
======== ======== ======== ========
Diluted 11,591 11,497 11,481 11,530
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
HARMONIC LIGHTWAVES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JULY 3, JUNE 27,
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (21,250) $ 3,936
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 2,199 1,601
In-process technology charge 14,000 --
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable 3,181 (8,838)
Inventories (2,685) 911
Prepaid expenses and other assets 973 65
Accounts payable 2,594 (1,358)
Accrued and other liabilities 2,894 180
--------- --------
Net cash provided by (used in) operating activities 1,906 (3,503)
Cash flows used in investing activities:
Acquisition of property and equipment (2,410) (2,685)
Acquisition of New Media Communication; net of cash
received (272) --
--------- --------
Net cash used in investing activities (2,682) (2,685)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 973 762
Repayments under bank line and term loan (648) --
--------- --------
Net cash provided by financing activities 325 762
Effect of exchange rate changes on cash
and cash equivalents 18 (20)
--------- --------
Net decrease in cash and cash equivalents (433) (5,446)
Cash and cash equivalents at beginning of period 13,670 16,410
--------- --------
Cash and cash equivalents at end of period $ 13,237 $ 10,964
========= ========
Supplemental schedule of cash flow information:
Income taxes paid during the period $ 80 $ 217
Interest paid during the period $ 35 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 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. NMC has been a
development stage company since its founding in 1996 and its revenues through
July 3, 1998 were not material in relation to those of the Company.
The following table sets forth the actual and pro forma net sales, net income
and net income per share of the Company for the six month periods ended July 3,
1998 and June 27, 1997, respectively. The pro forma information gives effect to
the acquisition of NMC as if it had occurred on January 1, 1997:
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS ENDED SIX MONTHS ENDED
---------------- ----------------
JULY 3, JUNE 27,
1998 1997
- ---------------------------------------------------------- ----------------
IN THOUSANDS, EXCEPT PER SHARE DATA (UNAUDITED)
<S> <C> <C>
Net sales $ 34,378 $ 40,131
Net income $ (21,250) $ 3,175
Net income per share
Basic $ (1.85) $ 0.28
Diluted $ (1.85) $ 0.25
Weighted average shares
Basic 11,481 11,290
Diluted 11,481 12,568
</TABLE>
6
<PAGE> 7
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
JULY 3, DECEMBER 31,
1998 1997
- ---------------------------------------------------------- ----------------
IN THOUSANDS (UNAUDITED)
<S> <C> <C>
Raw materials $ 4,939 $ 4,356
Work-in-process 3,158 3,127
Finished goods 10,603 7,991
========= =========
$ 18,700 $ 15,474
========= =========
</TABLE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1998 1997 1998 1997
- ----------------------------------------------- -------- -------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) (numerator) $ (2,885) $ 1,838 $(21,250) $ 3,936
========= ======== ======== ========
Shares calculation (denominator):
Average shares outstanding - basic 11,591 10,295 11,481 10,252
Effect of Dilutive Securities:
Potential Common Stock relating
to stock options and warrants -- 1,202 -- 1,278
--------- -------- -------- --------
Average shares outstanding - diluted 11,591 11,497 11,481 11,530
========= ======== ======== ========
Net income (loss) per share - basic $ (0.25) $ 0.18 $ (1.85) $ 0.38
========= ======== ======== ========
Net income (loss) per share - diluted $ (0.25) $ 0.16 $ (1.85) $ 0.34
========= ======== ======== ========
</TABLE>
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 six month periods ended July 3, 1998, but were not included in the
computation of diluted EPS as a result of the losses incurred by the Company or
because the option's exercise price was greater than the average market price of
the Common Shares.
