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INDEX TO EXHIBITS AT PAGE 17
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended April 2, 1999
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 INC.
(formerly 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 May 7, 1999 there were 14,888,265 shares of the Registrant's Common
Stock outstanding.
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HARMONIC INC.
Index
PART I - FINANCIAL INFORMATION Page
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Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at April 2, 1999
and December 31, 1998................................................................. 3
Condensed Consolidated Statements of Operations for the Three Months
Ended April 2, 1999 and April 3, 1998................................................. 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
April 2, 1999 and April 3, 1998....................................................... 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 Information.............................................................. 18
Item 6. Exhibits and Reports on Form 8-K............................................... 18
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 2, DECEMBER 31,
1999 1998
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 11,432 $ 9,178
Accounts receivable, net 20,753 17,646
Inventories 21,246 22,385
Prepaid expenses and other assets 1,282 1,175
----------- -----------
Total current assets 54,713 50,384
Property and equipment, net 11,071 10,726
Intangibles and other assets 1,241 1,314
----------- -----------
$ 67,025 $ 62,424
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,252 $ 7,534
Accrued liabilities 9,766 10,355
Borrowings under bank facilities 840 --
Current portion of long term debt 177 177
----------- -----------
Total current liabilities 19,035 18,066
----------- -----------
Long-term debt, less current portion 350 400
Other non-current liabilities 510 484
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;
12,020,306 and 11,725,844 shares issued and outstanding 12 12
Capital in excess of par value 73,159 70,924
Accumulated deficit (26,123) (27,472)
Currency translation 82 10
----------- -----------
Total stockholders' equity 47,130 43,474
----------- -----------
$ 67,025 $ 62,424
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------
APRIL 2, APRIL 3,
1999 1998
----------- -----------
Net sales $ 30,263 $ 16,204
Cost of sales 17,852 11,114
----------- -----------
Gross profit 12,411 5,090
----------- -----------
Operating expenses:
Research and development 3,694 3,423
Sales and marketing 5,180 4,072
General and administrative 1,770 2,148
Acquired in-process technology -- 14,000
----------- -----------
Total operating expenses 10,644 23,643
----------- -----------
Income (loss) from operations 1,767 (18,553)
Interest and other income, net 32 188
----------- -----------
Income (loss) before income taxes 1,799 (18,365)
Provision for income taxes 450 --
----------- -----------
Net income (loss) $ 1,349 $ (18,365)
=========== ===========
Net income (loss) per share
Basic $ 0.11 $ (1.60)
=========== ===========
Diluted $ 0.10 $ (1.60)
=========== ===========
Weighted average shares
Basic 11,924 11,475
=========== ===========
Diluted 13,346 11,475
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------------------------
APRIL 2, 1999 APRIL 3, 1998
------------ -------------
Cash flows from operating activities:
Net income (loss) $ 1,349 $ (18,365)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 1,230 1,080
Acquired in-process technology -- 14,000
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable (3,107) 2,209
Inventories 1,173 (262)
Prepaid expenses and other assets (105) 454
Accounts payable 718 634
Accrued and other liabilities (564) (186)
----------- -----------
Net cash provided by (used in) operating activities 694 (436)
Cash flows used in investing activities:
Acquisition of property and equipment (1,499) (761)
Acquisition of New Media Communication Ltd., net of cash
received -- (272)
----------- -----------
Net cash used in investing activities (1,499) (1,033)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 2,235 478
Borrowings under bank line 840 --
Repayments under bank line and term loan (50) (185)
----------- -----------
Net cash provided by financing activities 3,025 293
Effect of exchange rate changes on cash
and cash equivalents 34 (11)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,254 (1,187)
Cash and cash equivalents at beginning of period 9,178 13,670
----------- -----------
Cash and cash equivalents at end of period $ 11,432 $ 12,483
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid during the period $ 25 $ 9
Income taxes paid during the period $ 21 $ 68
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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HARMONIC 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
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 Form 10-K and on Form 10-K/A
which were filed with the Securities and Exchange Commission on March 17, 1999
and April 7, 1999 respectively. 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, 1999, 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"),
which has recently changed its name to Harmonic Data Systems Ltd. ("HDS"), 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
April 2, 1999 were not material in relation to those of the Company.
