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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25826
HARMONIC INC.
(FORMERLY, HARMONIC LIGHTWAVES, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0201147
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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549 BALTIC WAY
SUNNYVALE, CA 94089
(408) 542-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ] __________
Based on the closing sale price of the Common Stock on the NASDAQ National
Market System on February 25, 2000, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was $2,832,880,041. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, was 30,726,923 at February 25, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The statements contained herein that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, including without
limitation statements regarding Harmonic's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document or incorporated by reference herein are based on information available
to Harmonic on the date hereof, and Harmonic assumes no obligation to update any
such forward-looking statements. Harmonic's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Factors That
May Affect Future Results of Operations."
OVERVIEW
Harmonic designs, manufactures and markets digital and fiber optic systems
for delivering video, voice and data services over cable, satellite, telephone,
and wireless networks. Our advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high-speed Internet access, telephony and video on demand.
We offer a broad range of fiber optic transmission and digital headend products
for hybrid fiber coax, satellite and wireless networks, and our acquisition of
New Media Communication Ltd. (now called Harmonic Data Systems Ltd.) in January
1998 has allowed us to develop and expand our product offerings to include
high-speed data delivery software and hardware.
On October 27, 1999, Harmonic announced a definitive agreement to acquire
the DiviCom business of C-Cube Microsystems, Inc. A registration statement on
Form S-4 and definitive proxy materials for shareholders were filed with the
Securities and Exchange Commission on March 23, 2000. [Consummation of the
merger is subject to a number of conditions, including Harmonic and C-Cube
shareholder approval, the prior disposition of C-Cube's semiconductor business
and regulatory approvals. The shareholder meetings are scheduled to be held on
April 24, 2000.]
The DiviCom business designs, manufactures and sells products and systems
that enable satellite, wireless, telephone and cable companies to deliver
digital video, audio and data over a variety of networks. By combining video
compression technologies with network and communications technologies, the
DiviCom business creates innovative products for producers and distributors of
video and video-enhanced information. These products include encoders,
multiplexers and network management systems, as well as systems integration
services.
INDUSTRY BACKGROUND
Demand for Broadband Access
The demand for broadband access has increased significantly in recent years
due in large part to the dramatic growth of the Internet, which has facilitated
commercial applications such as telecommuting and electronic commerce as well as
widespread use of the Web for communicating and accessing information. Rapid
growth in the number of Internet users and the demand for more
bandwidth-intensive video, voice and data content has strained existing
communications networks and created bottlenecks, especially in the "last mile"
of the communications infrastructure where homes connect to the local network.
Increasingly, individuals who experience the value of high-speed Internet access
from their work locations are demanding similar levels of speed from their home
or laptop connection. Access to the Internet over the last mile using standard
telephone dial-up connections, however, has been limited generally to speeds of
up to 56 Kbps.
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Competition and Deregulation
Increased demand for high-speed broadband access, combined with recent and
proposed regulatory reform, has spurred competition among communications service
providers worldwide to offer combinations of video, voice and data services.
Historically, U.S. long distance carriers and regional Bell operating companies,
or RBOCs, were generally limited to providing only telephony services in the
residential market. Cable television multiple system operators, or MSOs, also
were generally limited to providing video programming. As a result, neither the
RBOCs nor the cable operators had networks conducive to providing high-speed
data services to residential subscribers. The Telecommunications Act of 1996,
however, permitted cable operators, long-distance carriers and local exchange
carriers such as the RBOCs to enter each other's markets. As a result, AT&T has
acquired TCI and MediaOne and announced plans to offer broadband and interactive
services, including telephony, on a broad scale over these cable systems in the
next few years. Similarly, RBOCs are deploying various digital subscriber line
technologies, or DSL, for high-speed data services over their existing copper
networks. A number of RBOCs also have deployed alternative delivery systems such
as hybrid fiber coax, or HFC, fiber to the curb and wireless for data and video
transmission. In certain major metropolitan areas, new carriers have entered the
market. For example, companies such as RCN are building state-of-the-art HFC
networks to compete with incumbent RBOCs and cable operators.
Similar deregulation of telecommunications and broadcasting abroad has
fostered substantial growth and competition in many foreign communications
markets. The emergence of direct broadcast satellite, or DBS, systems
internationally and in the United States has also subjected cable operators to
increasing competitive pressures. DBS systems offer consumers up to 200 channels
of digital video programming. In addition, operators in other countries with
more established DBS infrastructures are introducing data services to meet the
growing demand from residential and small business customers for Internet
access.
Response of the Cable Operators
To address increasing competition and demand for high-speed broadband
services, cable operators are introducing voice and data services in addition to
video. By offering bundled packages of broadband services, cable operators are
seeking to obtain a competitive advantage over telephone companies and DBS
providers and to create additional revenue streams.
In order to provide high-speed Internet access, cable operators have begun
to deploy cable modems in a number of major metropolitan areas. Cable modems
provide significantly faster and easier access to the Internet than traditional
28 Kbps or 56 Kbps telephone modems. Cable modems are frequently offered in
conjunction with Internet content services such as Excite@Home or Road Runner by
cable operators, which seek to accelerate customer adoption by providing a
complete hardware and content package. The number of cable modem subscribers in
the U.S. at the end of 1999 was estimated to be approximately 1.6 million,
compared to approximately 500,000 in 1998. Forecasts from Paul Kagan Associates
suggest that over five million cable modems will be deployed by 2001.
Similarly, cable operators are upgrading and rebuilding their networks to
offer digital video, which enables cable operators to provide more channels and
better picture quality. Paul Kagan Associates estimated that of the
approximately 67 million U.S. cable subscribers, approximately 5.1 million homes
subscribed to digital cable services at the end of 1999 and approximately 10.6
million homes will subscribe to digital cable services by the end of 2000.
Additionally, the FCC has mandated that broadcasters convert to digital format
by 2006. Operators, nevertheless, will have to work with both analog and digital
video signals for many years.
As telephone carriers are planning to offer broadband voice, data and video
services, cable operators are also upgrading and building out their HFC networks
to provide telephony services. AT&T has set targets of 30% local telephone
market share in its initial deployments in cable systems.
The ability of cable operators to deliver digital video, voice and
high-speed data services on a broad scale, however, is constrained by the
designs of their legacy networks. These networks, which pass more than 90% of
U.S. homes, were built initially for one-way broadcast analog television and
require substantial upgrades to
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make them capable of reliably supporting two-way digital services, such as
high-speed Internet access and telephony.
Development of the Cable System Network Architecture
The introduction and deployment of HFC network architectures has
significantly increased network capacity, quality and reliability. The higher
bandwidth of fiber can increase capacity to up to 110 analog channels. Video
compression technologies can further extend the capacity of cable television
systems to several hundred channels. However, to accommodate the interactive
nature of telephony and Internet services, these networks require installation
of return path equipment for the transmission of video, voice and data on the
return path from the subscriber to the headend. Additionally, the introduction
of these new services will require the deployment of fiber closer to the
subscriber and therefore increase the amount of optical fiber and fiber optic
equipment in an HFC network. In order to reliably deliver telephony and data
services for large numbers of subscribers, AT&T has undertaken a trial in Salt
Lake City in which optical fiber serves approximately 50 to 100 home groups, as
opposed to the 500 to 1,000 home groups that are common in today's networks.
In addition to upgrading and extending network infrastructure with fiber
optics, it will be necessary for cable operators to invest in new digital
headend equipment that can receive and process content from a variety of sources
in different formats and protocols. Interfaces to wired and wireless, analog and
digital, and local and remote sources will increase the complexity of local
headends. Moreover, the desire to tailor services to specific groups of
customers will require flexibility and ease of configuration at the local
network headend.
The Market Opportunity
The upgrade and extension of existing networks to facilitate high-speed
broadband video, voice and data services require substantial expenditure and the
replacement of significant portions of the transmission network. Competitive
pressures and the desire to capture new revenue opportunities have induced major
cable operators to focus on achieving economies of scale by increasing the size
of their cable systems. This has been accomplished largely through cable system
exchanges and the acquisition of smaller cable operators and independent
operators, many of which could not afford the significant costs necessary to
upgrade their systems. Having achieved a significant degree of consolidation,
many cable operators are now turning their attention to investment in new
infrastructure equipment.
As a result of growing demand for broadband services, development and
deployment of enabling technologies, significant regulatory change, rapidly
increasing competition and considerable industry consolidation, substantial new
investments in the cable industry are providing the capital necessary to
accelerate the upgrade of the cable infrastructure. Recent examples of this
increased investment activity include:
- In 1998, Paul Allen acquired Charter Communications for $4.5 billion and
purchased a controlling interest in Marcus Cable for $2.8 billion;
- In 1999, AT&T completed the acquisition of TCI for approximately $52
billion and has announced its intention to acquire MediaOne for
approximately $57 billion;
- In January 2000, America Online and Time Warner announced their intention
to merge in a transaction valued at over $300 billion.
As cable operators upgrade their networks to meet market demands, we
believe that increased recognition of the value of cable networks as a medium
for high-speed, interactive video, voice and data, their strategic access to
homes and the improved financial strength of cable operators represent a
significant market opportunity for broadband communications equipment vendors.
Moreover, we believe that equipment vendors will also benefit from growth in the
services offered by wireless, satellite and other broadband service providers.
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THE HARMONIC SOLUTION
Harmonic develops, manufactures and markets digital and fiber optic systems
for delivering video, voice and data services over cable, wireless and satellite
networks. Our technical strengths in optics have allowed us to develop reliable,
highly integrated systems that enable cable operators to transport digital
video, a greater number of channels and a choice of programming packages over
their fiber optic networks. In addition, our advanced solutions enable cable and
other network operators to provide a range of broadcast and interactive
broadband services that include high-speed Internet access, telephony and video
on demand.
Fiber Optics Products. Our optical transmission products, node and return
path products, and element management hardware and software allow operators to
deliver traditional broadcast video services while supporting the roll-out of
emerging interactive services and managing the fiber network. Our METROLink
dense wave division multiplexing, or DWDM, solution also allows cable operators
to provide video, voice and data services directly from the network headend to
distributed nodes, thereby simplifying network architecture and eliminating the
need to install complex electronics in multiple hubs, which significantly
reduces the size of hubs and the associated building and maintenance costs.
TRANsend Digital Headend System. Our digital TRANsend platform gives cable,
wireless and satellite service providers the flexibility to combine and
customize content from a variety of sources for seamless integration and
delivery of voice, video and data to different subscriber groups. The TRANsend
system leverages our expertise in combining and transporting Internet Protocol,
or IP, data together with digital video. In addition, the TRANsend platform is
designed to be compliant with established international digital video standards,
providing interoperability with equipment from other manufacturers, such as
set-top boxes.
CyberStream System. Our CyberStream product line, which we developed and
introduced in 1998 following our purchase of Harmonic Data Systems Ltd.,
provides a low cost, end to end hardware and software solution for high-speed
data delivery, primarily over satellite and wireless networks to residential and
business users. These products can support transmission rates of up to 48
Megabits per second.
Our products incorporate network management systems employing internally
developed hardware and software to monitor and control the network and increase
system availability. The "plug and play" design philosophy and network
management employed in our products further enhance ease of installation and
operation.
PRODUCTS
Harmonic designs, develops, manufactures and markets fiber optic
transmission and digital systems, comprised of three product families: fiber
optic products, TRANsend digital headend products and CyberStream data delivery
products. Our products employ internally developed hardware and software to
facilitate a high degree of system integration. The "plug and play" design
philosophy and network management employed in our products enhance ease of
installation and operation.
FIBER OPTIC PRODUCTS
We have applied our technical strengths in optics and electronics,
including expertise with lasers, modulators, and radio frequency technology, to
develop products which provide enhanced network reliability and allow broadband
service providers to deliver advanced services, including two-way interactive
services. We have provided the operator with end-to-end capability in the fiber
portion of the network.
Optical Transmission Systems
We offer MAXLink transmitters and optical amplifiers, PWRLink transmitters
and the METROLink system for a wide range of optical transmission requirements.
MAXLink Transmitters and Optical Amplifiers. The MAXLink transmitters and
optical amplifiers operate at a wavelength of 1550 nm and serve long-haul
applications and fiber dense architectures that are
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beyond the capability of 1310nm transmitters. This system is suited to evolving
cable networks employing such features as redundant rings, hub interconnects and
broadcast layer transmission.
PWRLink Transmitters. The PWRLink series of optical transmitters
incorporates semiconductor lasers and provides optical transmission primarily
for use at a headend or hub for local distribution to optical nodes and for
narrowcasting, which is the transmission of programming to a select set of
subscribers.
METROLink System. Our METROLink system, the first DWDM system for the cable
industry, allows operators to expand the capacity of a single strand of fiber
and also to provide high-speed narrowcast services directly from the headend to
nodes. This ability largely eliminates the need to locate expensive electronic
equipment in each network hub, which significantly reduces the size of hubs and
the associated building and equipment maintenance costs. By increasing the
downstream and upstream capacity of existing optical fiber, METROLink also can
eliminate the often significant expense associated with laying additional fiber.
Optical Node Receivers, Return Path and Network Management Products
We offer a number of optical nodes, return path transmitters and return
path receivers to provide two-way transmission capability. In addition, we offer
network management hardware and software to enable the network operator to
monitor and control the entire transmission network.
PWRBlazer Optical Node Receivers. Our PWRBlazer optical node receivers
convert optical signals received from the transmitters into radio frequency
signals for transmission to the home via coaxial cable. We offer a variety of
receiver products for applications including indoor and outdoor use, all of
which can be fitted to support two-way traffic.
PWRBlazer Scaleable Optical Node. Our PWRBlazer scaleable optical node is a
receiver which can be easily adapted to handle increasing traffic over a fiber
network without major reconstruction. It is particularly suited to networks that
are expected to handle increasing demands for two-way services and can be
flexibly configured to support specific operator requirements.
Return Path Transmitters and Receivers. Our return path transmitters
support two-way transmission capabilities by sending video, voice and data
signals from the optical node to the headend. Signals originating at the home
can be sent via the coaxial cable to the optical node and then transmitted in
optical form to the headend by the return path transmitter. Our return path
receivers operate at the headend to receive return path optical transmission
from the return path transmitters.
NETWatch Management System. Our NETWatch management system consists of
transponders and network management software. The transponders operate in
broadband networks to capture measurement data. Harmonic's software enables the
broadband service operator to monitor and control the entire HFC transmission
network from a central office or remote locations. Our NETWatch software is
designed to be integrated into larger network management systems through the use
of simple network management protocol, or SNMP.
TRANSEND DIGITAL HEADEND PRODUCTS
Our TRANsend digital headend platform consists of a number of products for
encoding, compressing, multiplexing and modulating digital signals prior to
transmission over broadband networks. It also provides interfaces to incoming
and outgoing data streams and various protocols and formats.
Video Transport Platform. Our VTP houses configurable combinations of
application modules necessary to perform a variety of functions required at a
digital headend. It includes a bus system which routes data and control
information between the application modules under network management control.
Encoders. Our encoder converts analog and digital video and audio signals
to compressed digital format fully compliant with the MPEG-2 standard.
Integrated Receiver eXchange Modules. Our IRX module receives a number of
individually encoded digital program streams originating from multiple sources.
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Multiplexers. Our multiplexer module combines multiple MPEG-2 streams into
one transport stream as well as authorizing conditional access.
Modulators. Our modulators accept digital signals for modulation on to a
radio frequency carrier for transmission over a broadband network.
Video Server Gateways. Our VSG module acts as a gateway between a video
server and subscribers on a network.
CYBERSTREAM PRODUCTS
CyberStream System. This system enables Internet access and high-speed data
delivery primarily over satellite or wireless networks to residential and
business subscribers. It is capable of supporting transmission rates of up to 48
Megabits per second which enables applications such as video distribution and
distance learning. This system includes a headend data encoder, a network
management system and an end-user receiver card which is installed in either a
PC or our Enterprise1 product.
Enterprise1. The Enterprise1 is a network router, which interfaces the
CyberStream System with a local area network. It provides desktop broadband
access by linking high-speed cable, satellite or wireless networks directly to a
LAN.
CUSTOMERS
We sell our products to a variety of broadband communications network
operators. Set forth below is a representative list of our customers during
1999.
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Adelphia A provincial PTT in China
AT&T Austar
Bell South Golden Channels
Charter Hong Kong Cable Television
Comcast Matav
Cox NTL
Daniels Rogers
MediaOne Shaw
Prime TeleDanmark
RCN Telewest
Time-Warner Videotron
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Historically, the majority of our sales have been to relatively few
customers, and we expect this customer concentration to continue in the
foreseeable future. In 1999, sales to AT&T accounted for 41% of net sales. In
1998, sales to TCI (now AT&T) accounted for 17% of net sales and sales to a
Chinese distributor accounted for 11% of net sales. In 1997, sales to Capella
(our Canadian distributor) accounted for 17% of net sales. No other customer
accounted for more than 10% of our net sales in 1999, 1998 or 1997. The loss of
AT&T or any other significant customer or any reduction in orders by AT&T or any
significant customer, or our failure to qualify our products with a significant
cable operator could adversely affect our business and operating results.