7
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ----------------------
JULY 3, JUNE 27, JULY 3, JUNE 27,
1998 1997 1998 1997
- ------------------------ -------- -------- -------- --------
IN THOUSANDS (UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) $ (2,885) $ 1,838 $(21,250) $ 3,936
Other comprehensive income (loss) 22 (20) 2 (20)
-------- -------- -------- --------
Total comprehensive income (loss) $ (2,863) $ 1,818 $(21,248) $ 3,916
========= ======== ======== ========
</TABLE>
8
<PAGE> 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 revenue,
expense and margin 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 decreased 11% from $20.5 million in the second quarter
of 1997 to $18.2 million in the second quarter of 1998. For the six month
periods, net sales decreased 13% from $39.5 million in the first six months of
1997 to $34.4 million in the first six months of 1998. This decrease in net
sales was attributable to lower shipments to international cable customers,
particularly in Canada, Latin America and Asia. International sales were down
37% in the second quarter of 1998, compared to the second quarter of 1997 and
represented 42% of net sales in the second quarter of 1998 compared to 59% of
net sales in the second quarter of 1997. The lower international sales were
partially offset by higher domestic sales, which increased by 25% over the level
achieved in the second quarter of 1997, the first volume shipments during the
second quarter of 1998 of the Company's digital headend products, and a modest
revenue contribution by NMC.
Gross Profit
Gross profit decreased from $9.7 million (47% of net sales) in the second
quarter of 1997 to $6.7 million (37% of net sales) in the second quarter of 1998
and from $18.7 million (47% of net sales) in the first six months of 1997 to
$11.8 million (34% of net sales) in the first six months of 1998. The decreases
in gross profit, as a percentage of net sales, were principally due to lower
unit 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 both the three and six month periods of 1998, the
Company increased its inventory reserves for existing products following the
introduction of several new products. The Company expects gross margins to
continue to be below 1997 levels in the next several quarters 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 (14% of net sales)
in the second quarter of 1997 to $3.2 million (18% of net sales) in the second
quarter of 1998. For the six month periods, research and development expenses
increased from $5.7 million in 1997 (14% of net sales) to $6.7 million in 1998
(19% of net sales). The 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
9
<PAGE> 10
increases in research and development expenses as a percentage of net sales in
both periods were also due to the lower sales level in 1998 compared to 1997.
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 $3.7 million (18% of net sales) in
the second quarter of 1997 to $4.8 million (26% of net sales) in the second
quarter of 1998. For the six month periods, sales and marketing expenses
increased from $6.6 million in 1997 (17% of net sales) to $8.9 million in 1998
(26% of net sales). The increases in expenses were primarily due to higher
headcount and costs associated with expansion of the direct sales force, sales
support and marketing organizations, as well as higher promotional expenses. The
inclusion of NMC's sales and marketing expenses starting in January 1998 also
contributed to the increases. The increases in sales and marketing expenses as a
percentage of net sales in both periods were also due to the lower sales level
in 1998 compared to 1997. 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 $1.1 million (6% of net
sales) in the second quarter of 1997 to $1.5 million (9% of net sales) in the
second quarter of 1998. For the six month periods, general and administrative
expenses increased from $2.2 million in 1997 (6% of net sales) to $3.7 million
in 1998 (11% of net sales). The increases in expenses in both periods were
attributable to costs of supporting the Company's growth in headcount, costs of
establishing international sales and support offices, and the inclusion of NMC's
expenses starting in January 1998. In addition, for the six month period, the
increase was partially 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. The increases in general and
administrative expenses as a percentage of net sales in both periods were also
due to the lower sales level in 1998 compared to 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, decreased
from $0.1 million in the second quarter of 1997 to a nominal amount in the
second quarter of 1998 and from $0.4 million for the six month period of 1997 to
$0.2 million for the six month period of 1998. The decrease was due primarily to
lower other income in both periods of 1998.
Income Taxes
No provision for income taxes was recorded for either period of 1998 due to the
net losses incurred. The provisions for income taxes for both periods of 1997
were based on an effective annual tax rate of 15%.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $1.9 million for the six months
ended July 3, 1998 compared to cash used in operations of $3.5 million for the
six months ended June 27, 1997. The improved cash flow was primarily due to
improved customer collections and higher accounts payable and accrued
liabilities, partially offset by higher inventory levels and a net loss in the
first six months of 1998 compared to net income in the comparable period of
1997.
