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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1997
[ ] 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)
DELAWARE 77-0201147
(State of incorporation) (I.R.S. Employer Identification No.)
549 Baltic Way
Sunnyvale, CA 94089
(408) 542-2500
(Address, including zip code, and
telephone number, including area code, of
Registrant's principal executive offices)
--------------
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, par
value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____
Based on the closing sale price of the Common Stock on the NASDAQ National
Market System on March 11, 1998, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $93,516,535. 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 11,503,212 at March 11, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document Location in Form 10-K
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<S> <C>
1997 Annual Report to Stockholders (pages 16 - 34). Parts II and IV
Portions of the Proxy Statement for the 1998 Annual 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, 1997). Part III
</TABLE>
The Board Compensation Committee Report and the Performance Graph to be
included with the 1998 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, Inc. ("Harmonic" or the "Company") designs, manufactures
and markets digital and lightwave based communications systems that deliver
video, audio and data over hybrid fiber/coax ("HFC"), satellite and wireless
networks. The Company's advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high speed Internet access and video on demand. The
Company offers a broad range of fiber optic transmission and digital headend
products for HFC networks, and through its acquisition of N.M. New Media
Communication Ltd. ("NMC") in January 1998 expanded its product offerings to
include high speed data delivery software and hardware. Harmonic was
incorporated in June 1988 in California and in May 1995 reincorporated into
Delaware.
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
Communications service providers worldwide are facing increasing competition as
a result of recent and proposed regulatory reform. For example, the United
States Telecommunications Act of 1996 (the "Telecom Act") permits cable
television multiple system operators ("MSOs") and local exchange carriers such
as the regional Bell operating companies ("RBOCs") to enter each other's markets
and to provide other services, such as high-speed data communications.
Historically, U.S. local exchange carriers have been prohibited from
transmitting video programming in their local service areas. Likewise, MSOs have
been prohibited by federal regulation from offering telephony services. In
addition, the emergence of direct broadcast satellite ("DBS") systems and other
alternative video programming delivery systems has subjected cable television
operators to increasing competitive 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, telephone companies are introducing alternative technologies such as
DSL ("Digital Subscriber Loop") which support the delivery of video programming
and data services over their existing copper loop networks. To address this more
competitive environment and to take advantage of new business opportunities,
such as the provision of Internet access and high-speed data services, the
Company believes that domestic cable television operators will be under
increasing pressure to upgrade and rebuild their networks.
Similar 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. These trends are expected to contribute to the increased
use of fiber optic transmission systems in the future.
Basic 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, significant investment in advanced network infrastructure will
be required to bring cable television service to large segments of the
population.
The introduction and deployment of fiber optic technology in cable television
networks has significantly increased network capacity, 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
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substantially lowering network installation and maintenance cost. The higher
bandwidth of fiber can increase capacity to up to 110 analog channels on a
typical 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, 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.
The competitive pressures to upgrade cable television networks and the
corresponding capital requirements have led to significant domestic 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 have been completed during the past several years.
In addition to HFC networks and copper-based telephony networks, other delivery
methods, such as satellites and LMDS (Local Multipoint Distribution System), a
wireless-based technology, are expected to be utilized for the provision of
video and high speed data services in many areas of the world. The first LMDS
service operating in the United States offers both video and high speed data
service to residents of Queens and Manhattan in New York. The F.C.C. has held
recent auctions for licenses required for new LMDS service areas in the United
States, and a number of LMDS systems are already in operation in several foreign
countries.
Satellite service providers are now introducing data services in addition to
multiple television channels. Although such satellite systems have relatively
low penetration rates in the United States, operators in other countries are
introducing satellite data services to meet the growing demand for connection to
the Internet. New satellite systems employing low earth orbit ("LEO")
satellites, which are being developed and implemented by a number of major
international consortia, are expected to further increase the demand for
integrated communications services, including high speed data.
In contrast to the past when consumers were generally limited to a single choice
for 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, ease of access,
interactivity, and picture, sound and data quality.
N.M. NEW MEDIA COMMUNICATION LTD. ("NMC")
NMC develops systems for the delivery of high-speed data over broadband
networks. The products, which have only recently been introduced, include
transmitters, data encoders and network management software for the system
headend and PCI-based broadband receiver cards for the subscriber.
Initial customers of NMC include operators of satellite, cable television and
LMDS networks. These customers are deploying NMC products for the delivery of
high-speed data services to residential and business customers. NMC sells its
products through its own sales force and a distribution network, including the
Company's direct sales force and its distributors. The Company anticipates that
a significant portion of NMC's future revenues will be generated in
international markets. In the cable television market, NMC's competitors
include many of the Company's existing competitors as well as certain large
consumer electronics and data networking companies and smaller companies such
as Hybrid Networks, Com21 and a number of private companies. In the satellite
market, NMC's competitors include Adaptec Inc., Groupe SAGEM and Media4, Inc.
NMC's hardware products are manufactured by Rockwell Semiconductor Systems in
the U.S. Certain of its products have been developed in collaboration with IBM
Israel, although it is anticipated that in the future NMC will undertake a
greater proportion of its development projects internally. NMC is based in Tel
Aviv, Israel, operates a sales and technical support office in San Diego and
had 16 employees at December 31, 1997. NMC's revenues have not been material in
relation to those of the Company, and it incurred a net loss of $2.6 million in
1997.
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, and MAXLink transmitters and optical
amplifiers for a wide range of optical transmission requirements.
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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 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.
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 offers products for the headend for encoding, compression and
modulation of digital signals over broadband networks.
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.
Initial shipments of these products for headend applications were made in the
fourth quarter of 1997. There can be no assurance that continued development of
these and other digital 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 1997, 1996 and 1995, sales of optical transmitters accounted for
approximately 63%, 71%, and 63%, respectively, of net sales. In 1997, 1996 and
1995, sales of optical node receivers accounted for approximately 11%, 8%, and
12%, 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 OEM and distributor revenues were a smaller percentage of
net sales in 1997 than they have been in prior years.
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 1997, sales to Capella (the
Company's Canadian distributor) accounted for 17% of net sales. In 1996, sales
to Tratec (the Company's former U.K. distributor), Capella, and ANTEC
Corporation ("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. No other customer accounted for more than 10%
of the Company's net sales in 1997, 1996 or 1995. Harmonic's products have been
purchased by each 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 TeleCommunications, Inc.
("TCI"), in the U.S., Rogers Communications in Canada, CableTel and TeleWest in
the U.K., Wharf Cable in Hong Kong and a major provincial telecommunications
company in China. 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 1997, 1996 and 1995
represented approximately 59%, 57% and 65% 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. In recent
months, certain Asian currencies have devalued significantly in relation to the
U.S. dollar. The Company is currently evaluating the effect of recent
developments in Asia on the Company's business, and there can be no assurance
that the Company's sales in Asia will not be materially adversely affected by
such developments. 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.
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
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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 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 being
provided 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 11 United States patents and 9 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, that 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.
In order to successfully develop and market its planned 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.
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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
result 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, 1997, order backlog amounted to $5.5 million, compared to $9.8
million at December 31, 1996. 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, 1997 or any
other date, is not necessarily indicative of actual sales for any succeeding
period.
In October 1996, the Company and several other equipment vendors received a
letter from TCI asking them to stop product shipments until further notice. The
Company has excluded from its December 31, 1997 and 1996 backlog all orders from
TCI other than those for which firm shipment dates and instructions had been
provided by 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 include many
of the same competitors as in headend fiber optic transmission products, and a
number of 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 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 1997, 1996 and
1995 were $11.7 million, $9.2 million, and $6.1 million, respectively. The
Company expects that research and development expenses will continue to increase
in the future.
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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 are likely to 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. Such
factors include 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 and 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. In addition, in each quarter of 1997 the Company recognized
a substantial portion of its revenues in the last month of the quarter. 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 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. Also, the Company's net sales in the second half of 1997
were adversely affected by a slow-down in spending by cable television
operators. The factors contributing to this slow capital spending include
consolidation and system exchanges by domestic cable customers, which generally
has had the effect of delaying certain system upgrades, uncertainty related to
development of industry standards for digital transmission, evaluation by many
cable customers of which advanced services and system architectures to provide
and use, and emphasis on marketing and customer service strategies by certain
international customers rather than continued construction of networks. The
Company is unable to predict when cable television industry capital spending
will increase. In addition, cable television capital spending can be subject to
the effects of seasonality, with fewer construction and upgrade projects
typically occurring in winter months and otherwise being affected by inclement
weather.
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Dependence on Key Customers and End Users
Historically, a majority of the Company's sales have been to relatively few
customers. Sales to the Company's ten largest customers in 1997, 1996 and 1995
accounted for approximately 56%, 72% and 80%, 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 domestic OEM and distributor
revenues were a smaller percentage of net sales in 1997 than they have been in
prior years. 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.
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 commenced shipment of 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.
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.
10
<PAGE> 11
Risks Associated with the Acquisition of N.M. New Media Communication, Ltd.
The growth in the Company's business has placed, and is expected to continue to
place, a significant strain on the Company's limited personnel, management and
other resources. Through its acquisition of NMC in January 1998, the Company
increased the scope of its product line to include broadband, high-speed data
delivery software and hardware and increased the scope of its international
operations in Israel. The acquisition of NMC involves numerous risks and
challenges, including: difficulties in the assimilation of operations, research
and development efforts, products, personnel and cultures of Harmonic and NMC;
the potential adverse effects of the acquisition on relationships with
customers, distributors, suppliers and other business partners of the two
companies; the dependence on the evolution and growth of the market for wireless
and satellite broadband services; regulatory developments; rapid technological
change; the highly competitive nature of the telecommunications industry; the
Company's ability to successfully develop, manufacture and gain market
acceptance of the products of NMC; the ability to manage geographically remote
units; the integration of NMC's management information systems with those of the
Company; potential adverse short-term effects on the Company's operating
results; the amortization of acquired intangible assets; the risk of entering
emerging markets in which the Company has limited or no direct experience; and
the potential loss of key employees of NMC. The Company's future operating
results will be significantly affected by its ability to successfully integrate
NMC, to implement operating, manufacturing and financial procedures and
controls, to improve coordination among different operating functions, to
strengthen management information and telecommunications systems and to continue
to attract, train and motivate additional qualified personnel in all areas.
There can be no assurance that the Company will be able to manage these
activities and implement these additional systems and controls successfully, and
any failure to do so could have a materially adverse effect upon the Company's
operating results. The Company expects that the inclusion of NMC's operations,
combined with seasonally low sales to both domestic and international cable
customers, will result in an operating loss for the Company in the first quarter
of 1998. In addition, the acquisition of NMC has resulted in significant
additional working capital requirements. While the Company believes that it
currently has sufficient funds to finance its operations for at least the next
twelve months, to the extent that such funds are insufficient to fund the
Company's activities, including any potential acquisitions, the Company may need
to raise additional funds through public or private equity or debt financing
from other sources. The sale of additional equity or convertible debt may result
in additional dilution to the Company's stockholders and such securities may
have rights, preferences or privileges senior to those of the Common Stock.
There can be no assurance that additional equity or debt financing will be
available or that if available it can be obtained on terms favorable to the
Company or its stockholders.
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 continue to 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 could materially and adversely affect its business and operating
results.
Risks of International Operations
Sales to customers outside of the United States in 1997, 1996 and 1995
represented 59%, 57% and 65% 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 two Israeli
subsidiaries, NMC and a 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
11
<PAGE> 12
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. In recent months, certain Asian currencies have devalued significantly
in relation to the U.S. dollar. The Company is currently evaluating the effect
of recent developments in Asia on the Company's business, and there can be no
assurance that the Company's sales in Asia will not be materially adversely
affected by such developments.
Risks of Information Systems
The Company has commenced, for all its information systems, a Year 2000 date
conversion project to address all necessary changes to be Year 2000 compliant.
The Company is expensing the costs of addressing the "Year 2000 issue" as
incurred. The Company does not expect that Year 2000 issues from its own
information systems will have a material adverse impact on its financial
position or results of operations. However, the Company could be adversely
impacted by Year 2000 issues faced by major customers and suppliers and other
organizations with which the Company interacts. The Company is in the process of
determining the impact that third parties who are not Year 2000 compliant may
have on the operations of the Company.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 253 people, including
95 in manufacturing operations, 75 in research and development, 54 in sales and
marketing and 29 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 and in the Company's immediate geographic area 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, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony J. Ley 59 Chairman of the Board of Directors,
President and Chief Executive Officer
Moshe Nazarathy 46 Senior Vice President, General Manager of Israel R&D
Center, and Director
Robin N. Dickson 50 Chief Financial Officer
Michael Yost 54 Vice President, Operations
John E. Dahlquist 51 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 Engineering at Fairchild Semiconductor/Schlumberger in Palo Alto,
California. Mr. Ley holds an M.A. in mechanical sciences from the
12
<PAGE> 13
University of Cambridge and an S.M.E.E. from the Massachusetts Institute of
Technology, is named as an inventor on 29 patents and is a Fellow of the I.E.E.
(U.K.) and a senior member of the I.E.E.E.
Moshe Nazarathy, a founder of the Company, has served as Senior Vice President,
General Manager of Israel R&D Center, since December 1993, as a director of the
Company since the Company's inception and 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 several sales offices in the United States, a sales and support
center in the United Kingdom and two subsidiaries, N.M. New Media Communication
Ltd., 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.
13
<PAGE> 14
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 16 of the 1997 Annual
Report to Stockholders under the caption "Selected Financial Data" and is
incorporated herein by reference. At December 31, 1997, there were 171 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 16 of the 1997 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 17 - 22 of the 1997 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 23 - 34 of the 1997 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 16 of the 1997 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 29, 1998, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "1998
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 1998
Proxy Statement.
14
<PAGE> 15
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1998 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 1998 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.
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
subsidiaries and Report of Independent Accountants are included in
the 1997 Annual Report to Stockholders filed herewith as Exhibit
13.1 and are incorporated herein by reference:
<TABLE>
<CAPTION>
1997 Annual
Report Page
-----------
<S> <C>
Consolidated Balance Sheets as at 23
December 31, 1997, and 1996
Consolidated Statement of Operations 24
for the years ended,
December 31, 1997, 1996 and 1995
Consolidated Statement of 25
Stockholders' Equity (Deficit)
for the years ended
December 31, 1997, 1996, and 1995
Consolidated Statement of Cash Flows 26
for the years ended
December 31, 1997, 1996, and 1995
Notes to Consolidated Financial Statements 27 - 34
Report of Independent Accountants 34
</TABLE>
(a)(2) Financial Statement Schedules
15
<PAGE> 16
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 18 of
this Report are filed herewith. The 1997 Annual Report to
Stockholders and 1998 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
A report on Form 8-K was filed on September 16, 1997. As reported
in such report, the Registrant, N.M. New Media Communication
Ltd., a corporation organized under the laws of Israel ("NMC"),
and each shareholder of NMC (collectively, the "Sellers"), entered
into a Stock Purchase Agreement (the "Purchase Agreement"),
whereby, among other things, the Sellers agreed to sell, and the
Registrant agreed to purchase, all of the issued outstanding
securities of NMC (the "Acquisition") and NMC was to become a
wholly-owned subsidiary of the Registrant.