Sales to customers outside of the United States in 1999, 1998 and 1997
represented 30%, 43% and 59% of net sales, respectively. We expect international
sales to continue to account for a substantial portion of our net sales for the
foreseeable future. International sales are subject to a number of risks,
including changes in foreign government regulations and telecommunications
standards, import and export license requirements, tariffs, taxes and other
trade barriers, fluctuations in foreign currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations, managing distributor relations and political and economic
instability. We cannot assure you that international markets will continue to
develop or that we will receive future orders to supply our products in
international markets at rates equal to or greater than those experienced in
recent periods. See "Risk Factors -- We Depend On Our International Sales And
Are Subject To The Risks Associated With International Operations."
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SALES AND MARKETING
We sell our products in the United States through our own direct sales
force which is organized geographically to support major network operators at
both the corporate level and in their individual systems. Our sales force is
supported by a highly qualified technical staff. Together, they work closely
with customers to design systems and develop technical proposals to optimize
system performance and economic benefits for the operators. The technical group
also assists customers with installation and post-sale support.
International sales are made primarily to distributors, which are generally
responsible for importing the products and providing installation and technical
support and service to customers in their territory. However, a small direct
sales force, based in Sunnyvale, California, and in Europe and Asia is
responsible for account management and providing high-level technical support
directly to customers as well as to distributors. Our technical group also
supports the international sales force.
Because of the cable industry's 24 hour programming requirements, we
provide round-the-clock technical support, both directly and through our
distributors. We provide training for our customers and distributors, as
required, both in our facilities and on-site.
Our marketing organization develops strategies for product lines and, in
conjunction with our sales force, identifies evolving technical and application
needs of customers so that our product development resources can be most
effectively and efficiently deployed to meet anticipated product requirements.
Our marketing organization is also responsible for setting price levels, demand
forecasting and general support of the sales force, particularly at major
accounts. We have many programs in place to heighten industry awareness of
Harmonic and our products, including participation in technical conferences,
publication of articles in industry journals and exhibiting at trade shows.
MANUFACTURING AND SUPPLIERS
Our manufacturing processes consist primarily of integration, final
assembly and test, performed by highly trained personnel employing
technologically advanced electronic equipment and proprietary test programs. The
manufacturing of our products and subassemblies is a complex process and we
cannot assure you that we will not experience production problems or
manufacturing delays in the future. Because we utilize our own manufacturing
facility for this production, and because such manufacturing capabilities are
not readily available from third parties, any interruption in operations could
materially and adversely affect our business and operating results.
We use third party contract manufacturers like Sanmina to assemble certain
standard parts for our products, including such items as printed circuit boards,
metal chassis and power supplies. We intend to subcontract an increasing number
of tasks to third parties in the future. Our increasing reliance on
subcontractors involves several risks, and we may not be able to obtain an
adequate supply of components, subassemblies and modules on a timely basis.
Some components, subassemblies and modules necessary for the manufacture
and integration of our products are obtained from a sole supplier or a limited
group of suppliers. In particular, we rely on Fujitsu as a major source of
lasers for our PWRLink and return path transmitters, for which there are limited
alternative suppliers. In addition, certain optical components used in our
METROLink and MAXLink products are currently available only from JDS Uniphase,
which has recently acquired a number of optical component suppliers. Although we
have qualified alternative suppliers for lasers, in the event that the supply of
optical components is interrupted for any reason, products from alternative
suppliers are unlikely to be immediately available in sufficient volume to meet
our production needs. Further, sole suppliers are providing certain key elements
of our digital products. The reliance on sole or limited suppliers, particularly
foreign suppliers, involves several risks, including a potential inability to
obtain an adequate supply of required components or subassemblies and reduced
control over pricing, quality and timely delivery of components. Although we
attempt to minimize supply risks by holding safety stocks and continuously
evaluating other sources, any interruption in supply could materially adversely
affect our business and operating results. We do not maintain long-term
agreements with any of our suppliers. While we have been able historically to
obtain adequate
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supplies of components in a timely manner from our principal suppliers, we
cannot assure you that we will be able to obtain adequate supplies in the
future. Because the purchase of certain key components involves long lead times,
in the event of unanticipated increases in demand for our products, we could be
unable to manufacture certain products in a quantity sufficient to meet our
customers' demand. If we cannot obtain adequate deliveries of key components we
may not be able to ship products on a timely basis. Delays in shipment could
damage relationships with current and prospective customers and could harm our
business and operating results.
INTELLECTUAL PROPERTY
We currently hold 14 issued United States patents and 9 issued foreign
patents, and have a number of patent applications pending. Although we attempt
to protect our intellectual property rights through patents, trademarks,
copyrights, maintaining certain technology as trade secrets and other measures,
we cannot assure you that any patent, trademark, copyright or other intellectual
property right owned by us will not be invalidated, circumvented or challenged,
that such intellectual property right will provide competitive advantages to us
or that any of our pending or future patent applications will be issued with the
scope of the claims sought by us, if at all. We cannot assure you that others
will not develop technologies that are similar or superior to our technology,
duplicate our technology or design around the patents that we own. In addition,
effective patent, copyright and trade secret protection may be unavailable or
limited in certain foreign countries in which we do business or intend to do
business in the future.
We believe that the future success of our business will depend on our
ability to translate the technological expertise and innovation of our personnel
into new and enhanced products. We generally enter into confidentiality or
license agreements with our employees, consultants, vendors and customers as
needed, and generally limit access to and distribution of our proprietary
information. Nevertheless, we cannot assure you that the steps taken by us will
prevent misappropriation of our technology. In addition, we have taken in the
past, and may take in the future, legal action to enforce our patents and other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Such litigation could result in
substantial costs and diversion of resources and could harm our business and
operating results.
In order to successfully develop and market our planned products for
digital headend applications, we may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing to enter into such technology development or licensing
agreements, we cannot assure you that such agreements will be negotiated on
terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements, when necessary, could limit our ability to
develop and market new products and could cause our business to suffer.
As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
BACKLOG
We schedule production of our systems based upon our backlog, informal
commitments from customers and sales projections. Our backlog consists of firm
purchase orders by customers for delivery within the next twelve months. At
December 31, 1999, order backlog amounted to $55.2 million, compared to $20.8
million at December 31, 1998. Anticipated orders from customers may fail to
materialize and delivery schedules may be
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deferred or canceled for a number of reasons, including reductions in capital
spending by cable television operators or changes in specific customer
requirements. In addition, due to weather-related seasonal factors and annual
capital spending budget cycles at many major end-users, our backlog at December
31, 1999 or any other date, is not necessarily indicative of actual sales for
any succeeding period.
COMPETITION
The markets for cable television equipment and other broadband
communications equipment are extremely competitive and characterized by rapid
technological change. The principal competitive factors in these markets include
product performance, reliability, price, breadth of product line, network
management capabilities, sales and distribution capability, technical support
and service and relationships with network operators. Certain of these factors
are outside of our control.
Our competitors for fiber optic transmission products include established
suppliers of cable television and telecommunications equipment such as ADC
Telecommunications, ANTEC, General Instrument (recently acquired by Motorola),
Philips and Scientific-Atlanta, as well as a number of smaller, more specialized
companies. For digital headend products, our competitors include many of the
same competitors as in fiber optic transmission products, and a number of new
competitors, including Lucent Technologies. Competitors for CyberStream products
in the satellite and wireless market include Broadlogic, SkyStream Networks,
Hybrid Networks, SAGEM and Philips. Most of our competitors are substantially
larger and have greater financial, technical, marketing and other resources than
we do. Many of our larger competitors are in a better position to withstand any
significant reduction in capital spending by cable television operators and
other broadband service providers. In addition, many of our competitors have
more long-standing and established relationships with domestic and foreign cable
operators than we do. See "Risk Factors -- The Market In Which We Operate Is
Intensely Competitive And Many Of Our Competitors Are Larger And More
Established."
RESEARCH AND DEVELOPMENT
We have historically devoted a significant amount of our resources to
research and development. Research and development expenses in 1999, 1998 and
1997 were $17.3 million, $13.5 million, and $11.7 million, respectively. We
expect that research and development expenses will continue to increase in the
future.
Our success in designing, developing, manufacturing and selling new or
enhanced products will depend on a variety of factors, including the
identification of market demand for new products, product selection, timely
implementation of product design and development, product performance, effective
manufacturing and assembly processes and sales and marketing. Because of the
complexity inherent in such research and development efforts, we cannot assure
you that we will successfully develop new products, or that new products
developed by us will achieve market acceptance. Our failure to successfully
develop and introduce new products could harm our business and operating
results.
EMPLOYEES
As of December 31, 1999, we employed a total of 454 people, including 197
in manufacturing operations, 112 in research and development, 105 in sales and
marketing and 40 in a general and administrative capacity. We also employ a
number of temporary employees and consultants on a contract basis. None of our
employees is represented by a labor union with respect to his or her employment
by Harmonic. We have not experienced any work stoppages and we consider our
relations with our employees to be good. Our future success will depend, in
part, upon our ability to attract and retain qualified personnel. Competition
for qualified personnel in the communications industry and in our immediate
geographic area is intense, and we cannot assure you that we will be successful
in retaining our key employees or that we will be able to attract skilled
personnel as we grow.
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<PAGE> 11
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of Harmonic and their ages as of March 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony J. Ley... 61 Chairman of the Board of Directors, President and Chief
Executive Officer
Moshe 48 Senior Vice President, General Manager Israel R&D Center,
Nazarathy...... Director
Robin N. 52 Chief Financial Officer
Dickson........
Michael Yost..... 56 Vice President, Operations
Israel Levi...... 60 Vice President, Research and Development
</TABLE>
Anthony J. Ley has served as Harmonic's President and Chief Executive
Officer since November 1988. Mr. Ley was elected Chairman of the Board of
Directors in February 1995. From 1963 to 1987, Mr. Ley was employed at
Schlumberger, both in Europe and the United States, holding various senior
business management and research and development positions, most recently as
Vice President, Research and Engineering at Fairchild Semiconductor/Schlumberger
in Palo Alto, California. Mr. Ley holds an M.A. in mechanical sciences from the
University of Cambridge and an S.M.E.E. from the Massachusetts Institute of
Technology, is named as an inventor on 29 patents and is a Fellow of the I.E.E.
(U.K.) and a senior member of the I.E.E.E.
Moshe Nazarathy, a founder of Harmonic, has served as Senior Vice
President, General Manager of Israel R&D Center, since December 1993, as a
director of Harmonic since Harmonic's inception and as Vice President, Research,
from Harmonic's inception through December 1993. From 1985 to 1988, Dr.
Nazarathy was employed in the Photonics and Instruments Laboratory of
Hewlett-Packard Company, most recently serving as Principal Scientist from 1987
to 1988. From 1982 to 1984, Dr. Nazarathy held post-doctoral and adjunct
professor positions at Stanford University. Dr. Nazarathy holds a B.S. and a
Ph.D. in electrical engineering from Technion-Israel Institute of Technology and
is named as an inventor on twelve patents.
Robin N. Dickson joined Harmonic in April 1992 as Chief Financial Officer.
From 1989 to March 1992, Mr. Dickson was corporate controller of Vitelic
Corporation, a semiconductor manufacturer. From 1976 to 1989, Mr. Dickson held
various positions at Raychem Corporation, a materials science company, including
regional financial officer of the Asia-Pacific Division of the International
Group. Mr. Dickson holds a Bachelor of Laws from the University of Edinburgh and
is a member of the Institute of Chartered Accountants of Scotland.
Michael Yost joined Harmonic in September 1991 as Vice President,
Operations. From 1983 until December 1990, Mr. Yost was employed at Vitalink
Communications, a satellite communications systems manufacturer, holding various
senior management positions, most recently as Vice President, Operations. Mr.
Yost holds a B.S. in management from San Jose State University.
Israel Levi joined Harmonic in July 1989 and has served as Vice President,
Research and Development since May 1996. Between July 1989 and May 1996, Mr.
Levi held various product management and product development positions at
Harmonic. From 1988 to 1989, Mr. Levi served in product development at DSC, a
telecommunications systems company, and from 1984 to 1988, Mr. Levi served as
Director of CATV Products Division at Catel Communications, a telecommunications
equipment manufacturer. Mr. Levi holds an M.S. in Electrical Engineering from
Carleton University, Ottawa, Canada and a B.S. in Electrical Engineering from
Technion-Israel Institute of Technology.
ITEM 2. PROPERTIES
Our principal operations are located at our corporate headquarters in
Sunnyvale, California. The lease on our headquarters building, of approximately
110,000 square feet, expires in July 2006. We also have several sales offices in
the United States, sales and support centers in Europe and Asia and two
subsidiaries, Harmonic Data Systems Ltd., and a research and development
facility in Israel. We also expect to enter into leases for
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<PAGE> 12
additional buildings in the near future in order to accommodate employees of the
DiviCom business after the merger.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or
to which any of our properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
(a) The Company's Common Stock has been quoted on the Nasdaq National
Market under the symbol HLIT since the Company's initial public offering on May
22, 1995. Prior to such time, there was no public market for the Common Stock of
the Company. The following table sets forth, for the periods indicated, the high
and low sales prices per share of the Common Stock as reported on the Nasdaq
National Market:
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
1998
First quarter............................................. $ 8.13 $ 5.31
Second quarter............................................ $ 9.50 $ 6.06
Third quarter............................................. $ 9.00 $ 3.81
Fourth quarter............................................ $ 9.44 $ 4.38
1999
First quarter............................................. $ 14.44 $ 7.44
Second quarter............................................ $ 29.50 $13.50
Third quarter............................................. $ 73.31 $26.00
Fourth quarter............................................ $100.88 $47.00
</TABLE>
(b) Holders of record: At February 25, 2000, there were approximately 129
stockholders of record of the Company's Common Stock.
(c) Dividends: The Company has never declared or paid any dividends on its
capital stock. The Company currently expects to retain future earnings, if any,
for the use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future. The covenants
made by the Company under its existing line of credit prohibit the payment of
dividends.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales...................................... $184,075 $ 83,857 $74,442 $60,894 $39,180
Gross profit................................... 80,605 30,555 34,605 27,731 17,851
Income (loss) from operations(1)............... 29,017 (21,943) 4,506 5,204 3,761
Net income (loss)(1)........................... 23,680 (21,453) 4,929 5,918 4,121
Basic net income (loss) per share.............. 0.84 (0.92) 0.24 0.29 0.36
Diluted net income (loss) per share............ 0.76 (0.92) 0.21 0.26 0.20
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and investments......... $ 89,699 $ 9,178 $13,670 $16,410 $22,126
Working capital................................ 121,172 32,318 38,772 34,321 32,495
Total assets................................... 180,215 62,424 58,887 54,633 41,817
Long term debt, including current portion...... -- 577 -- -- --
Stockholders' equity........................... 136,644 43,474 49,931 43,641 37,009
</TABLE>
- ---------------
(1) The 1998 loss from operations and net loss include a one-time charge of
$14.0 million for acquired in-process technology. See Note 2 of Notes to
Consolidated Financial Statements.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Harmonic designs, manufactures and markets digital fiber optic systems for
delivering video, voice and data services over cable, satellite and wireless
networks. Almost all of our sales have been derived directly or indirectly from
sales of fiber optic transmission systems to cable television operators. With
the introduction of our TRANsend digital headend products in 1997 and the
subsequent purchase of New Media Communication Ltd., we have broadened our
product offering to enable delivery of digital video, voice and data over
satellite and wireless networks in addition to cable systems.
On October 27, 1999 the Company entered into an Agreement and Plan of
Merger and Reorganization with C-Cube Microsystems, Inc. ("C-Cube"), pursuant to
which C-Cube will merge into Harmonic (the "Merger Agreement"). Under the terms
of the Merger Agreement, C-Cube will sell or spin-off to its shareholders all of
the assets and liabilities of its semiconductor business prior to closing.
C-Cube will then merge into Harmonic and, as a result, Harmonic will acquire
C-Cube's DiviCom business. The DiviCom business designs, manufactures and sells
products and systems that enable companies to deliver digital video, audio and
data over a variety of networks including satellite, wireless, telephone and
cable. The merger will be structured as a tax-free exchange of stock and will be
accounted for under the purchase method of accounting. In the merger, each share
of common stock of C-Cube will be converted into the right to receive .5427
shares of Harmonic common stock. Approximately 25.7 million shares of Harmonic
Common Stock will be issued and the purchase price including acquisition related
costs is expected to be approximately $1.7 billion. Consummation of the merger
is subject to a number of conditions, including Harmonic and C-Cube shareholder
approval, the prior disposition of C-Cube's semiconductor business and
regulatory approvals. The shareholder meetings are scheduled to be held on April
24, 2000.
