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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] __________
Based on the closing sale price of the Common Stock on the NASDAQ National
Market System on February 25, 2000, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $2,832,880,041. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, was 30,726,923 at February 25, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
LOCATION IN
DOCUMENT FORM 10-K
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None
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding Harmonic's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document or incorporated by reference herein are based on information available
to Harmonic on the date hereof, and Harmonic assumes no obligation to update any
such forward-looking statements. Harmonic's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Results of Operations."
OVERVIEW
Harmonic designs, manufactures and markets digital and fiber optic systems
for delivering video, voice and data services over cable, satellite, telephone,
and wireless networks. Our advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high-speed Internet access, telephony and video on demand.
We offer a broad range of fiber optic transmission and digital headend products
for hybrid fiber coax, satellite and wireless networks, and our acquisition of
New Media Communication Ltd. (now called Harmonic Data Systems Ltd.) in January
1998 has allowed us to develop and expand our product offerings to include
high-speed data delivery software and hardware.
On October 27, 1999, Harmonic announced a definitive agreement to acquire
the DiviCom business of C-Cube Microsystems, Inc. A registration statement on
Form S-4 and definitive proxy materials for shareholders were filed with the
Securities and Exchange Commission on March 23, 2000. [Consummation of the
merger is subject to a number of conditions, including Harmonic and C-Cube
shareholder approval, the prior disposition of C-Cube's semiconductor business
and regulatory approvals. The shareholder meetings are scheduled to be held on
April 24, 2000.]
The DiviCom business designs, manufactures and sells products and systems
that enable satellite, wireless, telephone and cable companies to deliver
digital video, audio and data over a variety of networks. By combining video
compression technologies with network and communications technologies, the
DiviCom business creates innovative products for producers and distributors of
video and video-enhanced information. These products include encoders,
multiplexers and network management systems, as well as systems integration
services.
INDUSTRY BACKGROUND
Demand for Broadband Access
The demand for broadband access has increased significantly in recent years
due in large part to the dramatic growth of the Internet, which has facilitated
commercial applications such as telecommuting and electronic commerce as well as
widespread use of the Web for communicating and accessing information. Rapid
growth in the number of Internet users and the demand for more
bandwidth-intensive video, voice and data content has strained existing
communications networks and created bottlenecks, especially in the "last mile"
of the communications infrastructure where homes connect to the local network.
Increasingly, individuals who experience the value of high-speed Internet access
from their work locations are demanding similar levels of speed from their home
or laptop connection. Access to the Internet over the last mile using standard
telephone dial-up connections, however, has been limited generally to speeds of
up to 56 Kbps.
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Competition and Deregulation
Increased demand for high-speed broadband access, combined with recent and
proposed regulatory reform, has spurred competition among communications service
providers worldwide to offer combinations of video, voice and data services.
Historically, U.S. long distance carriers and regional Bell operating companies,
or RBOCs, were generally limited to providing only telephony services in the
residential market. Cable television multiple system operators, or MSOs, also
were generally limited to providing video programming. As a result, neither the
RBOCs nor the cable operators had networks conducive to providing high-speed
data services to residential subscribers. The Telecommunications Act of 1996,
however, permitted cable operators, long-distance carriers and local exchange
carriers such as the RBOCs to enter each other's markets. As a result, AT&T has
acquired TCI and MediaOne and announced plans to offer broadband and interactive
services, including telephony, on a broad scale over these cable systems in the
next few years. Similarly, RBOCs are deploying various digital subscriber line
technologies, or DSL, for high-speed data services over their existing copper
networks. A number of RBOCs also have deployed alternative delivery systems such
as hybrid fiber coax, or HFC, fiber to the curb and wireless for data and video
transmission. In certain major metropolitan areas, new carriers have entered the
market. For example, companies such as RCN are building state-of-the-art HFC
networks to compete with incumbent RBOCs and cable operators.
Similar deregulation of telecommunications and broadcasting abroad has
fostered substantial growth and competition in many foreign communications
markets. The emergence of direct broadcast satellite, or DBS, systems
internationally and in the United States has also subjected cable operators to
increasing competitive pressures. DBS systems offer consumers up to 200 channels
of digital video programming. In addition, operators in other countries with
more established DBS infrastructures are introducing data services to meet the
growing demand from residential and small business customers for Internet
access.
Response of the Cable Operators
To address increasing competition and demand for high-speed broadband
services, cable operators are introducing voice and data services in addition to
video. By offering bundled packages of broadband services, cable operators are
seeking to obtain a competitive advantage over telephone companies and DBS
providers and to create additional revenue streams.
In order to provide high-speed Internet access, cable operators have begun
to deploy cable modems in a number of major metropolitan areas. Cable modems
provide significantly faster and easier access to the Internet than traditional
28 Kbps or 56 Kbps telephone modems. Cable modems are frequently offered in
conjunction with Internet content services such as Excite@Home or Road Runner by
cable operators, which seek to accelerate customer adoption by providing a
complete hardware and content package. The number of cable modem subscribers in
the U.S. at the end of 1999 was estimated to be approximately 1.6 million,
compared to approximately 500,000 in 1998. Forecasts from Paul Kagan Associates
suggest that over five million cable modems will be deployed by 2001.
Similarly, cable operators are upgrading and rebuilding their networks to
offer digital video, which enables cable operators to provide more channels and
better picture quality. Paul Kagan Associates estimated that of the
approximately 67 million U.S. cable subscribers, approximately 5.1 million homes
subscribed to digital cable services at the end of 1999 and approximately 10.6
million homes will subscribe to digital cable services by the end of 2000.
Additionally, the FCC has mandated that broadcasters convert to digital format
by 2006. Operators, nevertheless, will have to work with both analog and digital
video signals for many years.
As telephone carriers are planning to offer broadband voice, data and video
services, cable operators are also upgrading and building out their HFC networks
to provide telephony services. AT&T has set targets of 30% local telephone
market share in its initial deployments in cable systems.
The ability of cable operators to deliver digital video, voice and
high-speed data services on a broad scale, however, is constrained by the
designs of their legacy networks. These networks, which pass more than 90% of
U.S. homes, were built initially for one-way broadcast analog television and
require substantial upgrades to
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make them capable of reliably supporting two-way digital services, such as
high-speed Internet access and telephony.
Development of the Cable System Network Architecture
The introduction and deployment of HFC network architectures has
significantly increased network capacity, quality and reliability. The higher
bandwidth of fiber can increase capacity to up to 110 analog channels. Video
compression technologies can further extend the capacity of cable television
systems to several hundred channels. However, to accommodate the interactive
nature of telephony and Internet services, these networks require installation
of return path equipment for the transmission of video, voice and data on the
return path from the subscriber to the headend. Additionally, the introduction
of these new services will require the deployment of fiber closer to the
subscriber and therefore increase the amount of optical fiber and fiber optic
equipment in an HFC network. In order to reliably deliver telephony and data
services for large numbers of subscribers, AT&T has undertaken a trial in Salt
Lake City in which optical fiber serves approximately 50 to 100 home groups, as
opposed to the 500 to 1,000 home groups that are common in today's networks.
In addition to upgrading and extending network infrastructure with fiber
optics, it will be necessary for cable operators to invest in new digital
headend equipment that can receive and process content from a variety of sources
in different formats and protocols. Interfaces to wired and wireless, analog and
digital, and local and remote sources will increase the complexity of local
headends. Moreover, the desire to tailor services to specific groups of
customers will require flexibility and ease of configuration at the local
network headend.
The Market Opportunity
The upgrade and extension of existing networks to facilitate high-speed
broadband video, voice and data services require substantial expenditure and the
replacement of significant portions of the transmission network. Competitive
pressures and the desire to capture new revenue opportunities have induced major
cable operators to focus on achieving economies of scale by increasing the size
of their cable systems. This has been accomplished largely through cable system
exchanges and the acquisition of smaller cable operators and independent
operators, many of which could not afford the significant costs necessary to
upgrade their systems. Having achieved a significant degree of consolidation,
many cable operators are now turning their attention to investment in new
infrastructure equipment.
As a result of growing demand for broadband services, development and
deployment of enabling technologies, significant regulatory change, rapidly
increasing competition and considerable industry consolidation, substantial new
investments in the cable industry are providing the capital necessary to
accelerate the upgrade of the cable infrastructure. Recent examples of this
increased investment activity include:
- In 1998, Paul Allen acquired Charter Communications for $4.5 billion and
purchased a controlling interest in Marcus Cable for $2.8 billion;
- In 1999, AT&T completed the acquisition of TCI for approximately $52
billion and has announced its intention to acquire MediaOne for
approximately $57 billion;
- In January 2000, America Online and Time Warner announced their intention
to merge in a transaction valued at over $300 billion.
As cable operators upgrade their networks to meet market demands, we
believe that increased recognition of the value of cable networks as a medium
for high-speed, interactive video, voice and data, their strategic access to
homes and the improved financial strength of cable operators represent a
significant market opportunity for broadband communications equipment vendors.
Moreover, we believe that equipment vendors will also benefit from growth in the
services offered by wireless, satellite and other broadband service providers.
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THE HARMONIC SOLUTION
Harmonic develops, manufactures and markets digital and fiber optic systems
for delivering video, voice and data services over cable, wireless and satellite
networks. Our technical strengths in optics have allowed us to develop reliable,
highly integrated systems that enable cable operators to transport digital
video, a greater number of channels and a choice of programming packages over
their fiber optic networks. In addition, our advanced solutions enable cable 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.
Fiber Optics Products. Our optical transmission products, node and return
path products, and element management hardware and software allow operators to
deliver traditional broadcast video services while supporting the roll-out of
emerging interactive services and managing the fiber network. Our METROLink
dense wave division multiplexing, or DWDM, solution also allows cable operators
to provide video, voice and data services directly from the network headend to
distributed nodes, thereby simplifying network architecture and eliminating the
need to install complex electronics in multiple hubs, which significantly
reduces the size of hubs and the associated building and maintenance costs.
TRANsend Digital Headend System. Our digital TRANsend platform gives cable,
wireless and satellite service providers the flexibility to combine and
customize content from a variety of sources for seamless integration and
delivery of voice, video and data to different subscriber groups. The TRANsend
system leverages our expertise in combining and transporting Internet Protocol,
or IP, data together with digital video. In addition, the TRANsend platform is
designed to be compliant with established international digital video standards,
providing interoperability with equipment from other manufacturers, such as
set-top boxes.
CyberStream System. Our CyberStream product line, which we developed and
introduced in 1998 following our purchase of Harmonic Data Systems Ltd.,
provides a low cost, end to end hardware and software solution for high-speed
data delivery, primarily over satellite and wireless networks to residential and
business users. These products can support transmission rates of up to 48
Megabits per second.
Our products incorporate network management systems employing internally
developed hardware and software to monitor and control the network and increase
system availability. The "plug and play" design philosophy and network
management employed in our products further enhance ease of installation and
operation.
PRODUCTS
Harmonic designs, develops, manufactures and markets fiber optic
transmission and digital systems, comprised of three product families: fiber
optic products, TRANsend digital headend products and CyberStream data delivery
products. Our products employ internally developed hardware and software to
facilitate a high degree of system integration. The "plug and play" design
philosophy and network management employed in our products enhance ease of
installation and operation.
FIBER OPTIC PRODUCTS
We have applied our technical strengths in optics and electronics,
including expertise with lasers, modulators, and radio frequency technology, to
develop products which provide enhanced network reliability and allow broadband
service providers to deliver advanced services, including two-way interactive
services. We have provided the operator with end-to-end capability in the fiber
portion of the network.
Optical Transmission Systems
We offer MAXLink transmitters and optical amplifiers, PWRLink transmitters
and the METROLink system for a wide range of optical transmission requirements.
MAXLink Transmitters and Optical Amplifiers. The MAXLink transmitters and
optical amplifiers operate at a wavelength of 1550 nm and serve long-haul
applications and fiber dense architectures that are
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beyond the capability of 1310nm transmitters. This system is suited to evolving
cable networks employing such features as redundant rings, hub interconnects and
broadcast layer transmission.
PWRLink Transmitters. The PWRLink series of optical transmitters
incorporates semiconductor lasers and provides optical transmission primarily
for use at a headend or hub for local distribution to optical nodes and for
narrowcasting, which is the transmission of programming to a select set of
subscribers.
METROLink System. Our METROLink system, the first DWDM system for the cable
industry, allows operators to expand the capacity of a single strand of fiber
and also to provide high-speed narrowcast services directly from the headend to
nodes. This ability largely eliminates the need to locate expensive electronic
equipment in each network hub, which significantly reduces the size of hubs and
the associated building and equipment maintenance costs. By increasing the
downstream and upstream capacity of existing optical fiber, METROLink also can
eliminate the often significant expense associated with laying additional fiber.
Optical Node Receivers, Return Path and Network Management Products
We offer a number of optical nodes, return path transmitters and return
path receivers to provide two-way transmission capability. In addition, we offer
network management hardware and software to enable the network operator to
monitor and control the entire transmission network.
PWRBlazer Optical Node Receivers. Our PWRBlazer optical node receivers
convert optical signals received from the transmitters into radio frequency
signals for transmission to the home via coaxial cable. We offer a variety of
receiver products for applications including indoor and outdoor use, all of
which can be fitted to support two-way traffic.
PWRBlazer Scaleable Optical Node. Our PWRBlazer scaleable optical node is a
receiver which can be easily adapted to handle increasing traffic over a fiber
network without major reconstruction. It is particularly suited to networks that
are expected to handle increasing demands for two-way services and can be
flexibly configured to support specific operator requirements.
