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Total Number of Pages 26
Index to Exhibits at Page N/A
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 MARCH 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25826
HARMONIC 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 [ ]
----------
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, was 58,229,593 at March 30, 2001.
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HARMONIC INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at March 30, 2001 (Unaudited)
and December 31, 2000 .......................................................................................3
Condensed Consolidated Statements of Operations for the Three Months
Ended March 30, 2001 and March 31, 2000 (Unaudited)..........................................................4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 30, 2001 and March 31, 2000 (Unaudited)................................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................25
Item 5. Other Information.......................................................................................25
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE AMOUNTS)
MARCH 30, DECEMBER 31,
2001 2000
----------- -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 42,326 $ 13,505
Short-term investments 57,480 86,164
Accounts receivable, net 41,224 67,726
Inventories 64,024 80,191
Deferred income taxes 29,665 30,506
Prepaid expenses and other assets 8,523 10,961
----------- -----------
Total current assets 243,242 289,053
Property and equipment, net 58,378 47,366
Goodwill, intangibles and other assets 84,353 89,525
----------- -----------
$ 385,973 $ 425,944
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,750 $ 32,783
Income taxes payable 21,916 1,109
Accrued liabilities 54,606 60,543
----------- -----------
Total current liabilities 103,272 94,435
----------- -----------
Deferred income taxes 33,056 35,215
Other non-current liabilities 1,026 592
Stockholders' equity:
Preferred stock, $.001 par value, 5,000 shares authorized; no
shares issued or outstanding -- --
Common Stock, $.001 par value, 150,000 shares authorized; 58,230 and
57,891 shares issued and outstanding 58 58
Capital in excess of par value 1,954,646 1,952,784
Accumulated deficit (1,706,465) (1,657,800)
Accumulated other comprehensive income 380 660
----------- -----------
Total stockholders' equity 248,619 295,702
----------- -----------
$ 385,973 $ 425,944
=========== ===========
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
-----------------------------
MARCH 30, MARCH 31,
2001 2000
-------- -------
Net sales $ 40,274 $62,863
Cost of sales 51,034 33,067
-------- -------
Gross profit (loss) (10,760) 29,796
-------- -------
Operating expenses:
Research and development 15,502 6,018
Selling, general and administrative 21,682 9,779
Amortization of goodwill and other intangibles 3,096 76
-------- -------
Total operating expenses 40,280 15,873
-------- -------
Income (loss) from operations (51,040) 13,923
Interest and other income, net 1,556 1,121
-------- -------
Income (loss) before income taxes (49,484) 15,044
Provision for (benefit from) income taxes (819) 5,717
-------- -------
Net income (loss) $(48,665) $ 9,327
======== =======
Net income (loss) per share
Basic $ (0.84) $ 0.30
======== =======
Diluted $ (0.84) $ 0.28
======== =======
Weighted average shares
Basic 58,161 30,716
======== =======
Diluted 58,161 33,391
======== =======
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
-----------------------------
MARCH 30, MARCH 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $(48,665) $ 9,327
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Amortization of goodwill and other intangibles 5,109 76
Depreciation 4,237 1,640
Changes in assets and liabilities:
Accounts receivable 26,502 (3,217)
Inventories 16,167 (7,549)
Prepaid expenses and other assets 2,440 (232)
Deferred income taxes (1,319) --
Accounts payable (6,032) (327)
Income taxes payable 20,874 3,900
Accrued and other liabilities (5,442) (6,227)
-------- --------
Net cash provided by (used in) operating activities 13,871 (2,609)
Cash flows from investing activities:
Acquisition of property and equipment (16,682) (5,489)
Loss on disposal of assets 1,432 44
Proceeds from sale of investments 66,893 14,617
Purchases of investments (38,386) (22,382)
-------- --------
Net cash provided by (used in) investing activities 13,257 (13,210)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,862 1,829
-------- --------
Net cash provided by financing activities 1,862 1,829
Effect of exchange rate changes on cash
and cash equivalents (169) 104
-------- --------
Net increase (decrease) in cash and cash equivalents 28,821 (13,886)
Cash and cash equivalents at beginning of period 13,505 24,822
-------- --------
Cash and cash equivalents at end of period $ 42,326 $ 10,936
======== ========
Supplemental disclosure of cash flow information:
Income tax payments (refunds), net $(20,472) $ 1,849
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 on Form 10-K and Form 10-K/A
which were filed with the Securities and Exchange Commission on April 2, 2001
and April 19, 2001, 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, 2001, or any other future period. The
Company's fiscal quarters end on the Friday nearest the calendar quarter end.
NOTE 2 - CASH EQUIVALENTS AND INVESTMENTS
Cash equivalents are comprised of highly liquid investment-grade investments
with original maturities of three months or less at the date of purchase.
Investments are comprised of U.S. government, state, municipal and county
obligations and corporate debt securities with lives ranging from three months
to two years. The Company classifies its investments as available for sale in
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and states its
investments at estimated fair value, with material unrealized gains and losses
reported in other comprehensive income. The specific identification method is
used to determine the cost of securities disposed of, with realized gains and
losses reflected in other income and expense. Investments are anticipated to be
used for current operations and are, therefore, classified as current assets,
even though maturities may extend beyond one year.
At March 30, 2001, short-term investments of $55.2 million mature in less than
one year and $2.3 million mature between one and two years.
NOTE 3 -- DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statement
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists. Effective January 1, 2001, the Company
adopted SFAS 133, however, the adoption did not materially impact its financial
position or results of operations.
The Company enters into foreign currency forward exchange contracts ("forward
contracts") to manage exposure related to accounts receivable denominated in
foreign currencies. The Company does not enter into derivative financial
instruments for trading purposes. The Company had outstanding forward contracts
totaling approximately $1.7 million at March 30, 2001. The open contracts mature
at various dates through May 17, 2001 and hedge certain foreign currency
transaction exposures in the British Pound Sterling. The unrealized gains and
losses on the forward contracts at March 30, 2001 were negligible.
