<SEC-DOCUMENT>0000891618-99-003833-index.html : 19990817
<SEC-HEADER>0000891618-99-003833.hdr.sgml : 19990817
ACCESSION NUMBER: 0000891618-99-003833
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19990702
FILED AS OF DATE: 19990816
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HARMONIC INC
CENTRAL INDEX KEY: 0000851310
STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663]
IRS NUMBER: 770201147
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT:
SEC FILE NUMBER: 000-25826
FILM NUMBER: 99692531
BUSINESS ADDRESS:
STREET 1: 549 BALTIC WAY
CITY: SUNNYVALE
STATE: CA
ZIP: 94089
BUSINESS PHONE: 4085422500
FORMER COMPANY:
FORMER CONFORMED NAME: HARMONIC LIGHTWAVES INC
DATE OF NAME CHANGE: 19950404
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<DESCRIPTION>FORM 10-Q FOR THE PERIOD ENDED JULY 2, 1999
<TEXT>
<PAGE> 1
TOTAL NUMBER OF PAGES 22
INDEX TO EXHIBITS AT PAGE 22
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 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 July 2, 1999 there were 15,069,115 shares of the Registrant's Common Stock
outstanding.
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<PAGE> 2
HARMONIC INC.
Index
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets at July 2, 1999
and December 31, 1998.......................................................................3
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended July 2, 1999 and July 3, 1998.........................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
July 2, 1999 and July 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 4. Submission of Matters to a Vote of Security Holders.................................20
Item 5. Other Information...................................................................21
Item 6. Exhibits and Reports on Form 8-K....................................................21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HARMONIC INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JULY 2, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 32,188 $ 9,178
Short-term investments 25,510 --
Accounts receivable, net 26,885 17,646
Inventories 24,174 22,385
Prepaid expenses and other assets 2,264 1,175
------------ ------------
Total current assets 111,021 50,384
Long-term marketable investments 16,114 --
Property and equipment, net 12,033 10,726
Intangibles and other assets 1,165 1,314
------------ ------------
$ 140,333 $ 62,424
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,309 $ 7,534
Accrued liabilities 12,345 10,355
Current portion of long-term debt -- 177
------------ ------------
Total current liabilities 24,654 18,066
------------ ------------
Long-term debt, less current portion -- 400
Other non-current liabilities 529 484
Stockholders' equity:
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;
15,069,115 and 11,725,844 shares issued and outstanding 15 12
Capital in excess of par value 137,256 70,924
Accumulated deficit (22,268) (27,472)
Accumulated other comprehensive income 147 10
------------ ------------
Total stockholders' equity 115,150 43,474
------------ ------------
$ 140,333 $ 62,424
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 37,902 $ 18,174 $ 68,165 $ 34,378
Cost of sales 21,946 11,512 39,798 22,626
---------- ---------- ---------- ----------
Gross profit 15,956 6,662 28,367 11,752
---------- ---------- ---------- ----------
Operating expenses:
Research and development 3,479 3,243 7,173 6,666
Sales and marketing 6,106 4,797 11,286 8,869
General and administrative 1,942 1,551 3,712 3,699
Acquired in-process technology - - - 14,000
---------- ---------- ---------- ----------
Total operating expenses 11,527 9,591 22,171 33,234
---------- ---------- ---------- ----------
Income (loss) from operations 4,429 (2,929) 6,196 (21,482)
Interest and other income, net 711 44 743 232
---------- ---------- ---------- ----------
Income (loss) before income taxes 5,140 (2,885) 6,939 (21,250)
Provision for income taxes 1,285 - 1,735 -
---------- ---------- ---------- ----------
Net income (loss) $ 3,855 $ (2,885) $ 5,204 $ (21,250)
========== ========== ========== ==========
Net income (loss) per share
Basic $ 0.27 $ (0.25) $ 0.40 $ (1.85)
========== ========== ========== ==========
Diluted $ 0.25 $ (0.25) $ 0.36 $ (1.85)
========== ========== ========== ==========