To date, a substantial majority of Harmonic's net sales have been to
relatively few customers, and Harmonic expects this customer concentration to
continue in the foreseeable future. In 1999, sales to AT&T accounted for 41% of
net sales compared to 17% in 1998. In addition, in 1998 sales to a Chinese
distributor accounted for 11% of net sales.
Sales to customers outside of the United States in 1999, 1998 and 1997
represented 30%, 43% and 59% of net sales, respectively. International sales are
made primarily to distributors, which are generally responsible for importing
the products and providing installation and technical support and service to
customers within their territory. We expect international sales to continue to
account for a substantial portion of our net sales for the foreseeable future.
In 1999, 1998 and 1997, sales of optical transmitters accounted for
approximately 63%, 54% and 63%, respectively, of net sales and sales of optical
node receivers, return path and network management products accounted for
approximately 32%, 35% and 37%, respectively, of net sales. In 1999 and 1998,
TRANsend and CyberStream digital products accounted for 5% and 11% of net sales.
There were no significant sales of digital products in 1997.
Harmonic recognizes revenue upon shipment of products except when
probability of collection is not assured or contract provisions require customer
acceptance. Harmonic does not provide for rights of return to end users or
distributors. A provision for the estimated cost of warranty is recorded at the
time revenue is recognized and adjusted periodically to reflect actual and
anticipated experience. To date, gross margins on sales of optical transmitter
products have been higher than sales of receiver and return path products. In
addition, sales made to customers outside of the United States have generally
carried higher gross margins.
Harmonic often recognizes a substantial portion of its revenues in the last
month of the quarter. Harmonic establishes its expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of Harmonic's business is derived from
orders placed by a limited number of large customers, the timing of such
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<PAGE> 15
orders can also cause significant fluctuations in our operating results.
Harmonic's expenses for any given quarter are typically based on expected levels
of future sales and if sales are below expectations in any given quarter, the
adverse impact of the shortfall on operating results may be magnified by
Harmonic's inability to adjust spending to compensate for the shortfall. As a
result of these and other factors, Harmonic's operating results in one or more
future periods may fail to meet or exceed the expectations of securities
analysts or investors. In that event, the trading price of our common stock
would likely decline. See "Risk Factors -- Our operating results are likely to
fluctuate significantly and may fail to meet or exceed the expectations of
securities analysts or investors, causing our stock price to decline."
RESULTS OF OPERATIONS
Harmonic's historical consolidated statements of operations data for each
of the three years ended December 31, 1997, 1998 and 1999 as a percentage of net
sales, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales................................................... 100% 100% 100%
Cost of sales............................................... 56 64 54
--- --- ---
Gross profit................................................ 44 36 46
Operating expenses
Research and development.................................. 9 16 16
Sales and marketing....................................... 14 21 18
General and administrative................................ 5 8 6
Acquired in-process technology............................ 17 --
--- --- ---
Total operating expenses.......................... 28 62 40
--- --- ---
Income (loss) from operations............................... 16 (26) 6
Interest and other income, net.............................. 1 -- 1
--- --- ---
Income (loss) before income taxes........................... 17 (26) 7
Provision for income taxes.................................. 4 -- --
--- --- ---
Net income (loss)........................................... 13% (26)% 7%
=== === ===
</TABLE>
Net Sales
The Company's net sales increased 119% to $184.1 million in 1999, from
$83.9 million in 1998. The increase in net sales was primarily due to higher
unit sales of METROLink DWDM systems and PWRBlazer Scaleable Nodes, which began
volume shipment during the middle of 1998, and, to a lesser extent, higher unit
sales of existing products partially offset by lower selling prices. The
increase was also attributable to increased spending by domestic and
international customers. During 1999 domestic sales increased by 172%,
principally due to increased shipments to AT&T. AT&T represented 41% of net
sales during 1999 compared to 17% of net sales in 1998. International sales
increased 51% during 1999 compared to 1998, primarily due to higher shipments to
Canada and the United Kingdom. International sales represented 30% of net sales
in 1999 compared to 43% in 1998. Net sales increased by 13% to $83.9 million in
1998, from to $74.4 million in 1997. This growth in net sales was primarily
attributable to the sale of new products, including TRANsend digital headend
products, METROLink DWDM systems and PWRBlazer Scaleable Nodes, which began
volume shipment during the middle of 1998, as well as to an increase in spending
by domestic customers in the second half of 1998. During 1998 domestic sales
increased by 55%, principally due to increased shipments to AT&T, while
international sales decreased by 17% due to continued weakness in many
international markets. While the increase in net sales was also due to nominally
higher unit sales of existing products, generally lower selling prices in the
industry resulted in an approximate ten percent decrease in existing product
sales.
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<PAGE> 16
Gross Profit
Gross profit increased to $80.6 million (44% of net sales) in 1999 from
$30.6 million (36% of net sales) in 1998. The increases in gross profit and
gross margin were principally due to higher unit volumes, which allowed the
Company to improve fixed cost absorption and realize increased economies of
scale through higher production and purchasing volumes, as well as a more
favorable product mix, which included a higher percentage of transmitters. Gross
profit decreased to $30.6 million (36% of net sales) in 1998 from $34.6 million
(46% of net sales) in 1997. The decreases in gross profit and gross margin were
principally due to a lower percentage of international sales resulting from
reduced demand, a less favorable product mix, which included a lower percentage
of transmitters, and pricing pressure for certain products due to increased
competition. In addition, gross profit and gross margin were negatively impacted
1998 by start-up costs associated with new product introductions and an increase
of $1.2 million in inventory reserves for existing products following the
introduction of new products.
Research and Development
Research and development expenses increased to $17.3 million (9% of net
sales) in 1999, from $13.5 million (16% of net sales) in 1998. The increase in
absolute spending was principally attributable to higher headcount, consulting
expenses and prototype expenses. These increases were partially offset by higher
amounts of government grants earned in Israel, which are netted against research
and development expenses. The decrease in research and development expenses as a
percentage of net sales was principally attributable to increased net sales.
Research and development expenses increased to $13.5 million (16% of net sales)
in 1998 from $11.7 million (16% of net sales) in 1997. The increase in research
and development expenses in 1998 in absolute dollars was primarily due to
increased headcount, particularly at Harmonic's subsidiary in Caesarea, Israel,
which develops Harmonic's TRANsend digital headend products, and to the
inclusion of NMC's research and development expenses starting in January 1998.
Research and development expenses for 1999, 1998 and 1997 are net of grants of
approximately $950,000, $346,000 and $120,000, respectively. Harmonic
anticipates that research and development expenses will continue to increase in
absolute dollars, although they may vary as a percentage of net sales.
Sales and Marketing
Sales and marketing expenses increased to $25.0 million (14% of net sales)
in 1999 from $18.2 million (21% of net sales) in 1998. The increase in absolute
dollars was primarily due to higher headcount and costs associated with
expansion of the sales and marketing organizations to provide wider geographic
coverage and support for new products, as well as higher sales commissions
related to increased net sales. The decrease in sales and marketing expenses as
a percentage of net sales was principally attributable to increased net sales.
Sales and marketing expenses increased to $18.2 million (21% of net sales) in
1998 from $13.6 million (18% of net sales) in 1997. The increase in sales and
marketing expenses in 1998 was primarily due to higher headcount and costs
associated with expansion and reorganization of the direct sales force,
technical support and marketing organizations, particularly to support the
introduction of new products. This increase included expenses incurred in
connection with the recruiting and staffing for new international sales and
technical support centers. In addition, higher promotional expenses and the
inclusion of NMC's sales and marketing expenses starting in January 1998
contributed to the increase. Harmonic expects that sales and marketing expenses
will continue to increase in absolute dollars, although they may vary as a
percentage of net sales.
General and Administrative
General and administrative expenses increased to $9.3 million (5% of net
sales) in 1999, from $6.8 million (8% of net sales) in 1998. The increase in
absolute dollars in 1999 was principally due to increased personnel, consulting
and recruiting expenses associated with supporting the Company's overall growth
in headcount and operations. The decrease in general and administrative expenses
as a percentage of net sales was attributable to increased net sales. General
and administrative expenses increased to $6.8 million (8% of net sales) in 1998
from $4.8 million (6% of net sales) in 1997. The increase in general and
administrative expenses in 1998 was primarily due to the inclusion of NMC's
expenses starting in January
16
<PAGE> 17
1998, as well as costs of supporting Harmonic's growth in overall headcount, and
the establishment of international sales and support offices. Harmonic expects
to incur higher levels of general and administrative expenses in the future,
although such expenses may vary as a percentage of net sales.
Acquired In-Process Technology
On January 5, 1998, Harmonic acquired NMC, a privately-held Israeli
development stage company with 15 employees, for $17.6 million in a
stock-for-stock transaction. Harmonic also assumed all outstanding stock options
of NMC. The transaction was accounted for as a purchase and, accordingly, the
fair value of the assets and liabilities were recorded based upon their fair
value at the time of the transaction. Harmonic determined that technological
feasibility of the acquired in-process technology had not yet been established.
Harmonic also believed that NMC's existing technology would generate no further
revenue on account of its obsolescence. Accordingly, no value was assigned to
the existing technology. In accordance with generally accepted accounting
principles, Harmonic wrote off acquired in-process research and development
expenses of $14.0 million as a one-time charge to operations in the first
quarter of 1998.
Historically, NMC had developed receiver cards for data transmission over
cable, wireless and satellite networks. These analog products operated at
transmission speeds of 5.5Mbps and had been sold only to a limited number of
customers. NMC concluded during 1997 that these analog products were rapidly
becoming obsolete and discontinued research and development efforts. Based on
customer feedback and expected market trends, NMC commenced technology
development of the CyberStream System, a digital system designed to provide
substantially increased transmission speeds of 48Mbps to 52Mbps and to
incorporate differentiated service capabilities and sophisticated network
management.
At the time of the NMC acquisition, the CyberStream System was NMC's only
research and development project in process. The CyberStream System was
comprised of a data gateway at the satellite uplink or cable headend, network
management and control features at the headend, and a receiver card for
installation in a personal computer or a local area network router device. Just
prior to the acquisition, NMC had initiated production of a limited number of
prototype receiver cards in order to participate in pilot trials with two
prospective customers. Shipment of the prototype cards commenced at the end of
1997.
Harmonic determined that since these products were intended for deployment
in networks with large numbers of subscribers, NMC would have to engage in
ongoing trials over an extended period to determine the products' technological
feasibility. As part of these trials, NMC also shipped initial versions of
operating software, but was several months away from completion of critical
elements of the CyberStream System, such as quality of service, simple network
management protocol and porting of the software to the Windows 98 and NT
platforms. Subsequent to the acquisition, Harmonic expended $1.9 million in 1998
in research and development costs to accelerate development and to incorporate
changes resulting from field trial evaluations.
To estimate the value of NMC's existing and in-process technology, the
total income forecasted was allocated to existing, in-process and future
technology based on the products' scheduled release dates and expected lives. No
value was ascribed to existing technology due to its obsolescence nor to future
technology that was not in development at the date of acquisition. The forecasts
assumed timely release of the products as anticipated by Harmonic and that NMC
would utilize Harmonic distribution channels. Estimated revenues for the
purchased in-process products were assumed to commence by the middle of fiscal
year 1998 and increase through fiscal year 2002, at which time they were assumed
to decrease through fiscal year 2007, as newer products would be released.
Rapid change and improvements in technology characterize the high-speed
data delivery market. Harmonic's future success will depend on its ability to
achieve scientific and technological advances and to translate such advances
into commercially competitive products on a timely basis that keep pace with
competing technological developments and address the increasingly sophisticated
needs of our customers.
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<PAGE> 18
Interest and Other Income, Net
Interest and other income, net, consisting principally of interest income,
was $2.6 million in 1999, $0.5 million in 1998 and $0.7 million in 1997. The
increase in 1999 was due primarily to interest earned on cash and cash
equivalents and marketable investments, following the closing of the Company's
public offering of common stock in April 1999. The decrease in 1998 was due
primarily to lower interest income on lower average cash and cash equivalents
balances.
Income Taxes
The provision for income taxes for 1999 was based on an estimated annual
tax rate of 25%. No provision for income taxes was recorded for 1998 due to the
net loss incurred. The provision for income taxes for 1997 was based on an
estimated annual tax rate of 5% resulting from federal and state alternative
minimum taxes and utilization of net operating loss carryforwards. The Company
expects to have an effective annual tax rate that approximates statutory rates
in year 2000 and beyond on income before amortization of goodwill and other
intangibles related to the C-Cube merger. See "Risk Factors -- If The C-Cube
Merger Is Completed, We Will Record Substantial Goodwill And Other Intangible
Assets And Report Substantial Net Losses".
LIQUIDITY AND CAPITAL RESOURCES
In April 1999 the Company completed a public offering of its common stock,
raising approximately $58.3 million, net of underwriting discounts and offering
expenses. The Company also received $4.0 million from exercise of a warrant. As
of December 31, 1999, cash and cash equivalents and short-term investments
totaled $89.7 million.
Cash provided by operations was $21.7 million in 1999 compared to cash used
in operations of $2.0 million in 1998. The increase in cash provided by
operations in 1999 was primarily due to net income in 1999 compared to a net
loss in 1998, and higher accounts payable and accrued liabilities partially
offset by higher accounts receivable, inventory and prepaid expenses and other
assets.
The Company has a bank line of credit facility which provides for
borrowings up to $10.0 million with a $3.0 million equipment term loan sub-limit
and expires in July 2000. Borrowings pursuant to the line bear interest at the
bank's prime rate (prime rate plus 0.5% under the term loan) and are payable
monthly. The Company has letters of credit issued under the line of $0.6 million
which expire at various dates throughout year 2000. There were no outstanding
borrowings at December 31, 1999 and 1998 under the line.
Additions to property, plant and equipment were approximately $9.3 million
during 1999 compared to $4.4 million in 1998. The increase in 1999 was due
principally to higher expenditures for manufacturing and test equipment
associated with expansion of production capacity. While Harmonic currently has
no material commitments, it expects to spend approximately $15.0 million on
capital expenditures in 2000, primarily for manufacturing and test equipment. If
the C-Cube merger is completed, the Company expects to spend substantially more
on capital expenditures, but as of this date is unable to quantify the amount.
The Company believes that its existing liquidity sources, including its
bank line of credit facility, and anticipated funds from operations will satisfy
its cash requirements for at least the next twelve months if the C-Cube merger
were not to be completed. However, the Company expects the merger to be
completed, and believes that its existing liquidity sources, cash of $60 million
to be received pursuant to the merger agreement and cash to be received for the
estimated tax liability related to the spin-off of the semi-conductor business
will satisfy the cash requirements of the combined Company for at least the next
twelve months. See "Risk Factors -- We May Need Additional Capital In The Future
And May Not Be Able To Secure Adequate Funds In Terms Acceptable To Us."
YEAR 2000 DISCLOSURE
Thus far, the Company has not experienced any significant problems related
to year 2000 issues associated with products under development or released, or
with the Company's internal computer systems.
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<PAGE> 19
However, the Company cannot guarantee that the year 2000 problem will not
adversely affect its business, operating results or financial condition at some
point in the future.
FACTORS THAT MAY EFFECT FUTURE RESULTS OF OPERATIONS
Our Operating Results Are Likely To Fluctuate Significantly And May Fail To
Meet Or Exceed The Expectations Of Securities Analysts Or Investors, Causing
Our Stock Price To Decline.
Our operating results have fluctuated in the past and are likely to
continue to fluctuate in the future, on an annual and a quarterly basis, as a
result of several factors, many of which are outside of our control. Some of the
factors that may cause these fluctuations include:
- the level of capital spending of our customers, both in the U.S. and in
foreign markets;
- changes in market demand;
- the timing and amount of customer orders;
- competitive market conditions;
- our unpredictable sales cycles;
- new product introductions by our competitors or by us;
- changes in domestic and international regulatory environments;
- market acceptance of new or existing products;
- the cost and availability of components, subassemblies and modules;
- the mix of our customer base and sales channels;
- the mix of our products sold;
- our development of custom products;
- the level of international sales; and
- economic conditions specific to the cable television industry and general
economic conditions.
In addition, we often recognize a substantial portion of our revenues in
the last month of the quarter. We establish our expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of our business is derived from orders
placed by a limited number of large customers, the timing of such orders can
also cause significant fluctuations in our operating results. Our expenses for
any given quarter are typically based on expected sales and if sales are below
expectations in any given quarter, the adverse impact of the shortfall on our
operating results may be magnified by our inability to adjust spending to
compensate for the shortfall. As a result of all these factors, our operating
results in one or more future periods may fail to meet or exceed the
expectations of securities analysts or investors. In that event, the trading
price of our common stock would likely decline.
We Depend On Cable Industry Capital Spending For Substantially All Of Our
Revenue.