NOTE 4 - INVENTORIES
MARCH 30, DECEMBER 31,
In Thousands (Unaudited) 2001 2000
- ------------------------ -------- -----------
Raw materials $19,526 $20,414
Work-in-process 12,600 13,000
Finished goods 31,898 46,777
------- -------
$64,024 $80,191
======= =======
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NOTE 5 - NET INCOME (LOSS) PER SHARE
The basic net income (loss) per share is computed by dividing the net income
(loss) attributable to common stockholders for the period by the weighted
average number of the common shares outstanding during the period. The diluted
net loss per share is the same as the basic net loss per share for the quarter
ended March 30, 2001 because common equivalent shares, composed of common shares
subject to repurchase and common shares issuable upon the exercise of stock
options, are only considered when their effect would be dilutive. During the
quarter ended March 30, 2001 and March 31, 2000, 7,624,243, and 16,150,
respectively, antidilutive securities, including options, were excluded from the
net income (loss) per share computations
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted net income per share computations:
THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
In Thousands (Unaudited) 2001 2000
- ------------------------ -------- --------
Net income (loss) - (numerator) $(48,665) $ 9,327
======== =======
Shares calculation - (denominator):
Average shares outstanding - basic 58,161 30,716
Effect of Dilutive Securities:
Potential Common Stock relating to
stock options -- 2,675
-------- -------
Average shares outstanding - diluted 58,161 33,391
======== =======
Net income (loss) per share - basic $ (0.84) $ 0.30
======== =======
Net income (loss) per share - diluted $ (0.84) $ 0.28
======== =======
NOTE 6 - COMPREHENSIVE INCOME (LOSS)
The Company's total comprehensive income (loss) was as follows:
THREE MONTHS ENDED
-----------------------------
MARCH 30, MARCH 31,
In Thousands (Unaudited) 2001 2000
- ------------------------ -------- --------
Net income (loss) $(48,665) $ 9,327
Change in unrealized loss on investments (111) (76)
Currency translation (169) 115
-------- -------
Total comprehensive income (loss) $(48,945) $ 9,366
======== =======
NOTE 7 - ACQUISITIONS
DiviCom Business.
On May 3, 2000, Harmonic completed its merger with C-Cube Microsystems Inc.
("C-Cube") pursuant to the terms of an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") dated October 27, 1999. Under the terms
of the Merger Agreement, C-Cube spun off its semiconductor business as a
separate publicly traded company prior to the closing. C-Cube then merged into
Harmonic and Harmonic therefore acquired C-Cube's
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DiviCom business. The merger was structured as a tax-free exchange of stock and
was accounted for using the purchase method of accounting.
The purchase price of $1.8 billion included $1.6 billion of stock issued, $155
million in stock options assumed, and $9.6 million of transaction expenses
incurred. The issued stock reflected the conversion of each share of C-Cube
common stock into 0.5427 shares of Harmonic stock, totaling 26.4 million shares
at an average market price per share of $62.00. The average market price per
share was based on the average closing price of Harmonic common stock for a
period three days before and after the October 27, 1999 announcement of the
merger.
Goodwill and intangible assets of $1.7 billion were recorded at the time of the
merger and are being amortized on a straight-line basis over the estimated
useful of five years. In-process research and development of $38.7 million,
which had not reached the stage of technological feasibility at the acquisition
date, and had no alternative future use, was immediately charged to operations.
As of December 31, 2000, the Company recorded an impairment charge of $1.4
billion to write-down the goodwill and other intangibles associated with the
acquisition of the DiviCom business in accordance with the Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The
DiviCom business had experienced a significant decrease in the demand for its
products and services as customers in the digital headend systems market reduced
levels of current and planned capital expenditures and, as a result, revenues,
cash flows, and expected future growth rates decreased. Because the estimated
future undiscounted cash flow of this operation was less than the carrying value
of the related long-lived assets as of December 31, 2000, an impairment charge
was required to write-down long-lived assets to management's best estimate of
this operation's future discounted cash flows. As a result of the impairment
charge, the Company wrote off the remaining unamortized goodwill of $1.3 billion
as of December 31, 2000 and reduced on a pro rata basis the recorded value of
other identified intangibles related to its acquisition of the DiviCom business
to $79.3 million, which is being amortized over a remaining useful life of
approximately four years.
The following unaudited pro forma summary presents the combined statement of
operations as if the merger had been completed on January 1, 2000 and does not
purport to be indicative of what would have occurred had the merger actually
been completed on such date or of results which may occur in the future.
Impairment was assumed to have occurred as of December 31, 2000, thus the pro
forma summary below for the quarter ended March 31, 2000, includes amortization
of goodwill and other intangibles net of deferred tax benefit of $82.4 million
based on the purchase price allocation prior to the impairment charge.
THREE MONTHS ENDED
------------------------------
MARCH 30, MARCH 31,
In Thousands (Unaudited) 2001 2000
- ------------------------ -------- ---------
Net sales $ 40,274 $ 102,265
Net loss (48,665) (72,090)
Net loss per share
Basic and diluted $ (0.84) $ (1.26)
Weighted average shares
Basic and diluted 58,161 57,116
Cogent Technology, Inc.
In July 2000, Harmonic completed the acquisition of privately-held Cogent
Technology, Inc. ("Cogent") of Santa Cruz, California, a developer of advanced
MPEG-2 technology for the migration from analog to digital television on
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PCI based platforms. The purchase price of $7.9 million was accounted for as a
stock-for-stock transaction under the purchase method of accounting. The excess
of the purchase price over the fair value of the acquired assets resulted in the
recording of $9.1 million of goodwill and intangibles and a $2.8 million
deferred tax liability, which are being amortized on a straight-line basis over
the estimated useful life of five years.
NOTE 8 - LEGAL PROCEEDINGS
Securities Litigation
Between June 28 and August 25, 2000, several actions alleging violations of the
federal securities laws by the Company and certain of its officers and directors
were filed in or removed to the United States District Court for the Northern
District of California. The Court entered orders relating and consolidating all
of the securities class actions and permitting plaintiffs to file a consolidated
amended complaint.
On November 27, 2000, plaintiffs filed a consolidated amended complaint. On
December 7, 2000, plaintiffs filed a "corrected" consolidated amended complaint
("the Complaint"). The Complaint is brought on behalf of a purported class of
persons who purchased the Company's publicly traded securities between January
19 and June 26, 2000. The Complaint also alleges claims on behalf of a purported
subclass of persons who purchased C-Cube securities between January 19 and May
3, 2000. In addition to the Company and certain of its officers and directors,
the complaint also names C-Cube Microsystems Inc. and several of its officers
and directors as defendants. The Complaint alleges that, by making false or
misleading statements regarding the Company's prospects and customers and its
acquisition of C-Cube, the defendants violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Complaint also alleges that the defendants
violated section 14(a) of the Exchange Act and sections 11, 12(a)(2), and 15 of
the Securities Act of 1933 by filing a false or misleading registration
statement, prospectus, and joint proxy in connection with the C-Cube
acquisition. On February 13, 2001, the defendants filed motions to dismiss the
Complaint. Although a hearing is scheduled for May 23, 2001, the parties
currently are discussing the possibility of moving the hearing to accommodate a
scheduling conflict.