Weighted average shares
Basic 14,439 11,591 13,162 11,481
========== ========== ========== ==========
Diluted 15,698 11,591 14,619 11,481
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
HARMONIC INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JULY 2, 1999 JULY 3, 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,204 $ (21,250)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating activities:
Depreciation and amortization 2,517 2,199
Acquired in-process technology - 14,000
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable (9,239) 3,181
Inventories (1,748) (2,685)
Prepaid expenses and other assets (1,068) 973
Accounts payable 4,775 2,594
Accrued and other liabilities 1,888 2,894
------------ ------------
Net cash provided by (used in) operating activities 2,329 1,906
Cash flows used in investing activities:
Purchase of investments (41,645) -
Acquisition of property and equipment (3,668) (2,410)
Acquisition of Harmonic Data Systems Ltd.; net of cash - (272)
received
------------ ------------
Net cash used in investing activities (45,313) (2,682)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock, net 66,335 973
Borrowings under bank line 840 -
Repayments under bank line and term loan (1,270) (648)
------------ ------------
Net cash provided by financing activities 65,905 325
Effect of exchange rate changes on cash
and cash equivalents 89 18
------------ ------------
Net increase (decrease) in cash and cash equivalents 23,010 (433)
Cash and cash equivalents at beginning of period 9,178 13,670
------------ ------------
Cash and cash equivalents at end of period $ 32,188 $ 13,237
============ ============
Supplemental schedule of cash flow information:
Interest paid during the period $ 37 $ 35
Income taxes paid during the period $ 70 $ 80
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
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 on From
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
July 2, 1999 were not material in relation to those of the Company.
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
JULY 2, DECEMBER 31,
1999 1998
--------------------------------------------------------------------------------- ------------
<S> <C> <C>
IN THOUSANDS (UNAUDITED)
Raw materials $ 5,806 $ 3,747
Work-in-process 4,211 4,557
Finished goods 14,157 14,081
------------ ------------
$ 24,174 $ 22,385
============ ============
</TABLE>
NOTE 4 - PUBLIC OFFERING
In April 1999, the Company completed a public offering of 2,800,000 shares of
common stock 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 stockholders. 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
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<PAGE> 7
discounts and commissions and expenses. The shares sold by selling stockholders
included 720,000 shares held by Scientific-Atlanta, Inc. Scientific-Atlanta,
Inc. acquired these shares pursuant to the exercise of a warrant for which the
Company received $4.0 million upon such warrant's exercise.
NOTE 5 - INVESTMENTS
The Company's investments are comprised of U.S. government obligations and
corporate debt securities. The Company classifies its investments as
held-to-maturity and records them at amortized cost in accordance with Statement
of Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Prior to completion of the public offering in April 1999 all
investment securities had maturities of 90 days or less and accordingly were
classified as cash and cash equivalents.
The following table summarizes debt maturities at July 2, 1999.
<TABLE>
<CAPTION>
DEBT MATURITY SUMMARY AMORTIZED
IN THOUSANDS (UNAUDITED) COST
---------------------------------------------- ----------
<S> <C>
Less than one year $ 25,510
Due in 1-2 years 16,114
----------
$ 41,624
==========
</TABLE>
NOTE 6 - 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 gives effect to all dilutive potential common shares outstanding
during a period. In computing Diluted EPS, the average price for the period is
used in determining the number of shares assumed to be purchased from exercise
of stock options and warrants rather than the higher of the average or ending
price as used in the computation of fully diluted EPS. Net income per share for
all prior periods presented has been restated to conform to the provisions of
SFAS 128.