16
<PAGE> 17
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, hereunto duly authorized, in the City of Sunnyvale, State
of California, on March 27, 1998.
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
--------- ----- ----
<S> <C> <C>
/s/Anthony J. Ley Chairman of the Board, President and March 27, 1998
- ------------------------------------ Chief Executive Officer (Principal
(Anthony J. Ley) Executive Officer)
/s/Robin N. Dickson Chief Financial Officer (Principal March 27, 1998
- ------------------------------------ Financial and Accounting Officer)
(Robin N. Dickson)
/s/Barry Lemieux Director March 27, 1998
- ------------------------------------
(Barry Lemieux)
/s/E. Floyd Kvamme Director March 27, 1998
- ------------------------------------
(E. Floyd Kvamme)
/s/David A. Lane Director March 27, 1998
- ------------------------------------
(David A. Lane)
/s/Moshe Nazarathy Director March 27, 1998
- ------------------------------------
(Moshe Nazarathy)
/s/Michel L. Vaillaud Director March 27, 1998
- ------------------------------------
(Michel L. Vaillaud)
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with a
(i), (ii), (iii), (iv), (v), (vi), or a (vii) are incorporated herein by
reference.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C> <C>
3.1 (i) Certificate of Incorporation of Registrant
3.2 (i) Form of Restated Certificate of Incorporation of Registrant
3.3 (i) Bylaws of Registrant
4.1 (i) Form of Common Stock Certificate
10.1 (i)+ Form of Indemnification Agreement
10.2 (i)+ 1988 Stock Option Plan and form of Stock Option Agreement
10.3 (i)+ 1995 Stock Plan and form of Stock Option Agreement
10.4 (i)+ 1995 Employee Stock Purchase Plan and form of Subscription
Agreement
10.5 (i)+ 1995 Director Option Plan and form of Director Option Agreement
10.6 (i) Registration and Participation Rights and Modification Agreement
dated as of July 22, 1994 among Registrant and certain holders
of Registrant's Common Stock
10.7 (i) Distributor Agreement dated June 15, 1994 by and between
Registrant and Scientific-Atlanta, Inc.
10.8 (i) Warrant to purchase Common Stock of Registrant issued to
Scientific-Atlanta, Inc. on June 15, 1994
10.10 (i) Warrant to purchase Series D Preferred Stock of Registrant
issued to Comdisco, Inc. on February 10, 1993
10.14 (ii) Business Loan Agreement, Commercial Security Agreement and
Promissory Note dated August 26, 1993, as amended on September
14, 1995, between Registrant and Silicon Valley Bank
10.15 (ii) Facility lease dated as of January 12, 1996 by and between
Eastrich No. 137 Corporation and Company
10.16 Amended and Restated Loan and Security Agreement dated December
24, 1997 between Registrant and Silicon Valley Bank
10.17 (iii)+ Change of Control Severance Agreement dated March 27, 1997
between Registrant and Anthony J. Ley
10.18 (iii)+ Form of Change of Control Severance Agreement between Registrant
and certain executive officers of Registrant
10.19 (iv) Stock Purchase Agreement, dated September 16, 1997 among
Registrant, N.M. New Media Communication Ltd., ("NMC") and
Sellers of NMC.
10.20 (v) First Amendment to Stock Purchase Agreement, dated November 25,
1997 among Registrant, N. M. New Media Communication Ltd.,
("NMC") and Sellers of NMC.
10.21 (vi) Registration Rights Agreement dated as of January 5, 1998 by and
among the Registrant and the persons and entities listed in
Schedule A thereto (the "NMC Shareholders").
10.22 (vii) 1997 Nonstatutory Stock Option Plan.
13.1 1997 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
27.17 Financial Data Schedule
</TABLE>
(i) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 No. 33-90752.
(ii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1995.
(iii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1996.
(iv) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated September 29, 1997.
(v) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated January 6, 1998.
(vi) Previously filed as an Exhibit to the Company's Registration
Statement on Form S-3 dated January 8, 1998.
(vii) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 dated January 14, 1998.
+ Management Contract or Compensatory Plan or Arrangement required to be
filed as an exhibit to this report on Form 10-K.
18
<PAGE> 1
Exhibit 10.16
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. ACCOUNTING AND OTHER TERMS...............................................................................1
2. LOAN AND TERMS OF PAYMENT................................................................................1
2.1 Credit Extensions...............................................................................1
2.2 Overadvances....................................................................................3
2.3 Interest Rate, Payments.........................................................................3
2.4 Fees............................................................................................4
3. CONDITIONS OF LOANS......................................................................................4
3.1 Conditions Precedent to Initial Credit Extension................................................4
3.2 Conditions Precedent to all Credit Extensions...................................................4
4. CREATION OF SECURITY INTEREST............................................................................4
4.1 Grant of Security Interest......................................................................4
5. REPRESENTATIONS AND WARRANTIES...........................................................................4
5.1 Due Organization and Authorization..............................................................4
5.2 Collateral......................................................................................5
5.3 Litigation......................................................................................5
5.4 No Material Adverse Change in Financial Statements..............................................5
5.5 Solvency........................................................................................5
5.6 Regulatory Compliance...........................................................................5
5.7 Subsidiaries....................................................................................5
5.8 Full Disclosure.................................................................................5
6. AFFIRMATIVE COVENANTS....................................................................................6
6.1 Government Compliance...........................................................................6
6.2 Financial Statements, Reports, Certificates.....................................................6
6.3 Taxes...........................................................................................6
6.4 Insurance.......................................................................................6
6.5 Primary Accounts................................................................................7
6.6 Financial Covenants.............................................................................7
6.7 Further Assurances..............................................................................7
7. NEGATIVE COVENANTS.......................................................................................7
7.1 Dispositions....................................................................................7
7.2 Changes in Business, Ownership, Management or Business Locations................................7
7.3 Mergers or Acquisitions.........................................................................8
7.4 Indebtedness....................................................................................8
7.5 Encumbrance.....................................................................................8
7.6 Distributions; Investments......................................................................8
7.7 Transactions with Affiliates....................................................................8
7.8 Subordinated Debt...............................................................................8
7.9 Compliance......................................................................................8
8. EVENTS OF DEFAULT........................................................................................8
8.1 Payment Default.................................................................................9
8.2 Covenant Default................................................................................9
8.3 Material Adverse Change.........................................................................9
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
8.4 Attachment......................................................................................9
8.5 Insolvency......................................................................................9
8.6 Other Agreements................................................................................9
8.7 Judgments.......................................................................................9
8.8 Misrepresentations.............................................................................10
9. BANK'S RIGHTS AND REMEDIES..............................................................................10
9.1 Rights and Remedies............................................................................10
9.2 Power of Attorney..............................................................................10
9.3 Bank Expenses..................................................................................10
9.4 Bank's Liability for Collateral................................................................11
9.5 Remedies Cumulative............................................................................11
9.6 Demand Waiver..................................................................................11
10. NOTICES.................................................................................................11
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER..............................................................11
12. GENERAL PROVISIONS......................................................................................11
12.1 Successors and Assigns.........................................................................11
12.2 Indemnification................................................................................12
12.3 Time of Essence................................................................................12
12.4 Severability of Provision......................................................................12
12.5 Amendments in Writing, Integration.............................................................12
12.6 Counterparts...................................................................................12
12.7 Survival.......................................................................................12
12.8 Confidentiality................................................................................12
12.9 Effect of Amendment and Restatement............................................................12
13. DEFINITIONS.............................................................................................13
13.1 Definitions....................................................................................13
</TABLE>
-ii-
<PAGE> 4
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is dated December
24, 1997, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman
Drive, Santa Clara, CA 95054 and HARMONIC LIGHTWAVES, INC. ("Borrower"), whose
address is 549 Baltic Way, Sunnyvale, California 94089.
RECITALS
A. Bank and Borrower are parties to that certain Business Loan
Agreement and Promissory Note each dated August 26, 1993, as amended
(collectively, the "Original Agreement").
B. Borrower and Bank desire in this Agreement to set forth their
agreement with respect to a working capital loan and to amend and restate in its
entirety without novation the Original Agreement in accordance with the
provisions herein.
AGREEMENT
The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions
as set forth below in this Section 2.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the lesser of (A) the
Committed Revolving Line or (B) the Borrowing Base, minus (ii) the amount of all
outstanding letters of credit (including drawn but unreimbursed letters of
credit), and minus (iii) the Foreign Exchange Reserve. Advances may be repaid
and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit A. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and other amounts due under this Agreement are
immediately payable.
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2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued letters of credit for Borrower's account
not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing
Base minus (ii) the outstanding principal balance of the Advances minus the
Foreign Exchange Reserve; however, the face amount of outstanding letters of
credit (including drawn but unreimbursed letters of credit and any Letter of
Credit Reserve) may not exceed $4,000,000. Each letter of credit will have an
expiration date of no later than 180 days after the Revolving Maturity Date, but
Borrower's reimbursement obligation will be secured by cash on terms acceptable
to Bank at any time after the Revolving Maturity Date if the term of this
Agreement is not extended by Bank.
2.1.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS.
Borrower may enter foreign exchange contracts (the "Exchange
Contracts") not exceeding an aggregate amount of $4,000,000 (the "Contract
Limit"), under which Bank will sell to or purchase from Borrower foreign
currency on a spot or future basis. Borrower may not request any Exchange
Contracts if it is out of compliance with any provision of this Agreement.
Exchange Contracts must provide for delivery of settlement on or before the
Revolving Maturity Date. The amount available under the Committed Revolving Line
is reduced by the following (the "Foreign Exchange Reserve") on any given 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
after 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.
Bank may terminate the Exchange Contracts if (a) an Event of Default
has occurred and is continuing or (b) there is not sufficient availability under
the Committed Revolving Line and Borrower does not have available funds in its
deposit account for the Foreign Exchange Reserve. If Bank terminates the
Exchange Contracts, Borrower will reimburse Bank for all fees, costs and
expenses in connection with the Exchange Contracts.
Borrower may not permit the total of all Exchange Contracts on which
delivery is to be effected and settlement allowed in any two business day period
to be more than $4,000,000 (the "Settlement Limit") nor may Borrower permit the
total of all Exchange Contracts outstanding at any one time, to exceed the
Contract Limit. However, the amount which may be settled in any 2 business day
period may be increased above the Settlement Limit up to, but not above the
Contract Limit if:
(i) there is sufficient availability under the Committed Revolving Line
in the amount of the Foreign Exchange Reserve for each Determination
Date, provided that Bank in advance shall reserve the full amount of
the Foreign Exchange Reserve against the Committed Revolving Line; or
(ii) there is insufficient availability under the Committed Revolving
Line for settlements within any 2 business day period, but Bank: (A)
verifies good funds overseas before crediting Borrower's deposit
account (if Borrower sells foreign currency); or (B) debits Borrower's
deposit account before delivering foreign currency overseas (if
Borrower purchases foreign currency).
If Borrower purchases foreign currency, Borrower in advance must
instruct Bank either to treat the settlement as an advance under the Committed
Revolving Line, or to debit Borrower's account for the amount settled.
Borrower will execute all Bank's standard applications and agreements
in connection with the Exchange Contracts which are consistent with the terms of
this Agreement and pay all Bank's standard fees and charges.
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2.1.4 EQUIPMENT ADVANCES.
(a) Through December 23, 1998 (the "Equipment Availability End Date"),
Bank will make advances ("Equipment Advance" and, collectively, "Equipment
Advances") not exceeding the Committed Equipment Line. The Equipment Advances
may only be used to finance Equipment purchased on or after 90 days before the
date of this Agreement and may not exceed one hundred percent (100%) of the
equipment invoice excluding taxes, shipping, warranty charges, freight discounts
and installation expense. Software and used Equipment may constitute up to 25%
of the Committed Equipment Line. Each Equipment Advance must be for a minimum of
$50,000. Notwithstanding the foregoing, $500,000 under the Committed Equipment
Line shall be available to finance the purchase of Foreign Equipment. No invoice
will be required for such purpose.
(b) Interest accrues from the date of each Equipment Advance at the
rate in Section 2.3((a)) and is payable monthly until the Equipment Availability
End Date occurs. Equipment Advances outstanding on June 23, 1998 (the "First
Term Date"), are payable in 36 equal monthly installments of principal, plus
accrued interest, beginning on July 23, 1998 and all subsequent payments of
principal plus interest are due on the same day of each month after that.
Additionally, Equipment Advances outstanding on the Equipment Availability End
Date (the "Second Term Date") are payable in 36 equal monthly installments of
principal plus accrued interest, beginning on the twenty-third (23rd) day of the
month following the Equipment Availability End Date. The final payment for all
Equipment Advances will be due on December 23, 2001 (the "Equipment Loan
Maturity Date"). Equipment Advances when repaid may not be reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify Bank (the
notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1
Business Day before the day on which the Equipment Advance is to be made. The
notice in the form of Exhibit B (Payment/Advance Form) must be signed by a
Responsible Officer or designee and include a copy of the invoice for the
Equipment being financed.
2.2 OVERADVANCES.
If Borrower's Obligations under Section 2.1.1, 2.1.2 and 2.1.3.exceed
the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing
Base, Borrower must immediately pay Bank the excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate. (1) Advances accrue interest on the outstanding
principal balance at a per annum rate equal to (i) the Prime Rate or (ii) 2
percentage points above the LIBOR Rate as described in Exhibit D; and (2)
Equipment Advances accrue interest on the outstanding principal balance at a per
annum rate equal to 0.5 percentage points above the Prime Rate. At the First
Term Date and the Second Term Date, Borrower may elect a fixed rate on the then
outstanding Equipment Advances equal to the Treasury Rate then in effect. If
Borrower elects such fixed rate option, the Prepayment Fee will apply. After an
Event of Default, Obligations accrue interest at 5 percent above the rate
effective immediately before the Event of Default. The interest rate increases
or decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.
(b) Payments. Interest due on the Committed Revolving Line is payable
on the 23rd day of each month. Interest due on the Equipment Advances is payable
on the 23rd day of each month. Bank may debit any of Borrower's deposit accounts
including Account Number _____________________________ for principal and
interest payments or any amounts Borrower owes Bank under this Agreement or any
other Loan Document. Bank will notify Borrower when it debits Borrower's
accounts. These debits are not a set-off. Payments received after 12:00 noon
Pacific time are considered received at the opening of business on the next
Business Day. When a payment is due on a day that is not a Business Day, the
payment is due the next Business Day and additional fees or interest accrue.
