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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25826
HARMONIC LIGHTWAVES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0201147
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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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)
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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 March 11, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $156,102,407. 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 10,215,677 at March 11, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT LOCATION IN FORM 10-K
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1996 Annual Report to Stockholders (pages 17-36). Parts II and IV
Portions of the Proxy Statement for the 1997 Annual Part III
Meeting of Stockholders (which will be filed with
the Securities and Exchange Commission within 120
days of the end of the fiscal year ended December
31, 1996).
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The Board Compensation Committee Report and the Performance Graph to be
included with the 1997 Proxy Statement shall not be deemed to be "soliciting
material" or to be "filed" with the Commission or otherwise incorporated by
reference into this report.
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PART I
ITEM 1. BUSINESS
Harmonic Lightwaves ("Harmonic" or the "Company") develops, manufactures
and markets highly integrated fiber optic transmission, digital headend and
element management systems for delivering interactive services over broadband
networks. The Company's products include optical transmitters, nodes, receivers,
digital video compression and modulation equipment, and element management
hardware and software. These products are used by major communications
providers, such as cable television operators, in bi-directional networks.
Harmonic was incorporated in June 1988 in California. In May 1995, Harmonic
reincorporated into Delaware and completed its initial public offering.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those set forth under "Factors That May Affect Future Results
of Operations" and elsewhere in this Annual Report on Form 10-K.
INDUSTRY BACKGROUND
The introduction and deployment of fiber optic technology in cable
television networks has significantly increased network quality and reliability.
Fiber optic cables provide significant performance advantages compared to
coaxial cables, including longer transmission distance, greater channel
capacity, reduced cable size and weight, and resistance to interference from
external electronic signals. By eliminating the need for amplifiers in the trunk
section of a traditional coax network, fiber increases the reliability of a
cable television network and the quality of the signal, while substantially
lowering network installation and maintenance cost. The higher bandwidth of
fiber can increase capacity to up to 110 analog channels on a typical hybrid
fiber coax ("HFC") network and, together with the removal of amplifiers,
facilitates the two-way communication necessary for the provision of advanced
interactive services. As a result, HFC architectures are being increasingly
adopted on a worldwide basis. In addition to upgrading network infrastructure
with fiber optics, multiple system operators (MSOs) are beginning to introduce
digital transmission capability. Digital compression technology, which will
permit the system operator to provide new integrated voice, video and data
services over HFC networks, is now becoming available. Transmissions in digital
format are expected to allow operators to provide subscribers up to several
hundred channels of high-quality television, as well as high-speed data
communications, Internet access and telephony services.
Cable television service is currently available to approximately 90% of all
U.S. households. Accordingly, growth in the U.S. cable television equipment
market is being driven primarily by the need to upgrade and rebuild existing
cable television networks to provide improved and expanded services.
Internationally, because of the relatively low availability of cable television
networks and the stringent network performance criteria which have been imposed
by many foreign governments, significant investment in advanced network
infrastructure will be required to bring cable television service to large
segments of the population. These trends are expected to contribute to the
increased use of fiber optic transmission systems in the future.
Cable television operators are facing increasing competition worldwide as a
result of recent and proposed regulatory reform. The communications environment
in the United States is likely to be more competitive as a result of the
Telecommunications Act of 1996 ("the Telecom Act"). Historically, U.S. local
exchange carriers, such as the regional Bell operating companies (RBOCs), have
been prohibited from transmitting video programming in their local service
areas. Likewise, U.S. cable television operators have been prohibited by federal
regulation from offering telephony services. The Telecom Act permits cable
television operators and local exchange carriers to enter each other's markets
and to provide other services, such as high-speed data communications. To
address this more competitive environment, the Company believes that cable
television operators will be under increasing pressure to upgrade and rebuild
their networks.
In addition, the emergence of direct broadcast satellite (DBS) systems and
other alternative video programming delivery systems has already subjected cable
television operators to increasing competitive
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pressures. DBS systems broadcast compressed digital video over satellite to a
receiving dish located at the subscriber's home and offer consumers up to 200
channels of video programming. The continued penetration of DBS is expected to
put increasing pressure on cable television operators to provide additional
programming and better quality service. In addition, other competitive
technologies have emerged to support the delivery of video programming.
Government initiatives and deregulation of telecommunications markets
abroad have fostered substantial growth and competition in many foreign cable
television markets. Because of the early stage of development of many foreign
cable television markets and stringent system performance criteria established
by foreign government regulations, the provision of cable television service in
many foreign countries will require significant investment in advanced video
transmission equipment. The major U.S. MSOs and RBOCs have used this opportunity
to expand their presence internationally, through partnerships, joint ventures
and other initiatives.
The competitive pressures to upgrade cable television networks and the
corresponding capital requirements have led to significant cable television
industry consolidation in recent years. The upgrade of existing networks
requires substantial expenditures and the replacement of significant parts of
the transmission network. As a result, MSOs have sought to increase their size
in order both to achieve the economies of scale made possible by the ownership
of adjacent systems ("clustering") and to improve their financial strength. This
has been accomplished largely through acquisitions of smaller MSOs and
independent cable television operators, many of which cannot afford significant
system upgrades. A number of sizable acquisitions and system exchanges by MSOs
has been completed during the past several years.
In order to offer the increased capabilities needed to provide these
advanced services, MSOs are expected to continue to upgrade their systems by
incorporating fiber optic technology and digital transmission capability.
Similarly, telephone companies are expected to be under competitive pressure to
upgrade their copper local loop systems, which have limited video and data
communication capabilities, to incorporate fiber optic technology. In contrast
to the past, when consumers were generally limited to a single choice for their
video service and a single choice for local telephone service, consumers are
expected to be able to choose between two or more providers of highly integrated
services in the future. The factors affecting the selection of services in the
future are expected to include network reliability, price, the number of
television channels offered, the speed of data transmission, interactivity, and
picture, sound and data quality.
PRODUCTS
Harmonic develops, manufactures and markets highly integrated fiber optic
transmission, digital headend and element management systems for delivering
interactive services over broadband networks. The Company has applied its
technical strengths in optics and electronics, including expertise with lasers,
modulators, predistortion linearizers and compression technology, to produce
products which provide enhanced network reliability and allow broadband service
providers to deliver advanced services, including two-way interactive services.
The Company's products incorporate control systems employing internally
developed embedded firmware and software to facilitate a high degree of system
integration. The "plug and play" design philosophy and communication structure
employed in the Company's products enhance ease of installation.
Optical Transmitters
The Company offers PWRLink transmitters, YAGLink transmitters and MAXLink
transmitters and optical amplifiers for a wide range of optical transmission
requirements.
PWRLink Transmitters. The PWRLink series of optical transmitters
incorporates DFB semiconductor lasers and provides optical transmission
primarily for use at a headend for local distribution to optical nodes and
for narrowcasting (the transmission of programming to select subscribers
within one system).
MAXLink Transmitters and Optical Amplifiers. The MAXLink transmitters
and optical amplifiers operate at a wavelength of 1550nm 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,
broadcast layer transmission and hub interconnects.
YAGLink Transmitters. The Company's YAGLink transmitters are
high-powered 1310nm optical transmitters designed primarily for the
transmission of optical signals over long distances, such as between
headends on a redundant ring network, or in dense urban environments where
a single headend supports a very large number of optical nodes. The
increasing acceptance among cable operators of 1550nm transmitters for
broadcast transmission has led to a decline in demand for YAGLink
transmitters. This has resulted in a decrease in sales of YAGLink
transmitters in 1996 and the Company expects sales of YAGLink transmitters
to continue to decline.
Optical Node Receivers
The Company's optical node receivers convert optical signals received from
the transmitters into RF signals for transmission to the home via coaxial cable.
Harmonic's receivers cause low levels of distortion, which maintain the high
performance levels provided by the Company's optical transmitters. The receivers
are installed in rack mount or strand mount housings, each of which can
accommodate return path transmitters and transponders in addition to the optical
node receiver.
Return Path and Element Management Products
The Company offers a number of return path transmitters, return path
receivers and element management hardware and software to provide two way
transmission capability to enable the network operator to monitor and control
the entire transmission network.
Return Path Transmitters. The Company's return path transmitters send
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.
Return Path Receivers. Harmonic's return path receivers operate at
the headend to receive return path optical transmission from the return
path transmitters.
Element Management System (EMS). Harmonic's EMS consists of
transponders and element management software. The transponders operate in
broadband networks to capture measurement data. Harmonic's Windows-based
EMS software enables the broadband service operator to monitor and control
the entire HFC network from a central office or remote locations. The
Company's EMS software is designed to be integrated into larger network
management systems through the use of simple network management protocol
(SNMP).
Digital Headend Products
The company has recently announced the introduction of its initial products
for digital headend applications.
Encoders. The Company's encoders convert analog video and audio
signals to compressed digital format fully compliant with the MPEG-2
standard.
Modulators. Harmonic's modulators accept digital signals for
modulation on to a radio frequency (RF) carrier for transmission over a
broadband network.
These products for headend applications have not yet been shipped to
customers and are not expected to be shipped in volume until the fall of 1997.
There can be no assurance that successful development of these products will be
completed in a timely manner, if at all, that they will be successfully
manufactured in volume, or that they will achieve market acceptance. See
"Factors That May Affect Future Results of Operations -- Rapid Technological
Change."
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In 1996, 1995 and 1994, sales of optical transmitters accounted for
approximately 71%, 63%, and 72%, respectively, of net sales. In 1996, 1995 and
1994, sales of optical node receivers accounted for approximately 8%, 12%, and
15%, respectively, of net sales.
SALES AND MARKETING
Harmonic markets its products worldwide through its own direct sales force
as well as through system integrators and distributors. The Company's direct
sales force supports domestic and international sales and operates from the
Company's headquarters in Sunnyvale, California and from several sales offices.
Harmonic has adopted a strategy to sell to major domestic customers through its
own direct sales force and expects that domestic distributor and OEM revenues
will be a smaller percentage of net sales in the future. In this regard, net
sales to ANTEC Corporation ("ANTEC"), a leading manufacturer, system integrator
and distributor of cable television equipment, and one of the Company's largest
customers since 1992, are expected to be insignificant in the future. In
September 1996, Harmonic and ANTEC terminated an agreement pursuant to which the
Company manufactured ANTEC's LaserLink II(TM) DFB transmitter.
Historically, the majority of Harmonic's sales have been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future, notwithstanding the Company's strategy to sell to domestic
customers through its own direct sales force. In 1996, sales to Tratec (the
Company's U.K. distributor), Capella (the Company's Canadian distributor), and
ANTEC accounted for 15%, 15%, and 13%, respectively, of net sales. In 1995,
sales to Tratec, ANTEC and Capella accounted for 22%, 15% and 15%, respectively,
of net sales. In 1994, sales to ANTEC, Capella, Siemens, Tratec and
Scientific-Atlanta, Inc. accounted for 22%, 15%, 14%, 12% and 12%, respectively,
of net sales. No other customer accounted for more than 10% of the Company's net
sales in 1996, 1995 or 1994. Harmonic's products have been purchased by most of
the ten largest domestic MSOs and by a number of large cable television
operators outside the United States. These end users include Time-Warner, Inc.,
Cox Communications, Inc., and Tele-Communications, Inc. ("TCI"), in the U.S.,
Rogers Communications in Canada, CableTel and TeleWest in the U.K., Wharf Cable
in Hong Kong and VCC in Argentina. The loss of a significant customer or any
reduction in orders by any significant customer, or the failure of the Company
to qualify its products with a significant MSO could adversely affect the
Company's business and operating results.
Sales to customers outside of the United States in 1996, 1995 and 1994
represented approximately 57%, 65% and 57% of net sales, respectively. Harmonic
expects international sales to continue to account for a substantial portion of
its net sales for the foreseeable future. International sales are made primarily
to distributors, which are generally responsible for importing the products,
installation and technical support and service to cable television operators
within their territory. International sales are subject to a number of risks,
including changes in foreign government regulations and telecommunications
standards, export license requirements, tariffs and taxes, other trade barriers,
fluctuations in foreign currency exchange rates, difficulty in collecting
accounts receivable, difficulty in staffing and managing foreign operations,
managing distributor relations and political and economic instability. There can
be no assurance that international markets will continue to develop or that the
Company will receive future orders to supply its products in international
markets at rates equal to or greater than those experienced in recent periods.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing processes consist primarily of integration and
final assembly and test, performed by highly trained personnel employing
technologically advanced electronic equipment and proprietary test programs. The
manufacturing of the Company's products and subassemblies is a complex process
and there can be no assurance that the Company will not experience production
problems or manufacturing delays in the future. Because the Company utilizes its
own manufacturing facility for this production, and because such manufacturing
capabilities are not readily available from third parties, any interruption in
operations could have a material adverse effect on the Company's business and
operating results.