A derivative action purporting to be on behalf of the Company was filed against
its directors in the Superior Court for the County of Santa Clara on September
5, 2000. The Company also was named as a nominal defendant. The complaint is
based on allegations similar to those found in the securities class actions and
claims that the defendants breached their fiduciary duties by, among other
things, causing the Company to violate federal securities laws. The derivative
action was removed to the United States District Court for the Northern District
of California on September 20, 2000. The Court has approved a stipulation by the
parties to stay the derivative action pending a decision on the motions to
dismiss the securities class actions. The parties have agreed to meet and confer
regarding further scheduling in the derivative action following the hearing on
the motion to dismiss the securities class action if no ruling on the motions to
dismiss has been made by April 15, 2001.
Based on its review of the complaints in the securities class action, the
Company believes that it has meritorious defenses to the securities class action
and the derivative action and intends to defend itself vigorously. There can be
no assurance, however, that the Company will prevail. An unfavorable outcome of
this litigation could have a material adverse effect on the Company's
consolidated financial position, liquidity or results of operations.
NOTE 9 - SEGMENT REPORTING
Operating segments are defined as components of an enterprise that engage in
business activities for which separate financial information is available and
evaluated by the chief operating decision maker. Prior to the acquisition of the
DiviCom business, Harmonic was organized as one operating segment. On May 3,
2000, Harmonic completed the acquisition of the DiviCom business, thus changing
its organizational structure. The merged company has been organized into two
operating segments: Broadband Access Networks ("BAN") for fiber optic systems,
and Convergent Systems ("CS") for digital headend systems. These segments do not
correspond to the pre-merger companies in significant ways. For example,
Harmonic's TRANsend and CyberStream product lines are part of the CS segment.
Each of these operating segments require their own development and marketing
strategies and therefore have separate management teams, however, a worldwide
sales, sales support and systems integration group supports both operating
segments.
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The results of the reportable segments are derived directly from the Company's
management reporting system. These results reported below are based on
Harmonic's method of internal reporting and are not necessarily in conformity
with generally accepted accounting principles. Subsequent to the acquisition of
DiviCom, management commenced measuring the performance of each segment based on
several metrics, including revenue, and income or loss from operations. These
results are used, in part, to evaluate the performance of, and allocate
resources to each of the segments. Revenue for the prior periods has been
reclassified to reflect the new organizational structure. The reclassified
revenue for the prior periods reflects only Harmonic's revenue, and not the
historical revenue of the DiviCom business. However, income or loss from
operations is not available and is impractical to prepare for the periods prior
to the quarter ended June 30, 2000, and accordingly, has not been presented. Net
income or loss, and assets and liabilities are not internally reported by
business segment.
THREE MONTHS ENDED
----------------------------
MARCH 30, MARCH 31,
In Thousands (Unaudited) 2001 2000
- ------------------------ -------- --------
Net Sales:
Broadband Access Networks $ 18,805 $55,843
Convergent Systems 21,469 7,020
-------- -------
Total net sales $ 40,274 $62,863
======== =======
Loss from operations:
Broadband Access Networks $(22,775)
Convergent Systems (17,284)
--------
Total segment loss from operations (40,059)
Amortization of goodwill and other (5,109)
intangibles
Interest and other income, net 1,556
Corporate and unallocated costs, and (5,872)
eliminations
--------
Loss before income taxes $(49,484)
========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, future borrowing capability and the merger with C-Cube Microsystems, Inc.
("C-Cube") and the reorganization of our business organization. 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.
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. Historically, almost all of our
sales were derived directly or indirectly from sales of fiber optic transmission
systems to cable television operators. With the introduction of our TRANsend
digital headend products in 1997 and the subsequent purchase of New Media
Communication Ltd., which changed its name to Harmonic Data Systems Ltd., we
broadened our product offering to enable delivery of digital video, voice and
data over satellite and wireless networks and cable systems.
In order to further expand our digital systems capability, the Company completed
its merger with C-Cube Microsystems Inc. in May 2000, pursuant to the terms of
an Agreement and Plan of Merger and Reorganization (the "Merger Agreement")
dated October 27, 1999. Under the terms of the Merger Agreement, C-Cube spun off
its semiconductor business as a separate publicly traded company. C-Cube then
merged into Harmonic and Harmonic therefore acquired C-Cube's DiviCom business,
which provides MPEG-2 encoding products and systems for digital television. The
merger was structured as a tax-free exchange of stock and has been accounted for
under the purchase method of accounting. In the merger, each share of common
stock of C-Cube was converted into 0.5427 shares of Harmonic common stock. The
purchase price, including merger-related costs, was approximately $1.8 billion.
The purchase price was allocated to the assets acquired and liabilities assumed,
resulting in allocation of approximately $1.7 billion to identified intangibles
and goodwill. As of December 31, 2000, the Company determined that there was an
impairment and recorded an impairment charge of $1.4 billion, eliminating
goodwill and reducing identified intangibles acquired to $79.3 million. See Note
7 in the unaudited Notes to Condensed Consolidated Financial Statements.
The merger closed on May 3, 2000, and Harmonic has consolidated the results of
the DiviCom business in its financial statements from that date forward. The
merged company has been organized into two operating divisions, Broadband Access
Networks ("BAN") for fiber optic systems and Convergent Systems ("CS") for
digital headend systems. While the two divisions have been organized generally
around the pre-merger Harmonic fiber optics systems and the DiviCom digital
headend systems, respectively, these divisions do not correspond to the
pre-merger companies in significant ways. For example, Harmonic's TRANsend and
CyberStream product lines are now part of the CS division. Each of these
divisions have its own separate management team, with a worldwide sales, sales
support and systems integration group supporting both divisions.