Additions to property, plant and equipment were approximately $2.7 million and
$2.4 million in the first six months 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
10
<PAGE> 11
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 July 3, 1998, the Company's principal sources of liquidity included cash
and cash equivalents of $13.2 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 and other obligations of its subsidiaries
totaling $2.1 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 $152,000 as of July 3, 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.
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 two 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 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 quarter of 1998 from the levels
achieved in the first quarter of 1998 due to improved U.S. cable spending,
11
<PAGE> 12
spending by international cable television operators remainded 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 six months of 1998 accounted for approximately 72%, 56% and
60%, 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 half 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 shipped its first significant volumes 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.
12
<PAGE> 13
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 margin levels.
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 and NMC's products are provided by sole
source suppliers. 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.
13
<PAGE> 14
Risks of International Operations
Sales to customers outside of the United States in 1996, 1997 and the first six
months 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 half of 1998.
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.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held initially on April
29, 1998 and reconvened and completed on May 1, 1998, the following matters were
acted upon by the stockholders of the Company:
1. The election of Anthony J. Ley, Moshe Nazarathy, E. Floyd Kvamme, David A.
Lane, Barry D. Lemieux and Michel L. Vaillaud as directors of the Company,
each to hold office for a one-year term or until a successor is elected and
qualified;
2. The approval of an amendment to the Company's 1995 Stock Plan, to increase
the number of shares of the Company's Common Stock reserved for issuance
thereunder by 575,000 shares;
3. The approval of an amendment to the Company's 1995 Employee Stock Purchase
Plan to increase the number of shares of the Company's Common Stock
reserved for issuance thereunder by 200,000 shares; and
14
<PAGE> 15
4. The ratification of the appointment of Price Waterhouse, LLP as the
independent accountants of the Company for the fiscal year ending December
31, 1998.
The number of shares of Common Stock outstanding and entitled to vote at the
Annual Meeting was 11,503,212 and 10,792,559 shares were represented in person
or by proxy. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTE
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1. Election of Directors
a. Anthony J. Ley 10,523,947 268,612
b. Moshe Nazarathy 10,709,909 82,650
c. E. Floyd Kvamme 10,524,083 268,476
d. Barry D. Lemieux 10,710,709 81,850
e. David A. Lane 10,524,283 268,276
f. Michel L. Vaillaud 10,441,183 351,376
2. Amendment to Company's 1995 Stock Plan 4,524,010 3,246,961 23,825 2,997,763
3. Amendment to Company's 1995 Employee
Stock Purchase Plan 7,478,684 295,687 20,425 2,997,763
4. Ratification of Independent Accountants 10,763,479 14,664 14,416
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit # Description of Document
--------- -----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
B. Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
July 3, 1998.
15
<PAGE> 16
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: August 14, 1998 HARMONIC LIGHTWAVES, INC.
(Registrant)
By: /s/ Robin N. Dickson
-----------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16
<PAGE> 17
HARMONIC LIGHTWAVES, INC.
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUL-03-1998
<CASH> 13,237
<SECURITIES> 0
<RECEIVABLES> 13,425
<ALLOWANCES> 0
<INVENTORY> 18,700
<CURRENT-ASSETS> 46,729
<PP&E> 10,653
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,884
<CURRENT-LIABILITIES> 15,363
<BONDS> 0
0
0
<COMMON> 70,323
<OTHER-SE> (27,269)
<TOTAL-LIABILITY-AND-EQUITY> 58,884
<SALES> 34,378
<TOTAL-REVENUES> 34,378
<CGS> 22,626
<TOTAL-COSTS> 22,626
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (21,250)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,250)
<EPS-PRIMARY> (1.85)
<EPS-DILUTED> (1.85)
</TABLE>