Return Path Transmitters and Receivers. Our return path transmitters
support two-way transmission capabilities by sending video, voice and data
signals from the optical node to the headend. Signals originating at the home
can be sent via the coaxial cable to the optical node and then transmitted in
optical form to the headend by the return path transmitter. Our return path
receivers operate at the headend to receive return path optical transmission
from the return path transmitters.
NETWatch Management System. Our NETWatch management system consists of
transponders and network management software. The transponders operate in
broadband networks to capture measurement data. Harmonic's software enables the
broadband service operator to monitor and control the entire HFC transmission
network from a central office or remote locations. Our NETWatch software is
designed to be integrated into larger network management systems through the use
of simple network management protocol, or SNMP.
TRANSEND DIGITAL HEADEND PRODUCTS
Our TRANsend digital headend platform consists of a number of products for
encoding, compressing, multiplexing and modulating digital signals prior to
transmission over broadband networks. It also provides interfaces to incoming
and outgoing data streams and various protocols and formats.
Video Transport Platform. Our VTP houses configurable combinations of
application modules necessary to perform a variety of functions required at a
digital headend. It includes a bus system which routes data and control
information between the application modules under network management control.
Encoders. Our encoder converts analog and digital video and audio signals
to compressed digital format fully compliant with the MPEG-2 standard.
Integrated Receiver eXchange Modules. Our IRX module receives a number of
individually encoded digital program streams originating from multiple sources.
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Multiplexers. Our multiplexer module combines multiple MPEG-2 streams into
one transport stream as well as authorizing conditional access.
Modulators. Our modulators accept digital signals for modulation on to a
radio frequency carrier for transmission over a broadband network.
Video Server Gateways. Our VSG module acts as a gateway between a video
server and subscribers on a network.
CYBERSTREAM PRODUCTS
CyberStream System. This system enables Internet access and high-speed data
delivery primarily over satellite or wireless networks to residential and
business subscribers. It is capable of supporting transmission rates of up to 48
Megabits per second which enables applications such as video distribution and
distance learning. This system includes a headend data encoder, a network
management system and an end-user receiver card which is installed in either a
PC or our Enterprise1 product.
Enterprise1. The Enterprise1 is a network router, which interfaces the
CyberStream System with a local area network. It provides desktop broadband
access by linking high-speed cable, satellite or wireless networks directly to a
LAN.
CUSTOMERS
We sell our products to a variety of broadband communications network
operators. Set forth below is a representative list of our customers during
1999.
UNITED STATES INTERNATIONAL
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Adelphia A provincial PTT in China
AT&T Austar
Bell South Golden Channels
Charter Hong Kong Cable Television
Comcast Matav
Cox NTL
Daniels Rogers
MediaOne Shaw
Prime TeleDanmark
RCN Telewest
Time-Warner Videotron
Historically, the majority of our sales have been to relatively few
customers, and we expect this customer concentration to continue in the
foreseeable future. In 1999, sales to AT&T accounted for 41% of net sales. In
1998, sales to TCI (now AT&T) accounted for 17% of net sales and sales to a
Chinese distributor accounted for 11% of net sales. In 1997, sales to Capella
(our Canadian distributor) accounted for 17% of net sales. No other customer
accounted for more than 10% of our net sales in 1999, 1998 or 1997. The loss of
AT&T or any other significant customer or any reduction in orders by AT&T or any
significant customer, or our failure to qualify our products with a significant
cable operator could adversely affect our business and operating results.
Sales to customers outside of the United States in 1999, 1998 and 1997
represented 30%, 43% and 59% of net sales, respectively. We expect international
sales to continue to account for a substantial portion of our net sales for the
foreseeable future. International sales 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 foreign currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations, managing distributor relations and political and economic
instability. We cannot assure you that international markets will continue to
develop or that we will receive future orders to supply our products in
international markets at rates equal to or greater than those experienced in
recent periods. See "Risk Factors -- We Depend On Our International Sales And
Are Subject To The Risks Associated With International Operations."
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SALES AND MARKETING
We sell our products in the United States through our own direct sales
force which is organized geographically to support major network operators at
both the corporate level and in their individual systems. Our sales force is
supported by a highly qualified technical staff. Together, they work closely
with customers to design systems and develop technical proposals to optimize
system performance and economic benefits for the operators. The technical group
also assists customers with installation and post-sale support.
International sales are made primarily to distributors, which are generally
responsible for importing the products and providing installation and technical
support and service to customers in their territory. However, a small direct
sales force, based in Sunnyvale, California, and in Europe and Asia is
responsible for account management and providing high-level technical support
directly to customers as well as to distributors. Our technical group also
supports the international sales force.
Because of the cable industry's 24 hour programming requirements, we
provide round-the-clock technical support, both directly and through our
distributors. We provide training for our customers and distributors, as
required, both in our facilities and on-site.
Our marketing organization develops strategies for product lines and, in
conjunction with our sales force, identifies evolving technical and application
needs of customers so that our product development resources can be most
effectively and efficiently deployed to meet anticipated product requirements.
Our marketing organization is also responsible for setting price levels, demand
forecasting and general support of the sales force, particularly at major
accounts. We have many programs in place to heighten industry awareness of
Harmonic and our products, including participation in technical conferences,
publication of articles in industry journals and exhibiting at trade shows.
MANUFACTURING AND SUPPLIERS
Our manufacturing processes consist primarily of integration, final
assembly and test, performed by highly trained personnel employing
technologically advanced electronic equipment and proprietary test programs. The
manufacturing of our products and subassemblies is a complex process and we
cannot assure you that we will not experience production problems or
manufacturing delays in the future. Because we utilize our own manufacturing
facility for this production, and because such manufacturing capabilities are
not readily available from third parties, any interruption in operations could
materially and adversely affect our business and operating results.
We use third party contract manufacturers like Sanmina to assemble certain
standard parts for our products, including such items as printed circuit boards,
metal chassis and power supplies. We intend to subcontract an increasing number
of tasks to third parties in the future. Our increasing reliance on
subcontractors involves several risks, and we may not be able to obtain an
adequate supply of components, subassemblies and modules on a timely basis.
Some components, subassemblies and modules necessary for the manufacture
and integration of our products are obtained from a sole supplier or a limited
group of suppliers. In particular, we rely on Fujitsu as a major source of
lasers for our PWRLink and return path transmitters, for which there are limited
alternative suppliers. In addition, certain optical components used in our
METROLink and MAXLink products are currently available only from JDS Uniphase,
which has recently acquired a number of optical component suppliers. Although we
have qualified alternative suppliers for lasers, in the event that the supply of
optical components is interrupted for any reason, products from alternative
suppliers are unlikely to be immediately available in sufficient volume to meet
our production needs. Further, sole suppliers are providing certain key elements
of our digital products. The reliance on sole or limited suppliers, particularly
foreign suppliers, involves several risks, including a potential inability to
obtain an adequate supply of required components or subassemblies and reduced
control over pricing, quality and timely delivery of components. Although we
attempt to minimize supply risks by holding safety stocks and continuously
evaluating other sources, any interruption in supply could materially adversely
affect our business and operating results. We do not maintain long-term
agreements with any of our suppliers. While we have been able historically to
obtain adequate
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supplies of components in a timely manner from our principal suppliers, we
cannot assure you that we will be able to obtain adequate supplies in the
future. Because the purchase of certain key components involves long lead times,
in the event of unanticipated increases in demand for our products, we could be
unable to manufacture certain products in a quantity sufficient to meet our
customers' demand. If we cannot obtain adequate deliveries of key components we
may not be able to ship products on a timely basis. Delays in shipment could
damage relationships with current and prospective customers and could harm our
business and operating results.
INTELLECTUAL PROPERTY
We currently hold 14 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 intend to 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 headend applications, we may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing to enter into such technology development or licensing
agreements, we cannot assure you that such agreements will be negotiated on
terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements, when necessary, could limit our ability to
develop and market new products and could cause our business to suffer.
As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
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.
BACKLOG
We schedule production of our systems based upon our backlog, informal
commitments from customers and sales projections. Our backlog consists of firm
purchase orders by customers for delivery within the next twelve months. At
December 31, 1999, order backlog amounted to $55.2 million, compared to $20.8
million at December 31, 1998. Anticipated orders from customers may fail to
materialize and delivery schedules may be
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deferred or canceled for a number of reasons, including reductions in capital
spending by cable television operators or changes in specific customer
requirements. In addition, due to weather-related seasonal factors and annual
capital spending budget cycles at many major end-users, our backlog at December
31, 1999 or any other date, is not necessarily indicative of actual sales for
any succeeding period.
COMPETITION
The markets for cable television equipment and other broadband
communications equipment are extremely competitive and characterized by rapid
technological change. The principal competitive factors in these markets include
product performance, reliability, price, breadth of product line, network
management capabilities, sales and distribution capability, technical support
and service and relationships with network operators. Certain of these factors
are outside of our control.
Our competitors for fiber optic transmission products include established
suppliers of cable television and telecommunications equipment such as ADC
Telecommunications, ANTEC, General Instrument (recently acquired by Motorola),
Philips and Scientific-Atlanta, as well as a number of smaller, more specialized
companies. For digital headend products, our competitors include many of the
same competitors as in fiber optic transmission products, and a number of new
competitors, including Lucent Technologies. Competitors for CyberStream products
in the satellite and wireless market include Broadlogic, SkyStream Networks,
Hybrid Networks, SAGEM and Philips. Most of our competitors are substantially
larger and have greater financial, technical, marketing and other resources than
we do. Many of our larger competitors are in a better position to withstand any
significant reduction in capital spending by cable television operators and
other broadband service providers. In addition, many of our competitors have
more long-standing and established relationships with domestic and foreign cable
operators than we do. See "Risk Factors -- The Market In Which We Operate Is
Intensely Competitive And Many Of Our Competitors Are Larger And More
Established."
RESEARCH AND DEVELOPMENT
We have historically devoted a significant amount of our resources to
research and development. Research and development expenses in 1999, 1998 and
1997 were $17.3 million, $13.5 million, and $11.7 million, respectively. We
expect that research and development expenses will continue to increase in the
future.
Our success in designing, developing, manufacturing and selling new or
enhanced products will depend on a variety of factors, including the
identification of market demand for new products, product selection, timely
implementation of product design and development, product performance, effective
manufacturing and assembly processes and sales and marketing. Because of the
complexity inherent in such research and development efforts, we cannot assure
you that we will successfully develop new products, or that new products
developed by us will achieve market acceptance. Our failure to successfully
develop and introduce new products could harm our business and operating
results.
EMPLOYEES
As of December 31, 1999, we employed a total of 454 people, including 197
in manufacturing operations, 112 in research and development, 105 in sales and
marketing and 40 in a general and administrative capacity. We also employ a
number of temporary employees and consultants on a contract basis. None of our
employees is represented by a labor union with respect to his or her employment
by Harmonic. We have not experienced any work stoppages and we consider our
relations with our employees to be good. Our future success will depend, in
part, upon our ability to attract and retain qualified personnel. Competition
for qualified personnel in the communications industry and in our immediate
geographic area is intense, and we cannot assure you that we will be successful
in retaining our key employees or that we will be able to attract skilled
personnel as we grow.
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EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of Harmonic and their ages as of March 1, 2000:
NAME AGE POSITION
---- --- --------
Anthony J. Ley... 61 Chairman of the Board of Directors, President and Chief
Executive Officer
Moshe 48 Senior Vice President, General Manager Israel R&D Center,
Nazarathy...... Director
Robin N. 52 Chief Financial Officer
Dickson........
Michael Yost..... 56 Vice President, Operations
Israel Levi...... 60 Vice President, Research and Development
Anthony J. Ley has served as Harmonic's President and Chief Executive
Officer since November 1988. Mr. Ley was elected Chairman of the Board of
Directors in February 1995. From 1963 to 1987, Mr. Ley was employed at
Schlumberger, both in Europe and the United States, holding various senior
business management and research and development positions, most recently as
Vice President, Research and Engineering at Fairchild Semiconductor/Schlumberger
in Palo Alto, California. Mr. Ley holds an M.A. in mechanical sciences from the
University of Cambridge and an S.M.E.E. from the Massachusetts Institute of
Technology, is named as an inventor on 29 patents and is a Fellow of the I.E.E.
(U.K.) and a senior member of the I.E.E.E.
Moshe Nazarathy, a founder of Harmonic, has served as Senior Vice
President, General Manager of Israel R&D Center, since December 1993, as a
director of Harmonic since Harmonic's inception and as Vice President, Research,
from Harmonic's inception through December 1993. From 1985 to 1988, Dr.
Nazarathy was employed in the Photonics and Instruments Laboratory of
Hewlett-Packard Company, most recently serving as Principal Scientist from 1987
to 1988. From 1982 to 1984, Dr. Nazarathy held post-doctoral and adjunct
professor positions at Stanford University. Dr. Nazarathy holds a B.S. and a
Ph.D. in electrical engineering from Technion-Israel Institute of Technology and
is named as an inventor on twelve patents.
Robin N. Dickson joined Harmonic in April 1992 as Chief Financial Officer.
From 1989 to March 1992, Mr. Dickson was corporate controller of Vitelic
Corporation, a semiconductor manufacturer. From 1976 to 1989, Mr. Dickson held
various positions at Raychem Corporation, a materials science company, including
regional financial officer of the Asia-Pacific Division of the International
Group. Mr. Dickson holds a Bachelor of Laws from the University of Edinburgh and
is a member of the Institute of Chartered Accountants of Scotland.