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The Company uses third party contract manufacturers to assemble certain
standard parts for its products, including such items as printed circuit boards,
metal frames and power supplies. The Company intends to subcontract an
increasing number of tasks to third parties in the future. The Company's
increasing reliance on subcontractors involves several risks, including a
potential inability to obtain an adequate supply of components on a timely
basis.
Certain components and subassemblies necessary for the manufacture of the
Company's products are obtained from a sole supplier or a limited group of
suppliers. In particular, the Company relies on Fujitsu as a major source of DFB
lasers for its PWRLink and return path transmitters, for which there are limited
alternative suppliers. In addition, the optical modulators used in the Company's
MAXLink and YAGLink products are currently available only from Uniphase
Corporation. Although the Company has qualified alternative suppliers for its
lasers, in the event that the supply of optical modulators or lasers is
interrupted for any reason, products from alternative suppliers are unlikely to
be immediately available in sufficient volume to meet the Company's production
needs. Further, certain key elements of the Company's digital headend products
are expected to be provided initially by a sole foreign supplier. 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 the Company attempts to minimize its supply
risks by holding safety stocks and continuously evaluating other sources, any
interruption in supply could have a material adverse effect on the Company's
business and operating results. The Company does not maintain long-term
agreements with any of its suppliers. While the Company has historically been
able to obtain adequate supplies of components in a timely manner from its
principal suppliers, there can be no assurance that the Company will be able to
obtain such 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 the Company's products, the Company could be unable to manufacture
certain products in a quantity sufficient to meet its customers' demand. Any
inability to obtain adequate deliveries of key components could affect the
Company's ability to ship its products on a timely basis, which could damage
relationships with its current and prospective customers and could have a
material adverse effect on the Company's business and operating results.
INTELLECTUAL PROPERTY
The Company currently holds nine United States patents and nine foreign
patents, and has a number of patent applications pending. Although the Company
attempts to protect its intellectual property rights through patents,
trademarks, copyrights, maintaining certain technology as trade secrets and
other measures, there can be no assurance that any patent, trademark, copyright
or other intellectual property right owned by the Company will not be
invalidated, circumvented or challenged, such intellectual property right will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. There can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology or design around the patents
owned by the Company. In addition, effective patent, copyright and trade secret
protection may be unavailable or limited in certain foreign countries in which
the Company does business or intends to do business in the future.
The Company believes that the future success of its business will depend on
its ability to translate the technological expertise and innovation of its
personnel into new and enhanced products. The Company generally enters into
confidentiality or license agreements with its employees, consultants, vendors
and customers as needed, and generally limits access to and distribution of its
proprietary information. Nevertheless, there can be no assurance that the steps
taken by the Company will prevent misappropriation of its technology. In
addition, the Company has taken in the past, and may take in the future, legal
action to enforce the Company's patents and other intellectual property rights,
to protect the Company's 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 have a material adverse effect on the Company's business and
operating results.
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In order to successfully develop and market its recently announced products
for digital headend applications, the Company may be required to enter into
technology development or licensing agreements with third parties. Although many
companies are often willing to enter into such technology development or
licensing agreements, there can be no assurance that such agreements will be
negotiated on terms acceptable to the Company, or at all. The failure to enter
into technology development or licensing agreements, when necessary, could limit
the Company's ability to develop and market new products and could have a
material adverse effect on the Company's business and operating results.
As is common in its industry, the Company has from time to time received
notification from other companies of intellectual property rights held by those
companies upon which the Company's products may infringe. Any claim or
litigation, with or without merit, could be costly, time consuming and could
results in a diversion of management's attention, which could have a material
adverse effect on the Company's business operating results and financial
condition. If the Company were found to be infringing on the intellectual
property rights of any third party, the Company 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 the
Company or that failure to obtain a license would not adversely affect the
Company's operating results.
BACKLOG
The Company schedules production of its systems based upon its backlog,
informal commitments from customers and sales projections. The Company's backlog
consists of firm purchase orders by customers for delivery within the next
twelve months. At December 31, 1996, order backlog amounted to $9.8 million,
compared to $4.8 million at December 31, 1995. Anticipated orders from customers
may fail to materialize and delivery schedules may be 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 of its major end-users, the Company's backlog at December 31, 1996 or any
other date, is not necessarily indicative of actual sales for any succeeding
period.
The Company has excluded from its December 31, 1996 backlog significant
orders from TCI which have been on hold since the Company received a letter from
TCI dated October 17, 1996 asking it to stop product shipments until further
notice. Based on published reports, the Company believes that it was one of
approximately thirty equipment vendors to receive such a letter. The Company can
not presently estimate when, if ever, it will resume shipments to TCI.
COMPETITION
The market for cable television transmission equipment is extremely
competitive and is characterized by rapid technological change. The principal
competitive factors in this market include product performance, reliability,
price, breadth of product line, network management capabilities, sales and
distribution capability, technical support and service, relationships with cable
television operators and general industry and economic conditions. Certain of
these factors are outside of the Company's control.
The Company's competitors for its fiber optic transmission products include
established suppliers of cable television and telecommunications equipment such
as ADC Telecommunications, ANTEC, Lucent Technologies, General Instrument,
Philips and Scientific-Atlanta, as well as a number of smaller, more specialized
companies. For digital headend products, the Company's competitors are expected
to include many of the same competitors as in fiber optic transmission products,
and may also include new competitors. Most of the Company's competitors are
substantially larger and have greater financial, technical, marketing and other
resources than the Company. Many of such large competitors are in a better
position to withstand any significant reduction in capital spending by cable
television operators and other broadband service
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providers. In addition, many of the Company's competitors have more long
standing and established relationships with domestic and foreign MSOs than does
the Company.
RESEARCH AND DEVELOPMENT
The Company has historically devoted a significant amount of its resources
to research and development. Research and development expenses in 1996, 1995 and
1994 were $9.2 million, $6.1 million, and $3.2 million, respectively. The
Company expects that research and development expenses will continue to increase
in the future.
In 1994, the Company established a subsidiary in Israel in order to develop
technologies and products for digital video communication systems. The Company
has received a grant of $560,000, to be funded over an expected period of 31
months, from the BiNational Research & Development (BIRD) Foundation, a joint
U.S.-Israel program to foster research and development activities beneficial to
both countries. As of December 31, 1996, the Company had recognized
approximately $440,000 of this grant as a credit to research and development
expense. The full funding of the grant is conditioned upon the completion of the
scope of work outlined in the funding application by certain deadlines. If the
Company sells products which incorporate the technology developed in this
program, the Company will be obligated to repay the grant by means of the
payment of royalties to the BIRD Foundation. Royalties payable pursuant to the
grant are capped at an aggregate of 150% of the original grant.
Any success of the Company in designing, developing, manufacturing and
selling new and/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 and effective manufacturing and assembly processes and sales and
marketing. Because of the complexity inherent in such research and development
efforts, there can be no assurance that the Company will successfully develop
new products, or that new products developed by the Company will achieve market
acceptance. Any failure of the Company to successfully develop and introduce new
products could have a material adverse effect on the Company's business and
operating results.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Future Operating Results
The Company's operating results have fluctuated and may continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside of the Company's control, including
the level of capital spending in the cable television industry, changes in the
regulatory environment, changes in market demand, the timing of customer orders,
competitive market conditions, lengthy sales cycles, new product introductions
by the Company or its competitors, market acceptance of new or existing
products, the cost and availability of components, the mix of the Company's
customer base and sales channels, the mix of products sold, development of
custom products, the level of international sales and general economic
conditions. The Company establishes its expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of the Company's business is derived
from orders placed by a limited number of large customers, the timing of such
orders can also cause significant fluctuations in the Company's operating
results. If sales are below expectations in any given quarter, the adverse
impact of the shortfall on the Company's operating results may be magnified by
the Company's inability to adjust spending to compensate for the shortfall.
Dependence on Key Customers and End Users
Historically, a substantial majority of the Company's sales have been to
relatively few customers. Sales to the Company's ten largest customers in 1996,
1995 and 1994 accounted for approximately 72%, 80% and 88%, respectively, of its
net sales. Due in part to the consolidation of ownership of domestic cable
television systems, the Company expects that sales to relatively few customers
will continue to account for a significant
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percentage of net sales for the foreseeable future. Harmonic has adopted a
strategy to sell to major domestic customers through its own direct sales force
and expects that domestic OEM and distributor revenues will be a smaller
percentage of net sales in the future. In this regard, net sales to ANTEC in the
fourth quarter of 1996 were less than 10% of net sales, and are expected to be
insignificant in the future. Substantially all of the Company's sales are made
on a purchase order basis, and none of the Company's customers has entered into
a long-term agreement requiring it to purchase the Company's products. The loss
of, or any reduction in orders from, a significant customer would have a
material adverse effect on the Company's business and operating results.
Dependence on Cable Television Industry Capital Spending
To date, substantially all of the Company's sales have been derived,
directly or indirectly, from sales to cable television operators. Demand for the
Company's products depends to a significant extent upon the magnitude and timing
of capital spending by cable television operators for constructing, rebuilding
or upgrading their systems. The capital spending patterns of cable television
operators are dependent on a variety of factors, including access to financing,
cable television operators' annual budget cycles, the status of federal, local
and foreign government regulation of telecommunications and television
broadcasting, overall demand for cable television services, competitive
pressures (including the availability of alternative video delivery technologies
such as satellite broadcasting), discretionary customer spending patterns and
general economic conditions. The Company believes that the consolidation of
ownership of domestic cable television systems, by acquisition and system
exchanges, together with uncertainty over regulatory issues, particularly the
debate over the provisions of the Telecommunications Act of 1996, caused delays
in capital spending by major domestic MSOs during the second half of 1995 and
first quarter of 1996. Although the Act became law in February 1996 and the
Company believes that its provisions will result in increased capital
expenditures in the telecommunications industry, there can be no assurance that
capital spending by domestic MSOs will increase in the near future, or at all,
or that Harmonic's sales will benefit. 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.
Rapid Technological Change
The market for the Company's products is relatively new, making it
difficult to accurately predict the market's future growth rate, size and
technological direction. In view of the evolving nature of this market, there
can be no assurance that cable television operators, telephone companies or
other suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has announced and demonstrated initial products for digital
applications, there can be no assurance that the Company will successfully
complete development of, or successfully introduce, products for digital
applications, or that such products will achieve commercial acceptance. In
addition, in order to successfully develop and market its planned products for
digital applications, the Company may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing to enter into such technology development or licensing
agreements, there can be no assurance that such agreements will be negotiated on
terms acceptable to the Company, or at all. The failure to enter into technology
development or licensing agreements, when necessary, could limit the Company's
ability to develop and market new products and could have a material adverse
effect on the Company's business and operating results.
8
<PAGE> 10
The failure of the Company to successfully develop and introduce new
products that address the changing needs of the broadband communications market
could have a material adverse effect on the Company's business and operating
results. In addition, there can be no assurance that the successful introduction
by the Company of new products will not have an adverse effect on the sales of
the Company's existing products. For instance, an emerging trend in the domestic
market toward narrowcasting (targeted delivery of advanced services to small
groups of subscribers) is causing changes in the network architectures of some
cable operators. This may have the effect of changing the Company's product mix
toward lower price transmitters, which could adversely affect the Company's
gross margins.
Risks of International Operations
Sales to customers outside of the United States in 1996, 1995 and 1994
represented 57%, 65% and 57% of net sales, respectively, and the Company expects
that international sales will continue to represent a substantial portion of its
net sales for the foreseeable future. In addition, the Company has an Israeli
subsidiary that engages primarily in research and development. International
operations are subject to a number of risks, including changes in foreign
government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable, difficulty in
staffing and managing foreign operations and political and economic instability.