Harmonic's net sales decreased 36% in the first quarter of 2001 compared to the
first quarter of 2000 despite the inclusion of DiviCom, and have been below
internal expectations, as well as the expectations of securities analysts,
during each of the last four sequential quarters. The Company expects cable and
satellite industry spending to remain weak at least through the second quarter
of 2001. Major customers including AT&T have imposed shipment holds or cancelled
or delayed orders with Harmonic and other vendors or announced plans to reduce
capital spending this year. The factors contributing to this slow-down in
capital spending include uncertain worldwide economic conditions, reduced access
to capital markets for certain new and existing customers and inventory levels
held by some operators in excess of current deployment requirements. While
Harmonic is unable to predict if sales will continue to decline or when sales
will increase, the Company has recently implemented cost control measures
including a reduction in the work force of approximately 10% in February 2001
and a further 15% reduction in April 2001. Charges of $14 million are included
in operating results for the first quarter of 2001 related to inventory
provisions resulting from streamlining of our product lines, costs associated
with the relocation of the former DiviCom employees to new facilities in
Sunnyvale, California and
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severance costs associated with the February work force reduction. The Company
also expects to take additional charges of approximately $1.2 million in the
second quarter of 2001 for severance costs associated with the April reduction
and may incur further charges in the second quarter as a result of an on-going
review of its current facilities requirements. The Company expects to report a
loss, excluding amortization of goodwill and other intangibles, at least through
the second quarter of 2001, and can not predict when it will return to
profitability.
Due to lower than expected sales during the last four sequential quarters,
Harmonic failed to meet its internal expectations, as well as the expectations
of securities analysts, and the price of our common stock declined
significantly. See "Factors That May Affect Our Future 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."
RESULTS OF OPERATIONS
NET SALES
The Company's net sales decreased 36% from $62.9 million in the first quarter of
2000 to $40.3 million in the first quarter of 2001. This decrease was due
principally to significantly lower sales within the BAN division, partially
offset by the inclusion of sales from DiviCom. BAN sales for the first quarter
of 2001 declined by 66% as compared to the first quarter of 2000, primarily due
to lower cable industry spending and significantly reduced sales to AT&T and
RCN, which accounted for a total of 43% of sales in the first quarter of 2000
compared to less than 5% for the first quarter of 2001. CS sales increased $14.5
million during the first quarter of 2001 compared to the first quarter of 2000
primarily due to the inclusion of DiviCom sales. DiviCom product sales in the
first quarter of 2001 were significantly lower than in the comparable period of
2000 due principally to reduced spending by satellite operators and in part to
the impact of changes in our sales organization resulting from the merger. As a
result of the significant reduction in sales to domestic customers,
international sales represented 56% of net sales in the first quarter of 2001
compared to 33% in the first quarter of 2000.
GROSS PROFIT (LOSS)
Gross profit decreased from $29.8 million (47% of net sales) in the first
quarter of 2000 to a gross loss of $10.8 million (-27% of net sales) in the
first quarter of 2001. The decrease in gross profit and gross margin, which was
partially offset by the inclusion of DiviCom, was primarily due to decreased
sales and associated lower fixed cost absorption, and the recording of inventory
provisions of approximately $19 million of which approximately $11 million
related to streamlining of product lines and reducing the number of products
which have low margins or volumes. A less favorable product mix in BAN which
included a higher percentage of node products, the amortization of intangibles
related to the C-Cube and Cogent acquisitions of $2.0 million, and high fixed
costs associated with the CS systems integration group also contributed to the
decline of gross margins. The Company expects gross profit and gross margins to
improve in the second quarter of 2001 due to the actions taken in April 2001 to
streamline product lines and consolidate manufacturing operations into a single
organization.
RESEARCH AND DEVELOPMENT
Research and development expenses increased from $6.0 million (10% of net sales)
in the first quarter of 2000 to $15.5 million (38% of net sales) in the first
quarter of 2001. The increase in absolute dollars was principally attributable
to the inclusion of DiviCom. The increase in research and development as a
percentage of net sales was attributable to lower sales and inclusion of
DiviCom, which historically has spent a higher percentage of net sales on
research and development than has Harmonic. Harmonic anticipates research and
development expenses will continue to increase in absolute dollars due to the
inclusion of DiviCom, although they may vary as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE
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Selling, general and administrative expenses increased from $9.8 million (16% of
net sales) in the first quarter of 2000 to $21.7 million (54% of net sales) in
the first quarter of 2001. The increase in absolute expenses was primarily due
to the inclusion of DiviCom. The increase in selling, general and administrative
expenses as a percentage of net sales was principally attributable to decreased
net sales. Harmonic anticipates that selling, general and administrative
expenses will continue to increase in absolute dollars due to the inclusion of
DiviCom, although such expenses may vary as a percentage of net sales.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangible assets of approximately $90.0 million were
recorded in connection with the C-Cube merger and Cogent acquisition, after an
impairment charge of $1.4 billion was recorded as of December 31, 2000. During
the first quarter of 2001, the Company recorded $3.1 million of amortization
expense related to the remaining goodwill and other intangibles, which are being
amortized on a straight-line basis over the estimated useful lives of 5 years.
See Note 7 to the unaudited Notes to Condensed Consolidated Financial Statements
for the quarter ended March 30, 2001.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, increased from $1.1 million in the first quarter
of 2000 to $1.6 million in the first quarter of 2001. The increase was due
primarily to interest earned on higher average cash and short-term investments
as a result of $60 million of cash received in the merger. The Company expects
interest income to decrease in future periods due to lower average cash and
short-term investments.
INCOME TAXES
For the quarter ended March 30, 2001, the Company recorded a benefit from income
taxes because of non-deductible goodwill and intangible amortization, which was
partially offset by a provision for foreign taxes. The income tax provision for
the first quarter of 2000 was based on an estimated tax rate of 38%. In 2001,
the Company expects to have an annual tax provision of approximately $2 million,
before amortization of goodwill and other intangibles, principally due to
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 30, 2001, cash and cash equivalents and short term investments
totaled $99.8 million compared to $99.7 million as of December 31, 2000. Cash
provided by operations was $13.9 million in the first quarter of 2001 compared
to cash used by operations of $2.6 million in the first quarter of 2000. The
increase in cash provided by operations in the first quarter of 2001, despite a
significant net loss, was primarily due to a substantial decrease in accounts
receivable, a decrease in inventory, and an increase in income taxes payable.
During the first quarter of 2001, the Company received income tax refunds of
$22.4 million, however, approximately $15.0 million is expected to be repaid
during the second quarter of 2001.