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2.4 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of
$18,000 for the Committed Revolving Line and $10,000 for the Committed Equipment
Line due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the date of this Agreement, are
payable when due.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section remain true.
(c) As a condition to each Equipment Advance, Borrower will deliver to
Bank an executed UCC Financing Statement against the Equipment purchased from
proceeds of such Equipment Advance and any and all other documentation required
to perfect Bank's interest in the Collateral.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations under Section
2.1.4 entitled "Equipment Advances" and performance of each of Borrower's duties
under the Loan Documents. Subject to Permitted Liens, any security interest will
be a first priority security interest in the Collateral. Borrower will execute
any and all documents, including UCC Financing Statements, to perfect Bank's
interest in the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
not reasonably be expected to cause a Material Adverse Change.
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The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens, except
Permitted Liens.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could reasonably be expected to cause a
Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could cause a Material Adverse Change. None of Borrower's or any Subsidiary's
properties or assets has been used by Borrower or any Subsidiary or, to the best
of Borrower's knowledge, by previous Persons, in disposing, producing, storing,
treating, or transporting any hazardous substance other than legally. Borrower
and each Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all taxes, except those being contested in good faith
with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all government authorities that are necessary to
continue its business as currently conducted, except where the failure to do so
could not reasonably be expected to cause a Material Adverse Change.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements misleading (it being
recognized by Bank that the projections
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and forecasts provided by Borrower are not to be viewed as facts and that actual
results during the period or periods covered by any such projections and
forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify could have a material
adverse effect on Borrower's business or operations. Borrower will comply, and
have each Subsidiary comply, with all laws, ordinances and regulations to which
it is subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 45 days after the last day of each quarter, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) within 5 days of filing, copies of all statements,
reports and notices made available to Borrower's security holders or to any
holders of Subordinated Debt and all reports on Form 10-K, 10-Q and 8-K filed
with the Securities and Exchange Commission; (iii) a prompt report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of $100,000 or more;
and (iv) budgets, sales projections, operating plans or other financial
information Bank requests.
(b) Within 45 days after the last day of each quarter, Borrower will
deliver to Bank with the quarterly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit B.
(c) At such times as the aggregate outstanding Advances under the
Committed Revolving Line exceed $5,000,000, Borrower will deliver to Bank a
Borrowing Base Certificate signed by a Responsible Officer in the form of
Exhibit C, with aged listings of accounts receivable and accounts payable,
within 20 days after the last day of each month.
(d) Bank has the right to audit Borrower's Accounts at Borrower's
expense, but the audits will be conducted no more often than every six months
unless an Event of Default has occurred and is continuing.
6.3 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.
6.4 INSURANCE.
Borrower will keep its business and the Collateral insured for risks
and in amounts, as Bank reasonably requests. Insurance policies will be in a
form, with companies, and in amounts that are reasonably satisfactory to Bank.
All property policies will have a lender's loss payable endorsement showing Bank
as an additional loss payee and all liability policies will show the Bank as an
additional insured and provide that the insurer must give Bank at least 20 days
notice before canceling its policy. At Bank's request, Borrower will deliver
certified copies of policies and evidence of all premium payments. Proceeds
payable under any casualty policy will, at Borrower's option if no Event of
Default has occurred and is continuing, be payable to Borrower to replace the
property subject to the claim.
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If an Event of Default has occurred and is continuing, then at Bank's option,
proceeds will be payable to Bank on account of the Obligations.
6.5 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.6 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each quarter:
(i) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
0.75 to 1.00.
(ii) TANGIBLE NET WORTH. A Tangible Net Worth of at least $48,000,000
plus 75% of quarterly profits (excluding losses) beginning October 1, 1997 plus
100% of net new equity.
(iii) QUICK RATIO. A ratio of Quick Assets to Current Liabilities of at
least 2.00 to 1.00.
(iv) PROFITABILITY. Borrower will be profitable each quarter, except
that Borrower may suffer a one quarterly loss in each fiscal year not to exceed
$500,000, provided, however that Bank shall allow a loss of greater than
$500,000 for the fiscal quarter ending March 31, 1998 as a result of Borrower's
acquisition of New Media Communications, Ltd.
(v) DEBT SERVICE COVERAGE. A ratio of net income plus depreciation,
amortization and interest expense, less unfunded capital expenditures, divided
by interest expense and scheduled principal payments, all calculated on a
quarterly basis, of at least 1.50 to 1.00.
6.7 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action
as Bank reasonably requests to perfect or continue Bank's security interest in
the Collateral or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower will not do any of the following:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business, (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business, or (iii) of worn-out or obsolete Equipment, and (iv) other
Transfers which in the aggregate do not exceed $100,000 in any fiscal year.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto, or have a material change in its ownership of greater than 40%.
Borrower will not, without at least 30 days prior written notice, relocate its
chief executive office or add any new offices or business locations.
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7.3 MERGERS OR ACQUISITIONS.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except if no Event of Default has occurred and is
continuing or would exist after giving effect to the action (i) transactions
that do not in the aggregate exceed $10,000,000 with a maximum of $5,000,000 in
cash allowed to be used for such transactions, or (ii) a Subsidiary may merge or
consolidate into another Subsidiary or into Borrower. Notwithstanding the terms
and conditions contained in this Section, Bank consents to Borrower's
acquisition of New Media Communications, Ltd.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
herein subject only to Permitted Liens.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with
any Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Advance for that purpose; fail to meet the
minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair
Labor Standards Act or violate any other law or regulation, if the violation
could have a material adverse effect on Borrower's business or operations or
cause a Material Adverse Change, or permit any of its Subsidiaries to do so.
8. EVENTS OF DEFAULT
Any one of the following is an Event of Default:
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8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates
any covenant in Section 7 or does not perform or observe any other material
term, condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts within 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional period (of not
more than 30 days) to attempt to cure the default. During the additional time,
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in the exercise of its
reasonable judgment, that there is a reasonable likelihood that Borrower will
fail to comply with one or more of the financial covenants set forth in Section
during the next succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $100,000 is
rendered against Borrower and is unsatisfied and unstayed for 30 days (but no
Credit Extensions will be made before the judgment is stayed or satisfied); or
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8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) make, settle, and
adjust all claims under Borrower's insurance policies; and (ii) transfer the
Collateral into the name of Bank or a third party as the Code permits. Bank may
exercise the power of attorney to sign Borrower's name on any documents
necessary to perfect or continue the perfection of any security interest
regardless of whether an Event of Default has occurred. Bank's appointment as
Borrower's attorney in fact, and all of Bank's rights and powers, coupled with
an interest, are irrevocable until all Obligations have been fully repaid and
performed and Bank's obligation to provide Credit Extensions terminates.
9.3 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section , and take any action under the policies
Bank reasonably deems prudent. Any reasonable amounts paid by Bank are Bank
Expenses and immediately due and payable, bearing interest at the then
applicable rate and secured by the Collateral. No
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payments by Bank are deemed an agreement to make similar payments in the future
or Bank's waiver of any Event of Default.
9.4 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices and section 9-207 of
the Code it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person.
Borrower bears all risk of loss, damage or destruction of the Collateral.
9.5 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents,
and all other agreements are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank's exercise of one right or
remedy is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.
9.6 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10. NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12. GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
11
<PAGE> 15
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its
officers, employees, and agents against: (a) all obligations, demands, claims,
and liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing. This Agreement
represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement merge into this Agreement and the Loan
Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall continue to be
outstanding under this Agreement. All security interests granted under the
Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
12
<PAGE> 16
13. DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" is a loan advance under the Committed Revolving
Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all reasonable audit fees and expenses and
reasonable costs or expenses (including reasonable attorneys' fees and expenses)
for preparing, negotiating, administering, defending and enforcing the Loan
Documents (including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BORROWING BASE" means, when Advances exceed $5,000,000, then (i) 80%
of Eligible Accounts plus (ii) 80% of Pre-Approved Eligible Foreign Accounts
plus (iii) 100% of Eligible Foreign Accounts as determined by Bank from
Borrower's most recent Borrowing Base Certificate.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CAPITALIZED PRODUCT DEVELOPMENT COSTS" are all costs associated with
the development of Borrower's product, including, but not limited to software,
that are not recorded as an expense and have been classified as an asset
account.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the Equipment purchased by Borrower, excluding Foreign
Equipment, from Equipment Advance proceeds.
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to $3,000,000.
"COMMITTED REVOLVING LINE" is a Credit Extension of up to $12,000,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest
13
<PAGE> 17
rates, currency exchange rates or commodity prices; but "Contingent Obligation"
does not include endorsements in the ordinary course of business. The amount of
a Contingent Obligation is the stated or determined amount of the primary
obligation for which the Contingent Obligation is made or, if not determinable,
the maximum reasonably anticipated liability for it determined by the Person in
good faith; but the amount may not exceed the maximum of the obligations under
the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Equipment Advance, letter of
credit, Exchange Contract, or any other extension of credit by Bank for
Borrower's benefit.
"CURRENT LIABILITIES" is, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Credit
Extensions made under this Agreement, including all Indebtedness that is payable
upon demand or within one year from the date of determination thereof unless
such Indebtedness is renewable or extendible at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5.2;
but Bank may change eligibility standards by giving Borrower 30 days prior
written notice. Unless Bank agrees otherwise in writing, Eligible Accounts will
not include:
(a) Accounts that the account debtor has not paid within 90 days of
invoice date;
(b) Accounts for an account debtor, 50% or more of whose Accounts have
not been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed
that percentage, unless Bank approves in writing;
(e) Accounts for which the account debtor does not have its principal
place of business in the United States (other than Eligible Foreign Accounts and
Pre-Approved Eligible Foreign Accounts);
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;
(g) Accounts for which Borrower owes the account debtor, but only up to
the amount owed (sometimes called "contra" accounts, accounts payable, customer
deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in which
goods are consigned, sales guaranteed, sale or return, sale on approval, bill
and hold, or other terms if account debtor's payment may be conditional;
(i) Accounts for which the account debtor is Borrower's Affiliate,
officer, employee, or agent;
(j) Accounts in which the account debtor disputes liability or makes
any claim and Bank believes there may be a basis for dispute (but only up to the
disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(k) Accounts for which Bank reasonably determines collection to be
doubtful.
"ELIGIBLE FOREIGN ACCOUNTS" are Accounts for which the account debtor
does not have its principal place of business in the United States but are
supported by letter(s) of credit acceptable to Bank.
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<PAGE> 18
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, software, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 2.1.4.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.4.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.4.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"EXCHANGE CONTRACT" is defined in Section 2.1.3.
"FOREIGN EQUIPMENT" is (i) Equipment used for Borrower's foreign
subsidiaries' purposes and (ii) is not a part of Borrower's Collateral.
Equipment Advances to purchase Foreign Equipment shall be under the Committed
Equipment Line.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LIBOR" is defined in Exhibit "D".
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A.
"PERMITTED INDEBTEDNESS" is:
15
<PAGE> 19
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors and with respect to surety bonds
and similar obligations incurred in the ordinary course of business;
(e) Indebtedness secured by Permitted Liens.
(f) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby);
(g) Other Indebtedness not otherwise permitted by Section 7.4 not
exceeding One Hundred Thousand Dollars ($100,000) in the aggregate outstanding
at any time; and
(h) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (f) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue, and (iv) any
Investments permitted by Borrower's investment policy, as amended from time to
time, provided that such investment policy (any such amendment thereto) has been
approved by Bank;
(c) Investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business;
(d) Investments accepted in connection with Transfers permitted by
Section 7.1;
(e) Investments of Subsidiaries in or to other Subsidiaries or Borrower
and Investments by Borrower in Subsidiaries not to exceed 10% of Tangible Net
Worth;
(f) Investments consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in the ordinary course of
business, and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower's Board of
Directors;
(g) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;
(h) Investments consisting of notes receivable of, or prepaid royalties
and other credit extensions, to customers and suppliers who are not Affiliates,
in the ordinary course of business; provided that this paragraph (h) shall not
apply to Investments of Borrower in any Subsidiary;
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<PAGE> 20
(i) Deposit accounts of Borrower in which Bank has a Lien prior to any
other lien; and
(j) Other Investments not otherwise permitted by Section 7.7 not
exceeding One Hundred Thousand Dollars ($100,000) in the aggregate outstanding
at any time.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.7;
(g) Statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics and materialmen and other Liens imposed by law incurred in the
ordinary course of business securing obligations that are not yet delinquent or
are being contested in good faith and for which appropriate reserves have been
made in accordance with GAAP;
(h) Easements, reservations, rights-of-way, restrictions, minor defects
or irregularities in title and other similar charges or encumbrances affecting
real property not constituting a Material Adverse Change;
(i) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payments of customs duties in connection with the
importation of goods; and
(j) Liens on insurance proceeds in favor of insurance companies granted
solely as security for financed premiums.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRE-APPROVED ELIGIBLE FOREIGN ACCOUNTS" are Accounts for which the
account debtor does not have its principal place of business in the United
States but are pre-approved, in writing, by Bank on a case by case basis.
"PREPAYMENT FEE" is a fee on any portion of the Obligations with a
fixed interest rate (the "Fixed Obligations") paid before the payment due date.
"Base Interest Rate" means Bank's initial cost of funding the Fixed Obligations.
The Prepayment Fee is calculated as follows: First, Bank determines a "Current
Market Rate" based on what the Bank would receive if it loaned the amount on the
prepayment date in a wholesale funding market matching maturity, principal
amount and principal and interest payment dates (the aggregate payments received
are
17
<PAGE> 21
the "Current Market Rate Amount"). Bank may select any wholesale funding market
rate as the Current Market Rate. Second, Bank will take the prepayment amount
and calculate the present value of each principal and interest payment which,
without prepayment, the Bank would have received during the term of the Fixed
Obligations using the Base Interest Rate. The sum of the present value
calculations is the "Mark to Market Amount." Third, the Bank will subtract the
Mark to Market Amount from the Current Market Rate Amount. Any amount greater
than zero is the Prepayment Fee.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of 12 months or less determined according to GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is December 23, 1998.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"TREASURY RATE" is the Treasury Yield Percentage plus 350 basis points.
Treasury Yield Percentage is the average weekly yield (of the week ending
figures) in the most recent Federal Reserve Statistical Release on actively
traded U.S. Treasury obligations of similar maturity to the principal being
repaid or if a Statistical Release is not published, the arithmetic average (to
the nearest .01%) of the per annum yields to maturity for each Business Day
during the week (ending at least two Business Days before the determination is
made) of all actively traded marketable United States Treasury fixed interest
rate securities with a constant maturity of, or not more than 30 days longer or
shorter than the average life of the principal and interest payments that are
being prepaid (excluding securities that can be surrendered at face value to pay
Federal estate tax, or which provide for tax benefits to the holder).
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<PAGE> 22
BORROWER:
HARMONIC LIGHTWAVES, INC.