NOTE 3 - INVENTORIES
APRIL 2, DECEMBER 31,
1999 1998
- ---------------------------------------- -----------
IN THOUSANDS (UNAUDITED)
Raw materials $ 4,865 $ 3,747
Work-in-process 4,009 4,557
Finished goods 12,372 14,081
----------- -----------
$ 21,246 $ 22,385
=========== ===========
NOTE 4 - NET INCOME (LOSS) PER SHARE
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
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
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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.
The following table presents a reconciliation of the numerators and denominators
of the Basic and Diluted EPS computations for the periods presented below:
THREE MONTHS ENDED
---------------------------------
APRIL 2, APRIL 3,
1999 1998
- -------------------------------------------------------------- -----------
IN THOUSANDS (UNAUDITED)
Net income (loss) (numerator) $ 1,349 $ (18,365)
=========== ===========
Shares calculation (denominator):
Average shares outstanding - basic 11,924 11,475
Effect of Dilutive Securities:
Potential Common Stock relating
to stock options and warrants 1,422 --
----------- -----------
Average shares outstanding - diluted 13,346 11,475
=========== ===========
Net income (loss) per share - basic $ 0.11 $ (1.60)
=========== ===========
Net income (loss) per share - diluted $ 0.10 $ (1.60)
=========== ===========
Options and warrants to purchase 89,800 and 980,018 shares of Common Stock were
outstanding during the quarters ended April 2, 1999 and April 3, 1998,
respectively, but were not included in the computation of diluted EPS because
either the option's exercise price was greater than the average market price of
the Common Stock or inclusion of such options would have been antidilutive. The
price ranges of these options and warrants were from $22.75 to $27.63 per share
for the quarter ended April 2, 1999 and $0.30 to $22.75 per share for the
quarter ended April 3, 1998.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 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. The
Company's total comprehensive income (loss) was as follows:
THREE MONTHS ENDED
------------------------------
APRIL 2, APRIL 3,
1999 1998
- ---------------------------------------------------------- --------
IN THOUSANDS (UNAUDITED)
Net income (loss) $ 1,349 $(18,365)
Other comprehensive income (loss) 72 (20)
-------- --------
Total comprehensive income (loss) $ 1,421 $(18,385)
======== ========
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NOTE 6 - SUBSEQUENT EVENT
In April 1999, the Company completed a public offering of 2,800,000 at a price
of $30.25 per share. Of these 2,800,000 shares, 2,000,000 shares were sold by
the Company and 800,000 shares were sold by selling shareholders. An additional
50,000 shares were sold by the Company to the underwriters to cover
over-allotments. Total net proceeds to the Company were approximately $58.3
million, after underwriter discounts and commissions and estimated costs. The
shares sold by selling shareholders included 720,000 shares held by
Scientific-Atlanta, Inc. pursuant to the exercise of a warrant for which the
Company received $4.0 million upon such warrant's exercise.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Harmonic Inc. ("Harmonic" or the "Company") designs, manufactures and markets
digital and fiber optic systems for delivering video, voice and data services
over cable, satellite and wireless networks. Our solutions enable cable
television and other network operators to provide a range of broadcast and
interactive broadband services that include high-speed Internet access,
telephony and video on demand. We offer a broad range of fiber optic
transmission and digital headend products for hybrid fiber coax, satellite and
wireless networks, and our acquisition of New Media Communication Ltd., which
has recently changed its name to Harmonic Data Systems Ltd., in January 1998 has
allowed us to develop and expand our 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,
gross margins, 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 87% from $16.2 million in the first quarter of
1998 to $30.3 million in the first quarter of 1999. The increase in net sales
was attributable primarily to the sale of new products, including METROLink DWDM
systems, PWRBlazer Scaleable Nodes and TRANsend digital headend products, which
began volume shipment during the middle of 1998. This increase was also
attributable to increases in spending by domestic and international customers.
During the first quarter of 1999, domestic sales increased by 89%, principally
due to increased shipments to TCI, which was recently acquired by AT&T, while
international sales increased 84% due primarily to higher shipments to Canada as
severe weather conditions impacted sales to Canada in the first quarter of 1998.
International sales represented 42% of net sales in the first quarter of 1999
compared to 43% in the first quarter of 1998.