The Company has a bank line of credit facility which provides for borrowings up
to $10.0 million with a $3.0 million secured equipment term loan sub-limit and
expires March 2002. Borrowings pursuant to the line bear interest at the bank's
prime rate (prime rate plus 2.0% under the equipment term loan) and are payable
monthly. There were no outstanding borrowings at March 30, 2001 under the line.
Additions to property, plant and equipment were approximately $5.4 million and
$16.7 million in the first quarters of 2000 and 2001, respectively. The increase
in 2001 was due principally to expenditures for leasehold improvements and
related furniture, fixtures and equipment in connection with relocation of
former DiviCom employees to new facilities in Sunnyvale, and the implementation
of the Company's new enterprise resource planning (ERP) software system. These
major capital programs were substantially completed during the first quarter of
2001. Harmonic expects level of capital expenditures to be significantly lower
during the remainder of 2001 and expects total capital expenditures for 2001 to
be between $25 and $30 million.
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While the Company expects to report a loss, excluding amortization of goodwill
and other intangibles, at least through the second quarter of 2001, it believes
that its existing liquidity sources, including its bank line of credit facility
will satisfy its requirements for at least the next twelve months. See "Risk
Factors -- We May Need Additional Capital In The Future And May Not Be Able To
Secure Adequate Funds In Terms Acceptable To Us."
ITEM 3. 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
interest rates and foreign currency exchange rates as measured against the U.S.
Dollar and currencies of Harmonic's subsidiaries.
FOREIGN CURRENCY EXCHANGE RISK
Harmonic has a number of international subsidiaries each of whose sales are
generally denominated in U.S. dollars. In addition, the Company has various
international branch offices which provide sales support and systems integration
services. 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 local currencies would not harm Harmonic's financial condition and
results of operations.
INTEREST RATE RISK
Harmonic's exposure to market risk for changes in interest rates relate
primarily to its investment portfolio of marketable debt securities of various
issuers, types and maturities. Harmonic does not use derivative instruments in
its investment portfolio, and its investment portfolio only includes highly
liquid instruments with an original maturity of less than two years. These
investments are classified as available for sale and are carried at estimated
fair value, with material unrealized gains and losses reported in other
comprehensive income. There is risk that losses could be incurred if the Company
were to sell any of its securities prior to stated maturity.
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 and timing 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;
- the timing of revenue from systems contracts which may span
several quarters;
- competitive market conditions;
- our unpredictable sales cycles;
- our ability to integrate the acquired DiviCom business into
Harmonic's operations;
- new product introductions by our competitors or by us;
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- 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 and software;
- the level of international sales; and
- economic conditions specific to the cable and satellite
industries, 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 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. In this regard, due to lower
than expected sales to AT&T and lower than expected sales in the CS segment
during the second quarter of 2000, and lower than expected sales in the BAN
segment in the third and fourth quarters of 2000 and first quarter of 2001, we
failed to meet our internal expectations, as well as the expectations of
securities analysts and investors during the last four sequential quarters, and
the price of our common stock declined significantly.
We Depend On Cable and Satellite Industry Capital Spending For A Substantial
Portion Of Our Revenue And Any Decrease Or Delay In Capital Spending In These
Industries Would Negatively Impact Our Resources, Operating Results And
Financial Condition.
Prior to the merger with C-Cube, almost all of Harmonic's historic sales had
been derived from sales to cable television operators and broadcasters, and it
expects these sales to constitute a majority of net sales for the foreseeable
future. Almost all of the DiviCom business' historic sales have been derived
from sales to satellite operators, telephone companies and cable operators.
Demand for the combined company's products will depend on the magnitude and
timing of capital spending by cable television operators, broadcasters,
satellite operators and telephone companies for constructing and upgrading of
their systems.
These capital spending patterns are dependent on a variety of factors,
including:
- access to financing;
- annual budget cycles;
- the status of federal, local and foreign government regulation
of telecommunications and television broadcasting;
- overall demand for communication services and the acceptance of
new video, voice and data services;
- evolving industry standards and network architectures;
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- competitive pressures;
- discretionary customer spending patterns;
- general economic conditions.
In the past, specific factors contributing to reduced capital spending have
included:
- 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 cable
television operators instead of construction of networks; and
- general economic conditions in domestic and international
markets.
Recent developments in capital markets have reduced access to funding for new
and existing customers causing delays in the timing and scale of deployments of
our equipment, as well as the postponement of certain projects by our customers.
In addition, Harmonic and other vendors have received notification from major
customers, including AT&T, RCN and Bell South that they are imposing shipment
holds, cancelling new projects, or delaying new orders to allow them to reduce
inventory levels which are in excess of their current deployment requirements.
The timing of deployment of our equipment can be subject to a number of other
risks, including the availability of skilled engineering and technical
personnel, the availability of other equipment such as fiber optic cable, and
the need for local zoning and licensing approvals. We believe that changes in
our customers' deployment plans have in recent quarters delayed, and may in the
future delay, the receipt of new orders or the release of existing backlog.
Since the majority of our sales have been to relatively few customers, a delay
in equipment deployment at any one customer has in the past and could have a
material adverse effect on our sales in a particular quarter. In this regard,
the Company's sales decreased in each of the last three quarters and were below
our expectations in the BAN and CS segments.
BAN sales decreased sequentially in each of the last four quarters and were 66%
lower in the first quarter of 2001 than in the first quarter of 2000. This was
due primarily to lower cable industry spending and significantly reduced sales
to AT&T, which have declined from record levels in the third quarter of 1999,
and reduced sales to RCN. CS sales during the last four sequential quarters,
consisting principally of DiviCom products, were below DiviCom's sales levels in
1999 and the first quarter of 2000, and were significantly below our
expectations at the time the DiviCom merger was announced in October 1999. The
lower CS sales were attributable principally to reduced spending by satellite
operators and in part to the impact of changes in our sales organization
resulting from the merger. For a more detailed discussion regarding risks
related to AT&T, RCN and other major customers, see "Our Customer Base Is
Concentrated And The Loss Of One Or More Of Our Key Customers Would Harm Our
Business. The Loss Of AT&T Or Any Other Key Customer Would Have A Negative
Effect On Our Business".
The Company expects cable and satellite industry spending to remain weak at
least through the second quarter of 2001, and Harmonic is unable to predict if
sales will continue to decline or if sales will increase. The Company expects to
continue to report a loss, excluding amortization of goodwill and other
intangibles, at least through the second quarter of 2001, and cannot predict
when or if it will return to profitability. Further, 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. The Loss Of AT&T Or Any Other Key Customer
Would Have A Negative Effect On Our Business.