By: /s/ ROBIN N. DICKSON
--------------------------------
Title: Chief Financial Officer
BANK:
SILICON VALLEY BANK
By: /s/ JENNIFER FRYHOFF
---------------------------------
Title: /s/ Assistant Vice President
-----------------------------
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<PAGE> 23
EXHIBIT A
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:______________________________
FAX#: (408) 496-2426 TIME:______________________________
FROM: Harmonic Lightwaves, Inc.
__________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY:__________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:__________________________________________________________
PHONE NUMBER:__________________________________________________________________
FROM ACCOUNT # ________________________ TO ACCOUNT #____________________
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $__________________________________
PRINCIPAL PAYMENT (ONLY) $__________________________________
INTEREST PAYMENT (ONLY) $__________________________________
PRINCIPAL AND INTEREST (PAYMENT) $__________________________________
OTHER INSTRUCTIONS:___________________________________________________________
_______________________________________________________________________________
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
________________________________________ _______________________________
Authorized Requester Phone #
________________________________________ _______________________________
Received By (Bank) Phone #
______________________________
Authorized Signature (Bank)
1
<PAGE> 24
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: HARMONIC LIGHTWAVES, INC.
The undersigned authorized officer of Harmonic Lightwaves, Inc.
certifies that under the terms and conditions of the Amended and Restated Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending _______________ with all
required covenants except as noted below and (ii) all representations and
warranties in the Agreement are true and correct in all material respects on
this date. Attached are the required documents supporting the certification. The
Officer certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) consistently applied from one period to the next
except as explained in an accompanying letter or footnotes. The Officer
acknowledges that no borrowings may be requested at any time or date of
determination that Borrower is not in compliance with any of the terms of the
Agreement, and that compliance is determined not just at the date this
certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
<S> <C> <C>
Quarterly financial statements + CC Quarterly within 45 days Yes No
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
A/R, A/P Agings + BBC Monthly within 20 days* Yes No
*Only when outstanding balance under Committed Revolving Line is greater than $5,000,000
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
<S> <C> <C> <C>
Maintain on a QUARTERLY Basis:
Minimum Quick Ratio 2.00:1.00 _____:1.00 Yes No
Minimum Debt Service 1.50:1.00 _____:1.00 Yes No
Minimum Tangible Net Worth $48,000,000** $________ Yes No
Maximum Debt/Tangible Net Worth 0.75:1.00 _____:1.00 Yes No
**plus 75% of quarterly profits (excluding losses) beginning October 1, 1997 plus 100% of net new equity.
Profitability: Quarterly $_________ Yes No
Losses not to exceed: $500,000 for one fiscal quarter in a Yes No
fiscal year, provided, however that
Bank shall allow a loss of greater than
$500,000 for the fiscal quarter ending
March 31, 1998 as a result of Borrower's
acquisition of New Media Communications,
Ltd.
Maintain on a Quarterly Basis
Minimum Debt Service Coverage*** 1.50:1.00 _____:1.00 Yes No
***For calculation purposes Debt Service Coverage is net income plus depreciation, amortization and interest expense,
less unfunded capital expenditures, divided by interest expense and scheduled principal payments, all calculated on a
quarterly basis.
</TABLE>
<PAGE> 25
BANK USE ONLY
Received by:___________________________________________________________________
AUTHORIZED SIGNER
Date:__________________________________________________________________________
Verified:______________________________________________________________________
AUTHORIZED SIGNER
Date:__________________________________________________________________________
Compliance Status: Yes No
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
Harmonic Lightwaves, Inc.
_______________________________________________________________________________
SIGNATURE
_______________________________________________________________________________
TITLE
_______________________________________________________________________________
DATE
<PAGE> 26
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: HARMONIC LIGHTWAVES, INC. Lender: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
Commitment Amount: $12,000,000
<TABLE>
<CAPTION>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ______ $_________
2. Additions (please explain on reverse) $_________
3. TOTAL ACCOUNTS RECEIVABLE $_________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $________
5. Balance of 50% over 90 day accounts $________
6. Credit Balances over 90 day $________
7. Concentration Limits $________
8. Foreign Accounts $________
9. Governmental Accounts $________
10. Contra Accounts $________
11. Promotion or Demo Accounts $________
12 Intercompany/Employee Accounts $________
13. Other (please explain on reverse) $________
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_________
15. Eligible Accounts (#3 minus #14) $_________
16. LOAN VALUE OF ACCOUNTS (80% of #15) $_________
PRE-APPROVED FOREIGN ACCOUNTS RECEIVABLE DEDUCTIONS
17. Accounts Receivable Book Value as of _____ $________
18. Additions (please explain on reverse) $________
19. TOTAL FOREIGN ACCOUNTS RECEIVABLE $_________
a. Amounts over 90 days due $________
b. Balance of 50% over 90 day accounts $________
c. Concentration Limits $________
d. Governmental Accounts $________
e. Contra Accounts $________
f. Promotion of Demo Accounts $________
g. Intercompany/Employee Accounts $________
h. Other (please explain on reverse) $________
20. TOTAL FOREIGN ACCOUNTS RECEIVABLE
DEDUCTIONS $________
21. Eligible Accounts (#19 minus #20) $_________
22. LOAN VALUE OF FOREIGN ACCOUNTS (80% OF #21) $_________
LC BACKED FOREIGN ACCOUNTS
23. Total LC Backed Foreign Accounts $________
24. LOAN VALUE OF LC BACKED FOREIGN
ACCOUNTS (100% OF #23) $________
BALANCES
25. Maximum Loan Amount $________
26. Total Funds Available
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
<S> <C> <C>
[Lesser of #25 or (#16 plus #22 plus #24)] $________
27. Present balance owing on Line of Credit $________
28. Outstanding under Sublimits (LC or FX) $________
29. RESERVE POSITION (#26 minus #27 and #28) $________
</TABLE>
The undersigned represents and warrants that this is true, complete and correct,
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Amended and Restated Loan and Security
Agreement between the undersigned and Silicon Valley Bank.
COMMENTS
BANK USE ONLY
REC'D BY:__________________________
AUTH. SIGNER
DATE:_____________________________
VERIFIED:___________________________
AUTH. SIGNER
DATE:_____________________________
HARMONIC LIGHTWAVES, INC.
BY:____________________________________
AUTHORIZED SIGNER
<PAGE> 28
EXHIBIT D
LIBOR SUPPLEMENT TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
This LIBOR Supplement to Amended and Restated Loan and Security
Agreement (the "Supplement") is a supplement to the Amended and Restated Loan
and Security Agreement, dated December 24, 1997 (the "Loan Agreement"), between
Silicon Valley Bank ("Bank" and sometimes referred to as "Lender") and Harmonic
Lightwaves, Inc. ("Borrower"), and forms a part of and is incorporated into the
Loan Agreement.
1. Definitions
"Business Day" means a day of the year (a) that is not a Saturday,
Sunday or other day on which banks in the State of California or the City of
London are authorized or required to close and (b) on which dealings are carried
on in the interbank market in which Bank customarily participates.
"Interest Period" means for each LIBOR Rate Loan, a period of
approximately one, two or three months as the Borrower may elect, provided that
the last day of an Interest Period for a LIBOR Rate Loan shall be determined in
accordance with the practices of the LIBOR interbank market as from time to time
in effect, provided, further, in all cases such period shall expire not later
than the applicable Maturity Date.
"Interest Rate" shall mean as to :(a) Prime Rate Loans, a rate equal to
the Prime Rate; (b) LIBOR Rate Loans, a rate of 2.00% per annum in excess of the
LIBOR Rate (based on the LIBOR Rate applicable for the Interest Period selected
by the Borrower).
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate Loan,
the rate of interest per annum determined by Bank to be the per annum rate of
interest as which deposits in United States Dollars are offered to Bank in the
London interbank market in which Bank customarily participates at 11:00 a.m.
(local time in such interbank market) two (2) Business Days before the first day
of such Interest Period for a period approximately equal to such Interest Period
and in an amount approximately equal to the amount of such Loan.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate Loan,
a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%)
equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1
minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Loans" means any Loans made or a portion thereof on which
interest is payable based on the LIBOR Rate in accordance with the terms hereof.
"Prime Rate" means the variable rate of interest per annum, most
recently announced by Bank as its "prime rate," whether or not such announced
rate is the lowest rate available from Bank. The interest rate applicable to the
Prime Rate Loans shall change on each date there is a change in the Prime Rate.
"Prime Rate Loans" means any Loans made or a portion thereof on which
Interest is payable based on the Prime Rate in accordance with the terms hereof.
"Regulatory Change" means, with respect to Bank, any change on or after
the date of this Loan Agreement in the United States federal, state or foreign
laws or regulations, including Regulation D, or the adoption or making on or
after such date of any interpretations, directives or requests applying to a
class of lenders including Bank of or under any United States federal or state,
or any foreign, laws or regulations (whether or not having a force of law) by
any court or government or monetary authority charged with the interpretation or
administration thereof.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency Liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall
<PAGE> 29
reflect any other reserves required to be maintained by Bank by reason of any
Regulatory Change against (i) any category of liabilities which includes
deposits by reference to which the LIBOR Rate is to be determined as provided in
the definition of "LIBOR Base Rate" or (ii) any category of extensions of credit
or other assets which include Loans.
2. Requests for Loans; Confirmation of Initial Loans: Each LIBOR Rate
Loan shall be made upon the irrevocable written request of Borrower received by
Bank not later than 11:00 a.m. (Santa Clara, California time) on the Business
Day three (3) Business days prior to the date such Loan is to be made. Each such
notice shall specify the date such Loan is to be made, which day shall be a
Business Day; the amount of such Loan, the Interest Period for such Loan, and
comply with such other requirements as Bank determines are reasonable or
desirable in connection therewith.
Each written request for a LIBOR Rate Loan shall be in the form of a
LIBOR Rate Loan Borrowing Certificate as set forth on the LIBOR Rate Loan
Borrowing Certificate, which shall be duly executed by the Borrower.
Each Prime Rate Loan shall be made upon the irrevocable written request
of Borrower received by Bank not later than 3:00 p.m. (Santa Clara, California
time) on the Business Day on which such Loan is to be made. Each such notice
shall specify the date such Loan is to be made, day shall be a Business Day and
the amount of such Loan, and comply with such other requirements as Bank
determines are reasonable or desirable in connection therewith.
3. Conversion/Continuation of Loans.
(a) Borrower may from time to time submit in writing a request that
Prime Rate Loans be converted to LIBOR Rate Loans or that any existing LIBOR
Rate Loans continue for an additional Interest Period. Such request shall
specify the amount of the Prime Rate Loans which will constitute LIBOR Rate
Loans (subject to the limits set forth below) and the Interest Period to be
applicable to such LIBOR Rate Loans. Each written request for a conversion to a
LIBOR Rate Loan or a continuation of a LIBOR Rate Loan shall be substantially in
the form of a LIBOR Rate Conversion/Continuation Certificate as set forth on
LIBOR Rate Conversion/Continuation Certificate, which shall be duly executed by
the Borrower. Subject to the terms and conditions contained herein, three (3)
Business Days after Bank's receipt of such a request from Borrower, such Prime
Rate Loans shall be converted to LIBOR Rate Loans or such LIBOR Rate Loans shall
continue, as the case may be provided that:
(i) no Event of Default or event which with notice or passage of time
or both would constitute an Event of Default exists;
(ii) no party thereto shall have sent any notice of termination of this
Supplement or of the Loan Agreement;
(iii) Borrower shall have complied with such customary procedures as
Bank has established from time to time for Borrower's requests for LIBOR Rate
Loans;
(iv) the amount of a LIBOR Rate Loan shall be $500,000.00 or such
greater amount which is an integral multiple of $50,000; and
(v) Bank shall have determined that the Interest Period or LIBOR Rate
is available to Bank which can be readily determined as of the date of the
request for such LIBOR Rate Loan.
Any request by Borrower to convert Prime Rate Loans to LIBOR Rate Loans
or continue any existing LIBOR Rate Loans shall be irrevocable. Notwithstanding
anything to the contrary contained herein, Bank shall not be required to
purchase United States Dollar deposits in the London interbank market or other
applicable LIBOR Rate market to fund any LIBOR Rate Loans, but the provisions
hereof shall be deemed to apply as if Bank had purchased such deposits to fund
the LIBOR Rate Loans.
<PAGE> 30
(b) Any LIBOR Rate Loans shall automatically convert to Prime Rate
Loans upon the last day of the applicable Interest Period, unless Bank has
received and approved a complete and proper request to continue such LIBOR Rate
Loans at least three (3) Business Days prior to such last day in accordance with
the terms hereof. Any LIBOR Rate Loans shall, at Bank's option, convert to Prime
Rate Loans in the event that (i) an Event of Default, or event which with the
notice or passage of time or both would constitute an Event of Default, shall
exist, (ii) this Supplement or the Loan Agreement shall terminate, or (iii) the
aggregate principal amount of the Prime Rate Loans which have previously been
converted to LIBOR Rate Loans, or the aggregate principal amount of existing
LIBOR Rate Loans continued, as the case may be, at the beginning of an Interest
Period shall at any time during such Interest Period exceed either (A) the
aggregate principal amount of the Loans then outstanding or (B) the Loans then
available to Borrower hereunder. Borrower agrees to pay to Bank, upon demand by
Bank (or Bank may, at its option, charge Borrower's loan account) any amounts
required to compensate Bank for any loss (including loss of anticipated
profits), cost or expense incurred by such person, as a result of the conversion
of LIBOR Rate Loans to Prime Rate Loans pursuant to any of the foregoing.
(c) On all Loans, Interest shall be payable by Borrower to Bank monthly
in arrears not later than the twenty-third (23rd) day of each calendar month at
the applicable Interest Rate.
4. Additional Requirements/Provisions Regarding LIBOR Rate Loans; Etc.
(a) If for any reason (including voluntary or mandatory prepayment or
acceleration), Bank receives all or part of the principal amount of a LIBOR Rate
Loan prior to the last day of the Interest Period for such Loan, Borrower shall
immediately notify Borrower's account officer at Bank and, on demand by Bank,
pay Bank the amount (if any) by which (i) the additional interest which would
have been payable on the amount so received had it not been received until the
last day of such Interest Period exceeds (ii) the interest which would have been
recoverable by Bank by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day of
such Interest Period at the interest rate determined by Bank in its reasonable
discretion. Bank's determination as to such amount shall be conclusive absent
manifest error.
(b) Borrower shall pay to Bank, upon demand by Bank, from time to time
such amounts as Bank may determine to be necessary to compensate it for any
costs incurred by Bank that Bank determines are attributable to its making or
maintaining of any amount receivable by Bank hereunder in respect of any Loans
relating thereto (such increases in costs and reductions in amounts receivable
being herein called "Additional Costs"), in each case resulting from any
Regulatory Change which:
(i) changes the basis of taxation of any amounts payable to
Bank under this Supplement in respect of any Loans (other than changes with
affect taxes measured by or imposed on the overall net income of Bank by the
jurisdiction in which such Bank has its principal office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements relating to any extensions of credit or other assets of, or
any deposits with or other liabilities of Bank (including any Loans or any
deposits referred to in the definition of "LIBOR Base Rate"); or
(iii) imposes any other condition affecting this Supplement
(or any of such extensions of credit or liabilities).