While international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. Payment cycles for
international customers are typically longer than those for customers in the
United States. There can be no assurance that foreign markets will continue to
develop or that the Company will receive additional orders to supply its
products for use in foreign broadband systems.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 215 people,
including 92 in manufacturing operations, 65 in research and development, 40 in
sales and marketing and 18 in a general and administrative capacity. The Company
also employs a number of temporary employees and consultants on a contract
basis. None of the Company's employees is represented by a labor union with
respect to his or her employment by the Company. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
The Company's future success will depend, in part, upon its ability to attract
and retain qualified personnel. Competition for qualified personnel in the
communications industry is intense, and there can be no assurance that the
Company will be successful in retaining its key employees or that it will be
able to attract skilled personnel as the Company grows.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company and their ages as of March 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
Anthony J. Ley......................... 58 Chairman of the Board of Directors,
President and Chief Executive Officer
Moshe Nazarathy........................ 45 Senior Vice President, General Manager
of Israel R&D Center, and Director
Robin N. Dickson....................... 49 Chief Financial Officer
Michael Yost........................... 53 Vice President, Operations
John E. Dahlquist...................... 50 Vice President, Marketing
</TABLE>
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
9
<PAGE> 11
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 28 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 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 twelve patents.
Robin N. Dickson joined the Company 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. Prior to joining Raychem Corporation, Mr. Dickson
worked with the accounting firm of Deloitte, Haskins & Sells in Brussels,
Belgium. 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 the Company 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.
John E. Dahlquist joined the Company in November 1993 as Vice President
Marketing. From September 1990 to October 1993, Mr. Dahlquist served as Vice
President, Marketing at Philips Broadband Networks, Inc. From 1967 to August
1990, Mr. Dahlquist was employed at the Jerrold Division of General Instrument
Corporation, where he held various engineering and marketing management
positions, including Director International Business Programs from 1989 to 1990
and Director of European Cable Operations, U.K. from 1984 to 1989. Mr. Dahlquist
holds a B.S.E.E. and an M.B.A. from Drexel University.
ITEM 2. PROPERTIES
The Company's principal operations are located at its corporate
headquarters in Sunnyvale, California. The lease on its headquarters building,
of approximately 110,000 square feet, expires in July 2006. The Company has
subleased approximately 25,000 square feet of its headquarters through July
1998. The Company also has a regional sales and support office in Pennsylvania,
several sales offices in the United States and a research and development
facility in Israel. The Company believes that its existing facilities will be
adequate to meet its needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information required by this Item is set forth on page 17 of the 1996
Annual Report to Stockholders under the caption "Selected Financial Data" and is
incorporated herein by reference. At December 31, 1996, there were 207 holders
of record of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for the Company for each of the last
five fiscal years appears on page 17 of the 1996 Annual Report to Stockholders
under the caption "Selected Financial Data" and is incorporated herein by
reference.
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" appears on pages 18-23 of the 1996 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to pages 24 to 36 of the 1996 Annual Report to Stockholders filed as Exhibit
13.1 to this Annual Report on Form 10-K. Selected quarterly financial data for
the Company appear on page 17 of the 1996 Annual Report to Stockholders under
the caption "Selected Financial Data" and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on April 30, 1997, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
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 -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the 1997 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1997 Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information related to security ownership of certain beneficial owners and
security ownership of management is set forth in the 1997 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.
11
<PAGE> 13
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
The following consolidated financial statements of the Company and
subsidiary and Report of Independent Accountants are included in the 1996 Annual
Report to Stockholders filed herewith as Exhibit 13.1 and are incorporated
herein by reference:
<TABLE>
<CAPTION>
1996 ANNUAL
REPORT PAGE
------------
<S> <C>
Consolidated Balance Sheet as at December 31, 1996 and 1995.............. 24
Consolidated Statement of Operations for the years ended 25
December 31, 1996, 1995 and 1994.......................................
Consolidated Statement of Stockholders' Equity (Deficit) for the years 26
ended
December 31, 1996, 1995 and 1994.......................................
Consolidated Statement of Cash Flows for the years ended 27
December 31, 1996, 1995 and 1994.......................................
Notes to Consolidated Financial Statements............................... 28 - 35
Report of Independent Accountants........................................ 36
</TABLE>
(a)(2) Financial Statement Schedules
Schedules have been omitted because they are inapplicable, because the
required information has been included in the financial statements or notes
thereto, or the amounts are immaterial.
(a)(3) Exhibits
The documents listed on the Exhibit Index appearing at page 14 of this
Report are filed herewith. The 1996 Annual Report to Stockholders and 1997 Proxy
Statement shall be deemed to have been "filed" with the Securities and Exchange
Commission only to the extent portions thereof are expressly incorporated herein
by reference. 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
None.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Harmonic Lightwaves, Inc., a Delaware
corporation, has duly caused this Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State
of California, on March 26, 1997.
HARMONIC LIGHTWAVES, INC.
By: /s/ ANTHONY J. LEY
------------------------------------
Anthony J. Ley, Chairman of the
Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Anthony J. Ley and Robin N. Dickson, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ ANTHONY J. LEY Chairman of the Board, President March 26, 1997
- ------------------------------------------ and Chief Executive Officer
(Anthony J. Ley) (Principal Executive Officer)
/s/ ROBIN N. DICKSON Chief Financial Officer March 26, 1997
- ------------------------------------------ (Principal Financial and
(Robin N. Dickson) Accounting Officer)
/s/ BARRY LEMIEUX Director March 26, 1997
- ------------------------------------------
(Barry Lemieux)
/s/ E. FLOYD KVAMME Director March 26, 1997
- ------------------------------------------
(E. Floyd Kvamme)
/s/ DAVID A. LANE Director March 26, 1997
- ------------------------------------------
(David A. Lane)
/s/ MOSHE NAZARATHY Director March 26, 1997
- ------------------------------------------
(Moshe Nazarathy)
/s/ MICHEL L. VAILLAUD Director March 26, 1997
- ------------------------------------------
(Michel L. Vaillaud)
/s/ JOSEF BERGER Director March 26, 1997
- ------------------------------------------
(Josef Berger)
</TABLE>
13
<PAGE> 15
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
an asterisk (*) or double asterisk (**), are incorporated herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
<S> <C>
3.1* Certificate of Incorporation of Registrant
3.2* Form of Restated Certificate of Incorporation of Registrant
3.3* Bylaws of Registrant
4.1* Form of Common Stock Certificate
10.1*+ Form of Indemnification Agreement
10.2*+ 1988 Stock Option Plan and form of Stock Option Agreement
10.3*+ 1995 Stock Plan and form of Stock Option Agreement
10.4*+ 1995 Employee Stock Purchase Plan and form of Subscription Agreement
10.5*+ 1995 Director Option Plan and form of Director Option Agreement
10.6* 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* Distributor Agreement dated June 15, 1994 by and between Registrant and
Scientific- Atlanta, Inc.
10.8* Warrant to purchase Common Stock of Registrant issued to Scientific-Atlanta, Inc.
on June 15, 1994
10.10* Warrant to purchase Series D Preferred Stock of Registrant issued to Comdisco,
Inc. on February 10, 1993
10.14** 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** Facility lease dated as of January 12, 1996 by and between Eastrich No. 137
Corporation and Company
10.16 Loan Modification Agreement dated September 13, 1996 between Registrant and
Silicon Valley Bank
10.17+ Change of Control Severance Agreement dated March 27, 1997 between Registrant and
Anthony J. Ley
10.18+ Form of Change of Control Severance Agreement between Registrant and certain
executive officers of Registrant
11.1 Computation of Net Income (Loss) Per Share
13.1 1996 Annual Report (to be deemed filed with the Securities and Exchange Commission
only to the extent required by the instruction to exhibits for reports on Form
10-K)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney
</TABLE>
- ---------------
* Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 [No. 33-90752].
** Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1995.
+ Management Contract or Compensatory Plan or Arrangement required to be filed
as an exhibit to this report on Form 10-K pursuant to Item 14(c) of this
report.
14
<PAGE> 1
EXHIBIT #10.16
HARMONIC LIGHTWAVES, INC.
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of September 13, 1996,
by and between Harmonic Lightwaves, Inc. (the "Borrower") whose address is 549
Baltic Way, Sunnyvale, CA 94089, and Silicon Valley Bank (the "Lender") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated August 26, 1993, in the original
principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the
"Note"). The Note has been modified pursuant to Loan Modification Agreements
dated May 15, 1994, August 15, 1994, October 5, 1994 and September 14, 1995,
pursuant to which, among other things, the principal amount of the Note was
increased to Five Million and 00/100 Dollars ($5,000,000.00). The Note,
together with other promissory notes from Borrower to Lender, is governed by
the terms of a Business Loan Agreement, dated August 26, 1993, between Borrower
and Lender, as such agreement may be amended from time to time (the "Loan
Agreement"). Defined terms used but not otherwise defined herein, shall have
the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness."
2. DESCRIPTION OF COLLATERAL In connection with the repayment of the
Indebtedness, Borrower has agreed not to further encumber or Pledge any of its
assets pursuant to a Negative Pledge Agreement, being executed concurrently
herewith.
Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents." Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Documents."
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Note
1. Payable in one payment of all outstanding principal plus
all accrued unpaid interest on September 12, 1997 (the
"Maturity Date"). In addition, Borrower will pay regular
monthly payments of all accrued unpaid interest due as of
each payment date beginning October 12, 1996, and all
subsequent interest payments are due on the same day of
each month thereafter.
2. The principal amount of the Note is hereby increased to
Ten Million and 00/100 Dollars ($10,000,000.00).
3. The interest rate to be applied to the unpaid principal
balance of the Note shall be at a rate equal to Lender's
Index (as described in the Note) or a LIBOR Interest Rate
equal to 2.000 percentage points in excess of the LIBOR
Base Rate as described in the LIBOR Supplement to Loan
Modification Agreement, attached hereto.
4. The requirement for Borrower to maintain a zero balance
under the Note is hereby deleted in its entirety.
<PAGE> 2
B. Modification(s) to Loan Agreement.
1. The following paragraphs are hereby incorporated into the
Loan Agreement:
Accounts Receivable and Accounts Payable. At such time
as outstandings under the line of credit facility exceed
Five Million and 00/100 Dollars ($5,000,000.00), Borrower
shall provide to Lender, not later than twenty (20) days
after the end of each month with a Borrowing Base
Certificate and aged lists of accounts receivable and
accounts payable. Semi-annual accounts receivable
audits to be performed by Lender's agent. Borrower's
deposit account will be debited for the audit expense and
a notification will be mailed to Borrower.
Borrowing Base Formula. At such time as outstandings
under the line of credit facility exceed Five Million and
00/100 Dollars ($5,000,000.00), funds shall be advanced
under the line of credit facility according to a
borrowing base formula, as determined by Lender on a
monthly basis, defined as follows: the lesser of (a)
$10,000,000.00 minus the face amount of outstanding
Letters of Credit (including drawn but unreimbursed
Letters of Credit) minus the Foreign Exchange Reserve (as
defined herein) or (b) the sum of (i) eighty percent
(80%) of eligible domestic accounts receivable plus (ii)
eighty percent (80%) of pre-approved foreign accounts
receivable plus (iii) one hundred percent (100%) of
accounts receivable backed by letters of credit, provided
such letters of credit are issued by a bank acceptable to
Lender and in form and substance acceptable to Lender,
minus (iv) the face amount of outstanding Letters of
Credit (including drawn but unreimbursed Letters of
Credit) minus (v) the Foreign Exchange Reserve. Eligible
domestic accounts receivable shall include, but not be
limited to, those accounts outstanding less than 90 days
from the date of invoice, excluding foreign, government,
contra, and intercompany accounts; and exclude accounts
wherein 50% or more of the account is outstanding more
than 90 days from the date of invoice. Foreign accounts
may be eligible if approved by Lender on a case-by-case
basis. Any account which alone exceeds 25% of total
accounts will be ineligible to the extent said account
exceeds 25% of total accounts. Also exclude any credit
balances which are aged past 90 days. Also ineligible
are any accounts which Lender in its sole judgment
excludes for valid credit reasons.
Foreign Exchange Sublimit. Subject to the terms of this
Agreement, as amended from time to time, Borrower may
utilize up to $2,000,000.00 for spot and future foreign
exchange contracts (the "Exchange Contracts"). Borrower
shall not request an Exchange Contract at any time it is
not in compliance with any of the terms of this
Agreement. All Exchange Contracts must provide for
delivery of settlement on or before the Maturity Date.