Michael Yost joined Harmonic in September 1991 as Vice President,
Operations. From 1983 until December 1990, Mr. Yost was employed at Vitalink
Communications, a satellite communications systems manufacturer, holding various
senior management positions, most recently as Vice President, Operations. Mr.
Yost holds a B.S. in management from San Jose State University.
Israel Levi joined Harmonic in July 1989 and has served as Vice President,
Research and Development since May 1996. Between July 1989 and May 1996, Mr.
Levi held various product management and product development positions at
Harmonic. From 1988 to 1989, Mr. Levi served in product development at DSC, a
telecommunications systems company, and from 1984 to 1988, Mr. Levi served as
Director of CATV Products Division at Catel Communications, a telecommunications
equipment manufacturer. Mr. Levi holds an M.S. in Electrical Engineering from
Carleton University, Ottawa, Canada and a B.S. in Electrical Engineering from
Technion-Israel Institute of Technology.
ITEM 2. PROPERTIES
Our principal operations are located at our corporate headquarters in
Sunnyvale, California. The lease on our headquarters building, of approximately
110,000 square feet, expires in July 2006. We also have several sales offices in
the United States, sales and support centers in Europe and Asia and two
subsidiaries, Harmonic Data Systems Ltd., and a research and development
facility in Israel. We also expect to enter into leases for
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additional buildings in the near future in order to accommodate employees of the
DiviCom business after the merger.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or
to which any of our properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol HLIT since the Company's initial public offering on May
22, 1995. Prior to such time, there was no public market for the Common Stock of
the Company. The following table sets forth, for the periods indicated, the high
and low sales prices per share of the Common Stock as reported on the Nasdaq
National Market:
HIGH LOW
------- ------
1998
First quarter............................................. $ 8.13 $ 5.31
Second quarter............................................ $ 9.50 $ 6.06
Third quarter............................................. $ 9.00 $ 3.81
Fourth quarter............................................ $ 9.44 $ 4.38
1999
First quarter............................................. $ 14.44 $ 7.44
Second quarter............................................ $ 29.50 $13.50
Third quarter............................................. $ 73.31 $26.00
Fourth quarter............................................ $100.88 $47.00
(b) Holders of record: At February 25, 2000, there were approximately 129
stockholders of record of the Company's Common Stock.
(c) Dividends: The Company has never declared or paid any dividends on its
capital stock. The Company currently expects to retain future earnings, if any,
for the use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future. The covenants
made by the Company under its existing line of credit prohibit the payment of
dividends.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $184,075 $ 83,857 $74,442 $60,894 $39,180
Gross profit................................... 80,605 30,555 34,605 27,731 17,851
Income (loss) from operations(1)............... 29,017 (21,943) 4,506 5,204 3,761
Net income (loss)(1)........................... 23,680 (21,453) 4,929 5,918 4,121
Basic net income (loss) per share.............. 0.84 (0.92) 0.24 0.29 0.36
Diluted net income (loss) per share............ 0.76 (0.92) 0.21 0.26 0.20
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments......... $ 89,699 $ 9,178 $13,670 $16,410 $22,126
Working capital................................ 121,172 32,318 38,772 34,321 32,495
Total assets................................... 180,215 62,424 58,887 54,633 41,817
Long term debt, including current portion...... -- 577 -- -- --
Stockholders' equity........................... 136,644 43,474 49,931 43,641 37,009
- ---------------
(1) The 1998 loss from operations and net loss include a one-time charge of
$14.0 million for acquired in-process technology. See Note 2 of Notes to
Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Harmonic designs, manufactures and markets digital fiber optic systems for
delivering video, voice and data services over cable, satellite and wireless
networks. Almost all of our sales have been 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., we have broadened our
product offering to enable delivery of digital video, voice and data over
satellite and wireless networks in addition to cable systems.
On October 27, 1999 the Company entered into an Agreement and Plan of
Merger and Reorganization with C-Cube Microsystems, Inc. ("C-Cube"), pursuant to
which C-Cube will merge into Harmonic (the "Merger Agreement"). Under the terms
of the Merger Agreement, C-Cube will sell or spin-off to its shareholders all of
the assets and liabilities of its semiconductor business prior to closing.
C-Cube will then merge into Harmonic and, as a result, Harmonic will acquire
C-Cube's DiviCom business. The DiviCom business designs, manufactures and sells
products and systems that enable companies to deliver digital video, audio and
data over a variety of networks including satellite, wireless, telephone and
cable. The merger will be structured as a tax-free exchange of stock and will be
accounted for under the purchase method of accounting. In the merger, each share
of common stock of C-Cube will be converted into the right to receive .5427
shares of Harmonic common stock. Approximately 25.7 million shares of Harmonic
Common Stock will be issued and the purchase price including acquisition related
costs is expected to be approximately $1.7 billion. Consummation of the merger
is subject to a number of conditions, including Harmonic and C-Cube shareholder
approval, the prior disposition of C-Cube's semiconductor business and
regulatory approvals. The shareholder meetings are scheduled to be held on April
24, 2000.
To date, a substantial majority of Harmonic's net sales have been to
relatively few customers, and Harmonic expects this customer concentration to
continue in the foreseeable future. In 1999, sales to AT&T accounted for 41% of
net sales compared to 17% in 1998. In addition, in 1998 sales to a Chinese
distributor accounted for 11% of net sales.
Sales to customers outside of the United States in 1999, 1998 and 1997
represented 30%, 43% and 59% of net sales, respectively. International sales are
made primarily to distributors, which are generally responsible for importing
the products and providing installation and technical support and service to
customers within their territory. We expect international sales to continue to
account for a substantial portion of our net sales for the foreseeable future.
In 1999, 1998 and 1997, sales of optical transmitters accounted for
approximately 63%, 54% and 63%, respectively, of net sales and sales of optical
node receivers, return path and network management products accounted for
approximately 32%, 35% and 37%, respectively, of net sales. In 1999 and 1998,
TRANsend and CyberStream digital products accounted for 5% and 11% of net sales.
There were no significant sales of digital products in 1997.
Harmonic recognizes revenue upon shipment of products except when
probability of collection is not assured or contract provisions require customer
acceptance. Harmonic does not provide for rights of return to end users or
distributors. A provision for the estimated cost of warranty is recorded at the
time revenue is recognized and adjusted periodically to reflect actual and
anticipated experience. To date, gross margins on sales of optical transmitter
products have been higher than sales of receiver and return path products. In
addition, sales made to customers outside of the United States have generally
carried higher gross margins.
Harmonic often recognizes a substantial portion of its revenues in the last
month of the quarter. Harmonic establishes its expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of Harmonic's business is derived from
orders placed by a limited number of large customers, the timing of such
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orders can also cause significant fluctuations in our operating results.
Harmonic's expenses for any given quarter are typically based on expected levels
of future sales and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on operating results may be magnified by
Harmonic's inability to adjust spending to compensate for the shortfall. As a
result of these and other factors, Harmonic's 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. See "Risk Factors -- 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
Harmonic's historical consolidated statements of operations data for each
of the three years ended December 31, 1997, 1998 and 1999 as a percentage of net
sales, are as follows:
FISCAL YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
Net sales................................................... 100% 100% 100%
Cost of sales............................................... 56 64 54
--- --- ---
Gross profit................................................ 44 36 46
Operating expenses
Research and development.................................. 9 16 16
Sales and marketing....................................... 14 21 18
General and administrative................................ 5 8 6
Acquired in-process technology............................ 17 --
--- --- ---
Total operating expenses.......................... 28 62 40
--- --- ---
Income (loss) from operations............................... 16 (26) 6
Interest and other income, net.............................. 1 -- 1
--- --- ---
Income (loss) before income taxes........................... 17 (26) 7
Provision for income taxes.................................. 4 -- --
--- --- ---
Net income (loss)........................................... 13% (26)% 7%
=== === ===
Net Sales
The Company's net sales increased 119% to $184.1 million in 1999, from
$83.9 million in 1998. The increase in net sales was primarily due to higher
unit sales of METROLink DWDM systems and PWRBlazer Scaleable Nodes, which began
volume shipment during the middle of 1998, and, to a lesser extent, higher unit
sales of existing products partially offset by lower selling prices. The
increase was also attributable to increased spending by domestic and
international customers. During 1999 domestic sales increased by 172%,
principally due to increased shipments to AT&T. AT&T represented 41% of net
sales during 1999 compared to 17% of net sales in 1998. International sales
increased 51% during 1999 compared to 1998, primarily due to higher shipments to
Canada and the United Kingdom. International sales represented 30% of net sales
in 1999 compared to 43% in 1998. Net sales increased by 13% to $83.9 million in
1998, from to $74.4 million in 1997. This growth in net sales was primarily
attributable to the sale of new products, including TRANsend digital headend
products, METROLink DWDM systems and PWRBlazer Scaleable Nodes, which began
volume shipment during the middle of 1998, as well as to an increase in spending
by domestic customers in the second half of 1998. During 1998 domestic sales
increased by 55%, principally due to increased shipments to AT&T, while
international sales decreased by 17% due to continued weakness in many
international markets. While the increase in net sales was also due to nominally
higher unit sales of existing products, generally lower selling prices in the
industry resulted in an approximate ten percent decrease in existing product
sales.
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Gross Profit
Gross profit increased to $80.6 million (44% of net sales) in 1999 from
$30.6 million (36% of net sales) in 1998. The increases in gross profit and
gross margin were principally due to higher unit volumes, which allowed the
Company to improve fixed cost absorption and realize increased economies of
scale through higher production and purchasing volumes, as well as a more
favorable product mix, which included a higher percentage of transmitters. Gross
profit decreased to $30.6 million (36% of net sales) in 1998 from $34.6 million
(46% of net sales) in 1997. The decreases in gross profit and gross margin were
principally due to a lower percentage of international sales resulting from
reduced demand, a less favorable product mix, which included a lower percentage
of transmitters, and pricing pressure for certain products due to increased
competition. In addition, gross profit and gross margin were negatively impacted
1998 by start-up costs associated with new product introductions and an increase
of $1.2 million in inventory reserves for existing products following the
introduction of new products.
Research and Development
Research and development expenses increased to $17.3 million (9% of net
sales) in 1999, from $13.5 million (16% of net sales) in 1998. The increase in
absolute spending was principally attributable to higher headcount, consulting
expenses and prototype expenses. These increases were partially offset by higher
amounts of government grants earned in Israel, which are netted against research
and development expenses. The decrease in research and development expenses as a
percentage of net sales was principally attributable to increased net sales.
Research and development expenses increased to $13.5 million (16% of net sales)
in 1998 from $11.7 million (16% of net sales) in 1997. The increase in research
and development expenses in 1998 in absolute dollars was primarily due to
increased headcount, particularly at Harmonic's subsidiary in Caesarea, Israel,
which develops Harmonic's TRANsend digital headend products, and to the
inclusion of NMC's research and development expenses starting in January 1998.
Research and development expenses for 1999, 1998 and 1997 are net of grants of
approximately $950,000, $346,000 and $120,000, respectively. 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 to $25.0 million (14% of net sales)
in 1999 from $18.2 million (21% of net sales) in 1998. The increase in absolute
dollars was primarily due to higher headcount and costs associated with
expansion of the sales and marketing organizations to provide wider geographic
coverage and support for new products, as well as higher sales commissions
related to increased net sales. The decrease in sales and marketing expenses as
a percentage of net sales was principally attributable to increased net sales.
Sales and marketing expenses increased to $18.2 million (21% of net sales) in
1998 from $13.6 million (18% of net sales) in 1997. The increase in sales and
marketing expenses in 1998 was primarily due to higher headcount and costs
associated with expansion and reorganization of the direct sales force,
technical support and marketing organizations, particularly to support the
introduction of new products. This increase included expenses incurred in
connection with the recruiting and staffing for new international sales and
technical support centers. In addition, higher promotional expenses and the
inclusion of NMC's sales and marketing expenses starting in January 1998
contributed to the increase. Harmonic expects that sales and marketing expenses
will continue to increase in absolute dollars, although they may vary as a
percentage of net sales.
General and Administrative
General and administrative expenses increased to $9.3 million (5% of net
sales) in 1999, from $6.8 million (8% of net sales) in 1998. The increase in
absolute dollars in 1999 was principally due to increased personnel, consulting
and recruiting expenses associated with supporting the Company's overall growth
in headcount and operations. The decrease in general and administrative expenses
as a percentage of net sales was attributable to increased net sales. General
and administrative expenses increased to $6.8 million (8% of net sales) in 1998
from $4.8 million (6% of net sales) in 1997. The increase in general and
administrative expenses in 1998 was primarily due to the inclusion of NMC's
expenses starting in January
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1998, as well as costs of supporting Harmonic's growth in overall headcount, and
the establishment of international sales and support offices. Harmonic expects
to incur higher levels of general and administrative expenses in the future,
although such expenses may vary as a percentage of net sales.
Acquired In-Process Technology
On January 5, 1998, Harmonic acquired NMC, a privately-held Israeli
development stage company with 15 employees, for $17.6 million in a
stock-for-stock transaction. Harmonic also assumed all outstanding stock options
of NMC. The transaction was accounted for as a purchase and, accordingly, the
fair value of the assets and liabilities were recorded based upon their fair
value at the time of the transaction. Harmonic determined that technological
feasibility of the acquired in-process technology had not yet been established.