Almost all of our sales have been derived, directly or indirectly, from
sales to cable television operators and we expect these sales to constitute a
substantial majority for the foreseeable future. Demand for our products depends
to a significant extent upon the magnitude and timing of capital spending by
cable television operators for constructing, rebuilding or upgrading their
systems. The capital spending patterns of cable television operators are
dependent on a variety of factors, including:
- access to financing;
- cable television operators' annual budget cycles;
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- the status of federal, local and foreign government regulation of
telecommunications and television broadcasting;
- overall demand for cable television services and the acceptance of new
broadband services;
- competitive pressures (including the availability of alternative video
delivery technologies such as satellite broadcasting); and
- discretionary customer spending patterns and general economic conditions.
Our net sales in the second half of 1997 and the first quarter of 1998 were
negatively affected by a slow-down in spending by cable television operators in
the U.S. and in foreign markets. The factors contributing to this slow-down in
capital spending included:
- consolidation and system exchanges by our domestic cable customers, which
generally have had the initial effect of delaying certain system
upgrades;
- uncertainty related to development of digital video and cable modem
industry standards;
- delays associated with the evaluation of new services and system
architectures by many cable television operators;
- emphasis on marketing and customer service strategies by some
international cable television operators instead of construction of
networks; and
- general economic conditions in international markets.
While our net sales increased during the last seven quarters from the level
achieved in the first quarter of 1998 due to increased spending in the North
American cable television industry, spending by cable television operators
outside of North America generally remained weak. While net sales outside of
North America increased during the third and fourth quarters of 1999 compared to
the first quarter of 1998 we cannot predict if cable television spending outside
of North America will continue to grow or whether cable television spending in
North America will continue to increase. In addition, cable television capital
spending can be subject to the effects of seasonality, with fewer construction
and upgrade projects typically occurring in winter months and otherwise being
affected by inclement weather.
Our Customer Base Is Concentrated And The Loss Of One Or More Of Our Key
Customers Would Harm Our Business.
Historically, a significant majority of our sales have been to relatively
few customers. Sales to our ten largest customers in 1997, 1998 and 1999
accounted for approximately 56%, 66% and 75%, respectively, of net sales. Due in
part to the consolidation of ownership of domestic cable television systems, we
expect that sales to AT&T and relatively few other customers will continue to
account for a significant percentage of our net sales for the foreseeable
future. In 1999, sales to AT&T accounted for 41% of our net sales compared to
17% in 1998. In addition, in 1998 sales to a Chinese distributor accounted for
11% of our net sales. Almost all of our sales are made on a purchase order
basis, and none of our customers has entered into a long-term agreement
requiring it to purchase our products. The loss of, or any reduction in orders
from, a significant customer would harm our business.
We Depend On Our International Sales And Are Subject To The Risks Associated
With International Operations.
Sales to customers outside of the United States in 1997, 1998 and 1999
represented 59%, 43% and 30% of net sales, respectively, and we expect that
international sales will continue to represent a substantial portion of our net
sales for the foreseeable future. Our international operations are subject to a
number of risks, including:
- changes in foreign government regulations and telecommunications
standards;
- import and export license requirements, tariffs, taxes and other trade
barriers;
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<PAGE> 21
- fluctuations in currency exchange rates;
- difficulty in collecting accounts receivable;
- the burden of complying with a wide variety of foreign laws, treaties and
technical standards;
- difficulty in staffing and managing foreign operations; and
- political and economic instability.
While our international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country, leading to a
reduction in sales or profitability in that country. We do not currently engage
in any foreign currency hedging transactions. Gains and losses on the conversion
to U.S. dollars of accounts receivable, accounts payable and other monetary
assets and liabilities arising from international operations may contribute to
fluctuations in operating results. Furthermore, payment cycles for international
customers are typically longer than those for customers in the United States.
Unpredictable sales cycles could cause us to fail to meet or exceed the
expectations of security analysts and investors for any given period. Further,
we cannot assure you that foreign markets will continue to develop.
In recent years, certain Asian and Latin American currencies have devalued
significantly in relation to the U.S. dollar. We believe that financial
developments in Asia and Latin America were a major factor contributing to lower
international net sales in fiscal 1998 as compared to fiscal 1997. In addition,
the uncertain financial situation in Asia has placed financial pressure on some
of our distributors. In response, we increased accounts receivable reserves in
the first quarter of 1998. We are continuing to evaluate the effect on our
business of recent financial developments in Asia and Latin America. Given the
current economic uncertainties in China and throughout Asia, we cannot assure
you that shipment of orders to Asia, including China, will be made as scheduled,
or at all. We cannot assure you that our sales and collection cycles in Asia and
Latin America will not continue to be harmed by the uncertain financial climate.
In particular, we cannot predict the effect on our business, if any, of recent
political tensions between the U.S. and China.
We Must Be Able To Manage Expenses And Inventory Risks Associated With Meeting
The Demand Of Our Customers.
From time to time, we receive indications from our customers as to their
future plans and requirements to ensure that we will be prepared to meet their
demand for our products. In the past, however, we have received such indications
but, on occasion, we did not ultimately receive purchase orders for our
products. We must be able to effectively manage expenses and inventory risks
associated with meeting potential demand for our products. In addition, if we
fail to meet customers' supply expectations, we may lose business from such
customers. If we expend resources and purchase materials to manufacture products
and such products are not purchased, our business and operating results could
suffer.
The Market In Which We Operate Is Intensely Competitive And Many Of Our
Competitors Are Larger And More Established.
The market for cable television transmission equipment is extremely
competitive and has been characterized by rapid technological change. Harmonic's
current competitors include significantly larger corporations such as ADC
Telecommunications, ANTEC (a company owned in part by AT&T), General Instrument
(which was recently acquired by Motorola), Philips and Scientific-Atlanta.
Additional competition could come from new entrants in the broadband
communications equipment market, such as Lucent Technologies and Cisco Systems.
Most of these companies are substantially larger and have greater financial,
technical, marketing and other resources than we do. Many of these large
organizations are in a better position to withstand any significant reduction in
capital spending by cable television operators. In addition, many of our
competitors have more long standing and established relationships with domestic
and foreign cable television operators than we do. We cannot assure you that we
will be able to compete successfully in the future or that competition will not
harm our business.
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If any of our competitors' products or technologies were to become the
industry standard or if any of our smaller competitors were to enter into or
expand relationships with larger companies through mergers, acquisitions or
otherwise, our business could be seriously harmed. Further, our competitors may
bundle their products or incorporate functionality into existing products in a
manner that discourages users from purchasing our products.
Broadband Communications Markets Are Relatively Immature And Characterized By
Rapid Technological Change.
Broadband communications markets are relatively immature, making it
difficult to accurately predict the markets' future growth rate, size and
technological direction. In view of the evolving nature of these markets, it is
possible that cable television operators, telephone companies or other suppliers
of broadband wireless and satellite services will decide to adopt alternative
architectures or technologies that are incompatible with our current or future
products. If we are unable to design, develop, manufacture and sell products
that incorporate or are compatible with these new architectures or technologies,
our business will suffer.
We Need To Develop And Introduce New And Enhanced Products In A Timely Manner
To Remain Competitive.
Broadband communications markets are characterized by continuing
technological advancement, changes in customer requirements and evolving
industry standards. To compete successfully, we must design, develop,
manufacture and sell new or enhanced products that provide increasingly higher
levels of performance and reliability. However, we may not be able to
successfully develop or introduce these products. Moreover, these products may
not achieve broad commercial acceptance and may have lower gross margins than
our other products.
In addition, to successfully develop and market our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. We cannot assure you that we will be
able to enter into any necessary technology development or licensing agreement
on terms acceptable to us, or at all. The failure to enter into technology
development or licensing agreements when necessary could limit our ability to
develop and market new products and, accordingly, could materially and adversely
affect our business and operating results.
We Need To Effectively Manage Our Growth.
The growth in Harmonic's business has placed, and is expected to continue
to place, a significant strain on Harmonic's personnel, management and other
resources. Harmonic's ability to manage any future growth effectively will
require us to attract, train, motivate and manage new employees successfully, to
integrate new employees into our overall operations, to retain key employees and
to continue to improve our operational, financial and management systems. If we
fail to manage our future growth effectively, our business could suffer.
Competition For Qualified Personnel Is Intense, And We May Not Be Successful
In Attracting And Retaining Personnel.
Our future success will depend, to a significant extent, on the ability of
our management to operate effectively, both individually and as a group. We are
dependent on our ability to retain and motivate high caliber personnel, in
addition to attracting new personnel. Competition for qualified technical and
other personnel is intense, particularly in the San Francisco Bay Area and
Israel, and we may not be successful in attracting and retaining such personnel.
Competitors and others have in the past and may in the future attempt to
recruit our employees. While our employees are required to sign standard
agreements concerning confidentiality and ownership of inventions, we generally
do not have employment contracts or noncompetition agreements with any of our
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified
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personnel in the future or delays in hiring required personnel, particularly
engineers and other technical personnel, could negatively affect our business.
Our Acquisition Of NMC Has Created Numerous Risks And Challenges For Us.
The acquisition of New Media Communication Ltd., or NMC, which changed its
name during 1999 to Harmonic Data Systems Ltd., or HDS, has placed, and is
expected to continue to place, a significant strain on our personnel, management
and other resources. The acquisition of NMC in January 1998 has allowed us to
develop and expand our product offerings to include broadband high-speed data
delivery hardware and software and increased the scope of our international
operations in Israel. The acquisition of NMC continues to impose challenges,
including:
- the dependence on the evolution and growth of the market for wireless and
satellite broadband services;
- difficulties in the assimilation of operations, research and development
efforts, products, personnel and cultures of Harmonic and NMC;
- our ability to successfully develop, manufacture and gain market
acceptance of the products of NMC; and
- the amortization of goodwill resulting from the acquisition of NMC.
We cannot assure you that we will be able to successfully address these
challenges, and our failure to do so could materially and adversely affect our
business, financial condition and operating results.
We May Be Subject To Risks Associated With Acquisitions.
We have made and may make investments in complementary companies, products
or technologies. If we make acquisitions, we could have difficulty assimilating
or retaining the acquired companies' personnel and operations or integrating the
acquired technology or products into ours. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses. Moreover, our profitability may suffer because of acquisition-related
costs or amortization costs for acquired goodwill and other intangible assets.
Furthermore, we may have to incur debt or issue equity securities to pay for any
future acquisitions, the issuance of which could be dilutive to our existing
shareholders. If we are unable to successfully address any of these risks, our
business, financial condition and operating results could be harmed.
Our Failure To Complete The C-Cube Merger May Adversely Affect Our Business.
The Merger Agreement with C-Cube contains conditions which we and/or C-Cube
must meet prior to the consummation of the merger, including:
- Harmonic stockholder approval of the merger;
- C-Cube stockholder approval of the merger;
- Neither Harmonic nor C-Cube having experienced any material adverse
change in its business;
- Neither Harmonic nor C-Cube having materially breached any of its
representations, warranties or covenants in the Merger Agreement;
- C-Cube having effected a sale or spin-off of its semiconductor division;
and
- There being no law or court order prohibiting the merger.
In the event that the merger is not completed the market price for our
common stock could decline. In addition, pursuant to Section 7.3 of the Merger
Agreement, the Merger Agreement may be terminated by either party under certain
circumstances. Each of Harmonic and C-Cube has agreed that if the merger is not
consummated as a result of certain specified events, it will pay to the other
party a termination fee of $50 million. Payment of the fees described in this
paragraph are not in lieu of damages incurred in the event of willful breach of
the Merger Agreement. If the merger is not consummated, legal, accounting and
financial
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advisory fees as well as expenses incurred in connection with the proposed
combination, in addition to the consummation and implementation of the merger
and possible "break up fees" described above, could materially and adversely
affect Harmonic's operating results.
There are numerous risks associated with the C-Cube merger including those
identified in this report. For a more complete discussion of risks we face, we
urge you to read the risks set forth in the joint proxy statement filed with the
Securities and Exchange Commission on March 23, 2000.
If The C-Cube Merger Is Completed, We Will Record Substantial Goodwill And
Other Intangible Assets And Report Substantial Net Losses.
Goodwill and other intangible assets of approximately $1.3 billion are
expected to be recorded in connection with the merger as disclosed in the pro
forma financial data presented in the joint proxy statement. While the purchase
price allocation has not been finalized, goodwill and intangibles are expected
to be amortized over approximately 5 years, and such amortization is expected to
result in substantial net losses as a result of the noncash charges commencing
in the year 2000. The amortization of goodwill and intangibles are not
deductible for tax purposes which will result in a provision for income taxes
despite a substantial reported net loss.
We Will Be Liable For C-Cube Microsystems' Pre-Merger Tax Liabilities,
Including Tax Liabilities Resulting From The Spin-Off Of Its Semiconductor
Business.
We believe that the spin-off of the semiconductor business will give rise
to a significant tax liability which would be approximately $203 million based
on an assumed valuation of the semiconductor business of $975 million. The
actual tax liability may differ significantly from the estimate based on the
facts and circumstances existing at the time of the spin-off. For example, the
value of the stock of the spun-off semiconductor business will likely fluctuate
and if such value at the time of the spin-off exceeds the assumed value, the
actual tax liability will exceed the estimated tax liability. Under state law,
Harmonic generally will become liable for all of C-Cube Microsystems' debts,
including C-Cube Microsystems' liability for taxes resulting from the spin-off.
C-Cube Microsystems is required to retain and transfer to Harmonic in the merger
an amount of cash sufficient to pay this liability as well as all other tax
liabilities of C-Cube Microsystems and its subsidiaries for periods prior to the
merger. Harmonic will be indemnified by the spun-off semiconductor business if
the cash reserves are not sufficient to satisfy all of C-Cube Microsystems' tax
liabilities for periods prior to the merger. If for any reason, the spun-off
semiconductor business does not pay such taxes, or if there are additional taxes
due with respect to the non-semiconductor business, Harmonic generally will
remain liable, and such liability could have a material adverse effect on
Harmonic.
Due To The Structure Of The Merger Transaction, Harmonic Will Be Liable For
C-Cube Microsystems' General Pre-Merger Liabilities And Any Liabilities
Relating To C-Cube Microsystems' Semiconductor Business For Which The Spun-off
Semiconductor Business Is Unable To Indemnify Harmonic.
The merger of C-Cube Microsystems into Harmonic, with Harmonic as the
surviving entity, will result in Harmonic assuming all of the liabilities of
C-Cube Microsystems at the time of the merger. Pursuant to the merger agreement,
Harmonic will be indemnified by the spun-off semiconductor business for
liabilities associated with C-Cube Microsystems' historic semiconductor
business. However, if the spun-off semiconductor business is unable to fulfill
its indemnification obligations to Harmonic or if general liability claims not
specifically associated with C-Cube Microsystems' historic semiconductor
business are asserted after the merger, we would have to assume such
obligations. Those obligations could have a material adverse effect on Harmonic.
If The C-Cube Merger Is Completed, We May Experience Difficulties Integrating
The DiviCom Business Of C-Cube.
In addition to the risks generally associated with acquisitions, there are
a number of significant risks directly associated with our proposed merger with
C-Cube. In particular, the successful combination of
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Harmonic and C-Cube will require substantial attention from management. The
anticipated benefits of the merger will not be achieved unless the operations of
the DiviCom business of C-Cube are successfully combined with those of Harmonic
in a timely manner. The difficulties of assimilation may be increased by the
need to integrate disparate information systems and personnel into a combined
corporation and by Harmonic's limited personnel, management and other resources.
The successful combination of the two companies will also require integration of
the companies' product offerings and the coordination of their research and
development and sales and marketing efforts. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses and
certain customers may defer purchasing decisions. The diversion of the attention
of management from the day-to-day operations of the combined company, or
difficulties encountered in the transition and integration process, could also
materially and adversely affect the business, financial condition and operating
results of the combined company. In addition, the success of the combined
company depends, in part, on the retention and integration of key management,
technical, marketing, sales and customer support personnel of the DiviCom
business of C-Cube. The success of the combined company will depend upon the
retention of these key employees during the transitional period following the
merger. Harmonic can offer no assurance that such key employees will remain with
the combined company prior to or for any period after the proposed merger
especially as competition for qualified technical and other personnel is
intense, particularly in the San Francisco Bay Area. The loss of such services
would adversely affect the combined company's combined business and operating
results.
If Sales Forecasted For A Particular Period Are Not Realized In That Period
Due To The Unpredictable Sales Cycles Of Our Products, Our Operating Results
For That Period Will Be Harmed.
The sales cycles of many of our products, particularly our newer products
and products sold internationally, are typically unpredictable and usually
involve:
- a significant technical evaluation;
- a commitment of capital and other resources by cable and other network
operators;
- delays associated with cable and other network operators' internal
procedures to approve large capital expenditures;
- time required to engineer the deployment of new technologies or services
within broadband networks; and
- testing and acceptance of new technologies that affect key operations.
For these and other reasons, our sales cycles generally last three to six
months, but can last up to 12 months. If orders forecasted for a specific
customer for a particular quarter do not occur in that quarter, our operating
results for that quarter could be substantially lower than anticipated.
Our Failure To Adequately Protect Our Proprietary Rights May Adversely Affect
Us.