Bank will notify Borrower of any event occurring after the date of the Loan
Agreement which will entitle Bank to compensation pursuant to this section as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Bank will furnish Borrower with a statement setting
forth the basis and amount of each request by Bank for compensation under this
Section 4. Determinations and allocations by Bank for purposes of this Section 4
of the effect of any Regulatory Change on its costs of maintaining its
obligations to make Loans or of making or maintaining Loans or on amounts
receivable by it in respect of Loans, and of the additional amounts required to
compensate Bank in respect of any Additional Costs, shall be conclusive absent
manifest error.
<PAGE> 31
(c) Borrower shall pay to Bank, upon the request of Bank, such amount
or amounts as shall be sufficient (in the sole good faith opinion of such Bank)
to compensate it for any loss, costs or expense incurred by it as a result of
any failure by Borrower to borrow a Loan on the date for such borrowing
specified in the relevant notice of borrowing hereunder.
(d) If Bank shall determine that the adoption or implementation of any
applicable law, rule, regulation or treaty regarding capital adequacy, or any
change herein, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by Bank (or its
applicable lending office) with any respect or directive regarding capital
adequacy (whether or not having the force of law) or any such authority, central
bank or comparable agency, has or would have the effect of reducing the rate of
return on capital of Bank or any person or entity controlling Bank (a "Parent")
as a consequence of its obligations hereunder to a level below that which Bank
(or its Parent) could have achieved but for such adoption, change or compliance
(taking into consideration its policies with respect to capital adequacy) by an
amount deemed by Bank to be material, then from time to time, within 15 days
after demand by Bank, Borrower shall pay to Bank such additional amount or
amounts as will compensate Bank for such reduction. A statement of Bank claiming
compensation under this Section and setting forth the additional amount or
amounts to be paid to it hereunder shall be conclusive absent manifest error.
(e) If at any time Bank, in its sole and absolute discretion,
determines that: (i) the amount of the LIBOR Rate Loans for periods equal to the
corresponding Interest Periods are not available to Bank in the offshore
currency interbank markets, (ii) the LIBOR Rate does not accurately reflect the
cost to Bank of lending the LIBOR Rate Loan, then Bank shall promptly give
notice thereof to Borrower, and upon the giving of such notice Bank's obligation
to make the LIBOR Rate Loans shall terminate, unless Bank and the Borrower agree
in writing to a different interest rate applicable to LIBOR Rate Loans. If it
shall become unlawful for Bank to continue to fund or maintain any Loans, or to
perform its obligations hereunder, upon demand by Bank, Borrower shall repay the
Loans in full with accrued interest thereon and all other amounts payable by
Borrower hereunder (including, without limitation, any amount payable in
connection with such prepayment pursuant to Section 4(a)).
<PAGE> 32
LIBOR RATE LOAN BORROWING CERTIFICATE
The undersigned hereby certifies as follows:
I, __________________________, am the duly elected and acting
_____________________ of Harmonic Lightwaves, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that certain
LIBOR Supplement together with the Amended and Restated Loan and Security
Agreement, dated December 24, 1997 ("Loan Agreement"), between Borrower and
Silicon Valley Bank ("Bank"). The terms used in this Borrowing Certificate which
are defined in the Loan Agreement have the same meaning herein as ascribed to
them therein.
Borrower hereby requests on _______________, 19__, a LIBOR Rate Loan
(the "Loan") as follows:
(a) The date on which the Loan is to be made is _____________,
19__.
(b) The amount of the Loan is to be ______________
($_____________), for an Interest Period of ________ month(s).
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of this request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this Borrowing Base Certificate is executed by the
undersigned as of this _______ day of ____________, 19__.
HARMONIC LIGHTWAVES, INC.
By:________________________________
Title:_____________________________
FOR INTERNAL BANK USE ONLY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 33
LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, ________________________, am the duly elected and acting
___________________ of Harmonic Lightwaves, Inc. ("Borrower").
This certificate is delivered pursuant to Section 2 of that certain
LIBOR Supplement together with the Amended and Restated Loan and Security
Agreement, dated December 24, 1997 ("Loan Agreement"), between Borrower and
Silicon Valley Bank ("Bank"). The terms used in this LIBOR Rate
Conversion/Continuation Certificate which are defined in the Loan Agreement have
the same meaning herein as ascribed to them therein.
Borrower hereby requests on _____________, 19__ a LIBOR Rate Loan (the
"Loan") as follows:
(a) ______ (i) A rate conversion of an existing Prime Rate Loan from a
Prime Rate Loan to a LIBOR Rate Loan; or
_______ (ii) A continuation of an existing LIBOR Rate Loan as a LIBOR
Rate Loan;
[Check (i) or (ii) above]
(b) The date on which the Loan is to be made is _______, 19__.
(c) The amount of the Loan is to be ________________ ($____________),
for an Interest Period of ______________ month(s).
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of this request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this LIBOR Rate Conversion/Continuation Certificate
is executed by the undersigned as of this _______ day or _______, 19__.
HARMONIC LIGHTWAVES, INC.
By:________________________________
Title:_____________________________
FOR INTERNAL BANK USE ONLY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
LIBOR Pricing Date LIBOR Rate LIBOR Rate Variance Maturity Date
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 34
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Harmonic Lightwaves, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $12,000,000 and a Variable Rate, Equipment Line of Credit of a
principal amount of up to $3,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short term working
capital and purchase of equipment.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line Equipment Line
-------------- --------------
<S> <C> <C>
Amount paid to Borrower directly: $___________ $____________
Undisbursed Funds $___________ $____________
Principal $12,000,000 $3,000,000
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<TABLE>
<CAPTION>
<S> <C>
Prepaid Finance Charges Paid in Cash: $__________
$28,000 Loan Fee
$_____ Accounts Receivables Audit
Other Charges Paid in Cash: $__________
$100 UCC Filing Fees
$TBD Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $__________
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered __________________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF DECEMBER 24, 1997.
BORROWER:
Harmonic Lightwaves, Inc.
____________________________________
Authorized Officer
<PAGE> 35
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Harmonic Lightwaves, Inc. BANK: Silicon Valley Bank
INSURANCE REQUIREMENTS. Harmonic Lightwaves, Inc. ("Grantor")
understands that insurance coverage is required in connection with the extending
of a loan or the providing of other financial accommodations to Grantor by Bank.
These requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of December 24, 1997, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER
24, 1997.
GRANTOR:
Harmonic Lightwaves, Inc.
x_____________________________
Authorized Officer
FOR BANK USE ONLY
<PAGE> 36
INSURANCE VERIFICATION
DATE:__________________________ PHONE:___________________
AGENT'S NAME:__________________________________________________________________
INSURANCE COMPANY:_____________________________________________________________
POLICY NUMBER:_________________________________________________________________
EFFECTIVE DATES:_______________________________________________________________
COMMENTS:______________________________________________________________________
<PAGE> 37
[SILICON VALLEY BANK LOGO]
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: HARMONIC LIGHTWAVES, INC.
LOAN OFFICER: PETER KIDDER
DATE: DECEMBER 24, 1997
REVOLVING LOAN FEE $18,000.00
EQUIPMENT LINE LOAN FEE 10,000.00
CREDIT REPORT 35.00
TOTAL FEE DUE $28,035.00
PLEASE INDICATE THE METHOD OF PAYMENT:
{ } A CHECK FOR THE TOTAL AMOUNT IS ATTACHED.
{ } DEBIT DDA # __________________ FOR THE TOTAL AMOUNT.
{ } LOAN PROCEEDS
BORROWER:
BY:________________________________________________
(AUTHORIZED SIGNER)
___________________________________________________
SILICON VALLEY BANK (DATE)
ACCOUNT OFFICER'S SIGNATURE
<PAGE> 38
CORPORATE BORROWING RESOLUTION
BORROWER: HARMONIC LIGHTWAVES, INC. BANK: SILICON VALLEY BANK
549 BALTIC WAY 3003 TASMAN DRIVE
SUNNYVALE, CA 94089 SANTA CLARA, CA 95054-1191
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF HARMONIC LIGHTWAVES, INC.
("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or
agents of Borrower, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
______________________ __________________________ __________________________
______________________ __________________________ __________________________
______________________ __________________________ __________________________
______________________ __________________________ __________________________
</TABLE>
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment
should be borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan
documents of Borrower, on Bank's forms, at such rates of interest and
on such terms as may be agreed upon, evidencing the sums of money so
borrowed or any indebtedness of Borrower to Bank, and also to execute
and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the
loan documents, or any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of
Borrower's assets, which security interest shall secure all of
Borrower's obligations to Bank.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to Borrower or in which Borrower may have an
interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of Borrower with Bank, or to
cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
<PAGE> 39
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount
as, in the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock,
for such class, series and number, and on such terms, as an officer of
Borrower shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in all cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, including agreements waiving the
right to a trial by jury, as they may in their discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Borrower and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Borrower; and that
they are in full force and effect and have not been modified or revoked in any
manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on December 24, 1997 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X ______________________________________________
*Secretary or Assistant Secretary
X ______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
<PAGE> 1
EXHIBIT 13.1
HARMONIC LIGHTWAVES
1997 ANNUAL REPORT
[GRAPHIC]
BREAKING THE BANDWIDTH BARRIER
<PAGE> 2
PROFILE: MOVING MORE KINDS OF INFORMATION FASTER
HARMONIC LIGHTWAVES, INC. DESIGNS, MANUFACTURES AND MARKETS DIGITAL- AND
LIGHTWAVE-BASED COMMUNICATIONS SYSTEMS THAT DELIVER VIDEO, AUDIO AND DATA OVER
HYBRID FIBER/COAX (HFC), SATELLITE AND WIRELESS NETWORKS. HARMONIC'S ADVANCED
SOLUTIONS ENABLE CABLE TELEVISION AND OTHER NETWORK OPERATORS TO PROVIDE A RANGE
OF BROADCAST AND INTERACTIVE BROADBAND SERVICES THAT INCLUDE HIGH-SPEED INTERNET
ACCESS AND VIDEO-ON-DEMAND.
HEADQUARTERED IN SUNNYVALE, CALIFORNIA, HARMONIC OPERATES ITS NEW MEDIA
COMMUNICATION SUBSIDIARY AND AN R&D FACILITY IN ISRAEL, ALONG WITH A SALES
AND SUPPORT CENTER IN THE UNITED KINGDOM. HARMONIC IS ISO 9001-CERTIFIED
AND EMPLOYS MORE THAN 250 PEOPLE. THE COMPANY'S STOCK IS TRADED ON THE
NASDAQ STOCK MARKET UNDER THE SYMBOL "HLIT."
FOR MORE INFORMATION, PLEASE VISIT THE COMPANY'S WEB SITE AT:
WWW.HARMONIC-LIGHTWAVES.COM
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" and elsewhere in this annual report.
<PAGE> 3
TO OUR SHAREHOLDERS
WHILE 1997 WAS ANOTHER YEAR OF PROFITABLE GROWTH FOR HARMONIC LIGHTWAVES, IT WAS
ALSO HIGHLIGHTED BY SIGNIFICANT EXPANSION ACTIVITIES DESIGNED TO OPEN UP NEW
POSSIBILITIES FOR THE COMPANY.
We continued to solidify our leadership position in providing
advanced fiber optic transmission products for cable service
providers. Equally important, the combination of new product
introductions, enhancements to existing product lines and a key
acquisition enabled us to extend the horizons of Harmonic Lightwaves
to encompass a much wider range of market opportunities in the
rapidly evolving broadband communications arena.
For the year ended December 31, 1997, Harmonic reported revenues of
$74.4 million, a 22% increase compared to revenues of $60.9 million
in 1996. Net income for the year was $4.9 million, or $0.43 per
share.
1
<PAGE> 4
SOLID PROGRESS IN A GROWING MARKET
Harmonic's growth in 1997 underscored our leadership among the new wave of high
technology companies serving the high-speed transmission needs of cable service
providers. Our sales increased by 60% during the first half of the year, before
slowing significantly during the second half due to soft market conditions in
the industry worldwide. In spite of this downturn, we were ranked in the top 20
of the Silicon Valley Technology "Fast 50," an independent survey that
identifies the fastest-growing technology companies in the San Francisco Bay
Area. Harmonic's market is a truly global one, as illustrated by the fact that
international sales continued to account for more than half of our revenues. To
better serve the needs of this worldwide customer base, we opened a new sales
and technical support center in the United Kingdom during the year; plans call
for the opening of additional international offices in 1998.
In the past year, Harmonic introduced a number of new products to support our
fiber optic transmission-based core business. Two additions to our PWRBlazer(TM)
family of optical node receivers -- the PWRBlazer Scaleable Node and the
PWRBlazer Mini Node -- substantially expand the cost effectiveness, flexibility
and upgradability options we offer cable operators and telecommunications
companies. The groundbreaking PWRBlazer Scaleable Node is particularly important
in that it represents the first fiber optic transmission product that enables
operators to incrementally add bandwidth on demand.
We also extended the scope of Harmonic's MAXLink(TM) 1550 nm transmitters with
the introduction of two new high-output family members. Similar enhancements to
our PWRLink(TM) 1310 nm DFB transmitter family are now underway, with
introductions slated for the first quarter of 1998. And Harmonic added to the
element management capabilities we provide service operators using hybrid
fiber/coax (HFC) networks by introducing the NETWatch(TM) Multiple Element
Manager and the NETWatch Management Transponder. All of these enhancements to
our existing HFC product lines provide customers with tremendous flexibility and
price/performance options in designing and implementing their system solutions.
[GRAPH - NET SALES IN MILLIONS]
NEW BROADBAND HORIZONS
While the products just mentioned were important in solidifying Harmonic's
leadership position in fiber optic transmission technology, perhaps the most
compelling news of the year was related to our expansion into the extended
reaches of broadband communications. This migration began with our introduction
of the TRANsend(TM) family of video and audio digital compression products for
the broadband network headend.
2
<PAGE> 5
[GRAPH - NET INCOME IN MILLIONS]
Although the lion's share of initial applications for the TRANsend family will
be derived from sales to cable operators deploying HFC networks, Harmonic's new
digital headend products enable us to cultivate new broadband communications
customers, including multichannel, multipoint distribution system (MMDS)
wireless cable service providers and direct broadcast satellite (DBS)
communications suppliers. Our TRANsend QAM modulator became the first
commercially available product of its kind to support the cable industry's Data
Over Cable Service Interface Specification (DOCSIS). And we announced a new
Cable Modem Partnership Program designed to ensure interoperability between our
digital headend products and cable modems from partner companies such as Daewoo,
Panasonic and Thomson. We were the first to demonstrate this interoperability
between two independently developed products at the 1997 Western Cable Show.