Harmonic also believed that NMC's existing technology would generate no further
revenue on account of its obsolescence. Accordingly, no value was assigned to
the existing technology. In accordance with generally accepted accounting
principles, Harmonic wrote off acquired in-process research and development
expenses of $14.0 million as a one-time charge to operations in the first
quarter of 1998.
Historically, NMC had developed receiver cards for data transmission over
cable, wireless and satellite networks. These analog products operated at
transmission speeds of 5.5Mbps and had been sold only to a limited number of
customers. NMC concluded during 1997 that these analog products were rapidly
becoming obsolete and discontinued research and development efforts. Based on
customer feedback and expected market trends, NMC commenced technology
development of the CyberStream System, a digital system designed to provide
substantially increased transmission speeds of 48Mbps to 52Mbps and to
incorporate differentiated service capabilities and sophisticated network
management.
At the time of the NMC acquisition, the CyberStream System was NMC's only
research and development project in process. The CyberStream System was
comprised of a data gateway at the satellite uplink or cable headend, network
management and control features at the headend, and a receiver card for
installation in a personal computer or a local area network router device. Just
prior to the acquisition, NMC had initiated production of a limited number of
prototype receiver cards in order to participate in pilot trials with two
prospective customers. Shipment of the prototype cards commenced at the end of
1997.
Harmonic determined that since these products were intended for deployment
in networks with large numbers of subscribers, NMC would have to engage in
ongoing trials over an extended period to determine the products' technological
feasibility. As part of these trials, NMC also shipped initial versions of
operating software, but was several months away from completion of critical
elements of the CyberStream System, such as quality of service, simple network
management protocol and porting of the software to the Windows 98 and NT
platforms. Subsequent to the acquisition, Harmonic expended $1.9 million in 1998
in research and development costs to accelerate development and to incorporate
changes resulting from field trial evaluations.
To estimate the value of NMC's existing and in-process technology, the
total income forecasted was allocated to existing, in-process and future
technology based on the products' scheduled release dates and expected lives. No
value was ascribed to existing technology due to its obsolescence nor to future
technology that was not in development at the date of acquisition. The forecasts
assumed timely release of the products as anticipated by Harmonic and that NMC
would utilize Harmonic distribution channels. Estimated revenues for the
purchased in-process products were assumed to commence by the middle of fiscal
year 1998 and increase through fiscal year 2002, at which time they were assumed
to decrease through fiscal year 2007, as newer products would be released.
Rapid change and improvements in technology characterize the high-speed
data delivery market. Harmonic's future success will depend on its ability to
achieve scientific and technological advances and to translate such advances
into commercially competitive products on a timely basis that keep pace with
competing technological developments and address the increasingly sophisticated
needs of our customers.
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Interest and Other Income, Net
Interest and other income, net, consisting principally of interest income,
was $2.6 million in 1999, $0.5 million in 1998 and $0.7 million in 1997. The
increase in 1999 was 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. The decrease in 1998 was due
primarily to lower interest income on lower average cash and cash equivalents
balances.
Income Taxes
The provision for income taxes for 1999 was based on an estimated annual
tax rate of 25%. No provision for income taxes was recorded for 1998 due to the
net loss incurred. The provision for income taxes for 1997 was based on an
estimated annual tax rate of 5% resulting from federal and state alternative
minimum taxes and utilization of net operating loss carryforwards. The Company
expects to have an effective annual tax rate that approximates statutory rates
in year 2000 and beyond on income before amortization of goodwill and other
intangibles related to the C-Cube merger. See "Risk Factors -- If The C-Cube
Merger Is Completed, We Will Record Substantial Goodwill And Other Intangible
Assets And Report Substantial Net Losses".
LIQUIDITY AND CAPITAL RESOURCES
In April 1999 the Company completed a public offering of its common stock,
raising approximately $58.3 million, net of underwriting discounts and offering
expenses. The Company also received $4.0 million from exercise of a warrant. As
of December 31, 1999, cash and cash equivalents and short-term investments
totaled $89.7 million.
Cash provided by operations was $21.7 million in 1999 compared to cash used
in operations of $2.0 million in 1998. The increase in cash provided by
operations in 1999 was primarily due to net income in 1999 compared to a net
loss in 1998, and higher accounts payable and accrued liabilities partially
offset by higher accounts receivable, inventory and prepaid expenses and other
assets.
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 July 2000. Borrowings pursuant to the line bear interest at the
bank's prime rate (prime rate plus 0.5% under the term loan) and are payable
monthly. The Company has letters of credit issued under the line of $0.6 million
which expire at various dates throughout year 2000. There were no outstanding
borrowings at December 31, 1999 and 1998 under the line.
Additions to property, plant and equipment were approximately $9.3 million
during 1999 compared to $4.4 million in 1998. The increase in 1999 was due
principally to higher expenditures for manufacturing and test equipment
associated with expansion of production capacity. While Harmonic currently has
no material commitments, it expects to spend approximately $15.0 million on
capital expenditures in 2000, primarily for manufacturing and test equipment. If
the C-Cube merger is completed, the Company expects to spend substantially more
on capital expenditures, but as of this date is unable to quantify the amount.
The Company believes that its existing liquidity sources, including its
bank line of credit facility, and anticipated funds from operations will satisfy
its cash requirements for at least the next twelve months if the C-Cube merger
were not to be completed. However, the Company expects the merger to be
completed, and believes that its existing liquidity sources, cash of $60 million
to be received pursuant to the merger agreement and cash to be received for the
estimated tax liability related to the spin-off of the semi-conductor business
will satisfy the cash requirements of the combined Company 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."
YEAR 2000 DISCLOSURE
Thus far, the Company has not experienced any significant problems related
to year 2000 issues associated with products under development or released, or
with the Company's internal computer systems.
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However, the Company cannot guarantee that the year 2000 problem will not
adversely affect its business, operating results or financial condition at some
point in the future.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
Our Operating Results Are Likely To Fluctuate Significantly And May Fail To
Meet Or Exceed The Expectations Of Securities Analysts Or Investors, Causing
Our Stock Price To Decline.
Our operating results have fluctuated in the past and are likely to
continue to fluctuate in the future, on an annual and a quarterly basis, as a
result of several factors, many of which are outside of our control. Some of the
factors that may cause these fluctuations include:
- the level of capital spending of our customers, both in the U.S. and in
foreign markets;
- changes in market demand;
- the timing and amount of customer orders;
- competitive market conditions;
- our unpredictable sales cycles;
- new product introductions by our competitors or by us;
- changes in domestic and international regulatory environments;
- market acceptance of new or existing products;
- the cost and availability of components, subassemblies and modules;
- the mix of our customer base and sales channels;
- the mix of our products sold;
- our development of custom products;
- the level of international sales; and
- economic conditions specific to the cable television industry and general
economic conditions.
In addition, we often recognize a substantial portion of our revenues in
the last month of the quarter. We establish our expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of our business is derived from orders
placed by a limited number of large customers, the timing of such orders can
also cause significant fluctuations in our operating results. Our expenses for
any given quarter are typically based on expected sales 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;
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- 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 seven 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. While net sales outside of
North America increased during the third and fourth quarters of 1999 compared to
the first quarter of 1998 we cannot predict if cable television spending outside
of North America will continue to grow or whether cable television spending in
North America will continue to increase. In addition, cable television capital
spending can be subject to the effects of seasonality, with fewer construction
and upgrade projects typically occurring in winter months and otherwise being
affected by inclement weather.
Our Customer Base Is Concentrated And The Loss Of One Or More Of Our Key
Customers Would Harm Our Business.
Historically, a significant majority of our sales have been to relatively
few customers. Sales to our ten largest customers in 1997, 1998 and 1999
accounted for approximately 56%, 66% and 75%, 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 1999, sales to AT&T accounted for 41% of our net sales compared to
17% in 1998. In addition, in 1998 sales to a Chinese distributor accounted for
11% 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 1999
represented 59%, 43% and 30% 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;
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- 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 years, certain Asian and Latin American currencies have devalued
significantly in relation to the U.S. dollar. We believe that financial
developments in Asia and Latin America were a major factor contributing to lower
international net sales in fiscal 1998 as compared to fiscal 1997. In addition,
the uncertain financial situation in Asia has placed financial pressure on some
of our distributors. In response, we increased accounts receivable reserves in
the first quarter of 1998. We are continuing to evaluate the effect on our
business of recent financial developments in Asia and Latin America. Given the
current economic uncertainties in China and throughout Asia, we cannot assure
you that shipment of orders to Asia, including China, will be made as scheduled,
or at all. We cannot assure you that our sales and collection cycles in Asia and
Latin America will not continue to be harmed by the uncertain financial climate.
In particular, we cannot predict the effect on our 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
(which was recently acquired by Motorola), Philips and Scientific-Atlanta.
Additional competition could come from new entrants in the broadband
communications equipment market, such as Lucent Technologies and Cisco Systems.
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.
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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 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,
manufacture and sell new or enhanced products that provide increasingly higher
levels of performance and reliability. However, we may not be able to
successfully develop or introduce these products. Moreover, these products may
not achieve broad commercial acceptance and may have lower gross margins than
our other products.
In addition, to successfully develop and market our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. We cannot assure you that we will be
able to enter into any necessary technology development or licensing agreement
on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to
develop and market new products and, accordingly, could materially and adversely
affect our business and operating results.
We Need To Effectively Manage Our Growth.
The growth in Harmonic's business has placed, and is expected to continue
to place, a significant strain on Harmonic's personnel, management and other
resources. Harmonic's ability to manage any future growth effectively will
require us to attract, train, motivate and manage new employees successfully, to
integrate new employees into our overall operations, to retain key employees and
to continue to improve our operational, financial and management systems. If we
fail to manage our future growth effectively, our business could suffer.
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
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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 New Media Communication Ltd., or NMC, which changed its
name during 1999 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.
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.
Our Failure To Complete The C-Cube Merger May Adversely Affect Our Business.
The Merger Agreement with C-Cube contains conditions which we and/or C-Cube
must meet prior to the consummation of the merger, including:
- Harmonic stockholder approval of the merger;
- C-Cube stockholder approval of the merger;
- Neither Harmonic nor C-Cube having experienced any material adverse
change in its business;
- Neither Harmonic nor C-Cube having materially breached any of its
representations, warranties or covenants in the Merger Agreement;
- C-Cube having effected a sale or spin-off of its semiconductor division;
and
- There being no law or court order prohibiting the merger.
In the event that the merger is not completed the market price for our
common stock could decline. In addition, pursuant to Section 7.3 of the Merger
Agreement, the Merger Agreement may be terminated by either party under certain
circumstances. Each of Harmonic and C-Cube has agreed that if the merger is not
consummated as a result of certain specified events, it will pay to the other
party a termination fee of $50 million. Payment of the fees described in this
paragraph are not in lieu of damages incurred in the event of willful breach of
the Merger Agreement. If the merger is not consummated, legal, accounting and
financial
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advisory fees as well as expenses incurred in connection with the proposed
combination, in addition to the consummation and implementation of the merger
and possible "break up fees" described above, could materially and adversely
affect Harmonic's operating results.
There are numerous risks associated with the C-Cube merger including those
identified in this report. For a more complete discussion of risks we face, we
urge you to read the risks set forth in the joint proxy statement filed with the
Securities and Exchange Commission on March 23, 2000.
If The C-Cube Merger Is Completed, We Will Record Substantial Goodwill And
Other Intangible Assets And Report Substantial Net Losses.
Goodwill and other intangible assets of approximately $1.3 billion are
expected to be recorded in connection with the merger as disclosed in the pro
forma financial data presented in the joint proxy statement. While the purchase
price allocation has not been finalized, goodwill and intangibles are expected
to be amortized over approximately 5 years, and such amortization is expected to
result in substantial net losses as a result of the noncash charges commencing
in the year 2000. The amortization of goodwill and intangibles are not
deductible for tax purposes which will result in a provision for income taxes
despite a substantial reported net loss.
We Will Be Liable For C-Cube Microsystems' Pre-Merger Tax Liabilities,
Including Tax Liabilities Resulting From The Spin-Off Of Its Semiconductor
Business.
We believe that the spin-off of the semiconductor business will give rise
to a significant tax liability which would be approximately $203 million based
on an assumed valuation of the semiconductor business of $975 million. The
actual tax liability may differ significantly from the estimate based on the
facts and circumstances existing at the time of the spin-off. For example, the
value of the stock of the spun-off semiconductor business will likely fluctuate
and if such value at the time of the spin-off exceeds the assumed value, the
actual tax liability will exceed the estimated tax liability. Under state law,
Harmonic generally will become liable for all of C-Cube Microsystems' debts,
including C-Cube Microsystems' liability for taxes resulting from the spin-off.
C-Cube Microsystems is required to retain and transfer to Harmonic in the merger
an amount of cash sufficient to pay this liability as well as all other tax
liabilities of C-Cube Microsystems and its subsidiaries for periods prior to the
merger. Harmonic will be indemnified by the spun-off semiconductor business if
the cash reserves are not sufficient to satisfy all of C-Cube Microsystems' tax
liabilities for periods prior to the merger. If for any reason, the spun-off
semiconductor business does not pay such taxes, or if there are additional taxes
due with respect to the non-semiconductor business, Harmonic generally will
remain liable, and such liability could have a material adverse effect on
Harmonic.