We currently hold 14 issued United States patents and 9 issued foreign
patents, and have a number of patent applications pending. Although we attempt
to protect our intellectual property rights through patents, trademarks,
copyrights, maintaining certain technology as trade secrets and other measures,
we cannot assure you that any patent, trademark, copyright or other intellectual
property right owned by us will not be invalidated, circumvented or challenged,
that such intellectual property right will provide competitive advantages to us
or that any of our pending or future patent applications will be issued with the
scope of the claims sought by us, if at all. We cannot assure you that others
will not develop technologies that are similar or superior to our technology,
duplicate our technology or design around the patents that we own. In addition,
effective patent, copyright and trade secret protection may be unavailable or
limited in certain foreign countries in which we do business or may do business
in the future.
We believe that the future success of our business will depend on our
ability to translate the technological expertise and innovation of our personnel
into new and enhanced products. We generally enter into
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confidentiality or license agreements with our employees, consultants, vendors
and customers as needed, and generally limit access to and distribution of our
proprietary information. Nevertheless, we cannot assure you that the steps taken
by us will prevent misappropriation of our technology. In addition, we have
taken in the past, and may take in the future, legal action to enforce our
patents and other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial costs and diversion of resources and could harm our
business and operating results.
In order to successfully develop and market our planned products for
digital applications, we may be required to enter into technology development or
licensing agreements with third parties. Although many companies are often
willing to enter into such technology development or licensing agreements, we
cannot assure you that such agreements will be negotiated on terms acceptable to
us, or at all. The failure to enter into technology development or licensing
agreements, when necessary, could limit our ability to develop and market new
products and could cause our business to suffer.
As is common in our industry, we have from time to time received
notification from other companies of intellectual property rights held by those
companies upon which our products may infringe. Any claim or litigation, with or
without merit, could be costly, time consuming and could result in a diversion
of management's attention, which could harm our business. If we were found to be
infringing on the intellectual property rights of any third party, we could be
subject to liabilities for such infringement, which could be material, and could
be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, we cannot assure you that
licenses would be offered, that the terms of any offered license would be
acceptable to us or that failure to obtain a license would not cause our
operating results to suffer.
We May Need Additional Capital In The Future And May Not Be Able To Secure
Adequate Funds On Terms Acceptable To Us.
We currently anticipate that our existing cash balances and available line
of credit and cash flow expected to be generated from future operations will be
sufficient to meet our liquidity needs for at least the next twelve months. If
the C-Cube merger is consummated, we believe that our existing liquidity
sources, cash of $60 million to be received pursuant to the merger agreement,
cash to be received for the estimated tax liability related to the spin-off of
the semiconductor business, our bank line of credit facility and anticipated
funds from operations will satisfy the cash requirements of the combined company
for at least the next twelve months. However, we may need to raise additional
funds if our estimates change or prove inaccurate or in order for us to respond
to unforeseen technological or marketing hurdles or to take advantage of
unanticipated opportunities.
In addition, we expect to review other potential acquisitions that would
complement our existing product offerings or enhance our technical capabilities.
While we have no other current agreements or negotiations underway with respect
to any potential acquisition, any future transaction of this nature could
require potentially significant amounts of capital. Funds may not be available
at the time or times needed, or available on terms acceptable to us. If adequate
funds are not available, or are not available on acceptable terms, we may not be
able to take advantage of market opportunities, to develop new products or to
otherwise respond to competitive pressures.
We Purchase Several Key Components, Subassemblies And Modules Used In The
Manufacture Or Integration Of Our Products From Sole Or Limited Sources, And
We Are Increasingly Dependent On Contract Manufacturers.
Many components, subassemblies and modules necessary for the manufacture or
integration of our products are obtained from a sole supplier or a limited group
of suppliers. Our reliance on sole or limited suppliers, particularly foreign
suppliers, and our increasing reliance on subcontractors involves several risks,
including a potential inability to obtain an adequate supply of required
components, subassemblies or modules
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and reduced control over pricing, quality and timely delivery of components,
subassemblies or modules. In particular, certain optical components have been
recently in short supply and are available only from a small number of
suppliers, including sole source suppliers. While we expend considerable efforts
to qualify additional optical component sources, consolidation of suppliers in
the industry (including the proposed acquisition of Etek Dynamics by JDS
Uniphase) and the small number of viable alternatives have limited the results
of these efforts. Certain key elements of our digital headend products are
provided by a sole foreign supplier. We do not generally maintain long-term
agreements with any of our suppliers or subcontractors. An inability to obtain
adequate deliveries or any other circumstance that would require us to seek
alternative sources of supply could affect our ability to ship our products on a
timely basis, which could damage relationships with current and prospective
customers and harm our business. We attempt to limit this risk by maintaining
safety stocks of these components, subassemblies and modules. As a result of
this investment in inventories, we may be subject to an increasing risk of
inventory obsolescence in the future, which could harm our business. See
"Business -- Manufacturing and Suppliers."
We Face Risks Associated With Having Important Facilities And Resources
Located In Israel.
Harmonic maintains two facilities in the State of Israel with a total of
approximately 85 employees. The personnel at these facilities represent a
significant portion of our research and development operations. Accordingly, we
are directly influenced by the political, economic and military conditions
affecting Israel, and any major hostilities involving Israel or the interruption
or curtailment of trade between Israel and its present trading partners could
significantly harm our business.
In addition, most of our employees in Israel are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. We cannot predict the effect
of these obligations on Harmonic in the future.
Our Business Could Be Adversely Impacted By Year 2000 Issues.
Thus far, we have not experienced any significant problems related to year
2000 issues associated with products under development or released, or with our
internal computer systems. However, we can not guarantee that the year 2000
problem will not adversely affect our business, operating results or financial
condition at some point in the future.
Our Stock Price May Be Volatile.
The market price of our common stock has fluctuated in the past and is
likely to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
the securities of technology companies have been especially volatile. Investors
may be unable to resell their shares of our common stock at or above the
offering price. In the past, companies that have experienced volatility in the
market price of their stock have been the object of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources. See "Market for the Registrant's Common Stock and Related Security
Holder Matters."
Our Certificate Of Incorporation And Bylaws And Delaware Law Contain
Provisions That Could Discourage A Takeover.
Provisions of our Amended and Restated Certificate of Incorporation,
Bylaws, and Delaware law could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of Harmonic due to adverse changes
in market prices and rates. Harmonic is exposed to market risk because of
changes in foreign currency exchange rates as measured against the U.S. Dollar
and currencies of
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Harmonic's subsidiaries in Israel and in the United Kingdom. Harmonic has not
engaged in hedging activities as of December 31, 1999 and does not expect to do
so in the foreseeable future.
Foreign Currency Exchange Rates
Harmonic has subsidiaries in Israel and the United Kingdom whose sales are
generally denominated in U.S. dollars. While Harmonic does not anticipate that
near-term changes in exchange rates will have a material impact on future
operating results, fair values or cash flows, Harmonic cannot assure you that a
sudden and significant change in the value of the Israeli Shekel or British
Pound would not harm Harmonic's financial condition and results of operations.
Interest Rates
Changes in interest rates could impact the Company's anticipated interest
income on its cash equivalents and short-term investments. The company prepared
sensitivity analyses of its interest rate exposures to assess the impact of
hypothetical changes in interest rates. Based on the results of the analyses, a
10% adverse change in interest rates from the year end 1999 rates would not have
a material adverse effect on the company's results of operations, cash flows or
financial condition for the year 2000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(a) Index to Consolidated Financial Statements:
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Report of Independent Accountants........................... 29
Consolidated Balance Sheets as of December 31, 1999 and 30
1998........................................................
Consolidated Statement of Operations for the years ended, 31
December 31, 1999, 1998 and 1997............................
Consolidated Statement of Stockholders' Equity for the years 32
ended December 31, 1999, 1998, and 1997.....................
Consolidated Statement of Cash Flows for the years ended 33
December 31, 1999, 1998, and 1997...........................
Notes to Consolidated Financial Statements.................. 34
</TABLE>
(b) Financial Statement Schedules: All financial statement schedules have
been omitted because the information is not required to be set forth herein, is
not applicable or is included in the financial statements or notes thereto.
(c) Selected Quarterly Financial Data: The following table sets forth for
the period indicated selected quarterly financial data for the Company.
FISCAL YEARS BY QUARTER (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
--------------- ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales...................... $63,286 $52,624 $37,902 $30,263 $27,097 $22,382 $18,174 $ 16,204
Gross profit................... 29,142 23,096 15,956 12,411 10,369 8,434 6,662 5,090
Income (loss) from
operations(1)................ 13,496 9,325 4,429 1,767 583 (1,044) (2,929) (18,553)
Net income (loss)(1)........... 14,378 7,692 3,855 1,349 628 (831) (2,885) (18,365)
Basic net income (loss) per
share........................ 0.35 0.25 0.13 0.06 0.03 (0.04) (0.12) (0.80)
Diluted net income (loss) per
share........................ 0.33 0.23 0.12 0.05 0.02 (0.04) (0.12) (0.80)
</TABLE>
- ---------------
(1) The loss from operations and net loss for the first quarter of 1998 includes
a one-time charge of $14.0 million for acquired in-process technology. See
Note 2 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Harmonic Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
PRICEWATERHOUSECOOPERS LLP
San Jose, CA
January 18, 2000
29
<PAGE> 30
HARMONIC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 24,822 $ 9,178
Short-term investments.................................... 64,877 --
Accounts receivable, net.................................. 35,421 17,646
Inventories............................................... 35,310 22,385
Deferred income taxes..................................... 5,478 --
Prepaid expenses and other assets......................... 3,792 1,175
-------- --------
Total current assets.............................. 169,700 50,384
Property and equipment, net................................. 14,931 10,726
Intangibles and other assets................................ 1,062 1,314
-------- --------
$185,693 $ 62,424
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,946 $ 7,534
Income taxes payable...................................... 2,265 151
Accrued liabilities....................................... 19,073 10,204
Current portion of long-term debt......................... -- 177
-------- --------
Total current liabilities......................... 40,284 18,066
Long-term debt, less current portion........................ -- 400
Other non-current liabilities............................... 521 484
Commitments and contingencies (Note 14)
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued or outstanding............ -- --
Common Stock, $.001 par value, 50,000,000 shares
authorized; 30,501,766 and 23,451,688 shares issued and
outstanding............................................ 31 23
Capital in excess of par value............................ 148,551 70,913
Accumulated deficit....................................... (3,792) (27,472)
Accumulated other comprehensive income.................... 98 10
-------- --------
Total stockholders' equity........................ 144,888 43,474
-------- --------
$185,693 $ 62,424
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
HARMONIC INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Net sales................................................... $184,075 $ 83,857 $74,442
Cost of sales............................................... 103,470 53,302 39,837
-------- -------- -------
Gross profit................................................ 80,605 30,555 34,605
-------- -------- -------
Operating expenses:
Research and development.................................. 17,281 13,524 11,676
Sales and marketing....................................... 25,032 18,162 13,599
General and administrative................................ 9,275 6,812 4,824
Acquired in-process technology............................ -- 14,000 --
-------- -------- -------
Total operating expenses.......................... 51,588 52,498 30,099
-------- -------- -------
Income (loss) from operations............................... 29,017 (21,943) 4,506
Interest and other income, net.............................. 2,556 490 682
-------- -------- -------
Income (loss) before income taxes........................... 31,573 (21,453) 5,188
Provision for income taxes.................................. 7,893 -- 259
-------- -------- -------
Net income (loss)........................................... $ 23,680 $(21,453) $ 4,929
======== ======== =======
Net income (loss) per share:
Basic..................................................... $ 0.84 $ (0.92) $ 0.24
======== ======== =======
Diluted................................................... $ 0.76 $ (0.92) $ 0.21
======== ======== =======
Weighted average shares:
Basic..................................................... 28,290 23,244 20,690
======== ======== =======
Diluted................................................... 30,967 23,244 23,046
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
HARMONIC INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK CAPITAL IN OTHER
--------------- EXCESS OF ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT PAR VALUE DEFICIT INCOME EQUITY INCOME (LOSS)
------ ------ ---------- ----------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996... 20,322 $20 $ 54,569 $(10,948) $ -- $ 43,641
Net income..................... -- -- -- 4,929 -- 4,929 $ 4,929
Currency translation........... -- -- -- -- 23 23 23
--------
Other comprehensive income..... $ 4,952
========
Issuance of Common Stock under
option and purchase plans.... 506 1 1,337 -- -- 1,338
------ --- -------- -------- ----- --------
Balance at December 31, 1997... 20,828 21 55,906 (6,019) 23 49,931
Net loss....................... -- -- -- (21,453) -- (21,453) $(21,453)
Currency translation........... -- -- -- -- (13) (13) (13)
--------
Other comprehensive loss....... $(21,466)
========
Issuance of Common Stock under
option and purchase plans.... 548 -- 1,614 -- -- 1,614
Acquisition of New Media
Communication Ltd............ 2,076 2 13,393 -- -- 13,395
------ --- -------- -------- ----- --------
Balance at December 31, 1998... 23,452 23 70,913 (27,472) 10 43,474
Net income..................... -- -- -- 23,680 -- 23,680 $ 23,680
Change in unrealized loss on
investments.................. -- -- -- -- (126) (126) (126)
Currency translation........... -- -- -- -- 214 214 214
--------
Other comprehensive income..... $ 23,768
========
Tax benefit from exercise of
employee stock options....... -- -- 8,244 -- -- 8,244
Issuance of Common Stock in
public offering, net......... 4,100 5 58,231 -- -- 58,236
Issuance of Common Stock under
option and purchase plans and
warrant exercises............ 2,950 3 11,163 -- -- 11,166
------ --- -------- -------- ----- --------
Balance at December 31, 1999... 30,502 $31 $148,551 $ (3,792) $ 98 $144,188
====== === ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
HARMONIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 23,680 $(21,453) $ 4,929
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 6,278 4,283 3,441
Acquired in-process technology......................... -- 14,000 --
Changes in assets and liabilities, net of effect of
acquisition:
Accounts receivable.................................. (17,775) (1,040) (3,815)
Inventories.......................................... (12,905) (6,393) (692)
Prepaid expenses and other assets.................... (2,617) 1,697 139
Accounts payable..................................... 11,412 3,187 (1,896)
Accrued and other liabilities........................ 13,681 3,694 (140)
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... 21,754 (2,025) 1,966
Cash flows used in investing activities:
Purchases of investments.................................. (71,760) -- --
Proceeds from maturities of investments................... 5,826 -- --
Acquisition of property and equipment..................... (9,331) (4,384) (4,767)
Acquisition of New Media Communication Ltd., net of cash
received............................................... -- (280) --
Long-term advances........................................ -- -- (1,300)
-------- -------- -------
Net cash used in investing activities............. (75,265) (4,664) (6,067)
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................... 69,401 1,614 1,338
Borrowings under bank line and term loan.................. 840 1,377 --
Repayments under bank line and term loan.................. (1,270) (800) --
-------- -------- -------
Net cash provided by financing activities......... 68,971 2,191 1,338
Effect of exchange rate changes on cash and cash
equivalents............................................... 184 6 23
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 15,644 (4,492) (2,740)
Cash and cash equivalents at beginning of period............ 9,178 13,670 16,410
-------- -------- -------
Cash and cash equivalents at end of period.................. $ 24,822 $ 9,178 $13,670
======== ======== =======
Supplemental disclosure of cash flow information:
Income taxes paid during the period....................... $ 2,989 $ 146 $ 323
Interest paid during the period........................... $ 60 $ 80 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harmonic Inc. ("Harmonic" or the "Company") designs, manufactures and
markets digital and fiber optic systems for delivering video, voice and data
services over cable, satellite and wireless networks. Our advanced solutions
enable cable television and other network operators to provide a range of
broadcast and interactive broadband services that include high-speed Internet
access, telephony and video on demand. We offer a broad range of fiber optic
transmission and digital headend products for hybrid fiber coax, satellite and
wireless networks, and our acquisition in January 1998 of New Media
Communication Ltd., which changed its name to Harmonic Data Systems Ltd.
("HDS"), has allowed us to develop and expand our product offerings to include
high-speed data delivery software and hardware.
Basis of Presentation. The consolidated financial statements of the Company
include the financial statements of the Company and its wholly-owned
subsidiaries. All intercompany accounts and balances have been eliminated. The
Company's fiscal quarters end on the Friday nearest the calendar quarter end.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all highly liquid, investment-grade
investments purchased with an original maturity date of three months or less at
the date of purchase to be cash equivalents and are stated at amounts that
approximate fair value, based on quoted market prices.
Investments. The Company's investments are comprised of U.S. government
obligations and corporate debt securities. Investments include instruments with
lives ranging from three months to two years. The Company classifies its
investments as available for sale in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and states its investments at estimated fair value, with
material unrealized gains and losses reported in other comprehensive income. The
specific identification method is used to determine the cost of securities
disposed of, with realized gains and losses reflected in other income and
expense. Investments are anticipated to be used for current operations and are,
therefore, classified as current assets, even though maturities may extend
beyond one year.