The following table presents a reconciliation of the numerators and denominators
of the Basic and Diluted EPS computations for the periods presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
-------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
(UNAUDITED)
Net income (loss) (numerator) $ 3,885 $ (2,885) $ 5,204 $ (21,250)
========== ========== ========== ==========
Shares calculation (denominator):
Average shares outstanding - basic 14,439 11,591 13,162 11,481
Effect of dilutive securities:
Potential common stock relating
to stock options and warrants 1,259 -- 1,457 --
---------- ---------- ---------- ----------
Average shares outstanding - diluted 15,698 11,591 14,619 11,481
========== ========== ========== ==========
Net income (loss) per share - basic $ 0.27 $ (0.25) $ 0.40 $ (1.85)
========== ========== ========== ==========
Net income (loss) per share - diluted $ 0.25 $ (0.25) $ 0.36 $ (1.85)
========== ========== ========== ==========
</TABLE>
Options and warrants to purchase approximately 0.3 million shares of common
stock were outstanding during the three and six month periods ended July 2, 1999
and 3.0 million shares of common stock were outstanding during the three and six
periods ending July 3, 1998, 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 shares or inclusion of such options would have been
antidilutive. The price ranges of these options and warrants were from $49.38
to $57.44 per share for the three month period ended July 2, 1999 and from
$45.63 to $57.44 per share for the six month period ended July 2, 1999. The
price ranges of these options and warrants were from $0.30 to $22.75 per share
for the three and six month periods of 1998.
NOTE 7 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No. 130
requires that all items recognized under accounting standards as components of
comprehensive income be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. The
Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JULY 2, JULY 3, JULY 2, JULY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
IN THOUSANDS (UNAUDITED)
Net income (loss) $ 3,885 $ (2,885) $ 5,204 $ (21,250)
Other comprehensive income 65 22 137 2
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 3,950 $ (2,863) $ 5,341 $ (21,248)
========== ========== ========== ==========
</TABLE>
8
<PAGE> 9
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 in January 1998 of New Media
Communication Ltd., which changed its name to Harmonic Data Systems Ltd., 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 109% from $18.2 million in the second quarter
of 1998 to $37.9 million in the second quarter of 1999. For the six month
periods, net sales increased 98% from $34.4 million in the first six months of
1998 to $68.2 million in the first six months of 1999. The increases in net
sales were attributable primarily to the sale of new products, including
METROLink DWDM systems and PWRBlazer Scaleable Nodes, which began volume
shipment during the middle of 1998. The increases were also attributable to
higher spending by domestic and international customers. During the second
quarter of 1999, domestic sales increased by 147%, principally due to increased
shipments to AT&T. AT&T represented 40% of net sales during the second quarter
of 1999 compared to 9% of net sales in the second quarter of 1998. International
sales increased 56% during the second quarter of 1999, primarily due to higher
shipments to Canada and Asia. International sales represented 31% of net sales
in the second quarter of 1999 compared to 42% in the second quarter of 1998.
GROSS PROFIT
Gross profit increased from $6.7 million (37% of net sales) in the second
quarter of 1998 to $16.0 million (42% of net sales) in the second quarter of
1999. For the six month periods, gross profit increased from $11.8 million (34%
of net sales) in the first six months of 1998 to $28.4 million (42% of net
sales) in the first six months of 1999. The increases in gross profit and gross
margins were principally due to higher unit volume which allowed the Company to
improve fixed cost absorption and realize increased economies of scale through
higher production and purchasing volumes, and to reductions in product start-up
costs. 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
9
<PAGE> 10
Research and development expenses increased from $3.2 million (18% of net sales)
in the second quarter of 1998 to $3.5 million (9% of net sales) in the second
quarter of 1999. For the six month periods, research and development expenses
increased from $6.7 million (19% of net sales) in 1998 to $7.2 million (11% of
net sales) in 1999. The increases in absolute spending in both periods were
principally attributable to higher payroll expenses. These increases were
partially offset by lower prototype material costs and higher amounts of grants
earned in Israel which are netted against research and development expenses. The
decreases in research and development expenses as a percentage of net sales were
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
Sales and marketing expenses increased from $4.8 million (26% of net sales) in
the second quarter of 1998 to $6.1 million (16% of net sales) in the second
quarter of 1999. For the six month periods, sales and marketing expenses
increased from $8.9 million (26% of net sales) in 1998 to $11.3 million (17% of
net sales) in 1999. The increases in absolute dollars were primarily due to
higher headcount and costs associated with expansion of the sales and marketing