Due To The Structure Of The Merger Transaction, Harmonic Will Be Liable For
C-Cube Microsystems' General Pre-Merger Liabilities And Any Liabilities
Relating To C-Cube Microsystems' Semiconductor Business For Which The Spun-off
Semiconductor Business Is Unable To Indemnify Harmonic.
The merger of C-Cube Microsystems into Harmonic, with Harmonic as the
surviving entity, will result in Harmonic assuming all of the liabilities of
C-Cube Microsystems at the time of the merger. Pursuant to the merger agreement,
Harmonic will be indemnified by the spun-off semiconductor business for
liabilities associated with C-Cube Microsystems' historic semiconductor
business. However, if the spun-off semiconductor business is unable to fulfill
its indemnification obligations to Harmonic or if general liability claims not
specifically associated with C-Cube Microsystems' historic semiconductor
business are asserted after the merger, we would have to assume such
obligations. Those obligations could have a material adverse effect on Harmonic.
If The C-Cube Merger Is Completed, We May Experience Difficulties Integrating
The DiviCom Business Of C-Cube.
In addition to the risks generally associated with acquisitions, there are
a number of significant risks directly associated with our proposed merger with
C-Cube. In particular, the successful combination of
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Harmonic and C-Cube will require substantial attention from management. The
anticipated benefits of the merger will not be achieved unless the operations of
the DiviCom business of C-Cube are successfully combined with those of Harmonic
in a timely manner. The difficulties of assimilation may be increased by the
need to integrate disparate information systems and personnel into a combined
corporation and by Harmonic's limited personnel, management and other resources.
The successful combination of the two companies will also require integration of
the companies' product offerings and the coordination of their research and
development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses and
certain customers may defer purchasing decisions. 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 also
materially and adversely affect the business, financial condition and operating
results of the combined company. In addition, the success of the combined
company depends, in part, on the retention and integration of key management,
technical, marketing, sales and customer support personnel of the DiviCom
business of C-Cube. The success of the combined company will depend upon the
retention of these key employees during the transitional period following the
merger. Harmonic can offer no assurance that such key employees will remain with
the combined company prior to or for any period after the proposed merger
especially as competition for qualified technical and other personnel is
intense, particularly in the San Francisco Bay Area. The loss of such services
would adversely affect the combined company's combined business and operating
results.
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 14 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
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confidentiality or license agreements with our employees, consultants, vendors
and customers as needed, and generally limit access to and distribution of our
proprietary information. Nevertheless, we cannot assure you that the steps taken
by us will prevent misappropriation of our technology. In addition, we have
taken in the past, and may take in the future, legal action to enforce our
patents and other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could harm our
business and operating results.
In order to successfully develop and market our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. Although many companies are often
willing to enter into such technology development or licensing agreements, we
cannot assure you that such agreements will be negotiated on terms acceptable to
us, or at all. The failure to enter into technology development or licensing
agreements, when necessary, could limit our ability to develop and market new
products and could cause our business to suffer.
As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, we cannot assure you that
licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
We May Need Additional Capital In The Future And May Not Be Able To Secure
Adequate Funds On Terms Acceptable To Us.
We currently anticipate that our existing cash balances and available line
of credit and cash flow expected to be generated from future operations will be
sufficient to meet our liquidity needs for at least the next twelve months. If
the C-Cube merger is consummated, we believe that our existing liquidity
sources, cash of $60 million to be received pursuant to the merger agreement,
cash to be received for the estimated tax liability related to the spin-off of
the semiconductor business, our bank line of credit facility and anticipated
funds from operations will satisfy the cash requirements of the combined company
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 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 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
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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 proposed acquisition of Etek Dynamics 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. See
"Business -- Manufacturing and Suppliers."
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 85 employees. The personnel at these facilities represent a
significant portion of our research and development operations. Accordingly, we
are directly influenced by the political, economic and military conditions
affecting Israel, and any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
significantly harm our business.
In addition, most of our employees in Israel are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. We cannot predict the effect
of these obligations on Harmonic in the future.
Our Business Could Be Adversely Impacted By Year 2000 Issues.
Thus far, we have not experienced any significant problems related to year
2000 issues associated with products under development or released, or with our
internal computer systems. However, we can not guarantee that the year 2000
problem will not adversely affect our business, operating results or financial
condition at some point in the future.
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 the
offering 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. See "Market for the Registrant's Common Stock and Related Security
Holder Matters."
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.
ITEM 7A. 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
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Harmonic's subsidiaries in Israel and in the United Kingdom. Harmonic has not
engaged in hedging activities as of December 31, 1999 and does not expect to do
so in the foreseeable future.
Foreign Currency Exchange Rates
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.
Interest Rates
Changes in interest rates could impact the Company's anticipated interest
income on its cash equivalents and short-term investments. The company prepared
sensitivity analyses of its interest rate exposures to assess the impact of
hypothetical changes in interest rates. Based on the results of the analyses, a
10% adverse change in interest rates from the year end 1999 rates would not have
a material adverse effect on the company's results of operations, cash flows or
financial condition for the year 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Index to Consolidated Financial Statements:
PAGE
----
Report of Independent Accountants........................... 29
Consolidated Balance Sheets as of December 31, 1999 and 30
1998........................................................
Consolidated Statement of Operations for the years ended, 31
December 31, 1999, 1998 and 1997............................
Consolidated Statement of Stockholders' Equity for the years 32
ended December 31, 1999, 1998, and 1997.....................
Consolidated Statement of Cash Flows for the years ended 33
December 31, 1999, 1998, and 1997...........................
Notes to Consolidated Financial Statements.................. 34
(b) Financial Statement Schedules: All financial statement schedules have
been omitted because the information is not required to be set forth herein, is
not applicable or is included in the financial statements or notes thereto.
(c) Selected Quarterly Financial Data: The following table sets forth for
the period indicated selected quarterly financial data for the Company.
FISCAL YEARS BY QUARTER (UNAUDITED)
1999 1998
---------------------------------------- -----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
--------------- ------- ------- ------- ------- ------- ------- ------- --------
Net sales...................... $63,286 $52,624 $37,902 $30,263 $27,097 $22,382 $18,174 $ 16,204
Gross profit................... 29,142 23,096 15,956 12,411 10,369 8,434 6,662 5,090
Income (loss) from
operations(1)................ 13,496 9,325 4,429 1,767 583 (1,044) (2,929) (18,553)
Net income (loss)(1)........... 14,378 7,692 3,855 1,349 628 (831) (2,885) (18,365)
Basic net income (loss) per
share........................ 0.35 0.25 0.13 0.06 0.03 (0.04) (0.12) (0.80)
Diluted net income (loss) per
share........................ 0.33 0.23 0.12 0.05 0.02 (0.04) (0.12) (0.80)
- ---------------
(1) The loss from operations and net loss for the first quarter of 1998 includes
a one-time charge of $14.0 million for acquired in-process technology. See
Note 2 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
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REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Harmonic Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PRICEWATERHOUSECOOPERS LLP
San Jose, CA
January 18, 2000
29
30
HARMONIC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Current assets:
Cash and cash equivalents................................. $ 24,822 $ 9,178
Short-term investments.................................... 64,877 --
Accounts receivable, net.................................. 35,421 17,646
Inventories............................................... 35,310 22,385
Deferred income taxes..................................... 5,478 --
Prepaid expenses and other assets......................... 3,792 1,175
-------- --------
Total current assets.............................. 169,700 50,384
Property and equipment, net................................. 14,931 10,726
Intangibles and other assets................................ 1,062 1,314
-------- --------
$185,693 $ 62,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,946 $ 7,534
Income taxes payable...................................... 2,265 151
Accrued liabilities....................................... 19,073 10,204
Current portion of long-term debt......................... -- 177
-------- --------
Total current liabilities......................... 40,284 18,066
Long-term debt, less current portion........................ -- 400
Other non-current liabilities............................... 521 484
Commitments and contingencies (Note 14)
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; 30,501,766 and 23,451,688 shares issued and
outstanding............................................ 31 23
Capital in excess of par value............................ 148,551 70,913
Accumulated deficit....................................... (3,792) (27,472)
Accumulated other comprehensive income.................... 98 10
-------- --------
Total stockholders' equity........................ 144,888 43,474
-------- --------
$185,693 $ 62,424
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
30
31
HARMONIC INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales................................................... $184,075 $ 83,857 $74,442
Cost of sales............................................... 103,470 53,302 39,837
-------- -------- -------
Gross profit................................................ 80,605 30,555 34,605
-------- -------- -------
Operating expenses:
Research and development.................................. 17,281 13,524 11,676
Sales and marketing....................................... 25,032 18,162 13,599
General and administrative................................ 9,275 6,812 4,824
Acquired in-process technology............................ -- 14,000 --
-------- -------- -------
Total operating expenses.......................... 51,588 52,498 30,099
-------- -------- -------
Income (loss) from operations............................... 29,017 (21,943) 4,506
Interest and other income, net.............................. 2,556 490 682
-------- -------- -------
Income (loss) before income taxes........................... 31,573 (21,453) 5,188
Provision for income taxes.................................. 7,893 -- 259
-------- -------- -------
Net income (loss)........................................... $ 23,680 $(21,453) $ 4,929
======== ======== =======
Net income (loss) per share:
Basic..................................................... $ 0.84 $ (0.92) $ 0.24
======== ======== =======
Diluted................................................... $ 0.76 $ (0.92) $ 0.21
======== ======== =======
Weighted average shares:
Basic..................................................... 28,290 23,244 20,690
======== ======== =======
Diluted................................................... 30,967 23,244 23,046
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
31
32
HARMONIC INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER
--------------- EXCESS OF ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT PAR VALUE DEFICIT INCOME EQUITY INCOME (LOSS)
------ ------ ---------- ----------- ------------- ------------- -------------
(IN THOUSANDS)
Balance at December 31, 1996... 20,322 $20 $ 54,569 $(10,948) $ -- $ 43,641
Net income..................... -- -- -- 4,929 -- 4,929 $ 4,929
Currency translation........... -- -- -- -- 23 23 23
--------
Other comprehensive income..... $ 4,952
========
Issuance of Common Stock under
option and purchase plans.... 506 1 1,337 -- -- 1,338
------ --- -------- -------- ----- --------
Balance at December 31, 1997... 20,828 21 55,906 (6,019) 23 49,931
Net loss....................... -- -- -- (21,453) -- (21,453) $(21,453)
Currency translation........... -- -- -- -- (13) (13) (13)
--------
Other comprehensive loss....... $(21,466)
========
Issuance of Common Stock under
option and purchase plans.... 548 -- 1,614 -- -- 1,614
Acquisition of New Media
Communication Ltd............ 2,076 2 13,393 -- -- 13,395
------ --- -------- -------- ----- --------
Balance at December 31, 1998... 23,452 23 70,913 (27,472) 10 43,474
Net income..................... -- -- -- 23,680 -- 23,680 $ 23,680
Change in unrealized loss on
investments.................. -- -- -- -- (126) (126) (126)
Currency translation........... -- -- -- -- 214 214 214
--------
Other comprehensive income..... $ 23,768
========
Tax benefit from exercise of
employee stock options....... -- -- 8,244 -- -- 8,244
Issuance of Common Stock in
public offering, net......... 4,100 5 58,231 -- -- 58,236
Issuance of Common Stock under
option and purchase plans and
warrant exercises............ 2,950 3 11,163 -- -- 11,166
------ --- -------- -------- ----- --------
Balance at December 31, 1999... 30,502 $31 $148,551 $ (3,792) $ 98 $144,188
====== === ======== ======== ===== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
33
HARMONIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
Cash flows from operating activities:
Net income (loss)......................................... $ 23,680 $(21,453) $ 4,929
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 6,278 4,283 3,441
Acquired in-process technology......................... -- 14,000 --
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable.................................. (17,775) (1,040) (3,815)
Inventories.......................................... (12,905) (6,393) (692)
Prepaid expenses and other assets.................... (2,617) 1,697 139
Accounts payable..................................... 11,412 3,187 (1,896)
Accrued and other liabilities........................ 13,681 3,694 (140)
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... 21,754 (2,025) 1,966
Cash flows used in investing activities:
Purchases of investments.................................. (71,760) -- --
Proceeds from maturities of investments................... 5,826 -- --
Acquisition of property and equipment..................... (9,331) (4,384) (4,767)
Acquisition of New Media Communication Ltd., net of cash
received............................................... -- (280) --
Long-term advances........................................ -- -- (1,300)
-------- -------- -------
Net cash used in investing activities............. (75,265) (4,664) (6,067)
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................... 69,401 1,614 1,338
Borrowings under bank line and term loan.................. 840 1,377 --
Repayments under bank line and term loan.................. (1,270) (800) --
-------- -------- -------
Net cash provided by financing activities......... 68,971 2,191 1,338
Effect of exchange rate changes on cash and cash
equivalents............................................... 184 6 23
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 15,644 (4,492) (2,740)
Cash and cash equivalents at beginning of period............ 9,178 13,670 16,410
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 24,822 $ 9,178 $13,670
======== ======== =======
Supplemental disclosure of cash flow information:
Income taxes paid during the period....................... $ 2,989 $ 146 $ 323
Interest paid during the period........................... $ 60 $ 80 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
33
34
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 advanced solutions
enable cable television and other network operators to provide a range of
broadcast and interactive broadband services that include high-speed Internet
access, 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.
("HDS"), has allowed us to develop and expand our product offerings to include
high-speed data delivery software and hardware.