Historically, a majority of Harmonic's sales and DiviCom's sales have been to
relatively few customers. Sales to Harmonic's ten largest customers in 1999,
2000, and the first quarter of 2001 accounted for approximately 75%, 52% and 51%
of net sales, respectively. Due in part to the consolidation of ownership of
domestic cable
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television and direct broadcast satellite 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. Sales to a domestic customer
accounted for 12% of net sales in the first quarter of 2001. Sales to AT&T and
RCN accounted for 28% and 15% of our net sales, respectively, in the first
quarter of 2000 compared to less than 5% combined in the first quarter of 2001.
We cannot assure you that sales to other customers will compensate for any
further reduction in sales to AT&T and RCN nor can we predict the impact of
restructuring plans recently announced by AT&T on our future sales to AT&T.
Almost all of our sales are made on a purchase order or system contract 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.
We May Experience Continuing Difficulties Integrating The DiviCom Business.
In addition to the risks generally associated with acquisitions, there are a
number of significant risks directly associated with our merger with DiviCom. In
order to derive the expected benefits of the merger, we must complete the
integration of the companies' product offerings, coordinate research and
development and sales and marketing efforts, and complete the implementation of
facilities' moves and common information systems. The diversion of the attention
of management from the day-to-day operations of the combined company, or
difficulties encountered in the transition and integration process, could
adversely affect our business, financial condition and operating results. The
process of combining the organizations has caused interruption of, and a loss of
momentum in, certain of our business activities. In addition, we have
experienced the loss of certain key employees since the merger, principally due
to intense competition for qualified technical and other personnel in the San
Francisco Bay Area. We cannot assure you that disruptions associated with the
DiviCom acquisition, including the loss of key personnel, will not continue to
adversely affect our business and operating results.
We Depend On Our International Sales And Are Subject To The Risks Associated
With International Operations, Which May Negatively Affect Our Operating
Results.
Sales to customers outside of the United States in 1999, 2000, and the first
quarter of 2001 represented 30%, 36% and 56%, 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. 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.
In addition, foreign markets may not develop in the future.
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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. If actual orders differ materially from these indications, our
ability to manage inventory and expenses may be affected. In addition, if we
fail to meet customers' supply expectations, we may lose business from such
customers. If we enter into purchase commitments to acquire materials, acquire
materials or manufacture products or otherwise expend resources, and such
products are not purchased by our customers, our business and operating results
could suffer.
The Markets In Which We Operate Are Intensely Competitive And Many Of Our
Competitors Are Larger And More Established.
The markets for cable television fiber optics systems and digital video
broadcasting systems are extremely competitive and have been characterized by
rapid technological change and declining average selling prices.
Harmonic's competitors in the cable television fiber optics systems business
include significantly larger corporations such as ADC Telecommunications, ANTEC
(a company owned in part by AT&T), Motorola, Philips and Scientific-Atlanta.
In the digital and video broadcasting systems business, we compete broadly with
vertically integrated system suppliers including Motorola, Scientific-Atlanta,
Tandberg, Thomson Broadcast Systems and Philips, and in certain product lines
with Cisco Systems, SkyStream and Terayon.
Most of our competitors are substantially larger and have greater financial,
technical, marketing and other resources than Harmonic. Many of these large
organizations are in a better position to withstand any significant reduction in
capital spending by customers in these markets. They often have broader product
lines and market focus and will therefore not be as susceptible to downturns in
a particular market. In addition, many of our competitors have been in operation
longer than we have and therefore have more long standing and established
relationships with domestic and foreign customers. We may not be able to compete
successfully in the future and competition may harm our business.
If any of our competitors' products or technologies were to become the industry
standard, our business could be seriously harmed. For example, U.S. cable
operators have to date mostly purchased proprietary digital systems from
Motorola and Scientific-Atlanta. While certain operators have made limited
purchases of the "open" systems provided by Harmonic, we cannot assure you that
our digital products will find broad market acceptance with U.S. cable
operators. In addition, companies that have historically not had a large
presence in the broadband communications equipment market have begun recently to
expand their market share through mergers and acquisitions. The continued
consolidation of our competitors could have a significant negative impact on us.
Further, our competitors, particularly competitors of our digital and video
broadcasting systems' business, may bundle their products or incorporate
functionality into existing products in a manner that discourages users from
purchasing our products or which may require us to lower our selling prices
resulting in lower gross margins.
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 rates, sizes or technological
directions. 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 will
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,
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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, if our products:
- are not cost effective,
- are not brought to market in a timely manner,
- are not in accordance with evolving industry standards and
architectures, or
- fail to achieve market acceptance.
In addition, to successfully develop and market our planned products for digital
applications, we will be required to retain and attract new personnel with
experience and expertise in the digital arena. Competition for qualified
personnel is intense. We may not be successful in retaining and attracting
qualified personnel.
Also, to successfully develop and market certain of 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 Operations And The Cyclical Nature of Our
Business
The growth of our operations and cyclical nature of our business has placed, and
is expected to continue to place, a significant strain on our personnel,
management and other resources. This strain has been exacerbated by the
acquisition of DiviCom and the subsequent loss of numerous employees, including
senior management. In addition, in February 2001 and again in April 2001, we
reduced our work force by approximately 10% and 15%, respectively, due to
reduced industry spending and demand for our products. Our ability to manage our
business effectively in the future, including any future growth, will require us
to train, motivate and manage our employees successfully, to attract and
integrate new employees, including our new Chief Operating Officer, Michael
Moone, into our overall operations, to retain key employees and to continue to
improve our operational, financial and management systems. In particular, in
April 2001 we implemented a new management information system. We believe this
new system will significantly affect many aspects of our business, including
accounting, manufacturing operations, purchasing, sales and marketing functions.
The successful implementation of this system is expected to be critical to our
business. There can be no assurance that we will complete the transition to
the new system in an efficient, cost-effective or timely manner or that the new
information system will be adequate to support our operations. If we fail to
manage our existing operations or any future growth effectively, our business
could suffer.
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.
We Are Liable For C-Cube's Pre-Merger Tax Liabilities, Including Tax Liabilities
Resulting From The Spin-Off Of Its Semiconductor Business.