organizations to provide wider geographic coverage and support for new products,
as well as higher sales commissions related to increased net sales. The
decreases in sales and marketing expenses as a percentage of net sales were
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 increased from $1.6 million (9% of net
sales) in the second quarter of 1998 to $1.9 million (5% of net sales) in the
second quarter of 1999. For the six month periods, general and administrative
expenses were $3.7 million in both 1998 and 1999, but decreased as a percentage
of net sales from 11% in 1998 to 5% in 1999. The increase in absolute dollars in
the second quarter of 1999 was principally due to higher payroll expenses while
the flat expenses for the six month periods of 1998 and 1999 were due to higher
payroll expenses in 1999 partially offset by 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. The
decreases in general and administrative expenses as a percentage of net sales
were attributable to higher net sales. 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,
increased from a nominal amount in the second quarter of 1998 to $0.7 million in
the second quarter of 1999 and from $0.2 million for the six month period of
1998 to $0.7 million for the six month period of 1999. The increases were due
primarily to interest earned on cash and cash equivalents and marketable
investments, following the closing of the Company's public offering of common
stock in April 1999.
INCOME TAXES
The provisions for income taxes for both periods of 1999 are based on an
estimated annual tax rate of 25%. No provision for income taxes was recorded for
either period of 1998 due to the net losses incurred. Beyond 1999, the Company
expects to have an effective annual tax rate that approximates statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
10
<PAGE> 11
In April 1999 the Company completed a public offering of its common stock,
raising approximately $58.3 million, net of offering expenses. The Company also
received $4.0 million from exercise of a warrant. As of July 2, 1999, cash and
cash equivalents and short-term investments totaled $57.7 million and long-term
investments were $16.1 million.
Cash provided by operations was approximately $2.3 million for the six months
ended July 2, 1999 compared to $1.9 million for the six months ended July 3,
1998. The increase in cash provided by operations was primarily due to net
income in the first six months of 1999 compared to a net loss in the first six
months of 1998 partially offset by higher accounts receivable.
The Company has 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 line is secured by substantially all of the Company's assets. The
Company has guaranteed certain borrowing of its subsidiaries totaling $0.6
million with letters of credit and had total letters of credit issued under the
line of $1.9 million which expire at various dates over the next twelve months.
There were no outstanding borrowings under the credit facilities as of July 2,
1999.
Additions to property, plant and equipment were approximately $2.4 million and
$3.7 million in the first six months 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 $8.0 million on capital
expenditures in 1999, primarily for manufacturing and test equipment.
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 July 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.
Harmonic's exposure to market risk for changes in interest rates relates
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 held-to-maturity and are recorded at amortized
cost. While Harmonic intends to hold its investment securities to maturity there
is risk that losses could be incurred if it were to sell any of its securities
prior to maturity.
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
11
<PAGE> 12
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 fourth 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 fourth 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 substantially completed 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, particularly for AT&T;
- 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;
12
<PAGE> 13
- 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 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 five 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
13
<PAGE> 14
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 HIGHLY CONCENTRATED AND THE LOSS OF AT&T OR ANY OF OUR KEY
CUSTOMERS WOULD HARM OUR BUSINESS.
Historically, a significant majority of our sales have been to relatively few
customers. More recently, sales to one customer, AT&T, has accounted for an
increasingly significant portion of our net sales. Sales to our ten largest
customers in 1997 and 1998, and the first half of 1999 accounted for
approximately 56%, 66% and 78%, respectively, of net sales. Due in part to the
consolidation of ownership of domestic cable television systems, we expect that
sales to AT&T and relatively few other customers will continue to account for a
significant percentage of our net sales for the foreseeable future. In the
second quarter of 1999 sales to AT&T represented approximately 40% of our net
sales compared to approximately 22% in the prior three quarters. In addition, in
1998 sales to a Chinese distributor represented approximately 11% of our net
sales and in the first half of 1999 sales to our Canadian distributor
represented approximately 12% 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.