The limit available at any time shall be reduced by the
following amounts (the "Foreign Exchange Reserve") on
each day (the "Determination Date"): (i) on all
outstanding Exchange Contracts on which delivery is to be
effected or settlement allowed more than two business
days from the Determination Date, 10% of the gross amount
of the Exchange Contracts; plus (ii) on all outstanding
Exchange Contracts on which delivery is to be effected or
settlement allowed within two business days after the
Determination Date, 100% of the gross amount of the
Exchange Contracts. In lieu of the Foreign Exchange
Reserve for 100% of the gross amount of any Exchange
Contract, the Borrower may request that Lender debit
Borrower's bank account with Lender for such amount,
provided Borrower has immediately available funds in such
amounts in its bank account.
2
<PAGE> 3
Lender may, in its discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs
or (b) that there is not sufficient availability under
the Note and Borrower does not have available funds in
its bank account to satisfy the Foreign Exchange Reserve.
If Lender terminates the Exchange Contracts, and without
limitation of the FX Indemnity Provisions (as referred to
below), Borrower agrees to reimburse Lender for any and
all fees, costs and expenses relating thereto or arising
in connection therewith.
Borrower shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected
and settlement allowed in any two business day period to
be more than $2,000,000.00 nor shall Borrower permit the
total gross amount of all Exchange Contracts to which
Borrower is a party, outstanding at any one time, to
exceed $2,000,000.00.
Borrower shall execute all standard form applications and
agreements of Lender in connection with the Exchange
Contracts, and without limiting any of the terms of such
applications and agreements, Borrower will pay all
standard fees and charges of Lender in connection with
the Exchange Contracts.
Without limiting any of the other terms of this Agreement
or any such standard form applications and agreement of
Lender, Borrower agrees to indemnify Lender and hold
it harmless, from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and
expenses (including, without limitation, attorneys' fees
of counsel of Lender's choice), of every nature and
description which it may sustain or incur, based upon,
arising out of, or in any way relating to any of the
Exchange Contracts or any transactions relating thereto
or contemplated thereby (collectively referred to as the
"FX Indemnity Provisions").
2. The paragraph entitled "Letter of Credit Sublimit" is
hereby amended, in its entirety, to read as follows:
Letters of Credit. Subject to the terms and conditions
of this Agreement, Lender agrees to issue or cause to be
issued letters of credit for the account of Borrower in
an aggregate face amount not to exceed (i) the lesser of
the $10,000,000.00 or the Borrowing Base Formula minus
(ii) the then outstanding principal balance of the Note
provided that the face amount of outstanding Letters of
Credit (including drawn but unreimbursed Letters of
Credit) shall not in any case exceed Ten Million Dollars
($10,000,000.00). Each such letter of credit shall have
an expiry date no later than one hundred eighty (180)
days after the Maturity Date of the Note. provided that
Borrower's letter of credit reimbursement obligation
shall be secured by cash on terms acceptable to Lender at
any time after the Maturity Date if the term of the
Agreement is not extended by Lender. All such letters of
credit shall be, in form and substance, acceptable to
Lender in its sole discretion and shall be subject to the
terms and conditions of Lender's form of application and
letter of credit agreement.
Borrower shall indemnify, defend, protect and hold Lender
harmless from any loss, cost, expense or liability,
including, without limitation, reasonable attorneys'
fees, arising out of or in connection with any letters of
credit.
3
<PAGE> 4
Letter of credit Reimbursement: Reserve. Borrower may
request that Lender issue a letter of credit payable in a
currency other than United States Dollars. If a demand
for payment is made under any such letter of credit,
Lender shall treat such demand as an advance to Borrower
of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing
rate of exchange in San Francisco, California, for sales
of that other currency for cable transfer to the country
of which it is the currency.
Upon the issuance of any letter of credit payable in a
currency other than United States Dollars, Lender shall
create a reserve (the "Letter of Credit Reserve") under
the Committed Line for letters of credit against
fluctuations in currency exchange rates, in an amount
equal to ten percent (10%) of the face amount of such
letter of credit. The amount of such reserve may be
amended by Lender from time to time to account for
fluctuations in the exchange rate. The availability of
funds under the Note shall be reduced by the amount of
such reserve for so long as such letter of credit remains
outstanding.
3. The paragraph entitled "Financial Covenants" is hereby
amended to read in its entirety as follows:
Borrower shall maintain on a quarterly basis, a minimum
quick ratio of 2.00 to 1.0; a minimum tangible net worth
of $35,000,000.00, plus seventy five percent (75%) of
quarterly profits after taxes (exclusive of losses),
beginning as of October 1, 1996, plus one hundred percent
(100%) of net new equity; and a maximum total debt minus
subordinated debt to tangible net worth plus subordinated
debt ratio of 1.00 to 1.00. Additionally, Borrower shall
achieve profitability on a quarterly basis with allowance
for one quarterly loss, provided such loss does not
exceed $500,000.00.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEES. Borrower shall pay to Lender a fee in the amount of
Fifteen Thousand and 00/100 Dollars ($15,000.00) (the "Loan Fee") plus all
out-of-pocket expenses.
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of this date, it has no defenses against the obligations
to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents. Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect. Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness. Nothing in this Loan Modification Agreement shall constitute
a satisfaction of the Indebtedness. It is the intention of Lender and Borrower
to retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing. No maker,
endorser, or guarantor will be released by virtue of this Loan Modification
Agreement. The terms of this Paragraph apply not only to this Loan Modification
Agreement, but also to all subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.
4
<PAGE> 5
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: LENDER:
HARMONIC LIGHTWAVES, INC. SILICON VALLEY BANK
By: /s/Robin N. Dickson By: /s/Peter A. Kidder
------------------------ ---------------------------
Name: Robin N. Dickson Name: Peter A. Kidder
----------------------- ------------------------
Title: Chief Financial Officer Title: Vice President
----------------------- -----------------------
5
<PAGE> 1
EXHIBIT _________
HARMONIC LIGHTWAVES, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made
and entered into by and between Anthony J. Ley (the "Employee") and Harmonic
Lightwaves, Inc. (the "Company"), effective as of the latest date set forth by
the signatures of the parties hereto below.
R E C I T A L S
A. It is expected that the Company from time to time
will consider the possibility of an acquisition by another company or other
change of control. The Board of Directors of the Company (the "Board")
recognizes that such consideration can be a distraction to the Employee and can
cause the Employee to consider alternative employment opportunities. The Board
has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his employment and to motivate the Employee to maximize the value of
the Company upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the
Employee with certain severance benefits upon Employee's termination of
employment following a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the
date that all obligations of the parties hereto with respect to this Agreement
have been satisfied.
2. At-Will Employment. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
the Employee shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise
be available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
<PAGE> 2
3. Severance Benefits.
(a) Termination Following A Change of Control. If the
Employee's employment terminates at any time within eighteen (18) months
following a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive the following severance benefits:
(i) Involuntary Termination. If the Employee's
employment is terminated as a result of Involuntary Termination other than for
Cause, then the Employee shall receive the following severance benefits from
the Company:
(1) Severance Payment. A cash payment in an
amount equal to three hundred percent (300%) of the Employee's Annual
Compensation;
(2) Continued Employee Benefits. One
hundred percent (100%) Company-paid health, dental and life insurance coverage
at the same level of coverage as was provided to such employee immediately
prior to the Change of Control (the "Company-Paid Coverage"). If such coverage
included the Employee's dependents immediately prior to the Change of Control,
such dependents shall also be covered at Company expense. Company-Paid
Coverage shall continue until the earlier of (i) three years from the date of
the Change of Control, or (ii) the date that the Employee and his dependents
become covered under another employer's group health, dental or life insurance
plans that provide Employee and his dependents with comparable benefits and
levels of coverage. For purposes of Title X of the Consolidated Budget
Reconciliation Act of 1985 ("COBRA"), the date of the "qualifying event" for
Employee and his dependents shall be the date upon which the Company-Paid
Coverage terminates.
(3) Option and Restricted Stock Accelerated
Vesting. One Hundred percent (100%) of the unvested portion of any stock
option or restricted stock held by the Employee shall automatically be
accelerated in full so as to become completely vested; provided, however, that
if such potential vesting acceleration would cause a contemplated Change of
Control transaction that was intended to be accounted for as a
"pooling-of-interests" transaction to become ineligible for such accounting
treatment under generally accepted accounting principles, as determined by the
Company's independent public accountants (the "Accountants") prior to the
Change of Control, Employee's stock options and restricted stock shall not have
their vesting so accelerated.
(4) Outplacement Assistance. If desired
by Employee, Company will pay up to five thousand dollars ($5,000.00) for
outplacement assistance selected by Company and approved by Employee.
(b) Timing of Severance Payments. Any payments to which
Employee is entitled under Sections 3(a)(i)(1) and 5 shall be paid by the
Company to the Employee (or to the Employee's successors in interest, pursuant
to Section 7(b)) in cash and in full, not later than thirty (30) calendar days
following the Termination Date.
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<PAGE> 3
(c) Voluntary Resignation; Termination For Cause. If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be
established under the Company's then existing severance and benefits plans and
practices or pursuant to other agreements with the Company.
(d) Disability; Death. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
for those (if any) as may then be established under the Company's then existing
severance and benefits plans and practices or pursuant to other agreements with
the Company.
(e) Termination Apart from Change of Control. In the
event the Employee's employment is terminated for any reason, either prior to
the occurrence of a Change of Control or after the twelve (12)-month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.
5. Excise Tax Payments. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee constitute "parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") and will be subject
to the excise tax imposed by Section 4999 of the Code, then the Employee shall
receive (a) a payment from the Company sufficient to pay such excise tax, and
(b) an additional payment from the Company sufficient to pay the excise tax and
federal and state income taxes arising from the payments made by the Company to
Employee pursuant to this sentence. Unless the Company and the Employee
otherwise agree in writing, the determination of Employee's excise tax
liability and the amount required to be paid under this Section 5 shall be made
in writing by the Accountants. In the event that the excise tax incurred by
Employee is determined by the Internal Revenue Service to be greater or lesser
than the amount so determined by the Accountants, the Company and Employee
agree to promptly make such additional payment, including interest and any tax
penalties, to the other party as the Accountants reasonably determine is
appropriate to ensure that the net economic effect to Employee under this
Section 5, on an after-tax basis, is as if the Code Section 4999 excise tax did
not apply to Employee. For purposes of making the calculations required by
this Section 5, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on interpretations of
the Code for which there is a "substantial authority" tax reporting position.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this
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<PAGE> 4
Section. The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Annual Compensation. "Annual Compensation" means an
amount equal to (i) Employee's Company salary for the twelve months preceding
the Change of Control, and (ii) Employee's 100% "On Target" bonus for the year
in which the Change of Control occurs.
(b) Cause. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, and
(iv) following delivery to the Employee of a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties, continued violations by
the Employee of the Employee's obligations to the Company which are
demonstrably willful and deliberate on the Employee's part.
(c) Change of Control. "Change of Control" means the
occurrence of any of the following events:
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities;
(ii) A change in the composition of the Board
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company);
(iii) The consummation of a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty percent (50%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation;
-4-
<PAGE> 5
(iv) The consummation of the sale or disposition
by the Company of all or substantially all the Company's assets.
(d) Disability. "Disability" shall mean that the
Employee has been unable to perform his Company duties as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Employee or the Employee's legal representative (such Agreement as to
acceptability not to be unreasonably withheld). Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Employee's employment. In the event
that the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.
(e) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the significant
reduction of the Employee's duties, authority or responsibilities, relative to
the Employee's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Employee of such reduced duties,
authority or responsibilities; (ii) without the Employee's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary of the Employee as in effect immediately prior to
such reduction; (iv) a material reduction by the Company in the kind or level
of employee benefits, including bonuses, to which the Employee was entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee
to a facility or a location more than twenty-five (25) miles from the
Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for
which the grounds relied upon are not valid; (vii) the failure of the Company
to obtain the assumption of this agreement by any successors contemplated in
Section 7(a) below; or (viii) any act or set of facts or circumstances which
would, under California case law or statute constitute a constructive
termination of the Employee.
(f) Termination Date. "Termination Date" shall mean (i)
if this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30)-day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days
after the Company gives the Employee notice of termination, the Employee
notifies the Company that a dispute exists concerning the termination or the
benefits due pursuant to this Agreement, then the Termination Date shall be the
date on which such dispute is finally determined, either by mutual written
agreement of the parties, or a by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
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<PAGE> 6
7. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this Section 7(a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement
and all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. Notice.