Equally important to Harmonic's strategy is the recent acquisition of New Media
Communication Ltd., a leader in broadband, high-speed data delivery software and
hardware technology. The acquisition expands Harmonic's product portfolio by
enabling cable, satellite and wireless operators to provide video, audio,
high-speed Internet and other advanced services over today's networks. The
narrative of this report explains the implications of our digital headend and
New Media products and technologies in greater detail.
BROADBAND
BROAD OPPORTUNITIES
Harmonic's broadband communications activities represent a natural extension of
our integrated systems and core technology, and come at a time of great change
and opportunity in the industry. Microsoft -- which views the cable network as a
highly effective interactive medium to home users -- made a substantial
investment in the cable industry in 1997. Further evidence was supplied by
interactive services provider @Home, whose initial public offering points to the
potential for a significant subscriber base willing to pay for the new wave of
high-speed, interactive services. Throughout the industry, new standards are
continuing to coalesce, and competition among service providers is continuing to
intensify.
All of these service providers are seeking the greater bandwidth, superior
price/performance, ease of use and comprehensive network management capabilities
that Harmonic Lightwaves' products provide.
[GRAPH - NET SALES BY REGION]
3
<PAGE> 6
Combined with our world-class customer service and the continued integration and
enhancement of all of our product lines to support the convergence of video,
audio and data, these capabilities place the company in an excellent position to
take advantage of future opportunities for growth.
MOVING FORWARD
In summary, 1997 was a year during which Harmonic Lightwaves continued to grow
profitably while executing a strategy that opens up many new opportunities for
the future. I want to extend my gratitude to all of Harmonic's people, whose
dedication and hard work during the year were instrumental in enabling us to
achieve our solid results.
On behalf of everyone at the company, I want to thank all of our shareholders,
customers and partners for their support. The time has come to break down the
bandwidth barrier. We look forward to tackling that challenge, and continuing to
advance the frontiers of modern communications to bring people and information
closer together than ever before.
Sincerely,
/s/ ANTHONY J. LEY
- -----------------------------------
ANTHONY J. LEY
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHAIRMAN OF THE BOARD
4
<PAGE> 7
BREAKING
THE BANDWIDTH
BARRIER
HARMONIC LIGHTWAVES
is about moving information
in todays's application-rich
world
5
<PAGE> 8
MOVING DATA USED TO BE SIMPLE
BECAUSE THE DATA WAS SIMPLE
Moving more kinds of information, more kinds of ways. That's what modern
communications is all about.
The Internet is everywhere. Networks of all kinds -- from the wide area to the
local area, enterprise intranets to the desktop -- are ubiquitous. And with each
year, the information they carry becomes more complex. Voice, data, graphics,
video, audio -- all are competing for limited bandwidth in a multimedia age.
That's because all of this information is still largely transmitted through
standard modems, over standard twisted-pair telephone lines, creating a classic
bottleneck where the World Wide Web slows down to become the World Wide Wait.
The simplest way to understand the concept of bandwidth is to think of
today's transmission media -- phone lines, cable, etc. -- as pipes. A
small pipe can only let so much information through, with only so much
speed, no matter how advanced the technology leading into or out of the
pipe may be. The equation is simple: the bigger the pipe, the greater the
potential bandwidth.
Today, many different companies from seemingly disparate corners of the
communications industry are trying to find ways to widen the pipes and
surmount the bandwidth barrier. From traditional telecommunications
providers to cable operators, Internet service providers to direct
broadcast satellite and wireless transmission companies -- all are looking
for a competitive edge, a better way to provide bandwidth and interactive
services to a market ready to embrace the benefits of what promises to be
a truly interactive age.
AND THAT'S WHERE
HARMONIC LIGHTWAVES CAN HELP
6
<PAGE> 9
[GRAPHIC]
MOVING DATA TODAY IS MUCH MORE COMPLEX
7
<PAGE> 10
VOICE
AUDIO
DATA
VIDEO
[LOGO]
ALL COMPETING FOR LIMITED BANDWIDTH
AT THE SPEED OF LIGHT
Since its founding in 1988, Harmonic Lightwaves has established itself as the
technology leader in providing advanced fiber optic transmission solutions to
cable operators around the world. Over the years, our array of optical
transmitters, nodes, receivers and element management hardware and software have
enabled us to provide customers with better and faster ways of transmitting
information, by harnessing the incredible speed of light within the framework of
an electronic medium.
In the cable world, Harmonic leads the way. We've attained this position
thanks to our proprietary leading-edge technology, our unique system and
network management capabilities, the superior price/performance of our
products, and -- perhaps most important of all for the future -- the
return path capabilities we've pioneered to pave the way for interactive
applications, for business and home users.
8
<PAGE> 11
But cable communications is just part of a much larger picture. Recently,
Harmonic embarked on a strategy to integrate digital headend technology into our
product lines. Today, that technology works hand in hand with our fiber optic
transmission solutions to provide our traditional cable customers not only with
better and faster ways to transmit information, but also with the means to
exploit new business and application opportunities.
Even more important, Harmonic's new technology -- some of which we acquired in
1997 -- opens up much broader opportunities for us. From our roots as a provider
of fiber optic solutions for cable operators, we've now grown to become a
supplier of integrated broadband systems for delivering video, audio and data --
not only over cable, but via wireless and satellite communications as well.
ACROSS THE STREET OR AROUND THE WORLD. [GRAPHIC]
9
<PAGE> 12
[GRAPHIC]
SATELLITE OPTICS
10
<PAGE> 13
[GRAPHICS]
...more kinds of data moving in
MORE KINDS OF WAYS
THE DIGITAL IMPERATIVE
Harmonic's first foray beyond our fiber optic roots occurred with the 1997
introduction of the TRANsend(TM) video and audio compression product
family for the broadband network headend. The TRANsend family -- which
includes a quadrature amplitude modulation (QAM) modulator, an MPEG
(Motion Picture Experts Group)-2 program encoder, and a video transmission
platform -- offers service providers enhanced picture quality and greater
flexibility and reliability when adding advanced services that require
digital compression.
Combined with Harmonic's fiber optic offerings, our TRANsend products
provide a complete solution that will not only help our existing cable
operator customer base to stay competitive, but will also open up new
market opportunities for them. By the turn of the century, it's likely
that digital compression technology will be deployed to millions of homes,
providing subscribers with such advanced services as Internet access,
video services, telecommunications and videoconferencing.
Because of their bandwidth, capacity and overall cost-effectiveness, broadband
networks are ideally suited to provide all advanced data services into the home.
Harmonic's TRANsend products, which integrate seamlessly with our fiber optic
transmission and element management product lines, are positioned to anticipate
this convergence. Equally important, the new digital headends enable Harmonic to
move beyond the cable industry and serve the needs of satellite and wireless
communications providers as well.
But the TRANsend family was merely the first of two important steps that helped
Harmonic expand its horizons in 1997. The other was our first corporate
acquisition: New Media Communication Ltd.
11
<PAGE> 14
NEW MEDIA: NEW POSSIBILITIES
Following the introduction of the TRANsend family, one of the most significant
pieces of the digital puzzle that remained for Harmonic to solve was gaining
expertise in high-speed data transmission technology. We accomplished this goal
by acquiring New Media Communication Ltd., a company whose advanced digital
headend software for managing and transmitting data supports multicasting and
unicasting over broadband media. Complementing this innovative multimedia
delivery software is New Media's range of extremely high-speed end user PCI
receiver cards, which are compatible with cable, satellite and LMDS/MMDS
wireless transmission technologies.
New Media is the only company offering commercially available, high-speed data
solutions on all broadband platforms, and has become the first to deploy its
technology in a commercial LMDS system. Such varied wireless and satellite
customers as New York City's Cellularvision and Germany's KMS/Thyssen -- the
latter serving a huge market comprised of more than 25 million potential
satellite and cable service subscribers -- expand our focus beyond our
traditional customer base of cable operators. The acquisition now allows
Harmonic to move more kinds of information, in more different ways, than ever
before.
BUT BACK TO THE BANDWIDTH ISSUE. HOW FAST IS FAST?
FIG. A: HARMONIC LIGHTWAVES ENHANCED TRANSMISSION BANDWIDTH
[GRAPHIC]
12
<PAGE> 15
HARMONIC LIGHTWAVES IS MOVING
THE FRONTIERS OF
BROADBAND COMMUNICATIONS
SPEED MERCHANTS FOR THE INTERACTIVE AGE
To finally put the bandwidth issue into perspective, it's important to
understand the magnitude of Harmonic's technology and products. A few
comparisons are in order. Today, most standard modems transmit information
over twisted-pair telephone lines at a rate of 28.8 Kbps (kilobits per
second). ISDN lines, meanwhile, have the capability of transmitting data
at speeds of up to 128 Kbps.
Cable modems, by comparison, up the ante to 10 Mbps (megabits per second) --
almost eighty times as fast as ISDN, and more than 300 times the speed of a
standard telephone modem. Satellite communications today top out at 400 Kbps;
wireless and DSL communications at 6-10 Mbps.
And now for the clincher. Harmonic's combined fiber optic, digital and New Media
products support Internet content delivery and data broadcasting at speeds of up
to 52 Mbps via cable and MMDS wireless. Our performance for satellite and LMDS
wireless is just a shade behind, at 48 Mbps. By any measure, that's extremely
fast.
13
<PAGE> 16
To be sure, a number of things have to happen across the industry and throughout
today's communications infrastructures for this kind of bandwidth to be
available for everyone; the process is just getting underway. But it's more than
just a pipedream. It's happening now, and it's going to happen even faster
tomorrow. And as it does, Harmonic intends to be there every step of the way.
Which leaves one message for all those struggling to overcome the bandwidth
barrier:
THE LINES ARE OPEN
14
<PAGE> 17
FINANCIAL CONTENTS
<TABLE>
<S> <C>
16. selected financial data
17. management's discussion and analysis
23. consolidated balance sheets
24. consolidated statement of operations
25. consolidated statement of stockholders' equity
26. consolidated statement of cash flows
27. notes to consolidated financial statements
34. report of independent accountants
35. corporate information
</TABLE>
15
<PAGE> 18
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $74,442 $60,894 $39,180 $ 18,224 $ 6,714
Gross profit 34,605 27,731 17,851 6,467 1,458
Income (loss) from operations 4,506 5,204 3,761 (2,189) (4,956)
Net income (loss) 4,929 5,918 4,121 (2,368) (5,163)
Basic net income per share(1) 0.48 0.59 0.71 -- --
Diluted net income per share(1) 0.43 0.52 0.40 -- --
BALANCE SHEET DATA:
Cash and cash equivalents $13,670 $16,410 $22,126 $ 1,743 $ 4,699
Working capital 38,772 34,321 32,495 6,893 6,506
Total assets 58,887 54,633 41,817 14,578 11,093
Long term debt, including current portion -- -- -- 1,480 1,446
Mandatorily Redeemable Convertible
Preferred Stock -- -- -- 29,215 26,454
Stockholders' equity (deficit)(2) 49,931 43,641 37,009 (20,717) (18,600)
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEARS BY QUARTER 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
Net sales $17,350 $17,545 $20,514 $19,033 $19,497 $16,670 $13,485 $11,242
Gross profit 7,979 7,899 9,736 8,991 8,936 7,824 6,011 4,960
Income (loss) from operations (97) 360 2,016 2,227 2,250 1,610 908 436
Net income 580 413 1,838 2,098 2,405 1,741 1,126 646
Basic net income per share 0.06 0.04 0.18 0.20 0.24 0.17 0.11 0.07
Diluted net income per share 0.05 0.04 0.16 0.18 0.21 0.15 0.10 0.06
Common stock price-high $ 16.50 $ 20.88 $ 20.75 $ 25.22 $ 23.50 $ 26.00 $ 23.50 $ 14.63
Common stock price-low 10.75 15.63 12.00 13.38 15.38 15.38 11.25 9.00
</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) Net loss per share data for periods prior to the commencement of public
trading of the Company's Common Stock on May 22, 1995 have not been
presented as such presentation is not meaningful.
(2) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
16
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") designs, manufactures
and markets digital- and lightwave-based communications systems that deliver
video, audio and data over hybrid fiber/coax ("HFC"), satellite and wireless
networks. The Company's advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high-speed Internet access and video-on-demand. The
Company offers a broad range of fiber optic transmission and digital headend
products for HFC networks, and through its acquisition of New Media
Communication Ltd. ("NMC") in January 1998, expanded its product offerings to
include high-speed data delivery software and hardware.
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, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 54 54 54
---- ---- ----
Gross profit 46 46 46
Operating expenses:
Research and development 16 15 16
Sales and marketing 18 16 15
General and administrative 6 6 5
---- ---- ----
Total operating expenses 40 37 36
---- ---- ----
Income from operations 6 9 10
Other income, net 1 1 1
---- ---- ----
Income before income taxes 7 10 11
Provision for income taxes -- -- --
---- ---- ----
Net income 7% 10% 11%
</TABLE>
17
<PAGE> 20
Net Sales
The Company's net sales increased by 22% to $74.4 million in 1997. This growth
in net sales was primarily attributable to higher unit sales of the Company's
receiver and return path products and sales of the 1550 nm MAXLink transmission
system, which began shipment during the second quarter of 1996. These factors
were partially offset by lower unit sales of the YAGLink transmitters due in
part to the increasing acceptance of 1550 nm transmitters among cable operators
for broadcast transmission. Net sales in the second half of 1997 were lower than
in the first half of 1997 due principally to slowed capital spending in the
cable television industry. The factors contributing to this slow capital
spending include consolidation and system exchanges by domestic cable customers,
which generally has had the effect of delaying certain system upgrades,
uncertainty related to development of industry standards for digital
transmission, evaluation by many cable customers of which advanced services and
system architectures to provide and use, and emphasis on marketing and customer
service strategies by certain international customers rather than continued
construction of networks. The Company is unable to predict when cable television
industry capital spending will increase. See "Factors That May Affect Future
Results of Operations."
The Company's net sales increased by 55% to $60.9 million in 1996 from $39.2
million in 1995. 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 transmitters
and lower selling prices for certain products.
Historically, the majority of Harmonic's net sales have been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future. In 1997, sales to Capella (the Company's Canadian
distributor) accounted for 17% of the Company's net sales. In 1996, sales to
Tratec (the Company's former U.K. distributor), Capella 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.
Harmonic has adopted a strategy of selling to major domestic customers through
its own direct sales force; as a result, domestic OEM and distributor revenues
were a smaller percentage of net sales in 1997 than they were in prior years.