Fair Value of Financial Instruments. The carrying value of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to their
short maturities. The fair values of investments are determined using quoted
market prices for those securities or similar financial instruments.
Revenue Recognition. Revenue is recognized upon shipment of product except
when probability of collection is not assured or contract provisions require
customer acceptance. In these situations, revenue is recognized when collection
is assured or customer acceptance has occurred. The Company does not provide
rights of return to end users or distributors. A provision for the estimated
cost of warranty is recorded at the time revenue is recognized and is adjusted
periodically to reflect actual and anticipated experience.
Inventories. Inventories are stated at the lower of cost, using the
weighted average method, or market.
Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method based
upon the shorter of the estimated useful lives of the assets, which range from
two to ten years, or the lease term of the respective assets, if applicable.
Depreciation and amortization expense related to equipment and improvements for
the years ended December 31, 1999 and 1998 were $5,001,000 and $3,979,000,
respectively.
34
<PAGE> 35
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangibles and Other Assets. Goodwill acquired in connection with the
acquisition of businesses is included in "Intangibles and other assets."
Amortization is provided on a straight-line basis over the estimated useful life
of five years. See Notes 2 and 6.
Long-Lived Assets. The Company records impairment losses on long-lived
assets used in operations, such as equipment and improvements, and intangible
assets when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
the assets.
Concentrations of Credit Risk. Financial instruments which subject the
Company to concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable. Cash and cash equivalents are maintained
with high quality financial institutions and are invested in short-term, highly
liquid investment-grade obligations of government and commercial issuers, in
accordance with the Company's investment policy. The investment policy limits
the amount of credit exposure to any one financial institution or commercial
issuer. The Company's accounts receivable are derived from sales to cable
television and other network operators and distributors as discussed in Note 13.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company provides for expected losses but to
date has not experienced any material losses. At December 31, 1999, receivables
from two customers represented 20% and 11% respectively. At December 31, 1998,
receivables from three customers represented 24%, 15%, and 14%, respectively.
Currency Translation. The Company's Israeli operations' functional currency
is the U.S. Dollar. All other foreign subsidiaries use the respective local
currency as the functional currency. When the local currency is the functional
currency, gains and losses from translation are included in stockholders'
equity. Realized gains and losses resulting from foreign currency transactions
have not been material to the consolidated statements of operations for the
years ended December 31, 1999, 1998, and 1997.
Income Taxes. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax bases of
assets and liabilities and their financial statement reported amounts under the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109") which has been applied for all periods presented.
Accounting for Stock-Based Compensation. The Company's stock-based
compensation plans are accounted for in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." In January
1996, the Company adopted the disclosure requirements of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
Comprehensive Income. Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS No. 130 requires that all items recognized under
accounting standards as components of comprehensive income be reported in an
annual financial statement that is displayed with the same prominence as other
annual financial statements. The Company's comprehensive income has been
included in the Consolidated Statement of Stockholders' Equity for all periods
presented.
Accounting for Derivatives and Hedging Activities. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") which establishes
accounting and reporting standards for derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. The Company does not expect SFAS 133 to have a material impact upon the
Company's consolidated financial statements.
Reclassification. Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1999 presentation. These
reclassifications are not material.
35
<PAGE> 36
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: PENDING BUSINESS COMBINATION
On October 27, 1999, the Company entered into an Agreement and Plan of
Merger and Reorganization with C-Cube Microsystems, Inc. ("C-Cube"), pursuant to
which C-Cube will merge into Harmonic (the "Merger Agreement"). Under the terms
of the Merger Agreement, C-Cube will sell or spin-off to its shareholders all of
the assets and liabilities of its semiconductor business prior to closing.
C-Cube will then merge into Harmonic and, as a result, Harmonic will acquire
C-Cube's DiviCom business. The DiviCom business designs manufactures and sells
products and systems that enable companies to deliver digital video, audio and
data over as variety of networks including satellite, wireless, telephone and
cable. The merger will be structured as a tax-free exchange of stock and will be
accounted for under the purchase method of accounting. In the merger, each share
of common stock of C-Cube will be converted into the right to receive .5427
shares of Harmonic common stock. Approximately 25.7 million shares of Harmonic
Common Stock will be issued and the purchase price including acquisition related
costs is expected to be approximately $1.7 billion.
Consummation of the merger is subject to a number of conditions, including
Harmonic and C-Cube shareholder approval, the prior disposition of C-Cube's
semiconductor business and regulatory approvals. The shareholder meetings are
scheduled to be held on April 24, 2000.
Pursuant to Section 7.3 of the Merger Agreement, the Merger Agreement may
be terminated by either party under certain circumstances. Each of Harmonic and
C-Cube has agreed that if the merger is not consummated as a result of certain
specified events, it will pay to the other party a termination fee of $50.0
million. Payment of the fees described in this paragraph are not in lieu of
damages incurred in the event of willful breach of the Merger Agreement. If the
merger is not consummated, legal, accounting and financial advisory fees as well
as other expenses incurred in connection with the proposed combination, in
addition to the possible "break up fees" described above, could materially and
adversely affect Harmonic's operating results.
NOTE 3: ACQUISITION OF NEW MEDIA COMMUNICATION LTD.
On January 5, 1998, the Company acquired New Media Communication Ltd.
("NMC"), a privately held supplier of broadband, high-speed data delivery
software and hardware, in exchange for the issuance of 2,075,822 shares of
Harmonic Common Stock and the assumption of all outstanding NMC stock options.
NMC has been a development stage company since its founding in 1996 and its
revenues through 1998 were not material in relation to those of the Company. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of NMC have been included in the
consolidated financial statements of the Company from the date of acquisition.
The purchase price of approximately $17.6 million was allocated to the acquired
assets, in-process research and development ("IPRD") and goodwill. In connection
with the acquisition, $14.0 million was expensed in the first quarter of 1998 as
IPRD and approximately $1.5 million was allocated to goodwill. The goodwill is
being amortized on a straight-line basis over the estimated useful life of five
years.
The portion of the purchase price allocated to IPRD was identified and
valued through extensive interviews, analysis of data provided by NMC concerning
development projects, their stage of development, the time and resources needed
to complete them and their expected income generating ability and associated
risks. The income approach, which includes an analysis of the cash flows, and
risks associated with achieving such cash flows, was used in valuing the IPRD.
Management is primarily responsible for estimating the fair value of the IPRD.
At the time of the acquisition, NMC had commenced development of the
CyberStream System, a digital system for high-speed data transmission over
cable, wireless and satellite networks. The CyberStream System was NMC's only
research and development project in process at the acquisition date.
Technological feasibility of the acquired technology had not been established at
the time of the acquisition and the acquired technology
36
<PAGE> 37
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
had no future alternative uses. No value was attributed to NMC's existing analog
products as management believed that no further revenue would be generated due
to obsolescence.
The value of IPRD was determined by estimating the expected cash flows from
the acquired technology and discounting the net cash flows back to their present
values based on the following assumptions:
Net cash flows. The net cash flows are based on estimates of revenue, cost
of sales, operating expenses and income taxes for the project. At the date of
the acquisition, management expected commercial release of the CyberStream
system to commence by the middle of fiscal year 1998 and for revenues to
increase through fiscal year 2002, at which time they were assumed to decrease
through fiscal year 2007, as newer products would be released. The valuation
assumed that projected margins would increase based on higher sales volumes and
expenses would increase based on the growth of the business.
Discount rate. Discounting the net cash flows back to their present value
was based on the company's weighted average cost of capital of 16%. The
risk-adjusted discount rate applied to the cash flows from IPRD was 19%. The
risk premium of 3% for IPRD was due to inherent uncertainties surrounding the
acquired technology. The most significant risks associated with the acquired
technology include consumer acceptance, technology and resource risks.
The following table sets forth the pro-forma net sales, net income and net
income per share of the Company for the year ended December 31, 1997, giving
effect to the acquisition of NMC as if it had occurred as of the beginning of
the period presented:
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
---------------------
1997
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Net sales.................................................. $75,086
Net income................................................. $ 1,903
Net income per share:
Basic.................................................... $ 0.08
Diluted.................................................. $ 0.08
Weighted average shares:
Basic.................................................... 22,766
Diluted.................................................. 25,122
</TABLE>
NOTE 4: CASH AND CASH EQUIVALENTS
At December 31, 1999 and 1998, the Company had the following amounts in
cash and cash equivalents, with original maturity dates of three months or less
at the date of purchase. Realized gains and losses for the years ended December
31, 1999 and 1998 and the difference between gross amortized cost and estimated
fair value at December 31, 1999 and 1998 were immaterial.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Commercial paper.......................................... $ 572 $2,154
Cash and money market accounts............................ 24,250 7,024
------- ------
Total cash and cash equivalents................. $24,822 $9,178
======= ======
</TABLE>
37
<PAGE> 38
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENTS
The following table summarizes the Company's investments in securities (in
thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR VALUE
----------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. government debt securities......... $ 1,501 $ -- $ (7) $ 1,494
Corporate debt securities............... 63,543 233 (393) 63,383
------- ---- ----- -------
Total......................... $65,044 $233 $(400) $64,877
======= ==== ===== =======
</TABLE>
At December 31, 1998, all investment securities had original maturities of
three months or less at date of purchase and accordingly were classified as
cash and cash equivalents.
The following table summarizes debt maturities at December 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED
DECEMBER 31, 1999 COST FAIR VALUE
----------------- --------- ----------
<S> <C> <C>
Less than one year.......................................... $37,809 $37,795
Due in 1 - 2 years.......................................... 27,235 27,082
------- -------
Total............................................. $65,044 $64,877
======= =======
</TABLE>
38
<PAGE> 39
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Gross accounts receivable................................. $ 36,732 $ 18,646
Less: allowance for doubtful accounts..................... (1,311) (1,000)
-------- --------
$ 35,421 $ 17,646
======== ========
Inventories:
Raw materials............................................. $ 10,649 $ 3,747
Work-in-process........................................... 4,740 4,557
Finished goods............................................ 19,921 14,081
-------- --------
$ 35,310 $ 22,385
======== ========
Property and equipment:
Furniture and fixtures.................................... $ 2,278 $ 2,051
Machinery and equipment................................... 27,726 19,854
Leasehold improvements.................................... 3,886 2,779
-------- --------
33,890 24,684
Less: accumulated depreciation and amortization........... (18,959) (13,958)
-------- --------
$ 14,931 $ 10,726
======== ========
Intangibles and other assets:
Other assets.............................................. $ 150 $ 98
Goodwill.................................................. 1,520 1,520
-------- --------
1,670 1,618
Less: accumulated amortization............................ (608) (304)
-------- --------
$ 1,062 $ 1,314
======== ========
Accrued liabilities:
Accrued compensation...................................... $ 10,019 $ 3,655
Customer deposits......................................... 2,992 2,234
Deferred revenue.......................................... 1,302 1,466
Accrued warranties........................................ 1,167 575
Other..................................................... 3,593 2,274
-------- --------
$ 19,073 $ 10,204
======== ========
</TABLE>
NOTE 7: NET INCOME (LOSS) PER SHARE
Basic net income per share is computed by dividing net income available to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Basic net income per share excludes
the dilutive effect of stock options and warrants. Diluted net income per share
replaces fully diluted net income per share and gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted net
income per share, the average price for the period is used in determining the
number of shares assumed to be purchased from exercise of stock options and
warrants rather than the higher of the average or ending price as used in the
computation of fully diluted net income per share.
39
<PAGE> 40
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted net income per share computations:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss) (numerator)........................ $23,680 $(21,453) $ 4,929
======= ======== =======
Shares calculation (denominator):
Average shares outstanding -- basic.................. 28,290 23,244 20,690
Effect of Dilutive Securities:
Potential Common Stock relating to stock options and
warrants........................................... 2,677 -- 2,356
------- -------- -------
Average shares outstanding -- diluted................ 30,967 23,244 23,046
======= ======== =======
Net income (loss) per share -- basic................. $ 0.84 $ (0.92) $ 0.24
======= ======== =======
Net income (loss) per share -- diluted............... $ 0.76 $ (0.92) $ 0.21
======= ======== =======
</TABLE>
Options and warrants to purchase 189,170, 5,888,236, and 1,028,300 shares
of common stock were outstanding during 1999, 1998 and 1997, respectively, but
were not included in the computation of diluted net income per share because
either the option's exercise price was greater than the average market price of
the common shares or inclusion of such options would have been antidilutive. The
price ranges of these options and warrants were from $39.75 to $94.94 for 1999,
$0.15 to $11.37 per share for 1998, and $8.25 to $11.37 per share for 1997.
NOTE 8: LINE OF CREDIT
The Company has a bank line of credit facility (the "line"), providing for
borrowings of up to $10,000,000 with a $3,000,000 secured equipment term loan
sub-limit (the "term loan"). The line contains certain financial and other
covenants, with which the Company is in compliance at December 31, 1999, and is
available until July 2000. Borrowings pursuant to the line bear interest at the
bank's prime rate (prime rate plus 0.5% under the term loan) and are payable
monthly. The Company has letters of credit issued under the line of $0.6 million
which expire at various dates throughout year 2000. There were no outstanding
borrowings at December 31, 1999 and 1998 under the line.
NOTE 9: LONG-TERM DEBT
The Company had no long term debt at December 31, 1999. As of December 31,
1998 borrowings of $577,000 were outstanding under a previous equipment term
loan facility.
NOTE 10: CAPITAL STOCK
Stock Issuances. In April 1999, the Company completed a public offering of
5,600,000 shares of common stock at a price of $15.13 per share. Of these
5,600,000 shares, 4,000,000 shares were sold by the Company and 1,600,000 shares
were sold by selling stockholders. An additional 100,000 shares were sold by the
Company to the underwriters to cover over-allotments. Total net proceeds to the
Company were approximately $58.3 million, after underwriter discounts and
commissions and expenses. The shares sold by selling stockholders included
1,440,000 shares held by Scientific-Atlanta, Inc. Scientific-Atlanta, Inc.
acquired these shares pursuant to the exercise of a warrant for which the
Company received $4.0 million upon such warrant's exercise.
Common Stock Warrants. In June 1994, the Company entered into a
distribution agreement with Scientific-Atlanta, Inc., in connection with which
it issued a warrant to purchase up to 1,597,496 shares of Common Stock at $2.78
per share. The warrant had a fair value of $200,000, which was charged to
results of
40
<PAGE> 41
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
operations in the second quarter of 1994. In April 1999, the common stock
warrant was exercised immediately prior to the public offering. In consideration
of the acceleration of exercisability of the warrant, which was to become
exercisable in June 1999 and expire at the earlier of six years from the date of
issuance or the closing of a significant acquisition transaction, as defined in
the warrant, Scientific-Atlanta, Inc. agreed to reduce the number of shares
issued from 1,597,496 shares to 1,440,000 shares.
In 1993, the Company issued a warrant to purchase up to 44,444 shares of
the Company's Common Stock at an exercise price of $2.25 per share in
conjunction with an equipment lease line facility. In February 1999, the holder
elected to use the net exercise provision, resulting in the issuance of 35,476
shares of common stock and the surrender of the remaining 8,968 shares of common
stock.
Stock Split. The Company completed a two-for-one stock split which was
effected in the form of a stock dividend and distributed on October 14, 1999
payable to stockholders of record as of September 27, 1999. All references to
share and per-share data for all periods presented have been adjusted to give
effect to this two-for-one stock split.
NOTE 11: BENEFIT AND COMPENSATION PLANS
Stock Option Plans. In 1988, the Company adopted an incentive and
non-statutory stock option plan (the "1988 Plan") for which 2,251,834 shares
have been reserved for issuance. Following adoption of the 1995 Stock Plan (the
"1995 Plan") at the effectiveness of the Company's initial public offering
("IPO"), no further grants have been, or will be, made under the 1988 Plan.
Options granted under the 1988 Plan and the 1995 Plan are for periods not to
exceed ten years. Exercise prices of incentive stock option grants under both
plans must be at least 100% of the fair market value of the stock at the date of
grant and for nonstatutory stock options must be at least 85% of the fair market
value of the stock at the date of grant. Under both plans, the options generally
vest 25% at one year from date of grant, and an additional 1/48 per month
thereafter. The Company has reserved 4,400,000 shares of Common Stock for
issuance under the 1995 Plan. Upon the closing of the acquisition of HDS in
January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became
effective. The Company assumed all outstanding HDS options and issued new
options at the closing totaling 800,000 shares. No further grants have been, or
will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory
stock option plan (the "1999 Plan") for which 400,000 shares have been reserved
for issuance. Options granted under the 1997 and 1999 Plans were at fair market
value and for periods not to exceed ten years with vesting generally under the
same terms as the 1988 and 1995 plans.
Director Option Plan. Effective upon the IPO, the Company adopted the 1995
Director Option Plan (the "Director Plan") and reserved 100,000 shares of Common
Stock for issuance thereunder. The Director Plan provides for the grant of
nonstatutory stock options to certain nonemployee directors of the Company
pursuant to an automatic, nondiscretionary grant mechanism.