(a) General. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the
Company for Cause or by the Employee as a result of a voluntary resignation or
an Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8(a) of this Agreement.
Such notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated,
and shall specify the termination date (which shall be not more than 30 days
after the giving of such notice). The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may
receive from any other source.
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<PAGE> 7
(b) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.
(d) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California.
(e) Severability. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Withholding. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
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<PAGE> 8
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.
COMPANY HARMONIC LIGHTWAVES, INC.
By:_____________________________________
Title:__________________________________
Date:____________________
EMPLOYEE ________________________________________
Anthony J. Ley
Date:____________________
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<PAGE> 1
EXHIBIT ______
HARMONIC LIGHTWAVES, INC.
CHANGE OF CONTROL SEVERANCE AGREEMENT
This Change of Control Severance Agreement (the "Agreement") is made
and entered into by and between _____________________ (the "Employee") and
Harmonic Lightwaves, Inc. (the "Company"), effective as of the latest date set
forth by the signatures of the parties hereto below.
R E C I T A L S
A. It is expected that the Company from time to time
will consider the possibility of an acquisition by another company or other
change of control. The Board of Directors of the Company (the "Board")
recognizes that such consideration can be a distraction to the Employee and can
cause the Employee to consider alternative employment opportunities. The Board
has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his employment and to motivate the Employee to maximize the value of
the Company upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the
Employee with certain severance benefits upon Employee's termination of
employment following a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
The parties hereto agree as follows:
1. Term of Agreement. This Agreement shall terminate upon the
date that all obligations of the parties hereto with respect to this Agreement
have been satisfied.
2. At-Will Employment. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
the Employee shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise
be available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
<PAGE> 2
3. Severance Benefits.
(a) Termination Following A Change of Control. If the
Employee's employment terminates at any time within eighteen (18) months
following a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive the following severance benefits:
(i) Involuntary Termination. If the Employee's
employment is terminated as a result of Involuntary Termination other than for
Cause, then the Employee shall receive the following severance benefits from
the Company:
(1) Severance Payment. A cash payment in an
amount equal to two hundred percent (200%) of the Employee's Annual
Compensation;
(2) Continued Employee Benefits. One
hundred percent (100%) Company-paid health, dental and life insurance coverage
at the same level of coverage as was provided to such employee immediately
prior to the Change of Control (the "Company-Paid Coverage"). If such coverage
included the Employee's dependents immediately prior to the Change of Control,
such dependents shall also be covered at Company expense. Company-Paid
Coverage shall continue until the earlier of (i) two years from the date of the
Change of Control, or (ii) the date that the Employee and his dependents become
covered under another employer's group health, dental or life insurance plans
that provide Employee and his dependents with comparable benefits and levels of
coverage. For purposes of Title X of the Consolidated Budget Reconciliation
Act of 1985 ("COBRA"), the date of the "qualifying event" for Employee and his
dependents shall be the date upon which the Company-Paid Coverage terminates.
(3) Option and Restricted Stock Accelerated
Vesting. One Hundred percent (100%) of the unvested portion of any stock
option or restricted stock held by the Employee shall automatically be
accelerated in full so as to become completely vested; provided, however, that
if such potential vesting acceleration would cause a contemplated Change of
Control transaction that was intended to be accounted for as a
"pooling-of-interests" transaction to become ineligible for such accounting
treatment under generally accepted accounting principles, as determined by the
Company's independent public accountants (the "Accountants") prior to the
Change of Control, Employee's stock options and restricted stock shall not have
their vesting so accelerated.
(4) Outplacement Assistance. If desired
by Employee, Company will pay up to five thousand dollars ($5,000.00) for
outplacement assistance selected by Company and approved by Employee.
(b) Timing of Severance Payments. Any severance payment
to which Employee is entitled under Section 3(a)(i)(1) shall be paid by the
Company to the Employee (or to the Employee's successors in interest, pursuant
to Section 7(b)) in cash and in full, not later than thirty (30) calendar days
following the Termination Date.
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<PAGE> 3
(c) Voluntary Resignation; Termination For Cause. If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be
established under the Company's then existing severance and benefits plans and
practices or pursuant to other agreements with the Company.
(d) Disability; Death. If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
for those (if any) as may then be established under the Company's then existing
severance and benefits plans and practices or pursuant to other agreements with
the Company.
(e) Termination Apart from Change of Control. In the
event the Employee's employment is terminated for any reason, either prior to
the occurrence of a Change of Control or after the twelve (12)-month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.
4. Attorney Fees, Costs and Expenses. The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.
5. Limitation on Payments. In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, then the Employee's severance benefits under Section 3(a)(i) shall be
either
(a) delivered in full, or
(b) delivered as to such lesser extent which would result
in no portion of such severance benefits being
subject to excise tax under Section 4999 of the Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999,
results in the receipt by the Employee on an after-tax basis, of the greatest
amount of severance benefits, notwithstanding that all or some portion of such
severance benefits may be taxable under Section 4999 of the Code. Unless the
Company and the Employee otherwise agree in writing, any determination required
under this Section 5 shall be made in writing by the Company's Accountants
immediately prior to Change of Control, whose determination shall be conclusive
and binding upon the Employee and the Company for all purposes. For purposes
of making the calculations required by this Section 5, the Accountants may make
reasonable
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<PAGE> 4
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code. The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section. The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 5.
6. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Annual Compensation. "Annual Compensation" means an
amount equal to (i) Employee's Company salary for the twelve months preceding
the Change of Control, and (ii) Employee's 100% "On Target" bonus for the year
in which the Change of Control occurs.
(b) Cause. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, and
(iv) following delivery to the Employee of a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties, continued violations by
the Employee of the Employee's obligations to the Company which are
demonstrably willful and deliberate on the Employee's part.
(c) Change of Control. "Change of Control" means the
occurrence of any of the following events:
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities;
(ii) A change in the composition of the Board
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company);
(iii) The consummation of a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty
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<PAGE> 5
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;
(iv) The consummation of the sale or disposition
by the Company of all or substantially all the Company's assets.
(d) Disability. "Disability" shall mean that the Employee
has been unable to perform his Company duties as the result of his incapacity
due to physical or mental illness, and such inability, at least 26 weeks after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee's legal representative (such Agreement as to acceptability not to be
unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
(e) Involuntary Termination. "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the significant
reduction of the Employee's duties, authority or responsibilities, relative to
the Employee's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Employee of such reduced duties,
authority or responsibilities; (ii) without the Employee's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary of the Employee as in effect immediately prior to
such reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits, including bonuses, to which the Employee was entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee to
a facility or a location more than twenty-five (25) miles from the Employee's
then present location, without the Employee's express written consent; (vi) any
purported termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances which would, under
California case law or statute constitute a constructive termination of the
Employee.
(f) Termination Date. "Termination Date" shall mean (i)
if this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the Employee
shall not have returned to the performance of the Employee's duties on a
full-time basis during such thirty (30)-day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives the Employee notice of termination, the Employee notifies the
Company that a dispute exists concerning the termination or the benefits due
pursuant to this Agreement, then the Termination Date shall be the date on which
such dispute is finally determined, either by mutual written agreement of the
parties, or a by final judgment, order or
-5-
<PAGE> 6
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected), or (iii) if the Agreement
is terminated by the Employee, the date on which the Employee delivers the
notice of termination to the Company.
7. Successors.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this Section 7(a) or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement
and all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. Notice.
(a) General. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the
Company for Cause or by the Employee as a result of a voluntary resignation or
an Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8(a) of this Agreement.
Such notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated,
and shall specify the termination date (which shall be not more than 30 days
after the giving of such notice). The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.
-6-
<PAGE> 7
9. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may
receive from any other source.
(b) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.
(d) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California.
(e) Severability. The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) Withholding. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(g) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
-7-
<PAGE> 8
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.
COMPANY HARMONIC LIGHTWAVES, INC.
By:_____________________________________
Title:__________________________________
Date:___________________
EMPLOYEE ________________________________________
Date:___________________
-8-
<PAGE> 1
EXHIBIT 11.1
HARMONIC LIGHTWAVES, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE(1)(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss)......................................... $ 5,918 $ 4,121 $ (2,368)
======= ======= =======
Weighted average shares outstanding:
Common stock............................................ 10,106 5,797 443
Mandatorily redeemable convertible preferred stock...... -- 3,129 7,095
Common stock issuable upon exercise of options and
warrants............................................. 1,368 1,456 638
------- ------- -------
Weighted average common shares and equivalents............ 11,474 10,382 8,176
======= ======= =======
Net income (loss) per share(1)(2)......................... $ 0.52 $ 0.40 $ (0.29)
======= ======= =======
</TABLE>
- ---------------
(1) Computed in the manner described in Note 1 to Notes to Consolidated
Financial Statements.
(2) Share and per share data adjusted to reflect a 1-for-3 reverse stock split
effective upon the reincorporation of the Company into Delaware in May 1995.
<PAGE> 1
EXHIBIT 13.1
FINANCIAL CONTENTS
17 SELECTED FINANCIAL DATA
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
24 CONSOLIDATED BALANCE SHEETS
25 CONSOLIDATED STATEMENT OF OPERATIONS
26 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
27 CONSOLIDATED STATEMENT OF CASH FLOWS
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36 REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE> 2
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $60,894 $39,180 $ 18,224 $ 6,714 $ 3,504
Gross profit (loss) 33,163 17,851 6,467 1,458 (263)
Income (loss) from operations 5,204 3,761 (2,189) (4,956) (4,771)
Net income (loss) 5,918 4,121 (2,368) (5,163) (4,869)
Net income (loss) per share(1) $ 0.52 $ 0.40 $ (0.29) -- --
BALANCE SHEET DATA:
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $16,410 $22,126 $ 1,743 $ 4,699 4,568
Working capital 34,158 32,495 6,893 6,506 5,489
Total assets 54,633 41,817 14,578 11,093 9,055
Long term debt, including current portion -- -- 1,480 1,446 1,457
Mandatorily Redeemable
Convertible Preferred Stock -- -- 29,215 26,454 19,955
Stockholders' equity (deficit)(2) 43,641 37,009 (20,717) (18,600) (13,438)
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years by Quarter 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(unaudited, in thousands,
except per share data)
QUARTERLY DATA 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $19,497 $16,670 $13,485 $11,242 $10,677 $10,659 $9,623 $8,221
Gross profit 8,936 7,824 6,011 4,960 4,902 4,928 4,352 3,669
Income from operations 2,250 1,610 908 436 953 1,150 1,037 621
Net income 2,405 1,741 1,126 646 1,200 1,358 1,034 529
Net income per share(1) $ 0.21 $ 0.15 $ 0.10 $ 0.06 $ 0.11 $ 0.12 $ 0.10 $ 0.06
Common stock price-high $ 23.50 $ 26.00 $ 23.50 $ 14.63 $ 17.50 $ 19.50 $19.13 --
Common stock price-low 15.38 15.38 11.25 9.00 8.50 15.00 13.00 --
</TABLE>
The Company's Common Stock (Nasdaq symbol "HLIT") began trading publicly on the
Nasdaq National Market System on May 22, 1995. Prior to that date, there was no
public market for the Common Stock.
(1) The net loss per share for the year ended December 31, 1994 is pro forma.
Net loss per share data for periods prior to 1994 have not been presented as
such presentation is not meaningful. See Note 1 of Notes to Consolidated
Financial Statements for an explanation of the method used to determine the
number of shares used to compute per share amounts.
(2) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
Harmonic Lightwaves 17
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
OVERVIEW
Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") is a worldwide supplier
of highly integrated fiber optic transmission, digital headend and element
management systems for the delivery of interactive services over broadband
networks. The Company designs, manufactures and markets optical transmitters,
nodes, receivers, digital video compression and modulation equipment and element
management hardware and software.These products are used by major communications
providers, such as cable television operators, in bi-directional networks.
From its inception in June 1988 through 1991, the Company was principally
engaged in development of its first optical transmitter and optical receiver
products and began shipment of its initial products in late 1991. Subsequently,
the Company commenced development of additional fiber optic products and began
volume shipments of PWRLink transmitters in June 1994 and MAXLink 1550 nm
transmission systems in June 1996. In March 1997, the Company announced the
introduction of its TRANsend(TM) video and audio product family for digital
broadband headends.