Sales to customers outside the United States represented 59%, 57% and 65% of net
sales in 1997, 1996 and 1995, 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 $34.6 million (46% of net sales) in 1997 from $27.7
million (46% of net sales) in 1996. The increase in gross profit was principally
due to higher unit sales volume and lower manufacturing costs, particularly for
the Company's MAXLink products, which commenced shipment during the second
quarter of 1996, and improved margins on return path products resulting from
product design changes. These factors were partially offset by a less favorable
product mix which included lower sales of transmitters as a percentage of net
sales, and lower selling prices for certain products. 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. A more favorable
product mix, which included a higher percentage of transmitters, also
contributed to the increase in gross profit in 1996.
Research and Development
Research and development expenses increased to $11.7 million (16% of net sales)
in 1997 from $9.2 million (15% of net sales) in 1996. The increase in research
and development expenses was principally due to increased headcount,
particularly at the Company's Israeli subsidiary, which is developing Harmonic's
digital headend products, and higher prototype material costs in connection with
the node and digital development programs. Research and development expenses
increased to $9.2 million in 1996 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 for 1997, 1996 and 1995 are net of grants from the BIRD Foundation of
approximately $120,000, $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.
18
<PAGE> 21
Sales and Marketing
Sales and marketing expenses increased to $13.6 million (18% of net sales) in
1997 from $9.8 million (16% of net sales) in 1996. The increase in sales and
marketing expenses in 1997 was primarily due to higher headcount associated with
expansion of the direct sales force, customer service and technical support
organizations; expenses associated with establishing international sales
offices, and higher promotional expenses. 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 1996 was primarily attributable to higher headcount,
promotional expenses and commissions to international sales representatives. 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 $4.8 million in 1997 from $3.5
million in 1996 but remained constant as a percentage of net sales at 6%. The
increase in absolute expenses was principally attributable to costs of
supporting the Company's growth in headcount and operations and providing for a
higher accounts receivable reserve. 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 primarily due 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. 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
Interest and other income was $0.7 million in 1997 compared to $1.0 million in
1996. The decrease in 1997 was principally due to interest earned on lower
average cash balances. Interest and other income was $1.0 million in 1996
compared to $0.6 million in 1995. The increase in 1996 compared to 1995 was
principally attributable to interest earned on higher average cash balances in
1996 following the Company's initial public offering (the "IPO") in May 1995,
and lower interest expense in 1996 as the Company repaid all capital leases and
bank debt in 1995. The income in 1995 was principally attributable to interest
earned on cash balances, following the Company's IPO, partially offset by
interest expense.
Income Taxes
The provision for income taxes for 1997, 1996 and 1995 was 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. The Company had available federal
net operating loss carryforwards of approximately $0.8 million at December 31,
1997. 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 1998, exclusive of
consideration of the one-time, in-process technology charge associated with the
NMC acquisition. The Company expects to have an effective annual tax rate beyond
1998 that approximates statutory rates.
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 $2.0 million in 1997, $0.3 million
in 1996 and $2.3 million in 1995. The increase in cash provided by operations in
1997 compared to 1996 was principally attributable to slower growth in
receivables, inventory and prepaid expenses and other assets, partially offset
by lower net income, accounts payable and accrued liabilities. The decrease in
cash provided by operations in 1996 compared to 1995 was primarily due to higher
accounts receivable, inventory and prepaid expenses 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.
Net working capital was approximately $38.8 million at December 31, 1997,
including $13.7 million of cash and cash equivalents. During the fourth quarter
of 1997, the Company renegotiated its bank line of credit, which now provides
for up to $12.0 million in borrowings and expires in December 1998. The line of
credit bears interest at the bank's prime rate or LIBOR plus 2.0%. The bank has
also extended a term loan facility not to exceed $3.0 million to be used for the
purchase of capital equipment. This loan facility expires in December 1998 and
bears interest at the bank's prime rate plus 0.5%. There were no outstanding
borrowings under either the bank line of credit or term loan during 1997.
19
<PAGE> 22
Additions to property, plant and equipment were approximately $4.8 million
during 1997 compared to $6.7 million and $3.9 million in 1996 and 1995
respectively. The decrease in 1997 was due principally to nonrecurring
expenditures in 1996 for leasehold improvements and furniture and fixtures for
the Company's new headquarters. While the Company currently has no material
commitments, it expects to spend approximately $6.0 million on capital
expenditures in 1998, 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 are likely to 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. Such
factors include 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 and 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. In addition, in each quarter of 1997 the Company recognized
a substantial portion of its revenues in the last month of the quarter. 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 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. Also, the Company's net sales in the second half of 1997
were adversely affected by a slow-down in spending by cable television
operators. The factors contributing to this slow capital spending include
consolidation and system exchanges by domestic cable customers, which generally
has had the effect of delaying certain system upgrades, uncertainty related to
development of industry standards for digital transmission, evaluation by many
cable customers of which advanced services and system architectures to provide
and use, and emphasis on marketing and customer service strategies by certain
international customers rather than continued construction of networks. The
Company is unable to predict when cable television industry capital spending
will increase. In addition, cable television capital spending can be subject to
the effects of seasonality, with fewer construction and upgrade projects
typically occurring in winter months and otherwise being affected by inclement
weather.
Dependence on Key Customers and End Users
Historically, a majority of the Company's sales have been to relatively few
customers. Sales to the Company's ten largest customers in 1997, 1996 and 1995
accounted for approximately 56%, 72% and 80%, 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
20
<PAGE> 23
own direct sales force and domestic OEM and distributor revenues were a smaller
percentage of net sales in 1997 than they have been in prior years.
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.
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 commenced shipment of 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.
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 Associated with the Acquisition of NMC
The growth in the Company's business has placed, and is expected to continue to
place, a significant strain on the Company's limited personnel, management and
other resources. Through its acquisition of NMC in January 1998, the Company
increased the scope of its product line to include broadband, high-speed data
delivery software and hardware and increased the scope of its international
operations in Israel. The acquisition of NMC involves numerous risks and
challenges, including: difficulties in the assimilation of operations, research
and development efforts, products, personnel and cultures of Harmonic Lightwaves
and NMC; the potential adverse effects of the acquisition on relationships with
customers, distributors, suppliers and other business partners of the two
companies; the dependence on the evolution and growth of the market for wireless
and satellite broadband services; regulatory developments; rapid technological
change; the highly competitive nature of the telecommunications industry; the
Company's ability to successfully develop, manufacture and gain market
acceptance of the products of NMC; the ability to manage geographically remote
units; the integration of NMC's management information systems with those of the
21
<PAGE> 24
Company; potential adverse short-term effects on the Company's operating
results; the amortization of acquired intangible assets; the risk of entering
emerging markets in which the Company has limited or no direct experience; and
the potential loss of key employees of NMC. The Company's future operating
results will be significantly affected by its ability to successfully integrate
NMC, to implement operating, manufacturing and financial procedures and
controls, to improve coordination among different operating functions, to
strengthen management information and telecommunications systems and to continue
to attract, train and motivate additional qualified personnel in all areas.
There can be no assurance that the Company will be able to manage these
activities and implement these additional systems and controls successfully, and
any failure to do so could have a materially adverse effect upon the Company's
operating results. The Company expects that the inclusion of NMC's operations,
combined with seasonally low sales to domestic cable customers, will result in
an operating loss for the Company in the first quarter of 1998. In addition, the
acquisition of NMC has resulted in significant additional working capital
requirements. While the Company believes that it currently has sufficient funds
to finance its operations for at least the next twelve months, to the extent
that such funds are insufficient to fund the Company's activities, including any
potential acquisitions, the Company may need to raise additional funds through
public or private equity or debt financing from other sources. The sale of
additional equity or convertible debt may result in additional dilution to the
Company's stockholders and such securities may have rights, preferences or
privileges senior to those of the Common Stock. There can be no assurance that
additional equity or debt financing will be available or that if available it
can be obtained on terms favorable to the Company or its stockholders.
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 continue to 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 could materially and adversely affect its business and operating
results.
Risks of International Operations
Sales to customers outside of the United States in 1997, 1996 and 1995
represented 59%, 57% and 65% 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 two Israeli
subsidiaries, NMC and a 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. In recent months,
certain Asian currencies have devalued significantly in relation to the U.S.
dollar. The Company is currently evaluating the effect of recent developments in
Asia on the Company's business, and there can be no assurance that the Company's
sales in Asia will not be materially adversely affected by such developments.
Risks of Information Systems
The Company has commenced, for all its information systems, a Year 2000 date
conversion project to address all necessary changes to be Year 2000 compliant.
The Company is expensing the costs of addressing the "Year 2000 issue" as
incurred. The Company does not expect that Year 2000 issues from its own
information systems will have a material adverse impact on its financial
position or results of operations. However, the Company could be adversely
impacted by Year 2000 issues faced by major customers and suppliers and other
organizations with which the Company interacts. The Company is in the process of
determining the impact that third parties who are not Year 2000 compliant may
have on the operations of the Company.
22
<PAGE> 25
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,670 $ 16,410
Accounts receivable, net 16,458 12,643
Inventories 15,474 14,782
Prepaid expenses and other assets 1,774 1,315
-------- --------
Total current assets 47,376 45,150
Notes receivable 1,300 --
Property and equipment, net 10,077 8,751
Other assets 134 732
-------- --------
$ 58,887 $ 54,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,708 $ 5,604
Accrued liabilities 4,896 5,225
-------- --------
Total current liabilities 8,604 10,829
Other liabilities 352 163
Commitments (Notes 9 and 11)
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;
10,414,297 and 10,160,876 shares issued and outstanding 10 10
Capital in excess of par value 55,917 54,579
Accumulated deficit (6,019) (10,948)
Currency translation 23 --
-------- --------
Total stockholders' equity 49,931 43,641
-------- --------
$ 58,887 $ 54,633
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 26
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales $ 74,442 $ 60,894 $ 39,180
Cost of sales 39,837 33,163 21,329
-------- -------- --------
Gross profit 34,605 27,731 17,851
-------- -------- --------
Operating expenses:
Research and development 11,676 9,237 6,144
Sales and marketing 13,599 9,827 5,750
General and administrative 4,824 3,463 2,196
-------- -------- --------
Total operating expenses 30,099 22,527 14,090
-------- -------- --------
Income from operations 4,506 5,204 3,761
Interest and other income, net 682 1,025 577
-------- -------- --------
Income before income taxes 5,188 6,229 4,338
Provision for income taxes 259 311 217
-------- -------- --------
Net income $ 4,929 $ 5,918 $ 4,121
======== ======== ========
Basic net income per share $ 0.48 $ 0.59 $ 0.71
======== ======== ========
Diluted net income per share $ 0.43 $ 0.52 $ 0.40
======== ======== ========
Average number of shares outstanding 10,345 10,106 5,797
======== ======== ========
Average number of shares outstanding assuming dilution 11,523 11,474 10,382
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 27
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN STOCKHOLDERS'
----------------- EXCESS OF ACCUMULATED CURRENCY EQUITY
SHARES AMOUNT PAR VALUE DEFICIT TRANSLATION (DEFICIT)
------ ------ ------- ----------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
Exercise of stock options
and warrants 185 -- 612 -- -- 612
Issuance of Common Stock
under Stock Purchase Plan 68 -- 726 -- -- 726
Currency translation 23 23
Net income -- -- -- 4,929 -- 4,929
------ ----- ------- ---------- ------ ----------
Balance at December 31, 1997 10,414 $ 10 $55,917 $ (6,019) $ 23 $ 49,931
====== ===== ======= ========== ====== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 28
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,929 $ 5,918 $ 4,121
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,441 2,506 1,799
Changes in assets and liabilities:
Accounts receivable (3,815) (6,841) (1,246)
Inventories (692) (5,606) (3,523)
Prepaid expenses and other assets 139 (1,848) (15)
Accounts payable (1,896) 3,403 2
Accrued and other liabilities (140) 2,781 1,128
-------- -------- --------
Net cash provided by operating activities 1,966 313 2,266
Cash flows used in investing activities:
Acquisition of property and equipment (4,767) (6,743) (3,119)
Advances to New Media Communication Ltd. (1,300) -- --
-------- -------- --------
Net cash used in investing activities (6,067) (6,743) (3,119)
Cash flows from financing activities:
Repayment under bank line of credit -- -- (922)
Proceeds from issuance of Common Stock, net 1,338 714 24,390
Repayments of long-term debt -- -- (2,232)
-------- -------- --------
Net cash provided by financing activities 1,338 714 21,236
Effect of exchange rate changes on cash and cash equivalents 23 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,740) (5,716) 20,383
Cash and cash equivalents at beginning of period 16,410 22,126 1,743
-------- -------- --------
Cash and cash equivalents at end of period $ 13,670 $ 16,410 $ 22,126
-------- -------- --------
Supplemental schedule of cash flow information and non-cash financing
activities:
Interest paid during the period $ -- $ 21 $ 193
Income taxes paid during the period 323 285 126
Acquisition of property and equipment under
capital leases and equipment term loan $ -- $ -- $ 752
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harmonic Lightwaves, Inc. (the "Company") designs, manufactures and markets
digital and lightwave based communications systems that deliver video, audio and
data over hybrid fiber/coax ("HFC"), satellite and wireless networks. The
Company operates in one industry segment. See Note 10 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.
Basis of Presentation
The consolidated financial statements of the Company include the financial
statements of the Company and its wholly-owned subsidiaries. All intercompany
accounts and balances have been eliminated. The Company's fiscal quarters end on
the Friday nearest the calendar quarter end.
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
10. 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, 1997, receivables from one customer represented 25% of
accounts receivable. At December 31, 1996, receivables from three customers
represented 20%, 17% and 11%, respectively.
27
<PAGE> 30
Currency Translation
The assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates, and revenues and expenses are translated at
average exchange rates during the year. Cumulative currency translation
adjustments are included in stockholders' equity. Realized gains and losses from
currency exchange transactions have not been material.
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 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 123 ("SFAS 123").
Reclassification
Certain amounts in prior years' financial statements and related notes have been
reclassified to conform to the 1997 presentation. These reclassifications are
not material.
NOTE 2: CASH AND CASH EQUIVALENTS
At December 31, 1997 and 1996, the Company had the following amounts in cash and
cash equivalents, with original maturity dates of three months or less at the
date of purchase. Realized gains and losses for the years ended December 31,
1997 and 1996 and the difference between gross amortized cost and estimated fair
value at December 31, 1997 and 1996 were immaterial.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Commercial paper $ 7,956 $ 15,964
Cash and money market accounts 5,714 446
-------- --------
Total cash and cash equivalents $ 13,670 $ 16,410
======== ========
</TABLE>
NOTE 3: BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Gross accounts receivable $ 17,208 $ 12,943
Less: allowance for doubtful accounts (750) (300)
-------- --------
$ 16,458 $ 12,643
======== ========
Inventories:
Raw materials $ 4,356 $ 3,104
Work-in-process 3,127 4,704
Finished goods 7,991 6,974
-------- --------
$ 15,474 $ 14,782
======== ========
Property and equipment:
Furniture and fixtures $ 1,585 $ 1,124
Machinery and equipment 15,692 12,183
Leasehold improvements 2,779 1,982
20,056 15,289
Less: accumulated depreciation and amortization (9,979) (6,538)
-------- --------
$ 10,077 $ 8,751
======== ========
Accrued liabilities:
Accrued compensation $ 1,837 $ 2,166
Accrued warranties 626 733
Other 2,433 2,326
-------- --------
$ 4,896 $ 5,225
======== ========
</TABLE>
28
<PAGE> 31
NOTE 4: NET INCOME PER SHARE
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS, which replaces primary EPS, is computed by
dividing net income available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Unlike the computation of primary EPS, Basic EPS excludes the dilutive effect of
stock options, warrants and Mandatorily Redeemable Convertible Preferred Stock.