41
<PAGE> 42
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1996............... 210 2,482 $ 3.28
Shares authorized.......................... 960 -- --
Options granted............................ (1,008) 1,008 9.04
Options exercised.......................... -- (370) 1.65
Options canceled........................... 308 (354) 7.13
------ ------ ------
Balance at December 31, 1997............... 470 2,766 5.11
Shares authorized.......................... 1,950 -- --
Options granted............................ (2,128) 2,128 6.24
Options exercised.......................... -- (374) 2.10
Options canceled........................... 240 (274) 7.28
------ ------ ------
Balance at December 31, 1998............... 532 4,246 5.80
Shares authorized.......................... 1,560 -- --
Options granted............................ (977) 977 30.76
Options exercised.......................... -- (1,273) 4.80
Options canceled........................... 205 (218) 9.04
------ ------ ------
Balance at December 31, 1999............... 1,320 3,732 $12.48
====== ====== ======
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------- ---------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
RANGE OF DECEMBER 31, CONTRACTUAL LIFE WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE
EXERCISE PRICES 1999 (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE AND LIFE)
<S> <C> <C> <C> <C> <C>
$0.15 - 5.00.. 750 4.4 $ 2.10 721 $ 2.01
5.47 - 6.75.. 826 7.5 6.05 309 6.39
6.88 - 8.38.. 757 8.2 7.87 258 7.89
8.44 - 25.50.. 1,161 8.7 17.36 241 10.12
26.44 - 94.94.. 238 9.7 58.41 7 26.44
----- --- ------ ----- ------
3,732 7.5 $12.48 1,536 $ 5.26
===== === ====== ===== ======
</TABLE>
The weighted-average fair value of options granted in 1999 was $30.76. The
weighted-average fair value of options granted in 1998 and 1997 was $6.79 and
$9.14, respectively.
Employee Stock Purchase Plan. Effective upon the IPO, the Company adopted
the 1995 Employee Stock Purchase Plan (the "Purchase Plan") for which 800,000
shares have been reserved for issuance. The Purchase Plan enables employees to
purchase shares at 85% of the fair market value of the Common Stock at the
beginning or end of each six month purchase period. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. 201,826, 174,476 and 136,542 shares were issued under
the Purchase Plan during 1999, 1998 and 1997, respectively.
Fair Value Disclosures. The Company accounts for its stock-based
compensation plans in accordance with the provisions of Accounting Principles
Board Opinion No. 25. If compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value method at the
grant dates, as
42
<PAGE> 43
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
prescribed in SFAS 123, the Company's net income (loss) and net income (loss)
per share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported......................................... $23,680 $(21,453) $4,929
Pro forma........................................... 17,223 (26,457) 3,209
Basic net income (loss) per share:
As reported......................................... $ 0.84 $ (0.92) $ 0.24
Pro forma........................................... 0.61 (1.14) 0.15
Diluted net income (loss) per share:
As reported......................................... $ 0.76 $ (0.92) $ 0.21
Pro forma........................................... 0.56 (1.14) 0.14
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
--------------------------------------- ---------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dividend yield.............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Volatility.................. 90% 65% 55% 90% 65% 55%
Risk-free interest rate..... 4.7% - 6.7% 4.4% - 5.6% 5.6% - 6.7% 4.6% - 6.4% 4.6% - 5.5% 5.1% - 6.3%
Expected life (years)....... 4 4 4 2 2 2
</TABLE>
Retirement/Savings Plan. The Company has a retirement/savings plan which
qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code.
This plan allows participants to contribute up to 20% of total compensation,
subject to applicable Internal Revenue Service limitations. The Company makes
discretionary contributions to the plan of $0.25 per dollar contributed by
eligible participants up to a maximum contribution per participant of $750 per
year.
NOTE 12: INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998 1997
------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $11,611 $-- $168
Foreign................................................... 351 -- 90
State..................................................... 1,409 -- 1
------- --- ----
13,371 -- 259
Deferred:
Federal................................................... (4,143) -- --
Foreign................................................... -- -- --
State..................................................... (1,335) -- --
------- --- ----
(5,478) -- --
------- --- ----
$ 7,893 $-- $259
======= === ====
</TABLE>
43
<PAGE> 44
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's (benefit) provision for income taxes differed from the amount
computed by applying the statutory U.S. federal income tax rate to income (loss)
before income taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Provision at statutory rate........................... $11,051 $(7,294) $ 1,764
Differential (benefit) in rates on foreign earnings... (20) 774 (111)
State taxes, net of federal benefit................... 48 -- 1
Foreign sales corporation benefit..................... (307) -- (176)
Acquired in-process technology and non-deductible
goodwill............................................ 106 4,863 --
Utilization of net operating loss carryovers.......... (597) -- (1,661)
Utilization of research credits....................... (548) -- --
Future benefits not currently recognized.............. 508 2,116 364
Realized deferred tax assets previously reserved...... (3,249) -- --
Alternative minimum tax............................... -- -- 51
Others, net........................................... 901 (459) 27
------- ------- -------
$ 7,893 $ -- $ 259
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998 1997
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating loss carryovers.......................... $ -- $ 845 $ 303
Research and development credit carryovers............. -- 3,285 2,452
Capitalized research and development costs............. 283 71 234
Reserves not currently deductible...................... 4,863 2,814 1,657
Other.................................................. 332 419 96
------ ------- -------
Total deferred tax assets.................... 5,478 7,434 4,742
Valuation allowance.................................... -- (7,434) (4,742)
------ ------- -------
Net deferred tax assets................................ $5,478 $ -- $ --
====== ======= =======
</TABLE>
The valuation allowance at December 31, 1998 and 1997 was attributed to
deferred tax assets. Management believed that sufficient uncertainty existed
regarding the realizability of these items such that a full valuation allowance
was recorded.
The Company's income taxes payable for federal, state, and foreign purposes
have been reduced by the tax benefits of disqualifying dispositions of stock
options. The Company receives an income tax benefit for compensation expense for
tax purposes which is calculated as the difference between the market value of
the stock issued at the time of exercise and the option price at the applicable
income tax rates. This benefit is recorded as an increase in capital in excess
of par value.
NOTE 13: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in one industry segment and markets its products
worldwide through its own direct sales force and through systems integrators and
distributors. The Company has a manufacturing facility located in the U.S.,
international sales and support centers in Europe and Asia, and its Harmonic
Data Systems Ltd. subsidiary and a research and development facility in Israel.
44
<PAGE> 45
HARMONIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes net sales and property and equipment
information for geographic areas (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net sales:
United States...................................... $129,028 $47,422 $30,651
Canada............................................. 12,969 7,208 12,806
China.............................................. 8,552 11,647 8,254
Other foreign countries............................ 33,526 17,580 22,731
-------- ------- -------
Total...................................... $184,075 $83,857 $74,442
======== ======= =======
Property, equipment and intangibles:
United States...................................... $ 14,014 $10,384 $ 8,617
Israel............................................. 1,759 1,501 1,373
Other foreign countries............................ 70 57 87
-------- ------- -------
Total...................................... $ 15,843 $11,942 $10,077
======== ======= =======
</TABLE>
The Company sells to a significant number of its end users through
distributors. In 1999 sales to one domestic customer represented 41% of total
net sales. In 1998 sales to one domestic customer and one foreign distributor
represented 17% and 11% of total net sales, respectively. In 1997, sales to one
distributor represented 17% of total net sales.
In 1999, 1998 and 1997, sales of optical transmitters accounted for
approximately 63%, 54%, and 63%, respectively of net sales and sales of optical
node receivers, return path and network management products accounted for
approximately 32%, 35%, and 37%, respectively, of net sales. In 1999 and 1998,
TRANsend and CyberStream digital products accounted for 5%, and 11% of net
sales. There were no significant sales of digital products in 1997.
NOTE 14: COMMITMENTS AND CONTINGENCIES
Commitments -- Facilities Leases. The Company leases its facilities under
noncancelable operating leases which expire at various dates through 2010. Total
rent expense related to these operating leases was $1,647,000, $1,602,000, and
$1,413,000, for 1999, 1998 and 1997, respectively. Future minimum lease payments
under noncancelable operating leases at December 31, 1999, were as follows: (in
thousands)
<TABLE>
<CAPTION>
<S> <C>
2000........................................................ $1,513
2001........................................................ 1,415
2002........................................................ 1,324
2003........................................................ 1,352
2004........................................................ 1,392
Thereafter.................................................. 2,456
------
$9,452
======
</TABLE>
Commitments -- Royalties. The Company has obtained research and development
grants under various Israeli government programs that require the payment of
royalties on sales of certain products resulting from such research. During 1999
and 1998 royalty expenses were not material to consolidated operations or
financial position.
Contingencies. The Company is a party to certain litigation matters and
claims which are normal in the course of its operations and, while the results
of litigation and claims cannot be predicted with certainty, management believes
that the final outcome of such matters will not have a materially adverse effect
on the Company's consolidated financial position or results of operations.
45
<PAGE> 46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
Anthony J. Ley.......... 61 Chairman of the Board of Directors, President and Chief
Executive Officer, Harmonic Inc.
Moshe Nazarathy......... 48 Senior Vice President, General Manager Israel R&D
Center, Harmonic Inc.
E. Floyd Kvamme......... 62 General Partner, Kleiner Perkins Caufield & Byers
David A. Lane........... 41 General Partner, Alpine Technology Ventures
Barry D. Lemieux........ 60 Retired; former President of American Cablesystems
Corporation
Michel L. Vaillaud...... 68 Retired; former Chairman and CEO of Schlumberger,
Limited
</TABLE>
Each incumbent director has been engaged in the principal occupation set
forth above during the past five years. There are no family relationships
between any directors or executive officers of the Company.
Anthony J. Ley has served as the Company's President and Chief Executive
Officer since November 1988. Mr. Ley was elected Chairman of the Board of
Directors in February 1995. From 1963 to 1987, Mr. Ley was employed at
Schlumberger, both in Europe and the United States, holding various senior
business management and research and development positions, most recently as
Vice President, Research and Engineering at Fairchild Semiconductor/Schlumberger
in Palo Alto, California. Mr. Ley holds an M.A. in mechanical sciences from the
University of Cambridge and an S.M.E.E. from the Massachusetts Institute of
Technology, is named as an inventor on 29 patents and is a Fellow of the I.E.E.
(U.K.) and a senior member of the I.E.E.E.
Moshe Nazarathy, a founder of the Company, has served as Senior Vice
President, General Manager of Israel R&D Center, since December 1993, as a
director of the Company since the Company's inception and served as Vice
President, Research, from the Company's inception through December 1993. From
1985 to 1988, Dr. Nazarathy was employed in the Photonics and Instruments
Laboratory of Hewlett-Packard Company, most recently serving as Principal
Scientist from 1987 to 1988. From 1982 to 1984, Dr. Nazarathy held post-doctoral
and adjunct professor positions at Stanford University. Dr. Nazarathy holds a
B.S. and a Ph.D. in electrical engineering from Technion-Israel Institute of
Technology and is named as an inventor on 12 patents.
E. Floyd Kvamme has been a director of the Company since January 1990.
Since 1984, Mr. Kvamme has been a general partner of Kleiner Perkins Caufield &
Byers, a venture capital firm. Mr. Kvamme is also a director of Brio Technology,
Inc., GemFire, Photon Dynamics, Inc., Power Integrations, Inc., and Silicon
Genesis. Mr. Kvamme holds a B.S.E.E. from the University of California, Berkeley
and an M.S.E.E. from Syracuse University.
David A. Lane has been a director of the Company since June 1992. Since
December 1994, Mr. Lane has been a general partner and co-founder of Alpine
Technology Ventures, a venture capital firm. From August 1987 to December 1994,
he was a Vice President at the Harvard Private Capital Group, the investment
affiliate through which the Harvard Management Company makes private and direct
investments. Mr. Lane is also a director of several private companies. Mr. Lane
holds a B.S.E.E. from the University of Southern California and an M.B.A. from
Harvard University.
Barry D. Lemieux has been a director of the Company since January 1996. Now
retired, from 1978 to 1988 Mr. Lemieux was with American Cablesystems
Corporation, most recently as President and Chief Operating Officer. In addition
to marketing and general management positions with the New York Telephone
Company and Continental Cablevision, Mr. Lemieux has served on numerous cable
television industry
46
<PAGE> 47
committees, is a former director of the Cable Advertising Bureau (CAB) and past
Chairman of the Cable Television Administration and Marketing Society (CTAM).
Mr. Lemieux holds a B.A. in history from Hofstra University and an M.A.T. from
Harvard University.
Michel L. Vaillaud has been a director of the Company since March 1997. Now
retired, from 1973 to 1986 Mr. Vaillaud was with Schlumberger, Limited, most
recently as Chairman and Chief Executive Officer. He is a graduate of Ecole
Polytechnique in Paris and Ecole Nationale Superieure des Mines in Paris. He
serves as a Trustee of the Institute of Advanced Studies in Princeton, New
Jersey.
(c) Section 16(a) -- Beneficial Ownership Reporting Compliance.
Based solely on its review of copies of filings under Section 16(a) of the
Exchange Act received by it, or written representations from certain reporting
persons, the Company believes that during fiscal 1999 all Section 16 filings
requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
regarding the compensation of the Chief Executive Officer of the Company and the
other four most highly compensated executive officers of the Company whose
salary plus bonus exceeded $100,000 in the last fiscal year (collectively, the
"Named Executive Officers") for services rendered in all capacities to the
Company during the fiscal years ended December 31, 1997, December 31, 1998 and
December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) ------------------
---------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
--------------------------- ---- --------- --------- ------------------
<S> <C> <C> <C> <C>
Anthony J. Ley............................... 1999 $325,000 $641,069 50,000
Chairman of the Board, President & 1998 300,000 50,000 80,000
Chief Executive Officer 1997 275,000 -- 50,000
Moshe Nazarathy.............................. 1999 189,883 374,779 20,000
Senior Vice President, General Manager of 1998 168,242 25,000 24,000
Israel R&D Center 1997 157,909 -- 26,000
Michael Yost................................. 1999 190,000 374,779 24,000
Vice President, Operations 1998 175,000 25,000 24,000 26,000
1997 160,000 --
Israel Levi.................................. 1999 185,000 384,916 20,000
Vice President, Research & Development 1998 170,000 25,000 24,000
1997 155,000 -- 26,000
Robin N. Dickson............................. 1999 183,596 374,781 24,000
Chief Financial Officer 1998 160,000 25,000 24,000
1997 145,000 -- 26,000
</TABLE>
- ---------------
(1) Other than compensation described above, the Company did not pay any Named
Executive Officer any compensation, including incidental personal benefits,
in excess of 10% of such executive officer's salary.
47
<PAGE> 48
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TERM(2)
OPTIONS TO EMPLOYEES IN EXERCISE OR ---------------------------
NAME GRANTED(1) FISCAL YEAR BASE PRICE EXPIRATION DATE 5% 10%
---- ---------- ---------------- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Ley........... 50,000 5.1% $25.50 6/22/2009 $801,841 $2,032,022
Moshe Nazarathy.......... 20,000 2.0% 25.50 6/22/2009 320,736 812,809
Michael Yost............. 24,000 2.5% 25.50 6/22/2009 384,884 975,370
Robin N. Dickson......... 24,000 2.5% 25.50 6/22/2009 384,884 975,370
Israel Levi.............. 20,000 2.0% 25.50 6/22/2009 320,736 812,809
</TABLE>
- ---------------
(1) The options were granted pursuant to the Company's 1995 Stock Plan, and
become exercisable at a rate of 1/4 of the shares subject to the option one
year after the date of grant and an additional 1/48 of the shares at the end
of each month thereafter, subject to continued service as an employee. The
term of each option is ten years.
(2) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price. Actual gains, if any, on stock option exercises
will depend on the future financial performance of the Company, overall
market conditions and the option holders' continued employment through the
vesting period.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND YEAR-END VALUES
The following table provides information with respect to the exercise of
stock options during 1999 and the value of stock options held as of December 31,
1999 by each of the Named Executive Officers under the 1988 Stock Option Plan
and the 1995 Stock Plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT 12/31/99 OPTIONS AT 12/31/99(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Anthony J. Ley............ 60,000 $898,500 422,496 120,834 $38,641,505 $9,594,264
Moshe Nazarathy........... -- -- 131,540 45,792 11,768,812 3,610,271
Michael Yost.............. 20,000 220,750 62,130 49,770 5,549,842 3,886,039
Robin N. Dickson.......... 20,000 722,000 106,012 49,718 9,699,436 3,881,357
Israel Levi............... -- -- 58,846 46,960 5,174,622 3,707,929
</TABLE>
- ---------------
(1) Value realized represents the difference between the exercise price of the
options and the fair market value of the underlying securities on the date
of exercise.
(2) Calculated by determining the difference between the fair market value of
the Common Stock as of December 31, 1999 and the exercise price of the
underlying options.