Basis of Presentation. The consolidated financial statements of the Company
include the financial statements of the Company and its wholly-owned
subsidiaries. All intercompany accounts and balances have been eliminated. The
Company's fiscal quarters end on the Friday nearest the calendar quarter end.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all highly liquid, investment-grade
investments purchased with an original maturity date of three months or less at
the date of purchase to be cash equivalents and are stated at amounts that
approximate fair value, based on quoted market prices.
Investments. The Company's investments are comprised of U.S. government
obligations and corporate debt securities. Investments include instruments 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.
Fair Value of Financial Instruments. The carrying value of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to their
short maturities. The fair values of investments are determined using quoted
market prices for those securities or similar financial instruments.
Revenue Recognition. Revenue is recognized upon shipment of product except
when probability of collection is not assured or contract provisions require
customer acceptance. In these situations, revenue is recognized when collection
is assured or customer acceptance has occurred. The Company does not provide
rights of return to end users or distributors. A provision for the estimated
cost of warranty is recorded at the time revenue is recognized and is adjusted
periodically to reflect actual and anticipated experience.
Inventories. Inventories are stated at the lower of cost, using the
weighted average method, or market.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method based
upon the shorter of the estimated useful lives of the assets, which range from
two to ten years, or the lease term of the respective assets, if applicable.
Depreciation and amortization expense related to equipment and improvements for
the years ended December 31, 1999 and 1998 were $5,001,000 and $3,979,000,
respectively.
34
35
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangibles and Other Assets. Goodwill acquired in connection with the
acquisition of businesses is included in "Intangibles and other assets."
Amortization is provided on a straight-line basis over the estimated useful life
of five years. See Notes 2 and 6.
Long-Lived Assets. The Company records impairment losses on long-lived
assets used in operations, such as equipment and improvements, and intangible
assets when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
the assets.
Concentrations of Credit Risk. Financial instruments which subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are maintained
with high quality financial institutions and are invested in short-term, highly
liquid investment-grade obligations of government and commercial issuers, in
accordance with the Company's investment policy. The investment policy limits
the amount of credit exposure to any one financial institution or commercial
issuer. The Company's accounts receivable are derived from sales to cable
television and other network operators and distributors as discussed in Note 13.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company provides for expected losses but to
date has not experienced any material losses. At December 31, 1999, receivables
from two customers represented 20% and 11% respectively. At December 31, 1998,
receivables from three customers represented 24%, 15%, and 14%, respectively.
Currency Translation. The Company's Israeli operations' functional currency
is the U.S. Dollar. All other foreign subsidiaries use the respective local
currency as the functional currency. When the local currency is the functional
currency, gains and losses from translation are included in stockholders'
equity. Realized gains and losses resulting from foreign currency transactions
have not been material to the consolidated statements of operations for the
years ended December 31, 1999, 1998, and 1997.
Income Taxes. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their financial statement reported amounts under the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109") which has been applied for all periods presented.
Accounting for Stock-Based Compensation. The Company's stock-based
compensation plans are accounted for in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." In January
1996, the Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
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 comprehensive income has been
included in the Consolidated Statement of Stockholders' Equity for all periods
presented.
Accounting for Derivatives and Hedging Activities. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") which establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company does not expect SFAS 133 to have a material impact upon the
Company's consolidated financial statements.
Reclassification. Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1999 presentation. These
reclassifications are not material.
35
36
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: PENDING BUSINESS COMBINATION
On October 27, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization with C-Cube Microsystems, Inc. ("C-Cube"), pursuant to
which C-Cube will merge into Harmonic (the "Merger Agreement"). Under the terms
of the Merger Agreement, C-Cube will sell or spin-off to its shareholders all of
the assets and liabilities of its semiconductor business prior to closing.
C-Cube will then merge into Harmonic and, as a result, Harmonic will acquire
C-Cube's DiviCom business. The DiviCom business designs manufactures and sells
products and systems that enable companies to deliver digital video, audio and
data over as variety of networks including satellite, wireless, telephone and
cable. The merger will be structured as a tax-free exchange of stock and will be
accounted for under the purchase method of accounting. In the merger, each share
of common stock of C-Cube will be converted into the right to receive .5427
shares of Harmonic common stock. Approximately 25.7 million shares of Harmonic
Common Stock will be issued and the purchase price including acquisition related
costs is expected to be approximately $1.7 billion.
Consummation of the merger is subject to a number of conditions, including
Harmonic and C-Cube shareholder approval, the prior disposition of C-Cube's
semiconductor business and regulatory approvals. The shareholder meetings are
scheduled to be held on April 24, 2000.
Pursuant to Section 7.3 of the Merger Agreement, the Merger Agreement may
be terminated by either party under certain circumstances. Each of Harmonic and
C-Cube has agreed that if the merger is not consummated as a result of certain
specified events, it will pay to the other party a termination fee of $50.0
million. Payment of the fees described in this paragraph are not in lieu of
damages incurred in the event of willful breach of the Merger Agreement. If the
merger is not consummated, legal, accounting and financial advisory fees as well
as other expenses incurred in connection with the proposed combination, in
addition to the possible "break up fees" described above, could materially and
adversely affect Harmonic's operating results.
NOTE 3: ACQUISITION OF NEW MEDIA COMMUNICATION LTD.
On January 5, 1998, the Company acquired New Media Communication Ltd.
("NMC"), a privately held supplier of broadband, high-speed data delivery
software and hardware, in exchange for the issuance of 2,075,822 shares of
Harmonic Common Stock and the assumption of all outstanding NMC stock options.
NMC has been a development stage company since its founding in 1996 and its
revenues through 1998 were not material in relation to those of the Company. 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 acquisition.
The purchase price of approximately $17.6 million was allocated to the acquired
assets, in-process research and development ("IPRD") and goodwill. In connection
with the acquisition, $14.0 million was expensed in the first quarter of 1998 as
IPRD and approximately $1.5 million was allocated to goodwill. The goodwill is
being amortized on a straight-line basis over the estimated useful life of five
years.
The portion of the purchase price allocated to IPRD was identified and
valued through extensive interviews, analysis of data provided by NMC concerning
development projects, their stage of development, the time and resources needed
to complete them and their expected income generating ability and associated
risks. The income approach, which includes an analysis of the cash flows, and
risks associated with achieving such cash flows, was used in valuing the IPRD.
Management is primarily responsible for estimating the fair value of the IPRD.
At the time of the acquisition, NMC had commenced development of the
CyberStream System, a digital system for high-speed data transmission over
cable, wireless and satellite networks. The CyberStream System was NMC's only
research and development project in process at the acquisition date.
Technological feasibility of the acquired technology had not been established at
the time of the acquisition and the acquired technology
36
37
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had no future alternative uses. No value was attributed to NMC's existing analog
products as management believed that no further revenue would be generated due
to obsolescence.
The value of IPRD was determined by estimating the expected cash flows from
the acquired technology and discounting the net cash flows back to their present
values based on the following assumptions:
Net cash flows. The net cash flows are based on estimates of revenue, cost
of sales, operating expenses and income taxes for the project. At the date of
the acquisition, management expected commercial release of the CyberStream
system to commence by the middle of fiscal year 1998 and for revenues to
increase through fiscal year 2002, at which time they were assumed to decrease
through fiscal year 2007, as newer products would be released. The valuation
assumed that projected margins would increase based on higher sales volumes and
expenses would increase based on the growth of the business.
Discount rate. Discounting the net cash flows back to their present value
was based on the company's weighted average cost of capital of 16%. The
risk-adjusted discount rate applied to the cash flows from IPRD was 19%. The
risk premium of 3% for IPRD was due to inherent uncertainties surrounding the
acquired technology. The most significant risks associated with the acquired
technology include consumer acceptance, technology and resource risks.
The following table sets forth the pro-forma net sales, net income and net
income per share of the Company for the year ended December 31, 1997, giving
effect to the acquisition of NMC as if it had occurred as of the beginning of
the period presented:
PRO FORMA
(UNAUDITED)
---------------------
1997
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net sales.................................................. $75,086
Net income................................................. $ 1,903
Net income per share:
Basic.................................................... $ 0.08
Diluted.................................................. $ 0.08
Weighted average shares:
Basic.................................................... 22,766
Diluted.................................................. 25,122
NOTE 4: CASH AND CASH EQUIVALENTS
At December 31, 1999 and 1998, the Company had the following amounts in
cash and cash equivalents, with original maturity dates of three months or less
at the date of purchase. Realized gains and losses for the years ended December
31, 1999 and 1998 and the difference between gross amortized cost and estimated
fair value at December 31, 1999 and 1998 were immaterial.
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
Commercial paper.......................................... $ 572 $2,154
Cash and money market accounts............................ 24,250 7,024
------- ------
Total cash and cash equivalents................. $24,822 $9,178
======= ======
37
38
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENTS
The following table summarizes the Company's investments in securities (in
thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE
----------------- --------- ---------- ---------- ----------
U.S. government debt securities......... $ 1,501 $ -- $ (7) $ 1,494
Corporate debt securities............... 63,543 233 (393) 63,383
------- ---- ----- -------
Total......................... $65,044 $233 $(400) $64,877
======= ==== ===== =======
At December 31, 1998, all investment securities had original maturities of
three months or less at date of purchase and accordingly were classified as
cash and cash equivalents.
The following table summarizes debt maturities at December 31, 1999 (in
thousands):
AMORTIZED
DECEMBER 31, 1999 COST FAIR VALUE
----------------- --------- ----------
Less than one year.......................................... $37,809 $37,795
Due in 1 - 2 years.......................................... 27,235 27,082
------- -------
Total............................................. $65,044 $64,877
======= =======
38
39
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: BALANCE SHEET DETAILS
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Accounts receivable:
Gross accounts receivable................................. $ 36,732 $ 18,646
Less: allowance for doubtful accounts..................... (1,311) (1,000)
-------- --------
$ 35,421 $ 17,646
======== ========
Inventories:
Raw materials............................................. $ 10,649 $ 3,747
Work-in-process........................................... 4,740 4,557
Finished goods............................................ 19,921 14,081
-------- --------
$ 35,310 $ 22,385
======== ========
Property and equipment:
Furniture and fixtures.................................... $ 2,278 $ 2,051
Machinery and equipment................................... 27,726 19,854
Leasehold improvements.................................... 3,886 2,779
-------- --------
33,890 24,684
Less: accumulated depreciation and amortization........... (18,959) (13,958)
-------- --------
$ 14,931 $ 10,726
======== ========
Intangibles and other assets:
Other assets.............................................. $ 150 $ 98
Goodwill.................................................. 1,520 1,520
-------- --------
1,670 1,618
Less: accumulated amortization............................ (608) (304)
-------- --------
$ 1,062 $ 1,314
======== ========
Accrued liabilities:
Accrued compensation...................................... $ 10,019 $ 3,655
Customer deposits......................................... 2,992 2,234
Deferred revenue.......................................... 1,302 1,466
Accrued warranties........................................ 1,167 575
Other..................................................... 3,593 2,274
-------- --------
$ 19,073 $ 10,204
======== ========
NOTE 7: NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Basic net income per share excludes
the dilutive effect of stock options and warrants. Diluted net income per share
replaces fully diluted net income per share and gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted net
income per share, 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 net income per share.
39
40
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted net income per share computations:
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income (loss) (numerator)........................ $23,680 $(21,453) $ 4,929
======= ======== =======
Shares calculation (denominator):
Average shares outstanding -- basic.................. 28,290 23,244 20,690
Effect of Dilutive Securities:
Potential Common Stock relating to stock options and
warrants........................................... 2,677 -- 2,356
------- -------- -------
Average shares outstanding -- diluted................ 30,967 23,244 23,046
======= ======== =======
Net income (loss) per share -- basic................. $ 0.84 $ (0.92) $ 0.24
======= ======== =======
Net income (loss) per share -- diluted............... $ 0.76 $ (0.92) $ 0.21
======= ======== =======
Options and warrants to purchase 189,170, 5,888,236, and 1,028,300 shares
of common stock were outstanding during 1999, 1998 and 1997, respectively, but
were not included in the computation of diluted net income per share 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 $39.75 to $94.94 for 1999,
$0.15 to $11.37 per share for 1998, and $8.25 to $11.37 per share for 1997.
NOTE 8: LINE OF CREDIT
The Company has a bank line of credit facility (the "line"), providing for
borrowings of up to $10,000,000 with a $3,000,000 secured equipment term loan
sub-limit (the "term loan"). The line contains certain financial and other
covenants, with which the Company is in compliance at December 31, 1999, and is
available until July 2000. Borrowings pursuant to the line bear interest at the
bank's prime rate (prime rate plus 0.5% under the term loan) and are payable
monthly. The Company has letters of credit issued under the line of $0.6 million
which expire at various dates throughout year 2000. There were no outstanding
borrowings at December 31, 1999 and 1998 under the line.
NOTE 9: LONG-TERM DEBT
The Company had no long term debt at December 31, 1999. As of December 31,
1998 borrowings of $577,000 were outstanding under a previous equipment term
loan facility.
NOTE 10: CAPITAL STOCK
Stock Issuances. In April 1999, the Company completed a public offering of
5,600,000 shares of common stock at a price of $15.13 per share. Of these
5,600,000 shares, 4,000,000 shares were sold by the Company and 1,600,000 shares
were sold by selling stockholders. An additional 100,000 shares were sold by the
Company to the underwriters to cover over-allotments. Total net proceeds to the
Company were approximately $58.3 million, after underwriter discounts and
commissions and expenses. The shares sold by selling stockholders included
1,440,000 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.