Gross Profit
Gross profit increased from $5.1 million (31% of net sales) in the first quarter
of 1998 to $12.4 million (41% of net sales) in the first quarter of 1999. The
increases in gross profit and gross margins were due principally to higher unit
sales volume which allowed the Company to improve fixed cost absorption and
realize increasing economies of scale through higher absorption and purchasing
volumes. In addition, in the first quarter of 1998, the Company increased its
inventory reserves for certain existing products following the introduction of
several new products.
Research and Development
Research and development expenses increased from $3.4 million in the first
quarter of 1998 to $3.7 million in the first quarter of 1999, but decreased as a
percentage of net sales from 21% to 12%. The increase in absolute spending was
principally attributable to higher payroll expenses partially offset by lower
prototype material costs in connection with the PWRBlazer Scaleable Node and
TRANsend digital development programs due to commencement of volume shipment of
these products during the middle of 1998. The decrease in research and
development expenses as a percentage of net sales was principally attributable
to increased net sales. Harmonic anticipates that research and development
expenses will continue to increase in absolute dollars, although they may vary
as a percentage of net sales.
Sales and Marketing
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Sales and marketing expenses increased from $4.1 million in the first quarter of
1998 to $5.2 million in the first quarter of 1999, but decreased as a percentage
of net sales from 25% to 17%. The increase in absolute expenses was primarily
due to higher headcount and costs associated with expansion of the sales and
marketing organizations to provide wider geographic coverage and support for the
new digital products, as well as higher sales commissions related to increased
net sales. In addition, higher promotional expenses including one-time costs
associated with the Company's name change contributed to the increase. The
decrease in sales and marketing expenses as a percentage of net sales was
principally attributable to increased net sales. Harmonic anticipates that sales
and marketing expenses will continue to increase substantially in absolute
dollars, although such expenses may vary as a percentage of net sales.
General and Administrative
General and administrative expenses decreased from $2.1 million (13% of net
sales) in the first quarter of 1998 to $1.8 million (6% of net sales) in the
first quarter of 1999. The decrease in expenses was attributable to an increase
in accounts receivable reserve levels in the first quarter of 1998 as a result
of the financial situation in Asia which had impacted certain of the Company's
distributors, partially offset by higher payroll expenses in the first quarter
of 1999. The decrease in expenses as a percentage of net sales was also
attributable to higher net sales in the first quarter of 1999. 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, Net
Interest and other income, net, consisting principally of interest income, was
not significant in the first quarter of 1999 compared to $0.2 million in the
first quarter of 1998. The decrease in the first quarter of 1999 was due
primarily to lower interest income on lower average cash and cash equivalents
balances.
Income Taxes
A provision for income taxes of $450,000 was recorded for the first quarter of
1999 based on an estimated annual tax rate of 25%. No provision for income
taxes was recorded for the first quarter of 1998 due to the net loss for the
quarter. Beyond 1999, the Company expects to have an effective annual tax rate
that approximates statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operations was approximately $0.7 million in the first quarter
of 1999 compared to cash used in operations of approximately $0.4 million in the
first quarter of 1998. The increase in cash provided by operations was primarily
due to net income in the first quarter of 1999 compared to a net loss in the
first quarter of 1998 and lower inventory partially offset by higher accounts
receivable.
Additions to property, plant and equipment were approximately $0.8 million and
$1.5 million in the first quarters of 1998 and 1999, respectively. The increase
in 1999 compared to 1998 was due principally to higher expenditures for
manufacturing and test equipment associated with expansion of production
capacity. The Company expects to spend approximately $6.0 million on capital
expenditures in 1999, primarily for manufacturing and test equipment.
As of April 2, 1999, the Company's principal sources of liquidity included cash
and cash equivalents of $11.4 million and a bank line of credit facility which
provides for borrowings up to $10.0 million with a $3.0 million equipment term
loan sub-limit and expires in March 2000. Borrowings pursuant to the line bear
interest at the bank's prime rate plus 0.5% (prime rate plus 1.0% under the term
loan) and are payable monthly. The Company has guaranteed certain borrowing of
its subsidiaries totaling $0.7 million with letters of credit and had total
letters of credit issued under the line of $2.0 million, which expire at various
dates over the next twelve months. Outstanding borrowings under credit
facilities were $1.4 million as of April 2, 1999. The
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Company expects that it will be able to renew or replace the line of credit
facility upon its expiration on terms acceptable to the Company.