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those set forth under "Factors That May Affect Future Results Of
Operations" below and elsewhere in this annual report.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 54 54 64
--------------------------
Gross profit 46 46 36
Operating expenses:
Research and development 15 16 18
Sales and marketing 16 15 23
General and administrative 6 5 7
--------------------------
Total operating expenses 37 36 48
--------------------------
Income (loss) from operations 9 10 (12)
Other income (expense), net 1 1 (1)
--------------------------
Income (loss) before income taxes 10 11 (13)
Provision for income taxes -- -- --
--------------------------
Net income (loss) 10% 11% (13)%
==========================
</TABLE>
NET SALES The Company's net sales increased by 55% to $60.9 million in
1996.This growth in net sales was primarily attributable to higher unit sales of
the Company's existing products, particularly the PWRLink transmitter and return
path products. In addition, the Company began shipment of its 1550 nm MAXLink
transmission system during the second quarter of 1996. These factors were
partially offset by lower unit sales of the YAGLink optical transmitter and
lower selling prices for certain products. Net sales increased by 115% to $39.2
million in 1995 from $18.2 million in 1994. This growth in net sales was due
primarily to higher unit sales of the Company's
Harmonic Lightwaves 18
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
principal products, particularly the PWRLink transmitter and return path
products. Higher unit sales PWRLink transmitter in 1995 reflected a full year of
shipments of the product, which began initial volume shipments in June 1994 and
was sold only in nominal quantities prior to that time.
Historically, the majority of Harmonic's net sales has been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future. In 1996, sales to Tratec (the Company's U.K. distributor),
Capella (the Company's Canadian distributor) and ANTEC Corporation ("ANTEC")
accounted for 15%, 15% and 13%, respectively, of the Company's net sales. In
1995, sales to Tratec, ANTEC and Capella accounted for 22%, 15% and 15%,
respectively, of the Company's net sales. In 1994, sales to ANTEC, Capella,
Siemens, Tratec and Scientific-Atlanta, Inc. accounted for 22%, 15%, 14%, 12%
and 12% of the Company's net sales.
Harmonic has adopted a strategy of selling to major domestic customers through
its own direct sales force and expects that domestic OEM and distributor
revenues will be a smaller percentage of net sales in the future. In this
regard, sales to ANTEC in the fourth quarter of 1996 constituted less than 10%
of net sales, and are expected to be insignificant in the future. Sales to
customers outside the United States represented 57%, 65% and 57% of net sales in
1996, 1995 and 1994, respectively. Harmonic expects international sales to
continue to account for a substantial percentage of its net sales for the
foreseeable future.
GROSS PROFIT Gross profit increased to $27.7 million (46% of net sales) in 1996
from $17.9 million (46% of net sales) in 1995. The increase in gross profit was
principally due to higher unit sales volume which allowed the Company to improve
fixed cost absorption and realize increasing economies of scale through higher
production and purchasing volumes, partially offset by lower selling prices for
certain products. In addition, a more favorable product mix which included a
higher percentage of transmitters also contributed to the increase in gross
profit in 1996. Gross profit increased to $17.9 million (46% of net sales) in
1995 from $6.5 million (36% of net sales) in 1994.The gross profit growth was
due principally to higher unit sales volume and increased efficiencies of a new
manufacturing facility which commenced production in the first quarter of 1995.
RESEARCH AND DEVELOPMENT Research and development expenses increased to $9.2
million from $6.1 million in 1995, but decreased as a percentage of net sales
from 16% to 15%, reflecting higher sales levels. The increase in spending
related primarily to increased headcount, particularly at the Company's Israeli
subsidiary, and increased use of outside subcontractors and consultants in
Israel and in connection with the element management and 1550 nm MAXLink
transmission system development programs. Research and development expenses
increased to $6.1 million from $3.2 million in 1994, but decreased as a
percentage of net sales from 18% to 16%, reflecting higher sales levels. The
increase in research and development expenses in 1995 reflected increased
headcount and use of outside subcontractors and consultants, and higher
prototype material costs in conjunction with the development of the Company's
1550 nm MAXLink transmission system. Research and development expenses for 1996
and 1995 are net of grants from the BIRD Foundation of approximately $140,000
and $300,000, respectively. The Company anticipates that research and
development expenses will continue to increase significantly, although they may
vary as a percentage of net sales.
SALES AND MARKETING Sales and marketing expenses increased to $9.8 million (16%
of net sales) in 1996 from $5.8 million (15% of net sales) in 1995. The increase
in sales and marketing expenses in 1996 was primarily attributable to higher
headcount associated with expansion of the direct sales force and the customer
service and technical support organizations, as well as higher promotional
expenses and commissions to international sales representatives. Sales and
marketing expenses increased to $5.8 million in 1995 from $4.1 million in 1994,
but decreased as a percentage of net sales from 23% to 15%. The increase in
sales and marketing expenses in
Harmonic Lightwaves 19
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
1995 was principally due to increased commissions to international sales
representatives and higher payroll and promotional costs. The Company expects
that sales and marketing expenses will continue to increase significantly,
although they may vary as a percentage of net sales.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $3.5
million (6% of net sales) in 1996 from $2.2 million (5% of net sales) in 1995.
The increase in expenses was principally attributable to increased staffing and
related costs of supporting the Company's growth, and to a lesser extent, to
certain costs associated with being a public company. General and administrative
expenses increased to $2.2 million in 1995 from $1.3 million in 1994, but
decreased as a percentage of net sales from 7% to 5%, reflecting higher sales
levels. The increase in general and administrative expenses in 1995 was due
primarily to costs of supporting the Company's growth, and to a lesser extent to
certain costs associated with being a public company. The Company expects to
incur higher levels of general and administrative expenses in the future,
although such expenses may vary as a percentage of net sales.
OTHER INCOME (EXPENSE) Interest and other income (expense) was $1.0 million in
1996 compared to $0.6 million in 1995. The increase in interest and other income
in 1996 was principally due to interest earned on higher average cash balances
in 1996 following closing of the Company's initial public offering (the "IPO")
on May 30, 1995, and lower interest expense in 1996 as the Company repaid all
capital leases and bank debt in 1995. Interest and other income (expense) was
$0.6 million in 1995 compared to ($0.2) million in 1994. The income in 1995 was
principally attributable to interest earned on cash balances, following the
closing of the Company's IPO, partially offset by interest expense. The expense
in 1994 was principally attributable to interest paid on capital lease
obligations and on bank debt.
INCOME TAXES The provision for income taxes for 1996 and 1995 is based on an
estimated annual tax rate of 5% resulting from federal and state alternative
minimum taxes. This rate reflects estimated realization of deferred tax assets,
primarily net operating loss carryforwards. In 1994, the Company had no income
tax provision because of a net loss for the year. The Company had available
federal net operating loss carryforwards of approximately $5.8 million at
December 31, 1996. Under current tax law, the Company's utilization of its net
operating loss carryforwards has been limited and in the future may be limited
or impaired in certain circumstances resulting from a change in ownership.The
Company expects to have an effective annual tax rate of 10%-15% in 1997 and a
effective tax rate beyond 1997 that approximates statutory rates after full
utilization of the net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the IPO in May 1995, raising approximately $24.2 million,
net of offering costs. Prior to that, the Company satisfied its liquidity needs
primarily from the net proceeds of private sales of Preferred Stock, and to a
lesser extent, from capital equipment leases and bank borrowings.
Cash provided by operations was approximately $0.3 million in 1996 compared to
$2.3 million in 1995 and cash used in operations of approximately $5.3 million
in 1994. The decrease in cash provided by operations in 1996 compared to 1995
was primarily due to higher accounts receivable and inventory to support
increases in sales and production volumes, and prepayment of rents and deposits
of $1.8 million in connection with the Company's new corporate headquarters,
partially offset by higher net income, accounts payable and accrued liabilities.
The increase in cash provided by operations in 1995 compared to 1994 was
primarily due to the Company's profitability in 1995 compared to an operating
loss in 1994, partially offset by increased investments in inventories and
receivables to support higher sales and production volumes.
Harmonic Lightwaves 20
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Net working capital was approximately $34.2 million at December 31, 1996,
including $16.4 million of cash and cash equivalents. During the third quarter
of 1996, the Company renegotiated its bank line of credit, which now provides
for up to $10.0 million in borrowings and expires in September 1997. The line of
credit bears interest at the bank's prime rate or LIBOR plus 2.0%. There were no
outstanding borrowings under this line during 1996.
Additions to property, plant and equipment were approximately $6.7 million
during 1996 compared to $3.9 million and $1.4 million in 1995 and 1994
respectively. The increase in 1996 was due principally to increased expenditures
for manufacturing and test equipment resulting from higher demand for the
Company's products, introduction of new products including the 1550 nm MAXLink
transmission system, and leasehold improvements and furniture and fixtures for
the new facility. While the Company currently has no material commitments, it
expects to spend approximately $5.0 million on capital expenditures in 1997,
primarily for manufacturing and test equipment.
The Company believes that its existing liquidity sources and anticipated funds
from operations will satisfy its cash requirements for at least the next twelve
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company's operating
results have fluctuated and may continue to fluctuate in the future, on an
annual and a quarterly basis, as a result of a number of factors, many of which
are outside of the Company's control, including the level of capital spending in
the cable television industry, changes in the regulatory environment, changes in
market demand, the timing of customer orders, competitive market conditions,
lengthy sales cycles, new product introductions by the Company or its
competitors, market acceptance of new or existing products, the cost and
availability of components, the mix of the Company's customer base and sales
channels, the mix of products sold, development of custom products, the level of
international sales and general economic conditions. The Company establishes its
expenditure levels for product development and other operating expenses based on
projected sales levels, and expenses are relatively fixed in the short term.
Accordingly, variations in timing of sales can cause significant fluctuations in
operating results. In addition, because a significant portion of the Company's
business is derived from orders placed by a limited number of large customers,
the timing of such orders can also cause significant fluctuations in the
Company's operating results. If sales are below expectations in any given
quarter, the adverse impact of the shortfall on the Company's operating results
may be magnified by the Company's inability to adjust spending to compensate for
the shortfall.
DEPENDENCE ON KEY CUSTOMERS AND END USERS Historically, a substantial majority
of the Company's sales have been to relatively few customers. Sales to the
Company's ten largest customers in 1996, 1995 and 1994 accounted for
approximately 72%, 80% and 88%, respectively, of its net sales. Due in part to
the consolidation of ownership of domestic cable television systems, the Company
expects that sales to relatively few customers will continue to account for a
significant percentage of net sales for the foreseeable future. Harmonic has
adopted a strategy to sell to major domestic customers through its own direct
sales force and expects that domestic OEM and distributor revenues will be a
smaller percentage of net sales in the future. In this regard, net sales to
ANTEC in the fourth quarter of 1996 were less than 10% of net sales, and are
expected to be insignificant in the future. Substantially all of the Company's
sales are made on a purchase order basis, and none of the Company's customers
has entered into a long-term agreement requiring it to purchase the Company's
products. The loss of, or any reduction in orders from, a significant customer
would have a material adverse effect on the Company's business and operating
results.
Harmonic Lightwaves 21
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
DEPENDENCE ON CABLE TELEVISION INDUSTRY CAPITAL SPENDING To date, substantially
all of the Company's sales have been derived, directly or indirectly, from sales
to cable television operators. Demand for the Company's products depends to a
significant extent upon the magnitude and timing of capital spending by cable
television operators for constructing, rebuilding or upgrading their systems.
The capital spending patterns of cable television operators are dependent on a
variety of factors, including access to financing, cable television operators'
annual budget cycles, the status of federal, local and foreign government
regulation of telecommunications and television broadcasting, overall demand for
cable television services, competitive pressures (including the availability of
alternative video delivery technologies such as satellite broadcasting),
discretionary customer spending patterns and general economic conditions. The
Company believes that the consolidation of ownership of domestic cable
television systems, by acquisition and system exchanges, together with
uncertainty over regulatory issues, particularly the debate over the provisions
of the Telecommunications Act of 1996, caused delays in capital spending by
major domestic MSOs during the second half of 1995 and first quarter of 1996.
Although the Act became law in February 1996 and the Company believes that its
provisions will result in increased capital expenditures in the
telecommunications industry, there can be no assurance that capital spending by
domestic MSOs will increase in the near future, or at all, or that Harmonic's
sales will benefit. 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.