Common Stock Warrants. In June 1994, the Company entered into a
distribution agreement with Scientific-Atlanta, Inc., in connection with which
it issued a warrant to purchase up to 1,597,496 shares of Common Stock at $2.78
per share. The warrant had a fair value of $200,000, which was charged to
results of
40
41
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations in the second quarter of 1994. In April 1999, the common stock
warrant was exercised immediately prior to the public offering. In consideration
of the acceleration of exercisability of the warrant, which was to become
exercisable in June 1999 and expire at the earlier of six years from the date of
issuance or the closing of a significant acquisition transaction, as defined in
the warrant, Scientific-Atlanta, Inc. agreed to reduce the number of shares
issued from 1,597,496 shares to 1,440,000 shares.
In 1993, the Company issued a warrant to purchase up to 44,444 shares of
the Company's Common Stock at an exercise price of $2.25 per share in
conjunction with an equipment lease line facility. In February 1999, the holder
elected to use the net exercise provision, resulting in the issuance of 35,476
shares of common stock and the surrender of the remaining 8,968 shares of common
stock.
Stock Split. The Company completed a two-for-one stock split which was
effected in the form of a stock dividend and distributed on October 14, 1999
payable to stockholders of record as of September 27, 1999. All references to
share and per-share data for all periods presented have been adjusted to give
effect to this two-for-one stock split.
NOTE 11: BENEFIT AND COMPENSATION PLANS
Stock Option Plans. In 1988, the Company adopted an incentive and
non-statutory stock option plan (the "1988 Plan") for which 2,251,834 shares
have been reserved for issuance. Following adoption of the 1995 Stock Plan (the
"1995 Plan") at the effectiveness of the Company's initial public offering
("IPO"), no further grants have been, or will be, made under the 1988 Plan.
Options granted under the 1988 Plan and the 1995 Plan are for periods not to
exceed ten years. Exercise prices of incentive stock option grants under both
plans must be at least 100% of the fair market value of the stock at the date of
grant and for nonstatutory stock options must be at least 85% of the fair market
value of the stock at the date of grant. Under both plans, the options generally
vest 25% at one year from date of grant, and an additional 1/48 per month
thereafter. The Company has reserved 4,400,000 shares of Common Stock for
issuance under the 1995 Plan. Upon the closing of the acquisition of HDS in
January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became
effective. The Company assumed all outstanding HDS options and issued new
options at the closing totaling 800,000 shares. No further grants have been, or
will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory
stock option plan (the "1999 Plan") for which 400,000 shares have been reserved
for issuance. Options granted under the 1997 and 1999 Plans were at fair market
value and for periods not to exceed ten years with vesting generally under the
same terms as the 1988 and 1995 plans.
Director Option Plan. Effective upon the IPO, the Company adopted the 1995
Director Option Plan (the "Director Plan") and reserved 100,000 shares of Common
Stock for issuance thereunder. The Director Plan provides for the grant of
nonstatutory stock options to certain nonemployee directors of the Company
pursuant to an automatic, nondiscretionary grant mechanism.
41
42
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes activities under the Plans:
WEIGHTED
SHARES AVAILABLE STOCK OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
---------------- ------------- --------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE)
Balance at December 31, 1996............... 210 2,482 $ 3.28
Shares authorized.......................... 960 -- --
Options granted............................ (1,008) 1,008 9.04
Options exercised.......................... -- (370) 1.65
Options canceled........................... 308 (354) 7.13
------ ------ ------
Balance at December 31, 1997............... 470 2,766 5.11
Shares authorized.......................... 1,950 -- --
Options granted............................ (2,128) 2,128 6.24
Options exercised.......................... -- (374) 2.10
Options canceled........................... 240 (274) 7.28
------ ------ ------
Balance at December 31, 1998............... 532 4,246 5.80
Shares authorized.......................... 1,560 -- --
Options granted............................ (977) 977 30.76
Options exercised.......................... -- (1,273) 4.80
Options canceled........................... 205 (218) 9.04
------ ------ ------
Balance at December 31, 1999............... 1,320 3,732 $12.48
====== ====== ======
The following table summarizes information regarding stock options
outstanding at December 31, 1999:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF DECEMBER 31, CONTRACTUAL LIFE WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICES 1999 (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE AND LIFE)
$0.15 - 5.00.. 750 4.4 $ 2.10 721 $ 2.01
5.47 - 6.75.. 826 7.5 6.05 309 6.39
6.88 - 8.38.. 757 8.2 7.87 258 7.89
8.44 - 25.50.. 1,161 8.7 17.36 241 10.12
26.44 - 94.94.. 238 9.7 58.41 7 26.44
----- --- ------ ----- ------
3,732 7.5 $12.48 1,536 $ 5.26
===== === ====== ===== ======
The weighted-average fair value of options granted in 1999 was $30.76. The
weighted-average fair value of options granted in 1998 and 1997 was $6.79 and
$9.14, respectively.
Employee Stock Purchase Plan. Effective upon the IPO, the Company adopted
the 1995 Employee Stock Purchase Plan (the "Purchase Plan") for which 800,000
shares have been reserved for issuance. The Purchase Plan enables employees to
purchase shares at 85% of the fair market value of the Common Stock at the
beginning or end of each six month purchase period. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. 201,826, 174,476 and 136,542 shares were issued under
the Purchase Plan during 1999, 1998 and 1997, respectively.
Fair Value Disclosures. The Company accounts for its stock-based
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25. If compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value method at the
grant dates, as
42
43
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prescribed in SFAS 123, the Company's net income (loss) and net income (loss)
per share would have been as follows:
1999 1998 1997
------- -------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss):
As reported......................................... $23,680 $(21,453) $4,929
Pro forma........................................... 17,223 (26,457) 3,209
Basic net income (loss) per share:
As reported......................................... $ 0.84 $ (0.92) $ 0.24
Pro forma........................................... 0.61 (1.14) 0.15
Diluted net income (loss) per share:
As reported......................................... $ 0.76 $ (0.92) $ 0.21
Pro forma........................................... 0.56 (1.14) 0.14
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
Dividend yield.............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Volatility.................. 90% 65% 55% 90% 65% 55%
Risk-free interest rate..... 4.7% - 6.7% 4.4% - 5.6% 5.6% - 6.7% 4.6% - 6.4% 4.6% - 5.5% 5.1% - 6.3%
Expected life (years)....... 4 4 4 2 2 2
Retirement/Savings Plan. The Company has a retirement/savings plan which
qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code.
This plan allows participants to contribute up to 20% of total compensation,
subject to applicable Internal Revenue Service limitations. The Company makes
discretionary contributions to the plan of $0.25 per dollar contributed by
eligible participants up to a maximum contribution per participant of $750 per
year.
NOTE 12: INCOME TAXES
The provision for income taxes consists of the following:
DECEMBER 31,
-----------------------
1999 1998 1997
------- ---- ----
(IN THOUSANDS)
Current:
Federal................................................... $11,611 $-- $168
Foreign................................................... 351 -- 90
State..................................................... 1,409 -- 1
------- --- ----
13,371 -- 259
Deferred:
Federal................................................... (4,143) -- --
Foreign................................................... -- -- --
State..................................................... (1,335) -- --
------- --- ----
(5,478) -- --
------- --- ----
$ 7,893 $-- $259
======= === ====
43
44
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's (benefit) provision for income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate to income (loss)
before income taxes as follows:
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Provision at statutory rate........................... $11,051 $(7,294) $ 1,764
Differential (benefit) in rates on foreign earnings... (20) 774 (111)
State taxes, net of federal benefit................... 48 -- 1
Foreign sales corporation benefit..................... (307) -- (176)
Acquired in-process technology and non-deductible
goodwill............................................ 106 4,863 --
Utilization of net operating loss carryovers.......... (597) -- (1,661)
Utilization of research credits....................... (548) -- --
Future benefits not currently recognized.............. 508 2,116 364
Realized deferred tax assets previously reserved...... (3,249) -- --
Alternative minimum tax............................... -- -- 51
Others, net........................................... 901 (459) 27
------- ------- -------
$ 7,893 $ -- $ 259
======= ======= =======
Deferred tax assets (liabilities) comprise the following:
DECEMBER 31,
----------------------------
1999 1998 1997
------ ------- -------
(IN THOUSANDS)
Net operating loss carryovers.......................... $ -- $ 845 $ 303
Research and development credit carryovers............. -- 3,285 2,452
Capitalized research and development costs............. 283 71 234
Reserves not currently deductible...................... 4,863 2,814 1,657
Other.................................................. 332 419 96
------ ------- -------
Total deferred tax assets.................... 5,478 7,434 4,742
Valuation allowance.................................... -- (7,434) (4,742)
------ ------- -------
Net deferred tax assets................................ $5,478 $ -- $ --
====== ======= =======
The valuation allowance at December 31, 1998 and 1997 was attributed to
deferred tax assets. Management believed that sufficient uncertainty existed
regarding the realizability of these items such that a full valuation allowance
was recorded.
The Company's income taxes payable for federal, state, and foreign purposes
have been reduced by the tax benefits of disqualifying dispositions of stock
options. The Company receives an income tax benefit for compensation expense for
tax purposes which is calculated as the difference between the market value of
the stock issued at the time of exercise and the option price at the applicable
income tax rates. This benefit is recorded as an increase in capital in excess
of par value.
NOTE 13: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in one industry segment and markets its products
worldwide through its own direct sales force and through systems integrators and
distributors. The Company has a manufacturing facility located in the U.S.,
international sales and support centers in Europe and Asia, and its Harmonic
Data Systems Ltd. subsidiary and a research and development facility in Israel.
44
45
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes net sales and property and equipment
information for geographic areas (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
Net sales:
United States...................................... $129,028 $47,422 $30,651
Canada............................................. 12,969 7,208 12,806
China.............................................. 8,552 11,647 8,254
Other foreign countries............................ 33,526 17,580 22,731
-------- ------- -------
Total...................................... $184,075 $83,857 $74,442
======== ======= =======
Property, equipment and intangibles:
United States...................................... $ 14,014 $10,384 $ 8,617
Israel............................................. 1,759 1,501 1,373
Other foreign countries............................ 70 57 87
-------- ------- -------
Total...................................... $ 15,843 $11,942 $10,077
======== ======= =======
The Company sells to a significant number of its end users through
distributors. In 1999 sales to one domestic customer represented 41% of total
net sales. In 1998 sales to one domestic customer and one foreign distributor
represented 17% and 11% of total net sales, respectively. In 1997, sales to one
distributor represented 17% of total net sales.
In 1999, 1998 and 1997, sales of optical transmitters accounted for
approximately 63%, 54%, and 63%, respectively of net sales and sales of optical
node receivers, return path and network management products accounted for
approximately 32%, 35%, and 37%, respectively, of net sales. In 1999 and 1998,
TRANsend and CyberStream digital products accounted for 5%, and 11% of net
sales. There were no significant sales of digital products in 1997.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Commitments -- Facilities Leases. The Company leases its facilities under
noncancelable operating leases which expire at various dates through 2010. Total
rent expense related to these operating leases was $1,647,000, $1,602,000, and
$1,413,000, for 1999, 1998 and 1997, respectively. Future minimum lease payments
under noncancelable operating leases at December 31, 1999, were as follows: (in
thousands)
2000........................................................ $1,513
2001........................................................ 1,415
2002........................................................ 1,324
2003........................................................ 1,352
2004........................................................ 1,392
Thereafter.................................................. 2,456
------
$9,452
======
Commitments -- Royalties. The Company has obtained research and development
grants under various Israeli government programs that require the payment of
royalties on sales of certain products resulting from such research. During 1999
and 1998 royalty expenses were not material to consolidated operations or
financial position.
Contingencies. The Company is a party to certain litigation matters and
claims which are normal in the course of its operations and, while the results
of litigation and claims cannot be predicted with certainty, management believes
that the final outcome of such matters will not have a materially adverse effect
on the Company's consolidated financial position or results of operations.
45
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
Anthony J. Ley.......... 61 Chairman of the Board of Directors, President and Chief
Executive Officer, Harmonic Inc.
Moshe Nazarathy......... 48 Senior Vice President, General Manager Israel R&D
Center, Harmonic Inc.
E. Floyd Kvamme......... 62 General Partner, Kleiner Perkins Caufield & Byers
David A. Lane........... 41 General Partner, Alpine Technology Ventures
Barry D. Lemieux........ 60 Retired; former President of American Cablesystems
Corporation
Michel L. Vaillaud...... 68 Retired; former Chairman and CEO of Schlumberger,
Limited
Each incumbent director has been engaged in the principal occupation set
forth above during the past five years. There are no family relationships
between any directors or executive officers of the Company.
Anthony J. Ley has served as the Company's President and Chief Executive
Officer since November 1988. Mr. Ley was elected Chairman of the Board of
Directors in February 1995. From 1963 to 1987, Mr. Ley was employed at
Schlumberger, both in Europe and the United States, holding various senior
business management and research and development positions, most recently as
Vice President, Research and Engineering at Fairchild Semiconductor/Schlumberger
in Palo Alto, California. Mr. Ley holds an M.A. in mechanical sciences from the
University of Cambridge and an S.M.E.E. from the Massachusetts Institute of
Technology, is named as an inventor on 29 patents and is a Fellow of the I.E.E.
(U.K.) and a senior member of the I.E.E.E.