Subsequent to the end of the first quarter, Harmonic raised approximately $58.3
million, net of offering costs from a public offering of its Common Stock
which was completed in April 1999. The Company believes that the net proceeds
from the public offering, together with its existing liquidity sources and
anticipated funds from operations, will satisfy its cash requirements for at
least the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of Harmonic due to adverse changes in market
prices and rates. Harmonic is exposed to market risk because of changes in
foreign currency exchange rates as measured against the U.S. Dollar and
currencies of Harmonic's subsidiaries in Israel and in the United Kingdom.
Harmonic has not engaged in hedging activities as of April 2, 1999 and does not
expect to do so in the foreseeable future.
Harmonic has subsidiaries in Israel and the United Kingdom whose sales are
generally denominated in U.S. dollars. While Harmonic does not anticipate that
near-term changes in exchange rates will have a material impact on future
operating results, fair values or cash flows, Harmonic cannot assure you that a
sudden and significant change in the value of the Israeli Shekel or British
Pound would not harm Harmonic's financial condition and results of operations.
YEAR 2000 READINESS DISCLOSURE
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.
Harmonic 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 Harmonic is working with its customers to
provide migration paths for each product. Harmonic's significant internal
systems have been purchased from outside vendors and are Y2K compliant. Harmonic
is in the process of upgrading internal systems that are not currently Y2K
compliant, and expects to have this process completed during the third quarter
of 1999. To date, Y2K costs have not been material to Harmonic and Harmonic does
not expect that its Y2K costs will exceed $100,000 in the future. Harmonic
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 the end of
the third quarter of 1999 if its products and internal systems are not yet Y2K
compliant. In addition, Harmonic 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. Harmonic will continue to perform compliance
reviews and tests to ensure compliance on an ongoing basis. Harmonic currently
does not anticipate that the cost of its Y2K program will be material to its
financial condition and results of operations.
Although Harmonic has established and commenced its program to address Y2K
issues, the failure of Harmonic products to operate properly with regard to the
Y2K requirements could (a) cause Harmonic to incur unanticipated expenses to
remedy any problems, (b) cause a reduction in sales and (c) expose Harmonic to
related litigation by its customers, each of which could harm our business,
operating results and financial condition. In addition, Harmonic and third
parties with whom it conducts business may utilize equipment or software that
may not be Y2K compliant. Failure of Harmonic's or any such third party's
equipment or software to operate properly with regard to the Y2K requirements
could cause, among other things, Harmonic 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 Y2K 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 Harmonic,
which could have a material adverse effect on Harmonic business, operating
results and financial condition.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Our operating results are likely to fluctuate significantly and may fail to meet
or exceed the expectations of securities analysts or investors, causing our
stock price to decline.
Our operating results have fluctuated in the past and are likely to continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of
several factors, many of which are outside of our control. Some of the factors
that may cause these fluctuations include:
- the level of capital spending of our customers, both in the U.S.
and in foreign markets;
- changes in market demand;
- the timing and amount of customer orders;
- competitive market conditions;
- our unpredictable sales cycles;
- new product introductions by our competitors or by us;
- changes in domestic and international regulatory environments;
- market acceptance of new or existing products;
- the cost and availability of components, subassemblies and
modules;
- the mix of our customer base and sales channels;
- the mix of our products sold;
- our development of custom products;
- the level of international sales; and
- economic conditions specific to the cable television industry
and general economic conditions.
In addition, we often recognize a substantial portion of our revenues in the
last month of the quarter. We establish our 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 our business is derived from orders
placed by a limited number of large customers, the timing of such orders can
also cause significant fluctuations in our operating results. Our expenses for
any given quarter are typically based on expected sales
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and if sales are below expectations in any given quarter, the adverse impact of
the shortfall on our operating results may be magnified by our inability to
adjust spending to compensate for the shortfall. As a result of all these
factors, our operating results in one or more future periods may fail to meet or
exceed the expectations of securities analysts or investors. In that event, the
trading price of our common stock would likely decline.
We depend on cable industry capital spending for substantially all of our
revenue.