HIGHLY COMPETITIVE INDUSTRY The market for cable television transmission
equipment is extremely competitive and has been characterized by rapid
technological change. Most of the Company's competitors are substantially larger
and have greater financial, technical, marketing and other resources than the
Company. Many of such large competitors are in a better position to withstand
any significant reduction in capital spending by cable television operators. In
addition, many of the Company's competitors have more long standing and
established relationships with domestic and foreign cable television operators
than does the Company. There can be no assurance that the Company will be able
to compete successfully in the future or that competition will not have a
material adverse effect on the Company's business and operating results.
RAPID TECHNOLOGICAL CHANGE The market for the Company's products is relatively
new, making it difficult to accurately predict the market's future growth rate,
size and technological direction. In view of the evolving nature of this market,
there can be no assurance that cable television operators, telephone companies
or other suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has announced and demonstrated initial products for digital
applications, there can be no assurance that the Company will successfully
complete development of, or successfully introduce, products for digital
applications, or that such products will achieve commercial acceptance. In
addition, in order to successfully develop and market its planned products for
digital applications, the Company may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing
Harmonic Lightwaves 22
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
to enter into such technology development or licensing agreements, there can be
no assurance that such agreements will be negotiated on terms acceptable to the
Company, or at all. The failure to enter into technology development or
licensing agreements, when necessary, could limit the Company's ability to
develop and market new products and could have a material adverse effect on the
Company's business and operating results.
The failure of the Company to successfully develop and introduce new products
that address the changing needs of the broadband communications market could
have a material adverse effect on the Company's business and operating results.
In addition, there can be no assurance that the successful introduction by the
Company of new products will not have an adverse effect on the sales of the
Company's existing products. For instance, an emerging trend in the domestic
market toward narrowcasting (targeted delivery of advanced services to small
groups of subscribers) is causing changes in the network architectures of some
cable operators. This may have the effect of changing the Company's product mix
toward lower price transmitters, which could adversely affect the Company's
gross margins.
SOLE OR LIMITED SOURCES OF SUPPLY Certain components and subassemblies necessary
for the manufacture of the Company's products are obtained from a sole supplier
or a limited group of suppliers. The reliance on sole or limited suppliers and
the Company's increasing reliance on subcontractors involve several risks,
including a potential inability to obtain an adequate supply of required
components or subassemblies and reduced control over pricing, quality and timely
delivery of components or subassemblies. The Company does not maintain long-term
agreements with any of its suppliers or subcontractors. An inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply could affect the Company's ability to ship
its products on a timely basis, which could damage relationships with current
and prospective customers and could have a material adverse effect on the
Company's business and operating results. The Company believes that investment
in inventories will constitute a significant portion of its working capital in
the future. As a result of such investment in inventories, the Company may be
subject to an increasing risk of inventory obsolescence in the future, which
would materially and adversely affect its business and operating results.
RISKS OF INTERNATIONAL OPERATIONS Sales to customers outside of the United
States in 1996, 1995 and 1994 represented 57%, 65% and 57% of net sales,
respectively, and the Company expects that international sales will continue to
represent a substantial portion of its net sales for the foreseeable future. In
addition, the Company has an Israeli subsidiary that engages primarily in
research and development. International operations are subject to a number of
risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations and political and economic instability. While international sales are
typically denominated in U.S. dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Payment cycles for international customers are
typically longer than those for customers in the United States. There can be no
assurance that foreign markets will continue to develop or that the Company will
receive additional orders to supply its products for use in foreign broadband
systems.
Harmonic Lightwaves 23
<PAGE> 9
Consolidated
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,410 $22,126
Accounts receivable, net 12,643 5,802
Inventories 14,782 9,176
Prepaid expenses and other assets 1,315 199
------- -------
Total current assets 45,150 37,303
Property and equipment, net 8,751 4,514
Other assets 732 --
------- -------
$54,633 $41,817
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,604 $ 2,201
Accrued liabilities 5,388 2,607
------- -------
Total current liabilities 10,992 4,808
------- -------
Commitments (Notes 8 and 10)
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; 10,160,876 and 9,903,501 shares
issued and outstanding 10 10
Capital in excess of par value 54,579 53,865
Accumulated deficit (10,948) (16,866)
------- -------
Total stockholders'equity 43,641 37,009
------- -------
$54,633 $41,817
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 24
<PAGE> 10
Consolidated Statement of
OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net sales $ 60,894 $ 39,180 $ 18,224
Cost of sales 33,163 21,329 11,757
-------- -------- --------
Gross profit 27,731 17,851 6,467
-------- -------- --------
Operating expenses:
Research and development 9,237 6,144 3,209
Sales and marketing 9,827 5,750 4,108
General and administrative 3,463 2,196 1,339
-------- -------- --------
Total operating expenses 22,527 14,090 8,656
-------- -------- --------
Income (loss) from operations 5,204 3,761 (2,189)
Interest expense (21) (202) (237)
Interest and other income (expense), net 1,046 779 58
-------- -------- --------
Income (loss) before income taxes 6,229 4,338 (2,368)
Provision for income taxes 311 217 --
-------- -------- --------
Net income (loss) $ 5,918 $ 4,121 $ (2,368)
======== ======== ========
Net income (loss) per share $ 0.52 $ 0.40 $ (0.29)
======== ======== ========
Weighted average common shares and equivalents 11,474 10,382 8,176
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 25
<PAGE> 11
Consolidated Statement of
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Capital in Stockholders'
Common Stock Excess of Accumulated Equity
Shares Amount Par Value Deficit (Deficit)
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993 418 $ 1 $ 18 $(18,619) $(18,600)
Exercise of stock options and warrants 51 -- 51 -- 51
Issuance of Common Stock warrant -- -- 200 -- 200
Net loss -- -- -- (2,368) (2,368)
------ ------ ------- -------- --------
Balance at December 31, 1994 469 1 269 (20,987) (20,717)
Conversion of Mandatorily Redeemable
Preferred Stock 7,095 7 29,208 -- 29,215
Issuance of Common Stock in initial public
offering, net 2,000 2 24,198 -- 24,200
Exercise of stock options and warrants 340 -- 190 -- 190
Net income -- -- -- 4,121 4,121
------ ------ ------- -------- --------
Balance at December 31, 1995 9,904 10 53,865 (16,866) 37,009
Exercise of stock options and warrants 208 -- 240 -- 240
Issuance of Common Stock under
Stock Purchase Plan 49 -- 474 -- 474
Net Income -- -- -- 5,918 5,918
------ ------ ------- -------- --------
Balance at December 31, 1996 10,161 $ 10 $54,579 $(10,948) $ 43,641
====== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 26
<PAGE> 12
Consolidated Statement of
CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,918 $ 4,121 $(2,368)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,506 1,799 1,151
Issuance of Common Stock warrant -- -- 200
Changes in assets and liabilities:
Accounts receivable (6,841) (1,246) (3,242)
Inventories (5,606) (3,523) (2,918)
Prepaid expenses and other assets (1,848) (15) (43)
Accounts payable 3,403 2 1,300
Accrued liabilities 2,781 1,128 585
-------- -------- -------
Net cash provided by (used in)
operating activities 313 2,266 (5,335)
-------- -------- -------
Cash flows used in investing activities for the acquisition of
property and equipment (6,743) (3,119) (679)
-------- -------- -------
Cash flows from financing activities:
Borrowings (repayment) under bank line of credit -- (922) 922
Proceeds from issuance of Common Stock, net 714 24,390 51
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock, net -- -- 2,761
Repayments of long-term debt -- (2,232) (676)
-------- -------- -------
Net cash provided by financing activities 714 21,236 3,058
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (5,716) 20,383 (2,956)
Cash and cash equivalents at beginning of period 22,126 1,743 4,699
-------- -------- -------
Cash and cash equivalents at end of period $ 16,410 $ 22,126 $ 1,743
======= ======= ======
Supplemental schedule of cash flow information and
non-cash financing activities:
Interest paid during the period $ 21 $ 193 $ 211
Income taxes paid during the period $ 285 $ 126 $ --
Issuance of Mandatorily Redeemable Convertible
Preferred Stock upon conversion of convertible
promissory notes and accrued interest $ -- $ -- $ 3,000
Acquisition of property and equipment under
capital leases and equipment term loan $ -- $ 752 $ 710
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 27
<PAGE> 13
NOTES
to Consolidated Financial Statements
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harmonic Lightwaves, Inc. (the "Company") is a worldwide supplier of highly
integrated fiber optic transmission, digital headend and element management
systems for the delivery of interactive services over broadband networks. The
Company operates in one industry segment. See Note 9 for geographic information
and information regarding sales to significant customers.
REINCORPORATION AND REVERSE STOCK SPLIT The Company originally incorporated in
California in June 1988. In May 1995, the Company reincorporated in Delaware. In
conjunction with the reincorporation, all outstanding shares of the predecessor
California company were exchanged into common stock of the Delaware company in a
one-for-three reverse stock split. All applicable share and per share amounts in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect this reverse stock split.
BASIS OF PRESENTATION The consolidated financial statements of the Company
include the financial statements of the Company and its wholly-owned subsidiary.
All intercompany accounts and balances have been eliminated. The Company's
fiscal quarters end on the Friday nearest the calendar quarter end.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts. Actual results could differ
from these estimates.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased
with an original maturity date of three months or less at the date of purchase
to be cash equivalents. The Company's investments are classified as
held-to-maturity.
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.
REVENUE RECOGNITION Revenue is generally recognized upon shipment of product. A
provision for the estimated cost of warranty is recorded at the time revenue is
recognized.
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.
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 operators and
distributors as discussed in Note 9. The Company performs ongoing credit
evaluations of its customers, and provides for expected losses but to date has
not experienced any material losses. At December 31, 1996, receivables from
three customers represented 20%, 17% and 11%, respectively, of accounts
receivable. At December 31, 1995, receivables from two customers represented
32% and 19%, respectively, of accounts receivable.
Harmonic Lightwaves 28
<PAGE> 14
NOTES
to Consolidated Financial Statements
FOREIGN CURRENCY The functional currency of the Company's subsidiary is the U.S.
dollar. Foreign currency translation gains and losses, which have not been
material to date, are included in the statement of operations.
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 on Financial Accounting Standards No. 109 ("SFAS No. 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 ("SFAS No. 123").
NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of Mandatorily Redeemable
Convertible Preferred Stock (using the if converted method), and stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is anti-dilutive except that,
pursuant to the requirements of the Securities and Exchange Commission, common
equivalent shares relating to stock options and warrants (using the treasury
stock method and the initial public offering price) issued from April 1, 1994
through the Company's initial public offering ("IPO") have been included in the
computation for all periods presented through the Company's IPO even if
anti-dilutive. The net loss per share for the year ended December 31, 1994, is
pro forma.
RECLASSIFICATION Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1996 presentation. These
reclassifications are not material.
NOTE 2: CASH AND CASH EQUIVALENTS
At December 31, 1996 and 1995, the Company had the following amounts in cash and
cash equivalents, with original maturity dates of three months or less. Realized
gains and losses for the years ended December 31, 1996 and 1995 and the
difference between gross amortized cost and estimated fair value at December 31,
1996 and 1995 were immaterial.
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------------------
(in thousands)
<S> <C> <C>
Commercial paper $15,964 $14,769
Cash and money market accounts 446 7,357
---------------------
Total cash and cash equivalents $16,410 $22,126
=====================
</TABLE>
Harmonic Lightwaves
29
<PAGE> 15
NOTES
to Consolidated Financial Statements
NOTE 3: BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31, 1996 1995
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accounts receivable:
Gross accounts receivable $ 12,943 $ 5,902
Less: allowance for doubtful accounts (300) (100)
-----------------------
$ 12,643 $ 5,802
=======================
Inventories:
Raw materials $ 3,104 $ 2,866
Work-in-process 4,704 2,372
Finished goods 6,974 3,938
-----------------------
$ 14,782 $ 9,176
=======================
Property and equipment:
Furniture and fixtures $ 1,124 $ 201
Machinery and equipment 12,183 8,427
Leasehold improvements 1,982 655
-----------------------
15,289 9,283
Less: accumulated depreciation and amortization (6,538) (4,769)
-----------------------
$ 8,751 $ 4,514
=======================
Accrued liabilities:
Accrued compensation $ 2,166 $ 1,090
Accrued warranties 733 569
Other 2,489 948
-----------------------
$ 5,388 $ 2,607
=======================
</TABLE>
NOTE 4: LINE OF CREDIT
The Company has a bank line-of-credit agreement, providing for borrowings of up
to $ 10,000,000. The agreement contains certain financial covenants and is
available until September 1997. The borrowings bear interest at the bank's prime
rate or LIBOR plus 2%. There were no outstanding borrowings under the line at
December 31, 1996 or 1995.