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The spin-off of C-Cube's semiconductor business gave rise to a significant tax
liability of approximately $320 million based on a valuation of the
semiconductor business of $1.1 billion. The estimated liability was paid on
August 15, 2000. C-Cube determined the valuation by using the volume weighted
average price on May 3, 2000, the first trading day following the spin-off,
which resulted in a share price of $21.74. Under state law, Harmonic generally
is liable for all of C-Cube's debts, including C-Cube's liability for taxes
resulting from the spin-off. C- Cube retained and transferred to Harmonic in the
merger an amount of cash and other consideration sufficient to pay this
liability as well as all other tax liabilities of C-Cube and its subsidiaries
for periods prior to the merger. The merger agreement stipulates that Harmonic
will be indemnified by the spun-off semiconductor business if the cash reserves
are not sufficient to satisfy all of C-Cube's tax liabilities for periods prior
to the merger. If for any reason, the spun-off semiconductor business does not
have sufficient cash to pay such taxes, or if there are additional taxes due
with respect to the non-semiconductor business and Harmonic cannot be
indemnified by C-Cube, Harmonic generally will remain liable, and such liability
could have a material adverse effect on Harmonic. The spun-off semiconductor
business recently agreed to be acquired by LSI Logic, which will assume these
obligations to Harmonic.
Due To The Structure Of The Merger Transaction, Harmonic Is Liable For C-Cube's
General Pre-Merger Liabilities And Any Liabilities Relating To C-Cube's
Semiconductor Business For Which The Spun-off Semiconductor Business Is Unable
To Indemnify Harmonic.
The merger of C-Cube into Harmonic, with Harmonic as the surviving entity,
resulted in our assuming all of the liabilities of C-Cube at the time of the
merger. Pursuant to the merger agreement, Harmonic is indemnified by the
spun-off semiconductor business for liabilities associated with C-Cube's
historic semiconductor business. However, if the spun-off semiconductor business
(or LSI Logic, assuming the acquisition is completed) is unable to fulfill its
indemnification obligations to Harmonic or if general liability claims not
specifically associated with C-Cube's historic semiconductor business are
asserted, we would have to assume such obligations. Those obligations could have
a material adverse effect on us.
We May Be Subject To Risks Associated With Other 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.
Difficulties In The Development And Production Of Video Encoding Chips By
C-Cube's Spun-off Semiconductor Business May Adversely Impact Us.
The DiviCom business and C-Cube semiconductor business collaborated on the
production and development of two video encoding microelectronic chips prior to
the merger. In connection with the merger, Harmonic and the spun-off
semiconductor business entered into a contractual relationship under which
Harmonic will have access to certain of the spun-off semiconductor business
technologies and products which the DiviCom business previously depended on for
its product and service offerings.
However, under the contractual relationships between Harmonic and the spun-off
semiconductor business, the semiconductor business does not have a firm
commitment to continue the development of video encoding microelectronic chips.
As a result, the semiconductor business may choose not to continue future
development of the chips for any reason. The semiconductor business may also
encounter in the future technological difficulties in the production and
development of the chips. If the spun-off semiconductor business is not able to
or does not sustain its development and production efforts in this area, we may
not be able to fully recognize the benefits of the acquisition. See "Supply,
License and Development Agreement" at page 60 of the joint proxy statement filed
with the Securities and Exchange Commission on March 23, 2000, for further
details of Harmonic's business relationship with the spun-off semiconductor
business after the merger.
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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, satellite,
and other network operators;
- delays associated with cable, satellite, 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
- 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.
As a result of the merger, a significant portion of our revenue is derived from
systems contracts. A substantial portion of DiviCom's revenues are from systems
contracts which include a combination of product sales as well as installation
and integration services. Revenue forecasts are based on estimated timing of the
systems installation and integration. Because the systems contracts generally
span several quarters, the timing of revenue is difficult to predict and could
result in lower than expected revenue in any particular quarter.
Our Failure To Adequately Protect Our Proprietary Rights May Adversely Affect
Us.
We currently hold 23 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,
licensing arrangements, maintaining certain technology as trade secrets and
other measures, we cannot assure you that any patent, trademark, copyright or
other intellectual property rights owned by us will not be invalidated,
circumvented or challenged, that such intellectual property rights 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 certain of 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
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or licensing agreements, when necessary, could limit our ability to develop and
market new products and could cause our business to suffer.
Harmonic's industry is characterized by the existence of a large number of
patents and frequent claims and related litigation regarding patent and other
intellectual property rights. In particular, leading companies in the
telecommunications industry have extensive patent portfolios. From time to time,
third parties, including these leading companies, have asserted and may assert
exclusive patent, copyright, trademark and other intellectual property rights
against us or our customers. Indeed, a number of third parties, including
leading companies, have asserted patent rights to technologies that are
important to us. We expect to increasingly be subject to infringement claims
asserted by third parties as the numbers of products and competitors in the
telecommunications industry grow. In this regard, since December 2000, we have
been in communication with several of Harmonic's customers who have been
contacted by one of these leading companies that believes certain of our
products require a license under a number of their patents. We currently are
reviewing the identified patents to examine whether we consider a license
necessary. While it is our understanding that the third party is willing to
grant our customers a non-exclusive license under the identified patents, there
is no assurance that the terms of any offered license would be acceptable to
them or that failure to obtain a license would not cause our operating results
to be materially adversely affected.
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. In particular,
certain optical components have been recently in short supply and are available
only from a small number of suppliers, including sole source suppliers. While we
expend considerable efforts to qualify additional optical component sources,
consolidation of suppliers in the industry (including the acquisitions of Etek
Dynamics and SDL Inc. by JDS Uniphase) and the small number of viable
alternatives have limited the results of these efforts. 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 May Need Additional Capital In The Future And May Not Be Able To Secure
Adequate Funds On Terms Acceptable To Us.
While we expect to report a loss, excluding amortization of goodwill at least
through the second quarter of 2001, we currently believe that our existing
liquidity sources, including bank line of credit facility, will satisfy our
requirements 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.
In addition, we may review other potential acquisitions that would complement
our existing product offerings or enhance our technical capabilities. While we
have no other 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 Rely On A Continuous Power Supply To Conduct Our Operations, And California's
Current Electrical And Natural Gas Crisis Could Disrupt Our Operations And
Increase Our Expenses.