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 half
of 1999 represented 59%, 43% and 36% 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
14
<PAGE> 15
continue to be harmed by the uncertain financial climate. In particular, the
Company cannot predict the effect on its business, if any, of recent political
tensions between the U.S. and China.
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.
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.
15
<PAGE> 16
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.
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., or NMC, which has recently
changed its name to Harmonic Data Systems Ltd., or 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.
16
<PAGE> 17
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
- 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
17
<PAGE> 18
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 and cash equivalents, marketable
investments 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.
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 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.
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<PAGE> 19
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.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has fluctuated in the past 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.
If we were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held initially on May 12,
1999, postponed and reconvened on May 21, 1999, the following matters were acted
upon by the stockholders of the Company:
1. The election of Anthony J. Ley, Moshe Nazarathy, E. Floyd Kvamme, David A.
Lane, Barry D. Lemieux and Michel L. Vaillaud as directors of the Company,
each to hold office for a one-year term or until a successor is elected and
qualified;
2. The approval of an amendment to the 1995 Stock Plan to increase the number
of shares of Common Stock reserved for issuance thereunder by 580,000
shares;
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<PAGE> 20
3. The ratification of the appointment of PricewaterhouseCoopers, LLP as the
independent accountants of the Company for the fiscal year ending December
31, 1999.
The number of shares of Common Stock outstanding and entitled to vote at the
Annual Meeting was 12,014,082 and 9,773,376 shares were represented in person or
by proxy. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR AGAINST ABSTENTIONS NON-VOTE
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
1. Election of Directors
a. Anthony J. Ley 9,191,953 581,423
b. Moshe Nazarathy 9,188,671 584,705
c. E. Floyd Kvamme 9,192,224 581,152
d. Barry D. Lemieux 9,192,024 581,352
e. David A. Lane 9,192,124 581,252
f. Michel L. Vaillaud 9,192,124 581,252
2. Amendment to Company's 1995 Stock Plan 4,889,662 4,877,214 6,500 2,240,706
3. Ratification of Independent Accountants 9,766,090 2,886 4,400 2,240,706
4. To transact such other business as may 5,109,442 3,191,042 1,472,892 2,240,706
properly come before the meeting and any
adjournment or postponement thereof
</TABLE>
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, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Exhibit # Description of Document
<S> <C>
27.1 Financial Data Schedule
</TABLE>
20
<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 16, 1999
HARMONIC INC.
(Registrant)
By: /s/ Robin N. Dickson
------------------------------------------
Robin N. Dickson
Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
<PAGE> 22
HARMONIC INC.
Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT
27.1 Financial Data Schedule
22
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-27.1
<SEQUENCE>2
<DESCRIPTION>FINANCIAL DATA SCHEDULE
<TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUL-02-1999
<CASH> 32,188
<SECURITIES> 25,510
<RECEIVABLES> 26,885
<ALLOWANCES> 0
<INVENTORY> 24,174
<CURRENT-ASSETS> 111,021
<PP&E> 12,033
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,333
<CURRENT-LIABILITIES> 24,654
<BONDS> 0
<PREFERRED-MANDATORY> 0
<PREFERRED> 0
<COMMON> 137,271
<OTHER-SE> (22,121)
<TOTAL-LIABILITY-AND-EQUITY> 140,333
<SALES> 68,165
<TOTAL-REVENUES> 68,165
<CGS> 39,798
<TOTAL-COSTS> 39,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,939
<INCOME-TAX> 1,735
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,204
<EPS-BASIC> .40
<EPS-DILUTED> .36
</TABLE>
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>