NOTE 5: CAPITAL STOCK
INITIAL PUBLIC OFFERING In May 1995,the Company completed its initial public
offering ("IPO") of 2,600,000 shares of common stock, 600,000 of which were sold
by existing stockholders, at a price of $13.50 per share. Net proceeds to the
Company were approximately $24.2 million, after underwriter commissions and
associated costs. Upon the closing of the IPO, all outstanding shares of
Mandatorily Redeemable Convertible Preferred Stock automatically converted into
7,094,748 shares of Common Stock. Also effective with the closing of the IPO,
the Company was authorized to issue 5,000,000 shares of undesignated preferred
stock, of which none were issued or outstanding at December 31, 1996 and 1995.
COMMON STOCK WARRANTS In June 1994,the Company entered into a distribution
agreement, in connection with which it issued a warrant to purchase up to
798,748 shares of Common Stock at $5.55 per share. The warrant had a fair value
of $200,000, which was charged to results of operations in the second quarter of
1994. The warrants will become exercisable in June 1999 and expire at the
earlier of six years from the date of issuance
Harmonic Lightwaves
30
<PAGE> 16
NOTES
to Consolidated Financial Statements
or the closing of a significant acquisition transaction, as defined in the
warrant. Under certain conditions, the ability to exercise may be accelerated
and the warrant may be exercisable as early as June 14, 1997. The Company has
reserved 798,748 shares of Common Stock for issuance upon exercise of this
warrant.
In 1993, the Company issued a warrant to purchase up to 22,222 shares of the
Company's Common Stock at an exercise price of $4.50 per share in conjunction
with an equipment lease line facility. The fair value of the warrant was
nominal, and the warrant expires at the earlier of seven years from the date of
issuance or the merger or sale of the Company, meeting certain criteria. The
Company has reserved 22,222 shares of Common Stock for issuance upon exercise of
this warrant.
NOTE 6: 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 1,125,917 shares have been
reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995
Plan") at the effectiveness of the Company's 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, all as determined by the Board of Directors. Under both plans, the
options generally vest 25% at one year from date of grant, and an additional
1/48th per month thereafter. The Company has reserved 565,000 shares of Common
Stock for issuance under the 1995 Plan.
The following table summarizes activities under the Plans:
<TABLE>
<CAPTION>
Shares Available Stock Options Weighted Average
For Grant Outstanding Exercise Price
- ----------------------------------------------------------------------------------------------------
(in thousands, except exercise price)
<S> <C> <C> <C>
Balance at December 31, 1993 46 872 $ 0.38
Shares authorized 566 -- --
Options granted (373) 373 2.36
Options exercised -- (38) 0.35
Options canceled 60 (60) 1.11
---- ----- ------
Balance at December 31, 1994 299 1,147 0.99
Shares authorized 351 -- --
Options granted (276) 276 11.98
Options exercised -- (252) 0.53
Options canceled 20 (20) 5.81
---- ----- ------
Balance at December 31, 1995 394 1,151 3.65
Options granted (340) 340 12.70
Options exercised -- (208) 0.98
Options canceled 7 (48) 5.75
---- ----- ------
Balance at December 31, 1996 61 1,235 6.52
==== ===== ======
</TABLE>
Harmonic Lightwaves
31
<PAGE> 17
NOTES
to Consolidated Financial Statements
The following table summarizes information regarding stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 1996 Contractual Life (Years) Exercise Price December 31, 1996 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except exercise price and life)
<S> <C> <C> <C> <C> <C>
$ 0.30 - 1.20 386 5.4 $ 0.41 372 $ 0.41
1.80 - 4.65 264 7.5 2.42 154 2.31
7.20 - 13.50 447 8.7 10.74 94 11.18
14.13 - 22.75 138 9.4 17.52 22 17.71
===================================================================================================================
1,235 642
</TABLE>
DIRECTOR OPTION PLAN Effective upon the IPO,the Company adopted the 1995
Director Option Plan (the "Director Plan") and reserved 50,000 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. Grants of options to
purchase 4,000 shares were made during 1996 under the Director Plan at exercise
prices of $10.00 - $18.00. A grant of options to purchase 2,000 shares was made
during 1995 under the Director Plan at an exercise price of $13.50. At December
31, 1996, options to purchase 6,000 shares were outstanding, of which 4,999
shares were exercisable.
EMPLOYEE STOCK PURCHASE PLAN Effective upon the IPO, the Company adopted the
1995 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 200,000
shares of Common Stock for issuance thereunder. 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. 48,977 and zero shares were issued under the Purchase
Plan during 1996 and 1995, 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 market value at the grant dates, as
prescribed in SFAS 123, the Company's net income and net income per share would
have been as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C>
Net income:
As reported $ 5,918 $4,121
Pro forma 4,859 3,674
Net income per share:
As reported $ 0.52 $ 0.40
Pro forma 0.42 0.35
------- -------
</TABLE>
The fair value of each option grant, under the 1988 Plan, 1995 Plan and Director
Plan were estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants during 1996 and 1995:
dividend yield of 0.0%; expected weighted average volatility of 47.5%; and
expected weighted average lives of four years, during both years; and risk-free
interest rates of 5.2% to 6.5% and 5.4% to 7.1% for options granted during
1996 and 1995, respectively.
Harmonic Lightwaves
32
<PAGE> 18
NOTES
to Consolidated Financial Statements
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following
weighted average assumptions for 1996 and 1995: dividend yield of 0.0%; expected
volatility of 47.5%; expected lives of two years during both years; and
risk-free interest rates of 5.7% and 5.3% for 1996 and 1995, respectively.
RETIREMENT/SAVINGS PLAN Effective April 1, 1992, the Company implemented 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 may make discretionary contributions to the plan. To
date, the Company has not made any contributions.
NOTE 7: INCOME TAXES
The Company incurred net operating losses in each year through December 31,
1994. Foreign income (losses) were not significant for all years presented. The
provision for income taxes for the year ended December 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Current:
Federal $246 $174
Foreign 41 16
State 24 27
---- ----
$311 $217
==== ====
</TABLE>
The income tax provision reconciles to the provision at the federal statutory
rate as follows:
<TABLE>
<CAPTION>
December 31, 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Provision at statutory rate $ 2,118 $ 1,475
State taxes, net of federal benefit 16 18
Utilization of net operating loss carryovers (2,490) (2,052)
Future benefits not currently recognized 429 567
Alternative minimum tax 162 116
Other 76 93
------- -------
$ 311 $ 217
======= =======
</TABLE>
Deferred tax assets comprise the following:
<TABLE>
<CAPTION>
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Net operating loss carryovers $ 1,964 $ 3,960 $ 6,354
Research and development carryovers 2,112 1,396 1,396
Capitalized research and development costs 254 931 615
Reserves not currently deductible 1,187 574 422
Other 12 746 229
------- ------- -------
Total deferred tax assets 5,529 7,607 9,016
Valuation allowance (5,529) (7,607) (9,016)
------- ------- -------
Net deferred assets $ -- $ -- $ --
======= ======= =======
</TABLE>
Harmonic Lightwaves
33
<PAGE> 19
NOTES
to Consolidated Financial Statements
The deferred tax assets valuation allowance at December 31, 1996, 1995 and 1994
is attributed to federal and state deferred tax assets. Management believes
sufficient uncertainty exists regarding the realizability of these items such
that a full valuation allowance has been recorded.
At December 31, 1996, the Company had approximately $5,800,000 of net operating
loss carryovers for federal tax reporting purposes available to offset future
taxable income; such carryovers expire through 2009.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and research and development credits that can be carried
forward may be impaired or limited in certain circumstances. Events which may
cause changes in the Company's net operating loss and research and development
credit carryovers include, but are not limited to, a cumulative stock ownership
change of greater than 50%, as defined, over a three year period.
NOTE 8: RESEARCH AND DEVELOPMENT GRANT
In accordance with an agreement signed with the Israel-U.S. Binational
Industrial Research and Development Foundation ("BIRD") in December 1994, the
Company will obtain grants for a research and development project amounting to
50% of the actual expenditures incurred on the project subject to a maximum of
$560,000. The Company is not obligated to repay the grants regardless of the
outcome of its development efforts; however, it is obligated to pay the BIRD
royalties at the rate of up to 2%-5% of sales of any products or development
resulting from such research, but not in excess of 150% of the grant. Grants
earned of approximately $140,000, and $300,000 during 1996 and 1995,
respectively, were offset against research and development expenses for the same
period.The Company did not receive any funding and did not incur any significant
expenditures on the project during 1994.
NOTE 9: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Sales and purchase transactions are denominated in U.S. dollars. The Company has
one manufacturing facility located in the United States.The Company has no
significant assets located outside of the U.S.
International net sales were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Americas (excluding U.S.) $12,216 $ 8,281 $ 3,688
Europe 12,214 9,819 5,038
Asia 10,342 7,331 1,669
------- ------- -------
$34,772 $25,431 $10,395
======= ======= =======
</TABLE>
The Company sells to a significant number of its end users through distributors.
In 1996, sales to three distributors represented 15%, 15% and 13% of total
net sales, respectively. In 1995, sales to three distributors accounted for 22%,
15% and 15% of total net sales, respectively. In 1994, sales to five
distributors represented 22%, 15%, 14%, 12% and 12%, respectively, of total net
sales.
Harmonic Lightwaves
34
<PAGE> 20
NOTES
to Consolidated Financial Statements
NOTE 10: COMMITMENTS
The Company leases its facilities under noncancelable operating leases which
expire at various dates through 2006. Total rent expense related to these
operating leases were $828,000, $555,000, and $468,000, for 1996, 1995 and 1994,
respectively. Future minimum lease payments under noncancelable operating leases
at December 31, 1996, were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $ 160
1998 610
1999 1,304
2000 1,358
2001 1,375
Thereafter 6,171
-------
$10,978
=======
</TABLE>
At December 31, 1996, the Company had prepaid approximately $1,765,000 of rents
and deposits under the terms of its 10 year lease agreement for the new
corporate headquarters in Sunnyvale, California, which it occupied in August
1996. The Company has subleased a portion of its headquarters through July 1998.
Under the terms of the sublease, the sublessee is required to make payments of
$382,000 and $223,000 for 1997 and 1998, respectively.
Harmonic Lightwaves
35
<PAGE> 21
Report of
INDEPENDENT ACCOUNTANTS
To The Board of Directors & Shareholders of Harmonic Lightwaves, Inc.,
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders'equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Harmonic Lightwaves, Inc. and its subsidiary at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, 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/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 21, 1997
Harmonic Lightwaves
36
<PAGE> 1
EXHIBIT 21.1
HARMONIC LIGHTWAVES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
The following table shows certain information with respect to the active
significant subsidiaries of the Company as of December 31, 1996.
<TABLE>
<CAPTION>
STATE OR OTHER PERCENT OF VOTING
JURISDICTION OF SECURITIES OWNED
NAME INCORPORATION BY HARMONIC
- ---------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Harmonic Lightwaves (Israel), Ltd............................... Israel 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 [No. 33-94138] of Harmonic Lightwaves, Inc. of our report
dated January 21, 1997, appearing on page 36 of the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 28, 1997
<PAGE> 1
EXHIBIT 24.1
HARMONIC LIGHTWAVES, INC.
POWER OF ATTORNEY
See page 17 of Form 10-K.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 16,410
<SECURITIES> 0
<RECEIVABLES> 12,643
<ALLOWANCES> 0
<INVENTORY> 14,782
<CURRENT-ASSETS> 45,150
<PP&E> 8,751
<DEPRECIATION> 0
<TOTAL-ASSETS> 54,633
<CURRENT-LIABILITIES> 10,992
<BONDS> 0
0
0
<COMMON> 54,589
<OTHER-SE> (10,948)
<TOTAL-LIABILITY-AND-EQUITY> 54,633
<SALES> 60,894
<TOTAL-REVENUES> 60,894
<CGS> 33,163
<TOTAL-COSTS> 33,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,229
<INCOME-TAX> 311
<INCOME-CONTINUING> 6,229
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,918
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