Diluted EPS replaces fully diluted EPS and gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average price for the period is used in determining the number of shares
assumed to be purchased from exercise of stock options and warrants rather than
the higher of the average or ending price as used in the computation of fully
diluted EPS. Mandatorily Redeemable Convertible Preferred Stock is included in
the net income per share calculation using the if-converted method when
applicable. Net income per share for all prior periods presented has been
restated to conform to the provisions of SFAS 128.
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C>
Net income (numerator) $ 4,929 $ 5,918 $ 4,121
======== ======== ========
Shares calculation (denominator):
Average shares outstanding -- basic 10,345 10,106 5,797
Effect of Dilutive Securities:
Potential Common Stock
Stock options and warrants 1,178 1,368 1,456
Mandatorily Redeemable Convertible Preferred Stock -- -- 3,129
-------- -------- --------
Average shares outstanding -- diluted 11,523 11,474 10,382
======== ======== ========
Net income per share -- basic $ 0.48 $ 0.59 $ 0.71
======== ======== ========
Net income per share -- diluted $ 0.43 $ 0.52 $ 0.40
======== ======== ========
</TABLE>
Options to purchase 514,150 shares of common stock at prices ranging from $16.50
to $22.75 per share were outstanding during 1997, but were not included in the
computation of diluted EPS because either the option's exercise price was
greater than the average market price of the common shares or inclusion of such
options would have been antidilutive.
NOTE 5: BORROWING FACILITIES
The Company has a bank line of credit agreement, providing for borrowings of up
to $12,000,000. The agreement contains certain financial covenants and is
available until December 1998. Borrowings pursuant to the agreement bear
interest at the bank's prime rate or LIBOR plus 2%. The Company also has an
equipment term loan (the "term loan") facility, providing for borrowings of up
to $3,000,000 on a secured basis. The term loan is available until December 1998
and bears interest at the bank's prime rate plus 0.5%, payable monthly. The
outstanding balance is payable in monthly installments beginning June 1998
through December 2001. There were no outstanding borrowings at December 31, 1997
or 1996.
NOTE 6: 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, 1997 and 1996.
29
<PAGE> 32
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 or the closing of a significant acquisition transaction, as defined in
the warrant. 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 7: 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. 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 1,045,000 shares of Common
Stock for issuance under the 1995 Plan.
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.
The following table summarizes activities under the Plans:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVAILABLE STOCK OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE)
<S> <C> <C> <C>
Balance at December 31, 1994 299 1,147 $ 0.99
Shares authorized 401 -- --
Options granted (278) 278 11.99
Options exercised -- (252) 0.53
Options canceled 20 (20) 5.81
------ ------ ------
Balance at December 31, 1995 442 1,153 3.67
Options granted (344) 344 12.72
Options exercised -- (208) 0.98
Options canceled 7 (48) 5.75
------ ------ ------
Balance at December 31, 1996 105 1,241 6.56
Shares authorized 480 -- --
Options granted (504) 504 18.08
Options exercised -- (185) 3.31
Options canceled 154 (177) 14.26
------ ------ ------
Balance at December 31, 1997 235 1,383 $10.22
====== ====== ======
</TABLE>
30
<PAGE> 33
The following table summarizes information regarding stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DEC. 31, 1997 (YEARS) EXERCISE PRICE DEC. 31, 1997 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE AND LIFE)
<S> <C> <C> <C> <C> <C>
$ 0.30 - 1.20 307 4.4 $ 0.41 307 $ 0.41
1.80 - 4.65 175 6.5 2.40 149 2.33
7.20 - 13.75 434 7.9 10.98 219 10.75
14.13 - 22.75 467 9.3 18.89 43 17.45
----- --- ------ --- ------
1,383 7.4 $10.22 718 $ 4.98
===== === ====== === ======
</TABLE>
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.
68,271, 48,977 and no shares were issued under the Purchase Plan during 1997,
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>
1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported $4,929 $5,918 $4,121
Pro forma 3,209 4,474 3,610
Basic net income per share
As reported $ 0.48 $ 0.59 $ 0.71
Pro Forma 0.31 0.44 0.62
Diluted net income per share:
As reported $ 0.43 $ 0.52 $ 0.40
Pro forma 0.28 0.39 0.35
</TABLE>
The fair value of each option grant under the 1988 Plan, 1995 Plan and Director
Plan was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants during 1997, 1996 and 1995:
dividend yield of 0.0%; expected weighted average volatility of 55%, 47.5%, and
47.5%, respectively; and expected weighted average lives of four years, during
each year; and risk-free interest rates of 5.6% to 6.7%, 5.2% to 6.5% and 5.4%
to 7.1% for options granted during 1997, 1996 and 1995, respectively.
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 1997, 1996 and 1995: dividend yield of 0.0%;
expected volatility of 55%, 47.5%, and 47.5%, respectively; expected lives of
two years during each year; and risk-free interest rates of 5.1% to 6.3% for
1997 and, 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. Effective April 1,
1997, the Company began to make discretionary contributions to the plan of $0.25
per dollar contributed by eligible participants up to a maximum contribution per
participant of $750 per year.
31
<PAGE> 34
NOTE 8: 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, 1997 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal $168 $246 $174
Foreign 90 41 16
State 1 24 27
---- ---- ----
$259 $311 $217
==== ==== ====
</TABLE>
The income tax provision reconciles to the provision at the federal statutory
rate as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision at statutory rate $ 1,764 $ 2,118 $ 1,475
Differential in rates on foreign earnings (111) -- --
State taxes, net of federal benefit 1 16 18
Foreign sales corporation benefit (176) -- --
Utilization of net operating loss carryovers (1,661) (2,490) (2,052)
Future benefits not currently recognized 364 429 567
Alternative minimum tax 51 162 116
Other 27 76 93
------- ------- -------
$ 259 $ 311 $ 217
======= ======= =======
</TABLE>
Deferred tax assets comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryovers $ 303 $ 1,964 $ 3,960
Research and development carryovers 2,452 2,112 1,396
Capitalized research and development costs 234 254 931
Reserves not currently deductible 1,657 1,187 574
Other 96 12 746
------- ------- -------
Total deferred tax assets 4,742 5,529 7,607
Valuation allowance (4,742) (5,529) (7,607)
------- ------- -------
Net deferred assets $ -- $ -- $ --
======= ======= =======
</TABLE>
The deferred tax assets valuation allowance at December 31, 1997, 1996 and 1995
is attributed to federal and state deferred tax assets. Management believes that
sufficient uncertainty exists regarding the realizability of these items such
that a full valuation allowance has been recorded.
At December 31, 1997, the Company had approximately $800,000 of net operating
loss carryovers for federal tax reporting purposes available to offset future
taxable income; such carryovers expire through 2009. The net operating loss
carryovers do not include approximately $1,200,000 resulting from disqualifying
dispositions or exercises of non-incentive stock options, the tax benefit of
which, when realized, will be accounted for as an addition to capital in excess
of par value, rather than as a reduction of the provision for income taxes.
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.
32
<PAGE> 35
NOTE 9: RESEARCH AND DEVELOPMENT GRANTS
In accordance with separate agreements signed with the Israel - U.S. Binational
Industrial Research and Development Foundation ("BIRD") in December 1994 and
December 1997, the Company obtained grants for research and development projects
amounting to 50% of the actual expenditures incurred on each of the two projects
subject to a maximum of $560,000 and $845,000, respectively. 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 2.5%
- - 5% of sales of any products or development resulting from such research, but
not in excess of 150% of each grant. Under the first grant the Company earned
approximately $120,000, $140,000, and $300,000 during 1997, 1996 and 1995,
respectively, which 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 new project during 1997.
NOTE 10: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Sales and purchase transactions are denominated in U.S. dollars. The Company has
one manufacturing facility located in the U.S. The Company has no significant
assets located outside of the U.S.
International net sales were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Americas (excluding U.S.) $18,045 $12,216 $ 8,281
Asia 15,406 10,342 7,331
Europe 10,339 12,214 9,819
------- ------- -------
$43,790 $34,772 $25,431
======= ======= =======
</TABLE>
The Company sells to a significant number of its end users through distributors.
In 1997, sales to one distributor represented 17% of total net sales. 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.
NOTE 11: COMMITMENTS AND CONTINGENCIES
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 $1,413,000, $828,000, and $555,000, for 1997, 1996 and
1995, respectively. Future minimum lease payments under noncancelable operating
leases at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
- --------------------------------------------
<S> <C>
1998 $ 650
1999 1,344
2000 1,398
2001 1,415
2002 1,290
Thereafter 4,880
-------
$10,977
=======
</TABLE>
At December 31, 1997, the Company had prepaid approximately $655,000 of rents
and deposits under the terms of its 10 year lease agreement for its 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 aggregating
$223,000 for 1998.
Contingencies
The Company is a party to certain litigation matters and claims which are normal
in the course of its operations and, while the results of litigation and claims
cannot be predicted with certainty, management believes that the final outcome
of such matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
33
<PAGE> 36
NOTE 12: SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, the Company acquired New Media Communication Ltd. ("NMC"), a
privately held supplier of broadband, high-speed data delivery software and
hardware, in exchange for the issuance of 1,037,911 shares of Harmonic common
stock and the assumption of all outstanding NMC stock options. The acquisition
will be accounted for using the purchase method of accounting with the purchase
price of approximately $17.6 million being allocated to the acquired assets,
in-process technology and goodwill. Approximately $14.0 million of the purchase
price will be charged to in-process technology as a one-time charge in the first
quarter of 1998. Goodwill of approximately $1.5 million will be amortized over
the estimated useful life of five years. NMC has been a development stage
company since its founding in 1996 and its revenues to date have not been
material in relation to those of the Company. NMC had a net loss of
approximately $2.6 million for 1997. The Company made advances to NMC starting
in September 1997 which totaled $1.3 million at December 31, 1997.
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 subsidiaries at December 31, 1997, 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, 1997, 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
- -------------------------
San Jose, California
January 20, 1998
34
<PAGE> 37
[LOGO]
HARMONIC LIGHTWAVES, INC.
549 BALTIC WAY
SUNNYVALE, CALIFORNIA 94089
TELEPHONE: (408) 542-2500
FACSIMILE: (408) 542-2511
WWW.HARMONIC-LIGHTWAVES.COM
<PAGE> 38
CORPORATE INFORMATION
BOARD OF DIRECTORS
Anthony J. Ley
Chairman, President and
Chief Executive Officer
Harmonic Lightwaves, Inc.
Moshe Nazarathy
Senior Vice President
Harmonic Lightwaves, Inc.
E. Floyd Kvamme*+
General Partner
Kleiner Perkins Caufield & Byers
David A. Lane
General Partner
Alpine Technology Ventures
Barry D. Lemieux*
Former President
American Cablesystems Corporation
Michel L. Vaillaud+
Former Chairman and
Chief Executive Officer
Schlumberger Limited
*Member, Compensation Committee
+Member, Audit Committee
EXECUTIVE OFFICERS
Anthony J. Ley
Chairman, President and
Chief Executive Officer
Moshe Nazarathy
Senior Vice President,
General Manager,
Israel R&D Center
Robin N. Dickson
Chief Financial Officer
John E. Dahlquist
Vice President, Marketing
Michael Yost
Vice President, Operations
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, California
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Jose, California
TRANSFER AGENT/REGISTRAR
ChaseMellon Shareholder
Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 777-3694
www.chasemellon.com
SHAREHOLDER INFORMATION
Harmonic Lightwaves welcomes inquiries from shareholders and other interested
investors. Additional copies of this report and/or the Form 10-K, filed with the
Securities and Exchange Commission, may be obtained without charge by contacting
Investor Relations at (408) 542-2760 or via e-mail at
[email protected].
ANNUAL MEETING
Shareholders are invited to attend Harmonic Lightwaves' annual meeting at 8:00
a.m. on April 29, 1998 at The Westin - Santa Clara, 101 Great America Parkway,
Santa Clara, California 95054.
(408) 986-0700
STOCK LISTING
Stock traded on the Nasdaq National Market System under the symbol HLIT.
CORPORATE HEADQUARTERS
Harmonic Lightwaves, Inc.
549 Baltic Way
Sunnyvale, California 94089
Telephone: (408) 542-2500
Facsimile: (408) 542-2511
SUBSIDIARIES
Harmonic Lightwaves (Israel) Ltd.
19 Alon Hatavor St. - Zone 3
P.O. Box 3600
Caesarea Industrial Park
Pardes Hana, Israel 38900
Harmonic Lightwaves, Ltd.
Unit #17, Alban Park, Hatfield Rd.
St. Albans, Herts A1L40JJ
United Kingdom
New Media Communication, Ltd.
10 Beit Shamai St.
Tel Aviv, Israel 67018
(C)Harmonic Lightwaves, Inc. Printed in the USA. MAXLink, PWRLink, PWRBlazer,
NETWatch and TRANsend are trademarks of Harmonic Lightwaves, Inc.
<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, 1997.
<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%
Harmonic Lightwaves Ltd. United Kingdom 100%
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form (S-3 No. 333-43903) and
the Registration Statements on Form S-8 (Nos. 33-94138, 333-38025 and
333-44265) of Harmonic Lightwaves, Inc. of our report dated January 20, 1998,
appearing on page 34 of the Annual Report to Shareholders which is incorporated
by reference in this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,670
<SECURITIES> 0
<RECEIVABLES> 16,458
<ALLOWANCES> 0
<INVENTORY> 15,474
<CURRENT-ASSETS> 47,376
<PP&E> 10,077
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,887
<CURRENT-LIABILITIES> 8,604
<BONDS> 0
0
0
<COMMON> 55,927
<OTHER-SE> (5,996)
<TOTAL-LIABILITY-AND-EQUITY> 58,887
<SALES> 74,442
<TOTAL-REVENUES> 74,442
<CGS> 39,837
<TOTAL-COSTS> 39,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,188
<INCOME-TAX> 259
<INCOME-CONTINUING> 4,929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,929
<EPS-PRIMARY> 0.48<F1>
<EPS-DILUTED> 0.43
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