Moshe Nazarathy, a founder of the Company, has served as Senior Vice
President, General Manager of Israel R&D Center, since December 1993, as a
director of the Company since the Company's inception and served as Vice
President, Research, from the Company's inception through December 1993. From
1985 to 1988, Dr. Nazarathy was employed in the Photonics and Instruments
Laboratory of Hewlett-Packard Company, most recently serving as Principal
Scientist from 1987 to 1988. From 1982 to 1984, Dr. Nazarathy held post-doctoral
and adjunct professor positions at Stanford University. Dr. Nazarathy holds a
B.S. and a Ph.D. in electrical engineering from Technion-Israel Institute of
Technology and is named as an inventor on 12 patents.
E. Floyd Kvamme has been a director of the Company since January 1990.
Since 1984, Mr. Kvamme has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital firm. Mr. Kvamme is also a director of Brio Technology,
Inc., GemFire, Photon Dynamics, Inc., Power Integrations, Inc., and Silicon
Genesis. Mr. Kvamme holds a B.S.E.E. from the University of California, Berkeley
and an M.S.E.E. from Syracuse University.
David A. Lane has been a director of the Company since June 1992. Since
December 1994, Mr. Lane has been a general partner and co-founder of Alpine
Technology Ventures, a venture capital firm. From August 1987 to December 1994,
he was a Vice President at the Harvard Private Capital Group, the investment
affiliate through which the Harvard Management Company makes private and direct
investments. Mr. Lane is also a director of several private companies. Mr. Lane
holds a B.S.E.E. from the University of Southern California and an M.B.A. from
Harvard University.
Barry D. Lemieux has been a director of the Company since January 1996. Now
retired, from 1978 to 1988 Mr. Lemieux was with American Cablesystems
Corporation, most recently as President and Chief Operating Officer. In addition
to marketing and general management positions with the New York Telephone
Company and Continental Cablevision, Mr. Lemieux has served on numerous cable
television industry
46
47
committees, is a former director of the Cable Advertising Bureau (CAB) and past
Chairman of the Cable Television Administration and Marketing Society (CTAM).
Mr. Lemieux holds a B.A. in history from Hofstra University and an M.A.T. from
Harvard University.
Michel L. Vaillaud has been a director of the Company since March 1997. Now
retired, from 1973 to 1986 Mr. Vaillaud was with Schlumberger, Limited, most
recently as Chairman and Chief Executive Officer. He is a graduate of Ecole
Polytechnique in Paris and Ecole Nationale Superieure des Mines in Paris. He
serves as a Trustee of the Institute of Advanced Studies in Princeton, New
Jersey.
(c) Section 16(a) -- Beneficial Ownership Reporting Compliance.
Based solely on its review of copies of filings under Section 16(a) of the
Exchange Act received by it, or written representations from certain reporting
persons, the Company believes that during fiscal 1999 all Section 16 filings
requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding the compensation of the Chief Executive Officer of the Company and the
other four most highly compensated executive officers of the Company whose
salary plus bonus exceeded $100,000 in the last fiscal year (collectively, the
"Named Executive Officers") for services rendered in all capacities to the
Company during the fiscal years ended December 31, 1997, December 31, 1998 and
December 31, 1999.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) ------------------
---------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
--------------------------- ---- --------- --------- ------------------
Anthony J. Ley............................... 1999 $325,000 $641,069 50,000
Chairman of the Board, President & 1998 300,000 50,000 80,000
Chief Executive Officer 1997 275,000 -- 50,000
Moshe Nazarathy.............................. 1999 189,883 374,779 20,000
Senior Vice President, General Manager of 1998 168,242 25,000 24,000
Israel R&D Center 1997 157,909 -- 26,000
Michael Yost................................. 1999 190,000 374,779 24,000
Vice President, Operations 1998 175,000 25,000 24,000 26,000
1997 160,000 --
Israel Levi.................................. 1999 185,000 384,916 20,000
Vice President, Research & Development 1998 170,000 25,000 24,000
1997 155,000 -- 26,000
Robin N. Dickson............................. 1999 183,596 374,781 24,000
Chief Financial Officer 1998 160,000 25,000 24,000
1997 145,000 -- 26,000
- ---------------
(1) Other than compensation described above, the Company did not pay any Named
Executive Officer any compensation, including incidental personal benefits,
in excess of 10% of such executive officer's salary.
47
48
OPTION GRANTS IN FISCAL 1999
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TERM(2)
OPTIONS TO EMPLOYEES IN EXERCISE OR ---------------------------
NAME GRANTED(1) FISCAL YEAR BASE PRICE EXPIRATION DATE 5% 10%
---- ---------- ---------------- ----------- --------------- ----------- -------------
Anthony J. Ley........... 50,000 5.1% $25.50 6/22/2009 $801,841 $2,032,022
Moshe Nazarathy.......... 20,000 2.0% 25.50 6/22/2009 320,736 812,809
Michael Yost............. 24,000 2.5% 25.50 6/22/2009 384,884 975,370
Robin N. Dickson......... 24,000 2.5% 25.50 6/22/2009 384,884 975,370
Israel Levi.............. 20,000 2.0% 25.50 6/22/2009 320,736 812,809
- ---------------
(1) The options were granted pursuant to the Company's 1995 Stock Plan, and
become exercisable at a rate of 1/4 of the shares subject to the option one
year after the date of grant and an additional 1/48 of the shares at the end
of each month thereafter, subject to continued service as an employee. The
term of each option is ten years.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
will depend on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND YEAR-END VALUES
The following table provides information with respect to the exercise of
stock options during 1999 and the value of stock options held as of December 31,
1999 by each of the Named Executive Officers under the 1988 Stock Option Plan
and the 1995 Stock Plan.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/99 OPTIONS AT 12/31/99(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
Anthony J. Ley............ 60,000 $898,500 422,496 120,834 $38,641,505 $9,594,264
Moshe Nazarathy........... -- -- 131,540 45,792 11,768,812 3,610,271
Michael Yost.............. 20,000 220,750 62,130 49,770 5,549,842 3,886,039
Robin N. Dickson.......... 20,000 722,000 106,012 49,718 9,699,436 3,881,357
Israel Levi............... -- -- 58,846 46,960 5,174,622 3,707,929
- ---------------
(1) Value realized represents the difference between the exercise price of the
options and the fair market value of the underlying securities on the date
of exercise.
(2) Calculated by determining the difference between the fair market value of
the Common Stock as of December 31, 1999 and the exercise price of the
underlying options.
48
49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
February 25, 2000 by (i) each beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv)
all directors and executive officers as a group. Except as otherwise indicated,
each person has sole voting and investment power with respect to all shares
shown as beneficially owned, subject to community property laws where
applicable.
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
------------------------------------ ---------------- ----------------
AMVESCAP PLC(1)............................................. 2,347,800 7.6%
11 Devonshire Square
London, England EC2M
FMR Corp.(1)................................................ 2,359,000 7.7%
82 Devonshire Street
Boston, MA
Morgan Stanley Dean Witter(1)............................... 1,953,547 6.4%
1585 Broadway
New York, NY 10036
Oppenheimer Funds, Inc.(1).................................. 1,598,900 5.2%
Two World Trade Center, 34th Floor
New York, NY 10048
Anthony J. Ley(2)........................................... 692,526 2.2%
Moshe Nazarathy(3).......................................... 352,925 1.1%
E. Floyd Kvamme............................................. 328,684 1.1%
David A. Lane(4)............................................ 31,666 *
Barry Lemieux(5)............................................ 53,666 *
Michel L. Vaillaud(6)....................................... 31,666 *
Michael Yost(7)............................................. 66,776 *
Robin N. Dickson(8)......................................... 150,817 *
Israel Levi(9).............................................. 75,187 *
All directors and executive officers as a group (9 1,783,913 5.6%
persons)(10)..............................................
- ---------------
* Percentage of shares beneficially owned is less than one percent of total.
(1) Based solely on a review of Schedule 13D, 13F and 13G filings with the
Securities and Exchange Commission.
(2) Includes 434,371 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(3) Includes 136,207 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(4) Includes 19,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(5) Includes 15,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(6) Includes 11,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(7) Includes 66,774 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(8) Includes 110,605 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(9) Includes 64,096 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
49
50
(10) Includes 859,051 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See Index to Financial Statements at Item 8 on
page 28 of this Report:
(a)(2) Exhibits. The documents listed on the Exhibit Index of this Report
are filed herewith. Copies of the exhibits listed in the Exhibit
Index will be furnished, upon request, to holders or beneficial
owners of the Company's Common Stock.
(b) Reports on Form 8-K.
Form 8-K filed on November 1, 1999.
50
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation, has
duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Sunnyvale, State of
California, on March 30, 2000.
HARMONIC INC.
By: /s/ ANTHONY J. LEY
------------------------------------
Anthony J. Ley
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ANTHONY J. LEY Chairman of the Board, March 30, 2000
- ----------------------------------------------------- President and Chief Executive
(Anthony J. Ley) Officer (Principal Executive
Officer)
/s/ ROBIN N. DICKSON Chief Financial Officer March 30, 2000
- ----------------------------------------------------- (Principal Financial and
(Robin N. Dickson) Accounting Officer)
/s/ BARRY LEMIEUX* Director March 30, 2000
- -----------------------------------------------------
(Barry Lemieux)
/s/ E. FLOYD KVAMME* Director March 30, 2000
- -----------------------------------------------------
(E. Floyd Kvamme)
/s/ DAVID A. LANE* Director March 30, 2000
- -----------------------------------------------------
(David A. Lane)
/s/ MOSHE NAZARATHY* Director March 30, 2000
- -----------------------------------------------------
(Moshe Nazarathy)
/s/ MICHEL L. VAILLAUD* Director March 30, 2000
- -----------------------------------------------------
(Michel L. Vaillaud)
*By: /s/ ROBIN N. DICKSON
------------------------------------------------
(Robin N. Dickson)
Attorney-In-Fact
51
52
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
a (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) or (ix) are incorporated
herein by reference.
EXHIBIT
NUMBER
-------
2.1(ix) Agreement and Plan of Merger and Reorganization by and among
C-Cube Microsystems, Inc. and Harmonic Inc. dated October
27, 1999.
3.1(i) Certificate of Incorporation of Registrant.
3.2(i) Form of Restated Certificate of Incorporation of Registrant.
3.3(i) Bylaws of Registrant.
4.1(i) Form of Common Stock Certificate.
10.1(i)+ Form of Indemnification Agreement.
10.2(i)+ 1988 Stock Option Plan and form of Stock Option Agreement.
10.3(i)+ 1995 Stock Plan and form of Stock Option Agreement.
10.4(i)+ 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.5(i)+ 1995 Director Option Plan and form of Director Option
Agreement.
10.6(i) Registration and Participation Rights and Modification
Agreement dated as of July 22, 1994 among Registrant and
certain holders of Registrant's Common Stock.
10.7(i) Distributor Agreement dated June 15, 1994 by and between
Registrant and Scientific-Atlanta, Inc.
10.8(i) Warrant to purchase Common Stock of Registrant issued to
Scientific-Atlanta, Inc. on June 15, 1994.
10.10(i) Warrant to purchase Series D Preferred Stock of Registrant
issued to Comdisco, Inc. on February 10, 1993.
10.14(ii) Business Loan Agreement, Commercial Security Agreement and
Promissory Note dated August 26, 1993, as amended on
September 14, 1995, between Registrant and Silicon Valley
Bank.
10.15(ii) Facility lease dated as of January 12, 1996 by and between
Eastrich No. 137 Corporation and Company.
10.16(iv) Amended and Restated Loan and Security Agreement dated
December 24, 1997 between Registrant and Silicon Valley
Bank.
10.17(iii)+ Change of Control Severance Agreement dated March 27, 1997
between Registrant and Anthony J. Ley.
10.18(iii)+ Form of Change of Control Severance Agreement between
Registrant and certain executive officers of Registrant.
10.19(iv) Stock Purchase Agreement, dated September 16, 1997 among
Registrant, N.M. New Media Communication Ltd., ("NMC") and
Sellers of NMC.
10.20(v) First Amendment to Stock Purchase Agreement, dated November
25, 1997 among Registrant, N.M. New Media Communication
Ltd., ("NMC") and Sellers of NMC.
10.21(vi) Registration Rights Agreement dated as of January 5, 1998 by
and among the Registrant and the persons and entities listed
on Schedule A thereto (the "NMC Shareholders").
10.22(viii) Second Amended and Restated Loan and Security Agreement
dated March 5, 1999 between Registrant and Silicon Valley
Bank.
10.23(vii) 1997 Nonstatutory Stock Option Plan.
10.24 1999 Nonstatutory Stock Option Plan.
52
53
EXHIBIT
NUMBER
-------
10.25 Amendment to Second Amended and Restated Loan and Security
Agreement dated March 5, 1999, as amended June 10, 1999 and
March 24, 2000, between Registrant and Silicon Valley Bank.
21.1* Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
- ---------------
* Previously Filed.
(i) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 No. 33-90752.
(ii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1995.
(iii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1996.
(iv) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated September 29, 1997.
(v) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated January 6, 1998.
(vi) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3 dated January 8, 1998.
(vii) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-8 dated January 14, 1998.
(viii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1999 and as amended on April 7, 1999, February 23, 2000 and
March 10, 2000.
(ix) Previously filed as an Exhibit to the Company's Report on Form 8-K dated
November 1, 1999.
+ Management Contract or Compensatory Plan or Arrangement required to be
filed as an exhibit to this report on Form 10-K.
53