Almost all of our sales have been derived, directly or indirectly, from sales to
cable television operators and we expect these sales to constitute a substantial
majority for the foreseeable future. Demand for our 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 the acceptance
of new broadband services;
- competitive pressures (including the availability of alternative
video delivery technologies such as satellite broadcasting); and
- discretionary customer spending patterns and general economic
conditions.
Our net sales in the second half of 1997 and the first quarter of 1998 were
negatively 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-down in
capital spending included:
- consolidation and system exchanges by our domestic cable
customers, which generally have had the initial effect of
delaying certain system upgrades;
- uncertainty related to development of digital video and cable
modem industry standards;
- delays associated with the evaluation of new services and system
architectures by many cable television operators;
- emphasis on marketing and customer service strategies by some
international cable television operators instead of construction
of networks; and
- general economic conditions in international markets.
While our net sales increased during the last four quarters from the level
achieved in the first quarter of 1998 due to increased spending in the North
American cable television industry, spending by cable television operators
outside of North America generally remained weak. We cannot predict when cable
television spending outside of North America will increase and whether North
American 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.
Our customer base is concentrated and the loss of one or more of our key
customers would harm our business.
Historically, a significant majority of our sales have been to relatively few
customers. Sales to our ten largest customers in 1996, 1997 and 1998 and the
first quarter of 1999 accounted for approximately 72%, 56%, 66% and 77%,
respectively, of net sales. Due in part to the consolidation of ownership of
domestic cable television systems, we expect that sales to relatively few
customers will continue to account for a significant percentage of our net sales
for the foreseeable future. For example, in the second half of 1998 and first
quarter of 1999, sales to TeleCommunications, Inc., or TCI, which was recently
acquired by AT&T, represented approximately 23% and 22%, respectively, of our
net sales. In addition, in 1998 sales to a Chinese distributor represented
approximately 11% of our net sales and in the first quarter of 1999 sales to our
Canadian distributor represented approximately 14% of our net sales. Almost all
of our sales are made on a purchase order basis, and none of our customers has
entered into a long-term agreement requiring it to purchase our products. The
loss of, or any reduction in orders from, a significant customer would harm our
business.
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We depend on our international sales and are subject to the risks associated
with international operations.
Sales to customers outside of the United States in 1997, 1998 and the first
quarter of 1999 represented 59%, 43% and 42% of net sales, respectively, and we
expect that international sales will continue to represent a substantial portion
of our net sales for the foreseeable future. Our international operations are
subject to a number of risks, including:
- changes in foreign government regulations and telecommunications
standards;
- import and export license requirements, tariffs, taxes and other
trade barriers;
- fluctuations in currency exchange rates;
- difficulty in collecting accounts receivable;
- the burden of complying with a wide variety of foreign laws,
treaties and technical standards;
- difficulty in staffing and managing foreign operations; and
- political and economic instability.
While our international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. We do not currently engage
in any foreign currency hedging transactions. Gains and losses on the conversion
to U.S. dollars of accounts receivable, accounts payable and other monetary
assets and liabilities arising from international operations may contribute to
fluctuations in operating results. Furthermore, payment cycles for international
customers are typically longer than those for customers in the United States.
Unpredictable sales cycles could cause us to fail to meet or exceed the
expectations of security analysts and investors for any given period. Further,
we cannot assure you that foreign markets will continue to develop.
In recent periods, certain Asian and Latin American currencies have devalued
significantly in relation to the U.S. dollar. We believe that financial
developments in Asia and Latin America were a major factor contributing to lower
international net sales in fiscal 1998 as compared to fiscal 1997. In addition,
the uncertain financial situation in Asia has placed financial pressure on some
of our distributors. In response, we increased accounts receivable reserves in
the first quarter of 1998. We are continuing to evaluate the effect on our
business of recent financial developments in Asia and Latin America. Given the
current economic uncertainties in China and throughout Asia, we cannot assure
you that shipment of orders to Asia, including China, will be made as scheduled,
or at all. We cannot assure you that our sales and collection cycles in Asia and
Latin America will not continue to be harmed by the uncertain financial climate.
In particular, the Company cannot predict the effect on its business, if any, of
recent tensions between the U.S. and China resulting from the NATO bombing of
the Chinese embassy in Belgrade.