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We rely on a continuous power supply for manufacturing and to conduct our
business operations. Recent interruptions in electrical power supplies in
California are anticipated to become more frequent, particularly during the
coming summer. In addition, the cost of electricity and natural gas is expected
to rise significantly. Power outages could disrupt our manufacturing and
business operations and those of many of our suppliers, and could cause us to
fail to meet production schedules and commitments to customers and other third
parties. Any disruption to our operations or those of our suppliers could result
in damage to our current and prospective business relationships and could result
in lost revenue and additional expenses, thereby harming our business and our
results of operations.
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 140 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. We cannot assure you that the protraction or
escalation of current tensions in the Middle East will not adversely affect 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.
Securities Class Action Claims.
Between June 28 and August 25, 2000, several actions alleging violations of the
federal securities laws by the Company and certain of its officers and directors
were filed in or removed to the United States District Court for the Northern
District of California. The Court entered orders relating and consolidating all
of the securities class actions and permitting plaintiffs to file a consolidated
amended complaint.
On November 27, 2000, plaintiffs filed a consolidated amended complaint. On
December 7, 2000, plaintiffs filed a "corrected" consolidated amended complaint
("the Complaint"). The Complaint is brought on behalf of a purported class of
persons who purchased the Company's publicly traded securities between January
19 and June 26, 2000. The Complaint also alleges claims on behalf of a purported
subclass of persons who purchased C-Cube securities between January 19 and May
3, 2000. In addition to the Company and certain of its officers and directors,
the complaint also names C-Cube Microsystems Inc. and several of its officers
and directors as defendants. The Complaint alleges that, by making false or
misleading statements regarding the Company's prospects and customers and its
acquisition of C-Cube, the defendants violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Complaint also alleges that the defendants
violated section 14(a) of the Exchange Act and sections 11, 12(a)(2), and 15 of
the Securities Act of 1933 by filing a false or misleading registration
statement, prospectus, and joint proxy in connection with the C-Cube
acquisition. On February 13, 2001, the defendants filed motions to dismiss the
Complaint. Although a hearing is scheduled for May 23, 2001, the parties
currently are discussing the possibility of moving the hearing to accommodate a
scheduling conflict.
A derivative action purporting to be on behalf of the Company was filed against
its directors in the Superior Court for the County of Santa Clara on September
5, 2000. The Company also was named as a nominal defendant. The complaint is
based on allegations similar to those found in the securities class actions and
claims that the defendants breached their fiduciary duties by, among other
things, causing the Company to violate federal securities laws. The derivative
action was removed to the United States District Court for the Northern District
of California on September 20, 2000. The Court has approved a stipulation by the
parties to stay the derivative action pending a decision on the motions to
dismiss the securities class actions. The parties have agreed to meet and confer
regarding further scheduling in the derivative action following the hearing on
the motion to dismiss the securities class action if no ruling on the motions to
dismiss has been made by April 15, 2001.
Based on its review of the complaints in the securities class action, the
Company believes that it has meritorious defenses to the securities class action
and the derivative action and intends to defend itself vigorously. There can be
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no assurance, however, that the Company will prevail. An unfavorable outcome of
this litigation could have a material adverse effect on the Company's
consolidated financial position, liquidity or results of operations.
Our Stock Price May Be Volatile.
The market price of our common stock has fluctuated significantly in the past,
particularly in recent years, and is likely to fluctuate in the future. In
addition, the securities markets have experienced significant price and volume
fluctuations and the market prices of the securities of technology companies
have been especially volatile. Investors may be unable to resell their shares of
our common stock at or above their purchase price. In the past, companies that
have experienced volatility in the market price of their stock have been the
object of securities class action litigation.
Our Certificate Of Incorporation And Bylaws And Delaware Law Contain Provisions
That Could Discourage A Takeover.
Provisions of our Amended and Restated Certificate of Incorporation, Bylaws, and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders.
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PART II
ITEM 1. LEGAL PROCEEDINGS
Between June 28 and August 25, 2000, several actions alleging violations of the
federal securities laws by the Company and certain of its officers and directors
were filed in or removed to the United States District Court for the Northern
District of California. The Court entered orders relating and consolidating all
of the securities class actions and permitting plaintiffs to file a consolidated
amended complaint.
On November 27, 2000, plaintiffs filed a consolidated amended complaint. On
December 7, 2000, plaintiffs filed a "corrected" consolidated amended complaint
("the Complaint"). The Complaint is brought on behalf of a purported class of
persons who purchased the Company's publicly traded securities between January
19 and June 26, 2000. The Complaint also alleges claims on behalf of a purported
subclass of persons who purchased C-Cube securities between January 19 and May
3, 2000. In addition to the Company and certain of its officers and directors,
the complaint also names C-Cube Microsystems Inc. and several of its officers
and directors as defendants. The Complaint alleges that, by making false or
misleading statements regarding the Company's prospects and customers and its
acquisition of C-Cube, the defendants violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The Complaint also alleges that the defendants
violated section 14(a) of the Exchange Act and sections 11, 12(a)(2), and 15 of
the Securities Act of 1933 by filing a false or misleading registration
statement, prospectus, and joint proxy in connection with the C-Cube
acquisition. On February 13, 2001, the defendants filed motions to dismiss the
Complaint. Although a hearing is scheduled for May 23, 2001, the parties
currently are discussing the possibility of moving the hearing to accommodate a
scheduling conflict.
A derivative action purporting to be on behalf of the Company was filed against
its directors in the Superior Court for the County of Santa Clara on September
5, 2000. The Company also was named as a nominal defendant. The complaint is
based on allegations similar to those found in the securities class actions and
claims that the defendants breached their fiduciary duties by, among other
things, causing the Company to violate federal securities laws. The derivative
action was removed to the United States District Court for the Northern District
of California on September 20, 2000. The Court has approved a stipulation by the
parties to stay the derivative action pending a decision on the motions to
dismiss the securities class actions. The parties have agreed to meet and confer
regarding further scheduling in the derivative action following the hearing on
the motion to dismiss the securities class action if no ruling on the motions to
dismiss has been made by April 15, 2001.
Based on its review of the complaints in the securities class action, the
Company believes that it has meritorious defenses to the securities class action
and the derivative action and intends to defend itself vigorously. There can be
no assurance, however, that the Company will prevail. An unfavorable outcome of
this litigation could have a material adverse effect on the Company's
consolidated financial position, liquidity or results of operations.
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.
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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 14, 2001
HARMONIC INC.
(Registrant)
By: /s/ Robin N. Dickson
--------------------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting Officer)
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