We must be able to manage expenses and inventory risks associated with meeting
the demand of our customers.
From time to time, we receive indications from our customers as to their future
plans and requirements to ensure that we will be prepared to meet their demand
for our products. In the past, however, we have received such indications but,
on occasion, we did not ultimately receive purchase orders for our products. We
must be able to effectively manage expenses and inventory risks associated with
meeting potential demand for our products. In addition, if we fail to meet
customers' supply expectations, we may lose business from such customers. If we
expend resources and purchase materials to manufacture products and such
products are not purchased, our business and operating results could suffer.
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14
The market in which we operate is intensely competitive and many of our
competitors are larger and more established.
The market for cable television transmission equipment is extremely competitive
and has been characterized by rapid technological change. Harmonic's current
competitors include significantly larger corporations such as ADC
Telecommunications, ANTEC (a company owned in part by AT&T), General Instrument,
Philips and Scientific-Atlanta. Additional competition could come from new
entrants in the broadband communications equipment market, such as Lucent
Technologies. Most of these companies are substantially larger and have greater
financial, technical, marketing and other resources than we do. Many of these
large organizations are in a better position to withstand any significant
reduction in capital spending by cable television operators. In addition, many
of our competitors have more long standing and established relationships with
domestic and foreign cable television operators than we do. We cannot assure you
that we will be able to compete successfully in the future or that competition
will not harm our business.
If any of our competitors' products or technologies were to become the industry
standard or if any of our smaller competitors were to enter into or expand
relationships with larger companies through mergers, acquisitions or otherwise,
our business could be seriously harmed. Further, our competitors may bundle
their products or incorporate functionality into existing products in a manner
that discourages users from purchasing our products.
Broadband communications markets are relatively immature and characterized by
rapid technological change.
Broadband communications markets are relatively immature, making it difficult to
accurately predict the markets' future growth rate, size and technological
direction. In view of the evolving nature of these markets, it is possible that
cable television operators, telephone companies or other suppliers of broadband
wireless and satellite services will decide to adopt alternative architectures
or technologies that are incompatible with our current or future products. If we
are unable to design, develop, manufacture and sell products that incorporate or
are compatible with these new architectures or technologies, our business would
suffer.
We need to develop and introduce new and enhanced products in a timely manner to
remain competitive.
Broadband communications markets are characterized by continuing technological
advancement, changes in customer requirements and evolving industry standards.
To compete successfully, we must design, develop, manufacture and sell new or
enhanced products that provide increasingly higher levels of performance and
reliability. However, we may not be able to successfully develop or introduce
these products. Moreover, these products may not achieve broad commercial
acceptance and may have lower gross margins than our other products.
In addition, to successfully develop and market our planned products for digital
applications, we may be required to enter into technology development or
licensing agreements with third parties. We cannot assure you that we will be
able to enter into any necessary technology development or licensing agreement
on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to
develop and market new products and, accordingly, could materially and adversely
affect our business and operating results.
We need to effectively manage our growth.
The growth in Harmonic's business has placed, and is expected to continue to
place, a significant strain on Harmonic's personnel, management and other
resources. Harmonic's ability to manage any future growth effectively will
require us to attract, train, motivate and manage new employees successfully, to
integrate new employees into our overall operations, to retain key employees and
to continue to improve our operational, financial and management systems. If we
fail to manage our future growth effectively, our business could suffer.
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15
Competition for qualified personnel is intense, and we may not be successful in
attracting and retaining personnel.
Our future success will depend, to a significant extent, on the ability of our
management to operate effectively, both individually and as a group. We are
dependent on our ability to retain and motivate high caliber personnel, in
addition to attracting new personnel. Competition for qualified technical and
other personnel is intense, particularly in the San Francisco Bay Area and
Israel, and we may not be successful in attracting and retaining such personnel.
Competitors and others have in the past and may in the future attempt to recruit
our employees. While our employees are required to sign standard agreements
concerning confidentiality and ownership of inventions, we generally do not have
employment contracts or noncompetition agreements with any of our personnel. The
loss of the services of any of our key personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required personnel,
particularly engineers and other technical personnel, could negatively affect
our business.
Our acquisition of NMC has created numerous risks and challenges for us.
The acquisition of N.M. New Media Communication Ltd. ("NMC"), which has recently
changed its name to Harmonic Data Systems Ltd. ("HDS"), has placed, and is
expected to continue to place, a significant strain on our personnel, management
and other resources. The acquisition of NMC in January 1998 has allowed us to
develop and expand our product offerings to include broadband high-speed data
delivery hardware and software and increased the scope of our international
operations in Israel. The acquisition of NMC continues to impose challenges,
including:
- the dependence on the evolution and growth of the market for
wireless and satellite broadband services;
- difficulties in the assimilation of operations, research and
development efforts, products, personnel and cultures of
Harmonic and NMC;
- our ability to successfully develop, manufacture and gain market
acceptance of the products of NMC; and
- the amortization of goodwill resulting from the acquisition of
NMC.
We cannot assure you that we will be able to successfully address these
challenges, and our failure to do so could materially and adversely affect our
business, financial condition and operating results.
We may be subject to risks associated with acquisitions.
We have made and may make investments in complementary companies, products or
technologies. If we make acquisitions, we could have difficulty assimilating or
retaining the acquired companies' personnel and operations or integrating the
acquired technology or products into ours. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. Moreover, our profitability may suffer because of acquisition-related
costs or amortization costs for acquired goodwill and other intangible assets.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
shareholders. If we are unable to successfully address any of these risks, our
business, financial condition and operating results could be harmed.
If sales forecasted for a particular period are not realized in that period due
to the unpredictable sales cycles of our products, our operating results for
that period will be harmed.
The sales cycles of many of our products, particularly our newer products and
products sold internationally, are typically unpredictable and usually involve:
- a significant technical evaluation;
- a commitment of capital and other resources by cable and other
network operators;
- delays associated with cable and other network operators'
internal procedures to approve large capital expenditures;
- time required to engineer the deployment of new technologies or
services within broadband networks; and
15
16
- testing and acceptance of new technologies that affect key
operations.
For these and other reasons, our sales cycles generally last three to six
months, but can last up to 12 months. If orders forecasted for a specific
customer for a particular quarter do not occur in that quarter, our operating
results for that quarter could be substantially lower than anticipated.
Our failure to adequately protect our proprietary rights may adversely affect
us.
We currently hold 12 issued United States patents and 9 issued foreign patents,
and have a number of patent applications pending. Although we attempt to protect
our intellectual property rights through patents, trademarks, copyrights,
maintaining certain technology as trade secrets and other measures, we cannot
assure you that any patent, trademark, copyright or other intellectual property
right owned by us will not be invalidated, circumvented or challenged, that such
intellectual property right will provide competitive advantages to us or that
any of our pending or future patent applications will be issued with the scope
of the claims sought by us, if at all. We cannot assure you that others will not
develop technologies that are similar or superior to our technology, duplicate
our technology or design around the patents that we own. In addition, effective
patent, copyright and trade secret protection may be unavailable or limited in
certain foreign countries in which we do business or may do business in the
future.
We believe that the future success of our business will depend on our ability to
translate the technological expertise and innovation of our personnel into new
and enhanced products. We generally enter into confidentiality or license
agreements with our employees, consultants, vendors and customers as needed, and
generally limit access to and distribution of our proprietary information.
Nevertheless, we cannot assure you that the steps taken by us will prevent
misappropriation of our technology. In addition, we have taken in the past, and
may take in the future, legal action to enforce our patents and other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could harm our business and
operating results.
In order to successfully develop and market our planned products for digital
applications, we 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, we
cannot assure you that such agreements will be negotiated on terms acceptable to
us, or at all. The failure to enter into technology development or licensing
agreements, when necessary, could limit our ability to develop and market new
products and could cause our business to suffer.
As is common in our industry, we have from time to time received notification
from other companies of intellectual property rights held by those companies
upon which our products may infringe. Any claim or litigation, with or without
merit, could be costly, time consuming and could result in a diversion of
management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, we cannot assure you that
licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
We may need additional capital in the future and may not be able to secure
adequate funds on terms acceptable to us.
We currently anticipate that our existing cash balances and available line of
credit and cash flow expected to be generated from future operations, will be
sufficient to meet our liquidity needs for at least the next twelve months.
However, we may need to raise additional funds if our estimates change or prove
inaccurate or in order for us to respond to unforeseen technological or
marketing hurdles or to take advantage of unanticipated opportunities.
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17
In addition, we expect to review potential acquisitions that would complement
our existing product offerings or enhance our technical capabilities. While we
have no current agreements or negotiations underway with respect to any
potential acquisition, any future transaction of this nature could require
potentially significant amounts of capital. Funds may not be available at the
time or times needed, or available on terms acceptable to us. If adequate funds
are not available, or are not available on acceptable terms, we may not be able
to take advantage of market opportunities, to develop new products or to
otherwise respond to competitive pressures.
We purchase several key components, subassemblies and modules used in the
manufacture or integration of our products from sole or limited sources, and we
are increasingly dependent on contract manufacturers.
Many components, subassemblies and modules necessary for the manufacture or
integration of our products are obtained from a sole supplier or a limited group
of suppliers. Our reliance on sole or limited suppliers, particularly foreign
suppliers, and our increasing reliance on subcontractors involves several risks,
including a potential inability to obtain an adequate supply of required
components, subassemblies or modules and reduced control over pricing, quality
and timely delivery of components, subassemblies or modules. Certain key
elements of our digital headend products are provided by a sole foreign
supplier. We do not generally maintain long-term agreements with any of our
suppliers or subcontractors. An inability to obtain adequate deliveries or any
other circumstance that would require us to seek alternative sources of supply
could affect our ability to ship our products on a timely basis, which could
damage relationships with current and prospective customers and harm our
business. We attempt to limit this risk by maintaining safety stocks of these
components, subassemblies and modules. As a result of this investment in
inventories, we may be subject to an increasing risk of inventory obsolescence
in the future, which could harm our business.
We face risks associated with having important facilities and resources located
in Israel.
Harmonic maintains two facilities in the State of Israel with a total of
approximately 60 employees. The personnel at these facilities represent a
significant portion of our research and development operations. Accordingly, we
are directly influenced by the political, economic and military conditions
affecting Israel, and any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
significantly harm our business.
In addition, most of our employees in Israel are currently obligated to perform
annual reserve duty in the Israel Defense Forces and are subject to being called
for active military duty at any time. We cannot predict the effect of these
obligations on Harmonic in the future.
Our business could be adversely impacted by Year 2000 compliance issues.
During the next year, many software programs may not recognize calendar dates
beginning in the year 2000. This problem could force computers or machines which
utilize date dependent software to either shut down or provide incorrect
information. To address this problem, we have examined our computer and
information systems, contacted our software and hardware providers, and, where
necessary, made upgrades to our systems.
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 Harmonic is working with its customers to
provide migration paths for each product. Undetected errors or defects may
remain. Disruptions to our business or unexpected costs may arise because of
undetected errors or defects in the technology used in our products,
manufacturing processes or internal information systems, which are comprised
predominantly of third party software and hardware. If we, or any of our key
suppliers or customers, fail to mitigate internal and external Year 2000 risks,
we may temporarily be unable to process transactions, manufacture products, send
invoices or engage in similar normal business activities or we may experience a
decline in sales, which could materially and adversely affect our business,
financial condition and results of operations.
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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 1999 annual meeting of
stockholders on April 12, 1999, the deadline for receipt of any such
stockholder proposal for the 2000 annual meeting of stockholders is
February 26, 20000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit # Description of Document
--------- -----------------------
27.1 Financial Data Schedule
B. Reports on Form 8-K
In a Report on Form 8-K dated March 24, 1999, Harmonic announced the merger
of its subsidiary with and into Harmonic pursuant to which Harmonic changed
its corporate name from Harmonic Lightwaves, Inc. to Harmonic Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 17, 1999
HARMONIC INC.
(Registrant)
By: /s/ Robin N. Dickson
---------------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting Officer)
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20
HARMONIC INC.
Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------
27.1 Financial Data Schedule
20
5
1
3-MOS
DEC-31-1999
JAN-01-1999
APR-02-1999
11,432
0
20,753
0
21,246
54,713
11,071
0
67,025
19,035
0
0
0
73,171
(26,041)
67,025
30,263
30,263
17,852
17,852
0
0
0
1,799
450
0
0
0
0
1,349
0.11
0.10