48
<PAGE> 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of
February 25, 2000 by (i) each beneficial owner of more than 5% of the Company's
Common Stock, (ii) each director, (iii) each Named Executive Officer and (iv)
all directors and executive officers as a group. Except as otherwise indicated,
each person has sole voting and investment power with respect to all shares
shown as beneficially owned, subject to community property laws where
applicable.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF TOTAL
------------------------------------ ---------------- ----------------
<S> <C> <C>
AMVESCAP PLC(1)............................................. 2,347,800 7.6%
11 Devonshire Square
London, England EC2M
FMR Corp.(1)................................................ 2,359,000 7.7%
82 Devonshire Street
Boston, MA
Morgan Stanley Dean Witter(1)............................... 1,953,547 6.4%
1585 Broadway
New York, NY 10036
Oppenheimer Funds, Inc.(1).................................. 1,598,900 5.2%
Two World Trade Center, 34th Floor
New York, NY 10048
Anthony J. Ley(2)........................................... 692,526 2.2%
Moshe Nazarathy(3).......................................... 352,925 1.1%
E. Floyd Kvamme............................................. 328,684 1.1%
David A. Lane(4)............................................ 31,666 *
Barry Lemieux(5)............................................ 53,666 *
Michel L. Vaillaud(6)....................................... 31,666 *
Michael Yost(7)............................................. 66,776 *
Robin N. Dickson(8)......................................... 150,817 *
Israel Levi(9).............................................. 75,187 *
All directors and executive officers as a group (9 1,783,913 5.6%
persons)(10)..............................................
</TABLE>
- ---------------
* Percentage of shares beneficially owned is less than one percent of total.
(1) Based solely on a review of Schedule 13D, 13F and 13G filings with the
Securities and Exchange Commission.
(2) Includes 434,371 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(3) Includes 136,207 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(4) Includes 19,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(5) Includes 15,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(6) Includes 11,666 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(7) Includes 66,774 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(8) Includes 110,605 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
(9) Includes 64,096 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
49
<PAGE> 50
(10) Includes 859,051 shares which may be acquired upon exercise of options
exercisable within 60 days of February 25, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See Index to Financial Statements at Item 8 on
page 28 of this Report:
(a)(2) Exhibits. The documents listed on the Exhibit Index of this Report
are filed herewith. Copies of the exhibits listed in the Exhibit
Index will be furnished, upon request, to holders or beneficial
owners of the Company's Common Stock.
(b) Reports on Form 8-K.
Form 8-K filed on November 1, 1999.
50
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation, has
duly caused this Report on Form 10-K to be signed on its behalf by the
undersigned, hereunto duly authorized, in the City of Sunnyvale, State of
California, on March 30, 2000.
HARMONIC INC.
By: /s/ ANTHONY J. LEY
------------------------------------
Anthony J. Ley
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ANTHONY J. LEY Chairman of the Board, March 30, 2000
- ----------------------------------------------------- President and Chief Executive
(Anthony J. Ley) Officer (Principal Executive
Officer)
/s/ ROBIN N. DICKSON Chief Financial Officer March 30, 2000
- ----------------------------------------------------- (Principal Financial and
(Robin N. Dickson) Accounting Officer)
/s/ BARRY LEMIEUX* Director March 30, 2000
- -----------------------------------------------------
(Barry Lemieux)
/s/ E. FLOYD KVAMME* Director March 30, 2000
- -----------------------------------------------------
(E. Floyd Kvamme)
/s/ DAVID A. LANE* Director March 30, 2000
- -----------------------------------------------------
(David A. Lane)
/s/ MOSHE NAZARATHY* Director March 30, 2000
- -----------------------------------------------------
(Moshe Nazarathy)
/s/ MICHEL L. VAILLAUD* Director March 30, 2000
- -----------------------------------------------------
(Michel L. Vaillaud)
*By: /s/ ROBIN N. DICKSON
------------------------------------------------
(Robin N. Dickson)
Attorney-In-Fact
</TABLE>
51
<PAGE> 52
EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
a (i), (ii), (iii), (iv), (v), (vi), (vii), (viii) or (ix) are incorporated
herein by reference.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
2.1(ix) Agreement and Plan of Merger and Reorganization by and among
C-Cube Microsystems, Inc. and Harmonic Inc. dated October
27, 1999.
3.1(i) Certificate of Incorporation of Registrant.
3.2(i) Form of Restated Certificate of Incorporation of Registrant.
3.3(i) Bylaws of Registrant.
4.1(i) Form of Common Stock Certificate.
10.1(i)+ Form of Indemnification Agreement.
10.2(i)+ 1988 Stock Option Plan and form of Stock Option Agreement.
10.3(i)+ 1995 Stock Plan and form of Stock Option Agreement.
10.4(i)+ 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.5(i)+ 1995 Director Option Plan and form of Director Option
Agreement.
10.6(i) Registration and Participation Rights and Modification
Agreement dated as of July 22, 1994 among Registrant and
certain holders of Registrant's Common Stock.
10.7(i) Distributor Agreement dated June 15, 1994 by and between
Registrant and Scientific-Atlanta, Inc.
10.8(i) Warrant to purchase Common Stock of Registrant issued to
Scientific-Atlanta, Inc. on June 15, 1994.
10.10(i) Warrant to purchase Series D Preferred Stock of Registrant
issued to Comdisco, Inc. on February 10, 1993.
10.14(ii) Business Loan Agreement, Commercial Security Agreement and
Promissory Note dated August 26, 1993, as amended on
September 14, 1995, between Registrant and Silicon Valley
Bank.
10.15(ii) Facility lease dated as of January 12, 1996 by and between
Eastrich No. 137 Corporation and Company.
10.16(iv) Amended and Restated Loan and Security Agreement dated
December 24, 1997 between Registrant and Silicon Valley
Bank.
10.17(iii)+ Change of Control Severance Agreement dated March 27, 1997
between Registrant and Anthony J. Ley.
10.18(iii)+ Form of Change of Control Severance Agreement between
Registrant and certain executive officers of Registrant.
10.19(iv) Stock Purchase Agreement, dated September 16, 1997 among
Registrant, N.M. New Media Communication Ltd., ("NMC") and
Sellers of NMC.
10.20(v) First Amendment to Stock Purchase Agreement, dated November
25, 1997 among Registrant, N.M. New Media Communication
Ltd., ("NMC") and Sellers of NMC.
10.21(vi) Registration Rights Agreement dated as of January 5, 1998 by
and among the Registrant and the persons and entities listed
on Schedule A thereto (the "NMC Shareholders").
10.22(viii) Second Amended and Restated Loan and Security Agreement
dated March 5, 1999 between Registrant and Silicon Valley
Bank.
10.23(vii) 1997 Nonstatutory Stock Option Plan.
10.24 1999 Nonstatutory Stock Option Plan.
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
10.25 Amendment to Second Amended and Restated Loan and Security
Agreement dated March 5, 1999, as amended June 10, 1999 and
March 24, 2000, between Registrant and Silicon Valley Bank.
21.1* Subsidiaries of Registrant.
23.1 Consent of Independent Accountants.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously Filed.
(i) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 No. 33-90752.
(ii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1995.
(iii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1996.
(iv) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated September 29, 1997.
(v) Previously filed as an Exhibit to the Company's Current Report on 8-K
dated January 6, 1998.
(vi) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-3 dated January 8, 1998.
(vii) Previously filed as an Exhibit to the Company's Registration Statement on
Form S-8 dated January 14, 1998.
(viii) Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1999 and as amended on April 7, 1999, February 23, 2000 and
March 10, 2000.
(ix) Previously filed as an Exhibit to the Company's Report on Form 8-K dated
November 1, 1999.
+ Management Contract or Compensatory Plan or Arrangement required to be
filed as an exhibit to this report on Form 10-K.
53
<PAGE> 1
EXHIBIT 10.24
HARMONIC INC.
1999 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock Option
Plan are:
- to attract and retain the best available personnel for positions of
substantial responsibility,
- to provide additional incentive to Employees and Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are, or will be, granted under
the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Harmonic Inc., a Delaware corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers, employed by
the Company or any Parent or Subsidiary of the Company. A Service Provider shall
not cease to be an Employee
<PAGE> 2
in the case of (i) any leave of absence approved by the Company or (ii)
transfers between locations of the Company or between the Company, its Parent,
any Subsidiary, or any successor. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment" by
the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company
within the meaning of Nasdaq guidelines, including all employees with the
corporate rank of vice-president or higher, and employees with lesser rank but
comparable authority.
(p) "Option" means a nonstatutory stock option granted pursuant
to the Plan, that is not intended to qualify as an incentive stock option within
the meaning of Section 422 of the Code and the regulations promulgated
thereunder.
(q) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(r) "Optioned Stock" means the Common Stock subject to an Option.
(s) "Optionee" means the holder of an outstanding Option granted
under the Plan.
2
<PAGE> 3
(t) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(u) "Plan" means this 1999 Nonstatutory Stock Option Plan.
(v) "Service Provider" means an Employee including an Officer or
Consultant.
(w) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 400,000 Shares. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange Program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated).
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the
Board or (ii) a Committee, which committee shall be constituted to satisfy
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common
Stock;
(ii) to select the Service Providers to whom Options may
be granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised (which may be based on
3
<PAGE> 4
performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
shares of Common Stock relating thereto, based in each case on such factors as
the Administrator, in its sole discretion, shall determine;
(vii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(ix) to modify or amend each Option (subject to Section
14(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(x) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Options;
(xii) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers; provided,
however, that notwithstanding anything to the contrary contained in the Plan,
Options may not be granted to Officers and Directors.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship as a
Service Provider with the Company, nor shall they interfere in any way with the
Optionee's right or the Company's right to terminate such relationship at any
time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption by
the Board. It shall continue in effect for ten (10) years, unless sooner
terminated under Section 14 of the Plan.
4
<PAGE> 5
8. Term of Option. The term of each Option shall be stated in the Option
Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of
payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. An Option may not be exercised for a fraction of
a Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to
5
<PAGE> 6
exercise the Option, and (ii) full payment for the Shares with respect to which
the Option is exercised. Full payment may consist of any consideration and
method of payment authorized by the Administrator and permitted by the Option
Agreement and the Plan. Shares issued upon exercise of an Option shall be issued
in the name of the Optionee or, if requested by the Optionee, in the name of the
Optionee and his or her spouse. Until the Shares are issued (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company), no right to vote or receive dividends or any other rights
as a shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued) such
Shares promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option, but only within such
period of time as is specified in the Option Agreement, and only to the extent
that the Option is vested on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option shall
remain exercisable for thirty (30) days following the Optionee's termination.
If, on the date of termination, the Optionee is not vested as to his or her
entire Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option
Agreement, to the extent the Option is vested on the date of termination (but in
no event later than the expiration of the term of such Option as set forth in
the Option Agreement). In the absence of a specified time in the Option
Agreement, the Option shall remain exercisable for twelve (12) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
6
<PAGE> 7
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by the
Administrator, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
7
<PAGE> 8
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option shall be assumed or an equivalent option
or right substituted by the successor corporation or a Parent or Subsidiary of
the successor corporation. In the event that the successor corporation refuses
to assume or substitute for the Option, the Optionee shall fully vest in and
have the right to exercise the Option as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a merger or sale of assets, the Administrator shall notify the
Optionee in writing or electronically that the Option shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase or
receive, for each Share of Optioned Stock, immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the merger or sale of assets by holders of Common Stock
for each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding Shares); provided, however, that if
such consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock to be
solely common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common Stock
in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
8
<PAGE> 9
(b) Investment Representations. As a condition to the exercise of
an Option the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
16. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
9
<PAGE> 10
HARMONIC INC.
1999 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[OPTIONEE'S NAME AND ADDRESS]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ____________________________
Date of Grant ____________________________
Vesting Commencement Date ____________________________
Exercise Price per Share $____________________________
Total Number of Shares Granted ____________________________
Total Exercise Price $____________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: ____________________________
Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such
dates, this Option shall vest and become exercisable in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48 of the Shares subject to the Option
shall vest each month thereafter.
Termination Period:
This Option may be exercised for thirty (30) days after Optionee ceases
to be a Service Provider. Upon the death or Disability of the Optionee, this
Option may be exercised for such longer period as provided in the Plan. In no
event shall this Option be exercised later than the Term/Expiration Date as
provided above.
<PAGE> 11
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "Exercise Price"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 14(b) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be completed
by the Optionee and delivered to Stock Option Administrator. The Exercise Notice
shall be accompanied by payment of the aggregate Exercise Price as to all
Exercised Shares. This Option shall be deemed to be exercised upon receipt by
the Company of such fully executed Exercise Notice accompanied by such aggregate
Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Exercised Shares shall be considered
transferred to the Optionee on the date the Option is exercised with respect to
such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
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<PAGE> 12
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular federal
income tax liability upon exercise of an NSO. The Optionee will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Exercised Shares on the
date of exercise over their aggregate Exercise Price. If the Optionee is an
Employee or a former Employee, the Company will be required to withhold from his
or her compensation or collect from Optionee and pay to the applicable taxing
authorities an amount in cash equal to a percentage of this compensation income
at the time of exercise, and may refuse to honor the exercise and refuse to
deliver Shares if such withholding amounts are not delivered at the time of
exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by the internal substantive laws, but not
the choice of law rules, of California.
8. No guarantee of continued service. Optionee acknowledges and agrees
that the vesting of shares pursuant to the vesting schedule hereof is earned
only by continuing as a service provider at the will of the company (and not
through the act of being hired, being granted an option or purchasing shares
hereunder). Optionee further acknowledges and agrees that this agreement, the
transactions contemplated hereunder and the vesting schedule set forth herein do
not constitute an express or implied promise of continued engagement as a
service provider for the vesting period, for any period, or at all, and shall
not interfere with optionee's right or the company's right to terminate
optionee's relationship as a service provider at any time, with or without
cause.
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<PAGE> 13
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and governed
by the terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE HARMONIC INC.
- ------------------------------------ -----------------------------------
Signature By
- ------------------------------------ -----------------------------------
Print Name Title
- ------------------------------------
Residence Address
- ------------------------------------
4
<PAGE> 14
EXHIBIT A
HARMONIC INC.
1999 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
Harmonic Inc.
549 Baltic Way
Sunnyvale, CA 94089-1140
Attention: Stock Option Administrator
1. Exercise of Option. Effective as of today, ________________, _____,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Harmonic Inc. (the "Company") under and
pursuant to the 1999 Nonstatutory Stock Option Plan (the "Plan") and the Stock
Option Agreement dated _____________ (the "Option Agreement"). The purchase
price for the Shares shall be $____________ , as required by the Option
Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the Shares, no right to vote or receive dividends or
any other rights as a shareholder shall exist with respect to the Optioned
Stock, notwithstanding the exercise of the Option. The Shares so acquired shall
be issued to the Optionee as soon as practicable after exercise of the Option.
No adjustment will be made for a dividend or other right for which the record
date is prior to the date of issuance, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE> 15
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by the internal substantive laws, but not the choice of law rules, of
Delaware.
Submitted by: Accepted by:
PURCHASER HARMONIC INC.
- ------------------------------------ -------------------------------------
Signature By
- ------------------------------------ -------------------------------------
Print Name Title
Address:
----------------------------
----------------------------
----------------------------
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<PAGE> 1
EXHIBIT 10.25
This SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as of March
5, 1999, is between SILICON VALLEY BANK ("Bank") and HARMONIC LIGHTWAVES, INC.
(doing business in California as DELAWARE HARMONIC LIGHTWAVES, INC.), a Delaware
corporation ("Borrower").
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1. Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, partners and, for any Person that
is a limited liability company, such Persons, managers and members.
"Bank Expenses" means all reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, (including fees and
expenses of appeal or review, or those incurred in any Insolvency Proceeding)
whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and records
including, without limitation: ledgers; records concerning Borrower's assets or
liabilities, the Collateral, business operations or financial condition; and all
computer programs, or tape files, and the equipment, containing such information
if such equipment is necessary for the review of such information.
"Borrowing Base" means an amount equal to 70% of Eligible
Accounts, as determined by Bank with reference to the most recent Borrowing Base
Certificate delivered by Borrower.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date of this Agreement.
"Collateral" means the property described on Exhibit A attached
hereto; provided that the "Collateral" does not include any Excluded Property.
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such
<PAGE> 2
obligation directly or indirectly guaranteed, endorsed, co-made or discounted or
sold with recourse by that Person, or in respect of which that Person is
otherwise directly or indirectly liable; (ii) any obligations with respect to
undrawn letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided that the
term "Contingent Obligation" shall not include endorsements for collection or
deposit in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the stated or determined
amount of the primary obligation in respect of which such Contingent Obligation
is made or, if not stated or determinable, the maximum reasonably anticipated
liability in respect thereof as determined by such Person in good faith;
provided that such amount shall not in any event exceed the maximum amount of
the obligations under the guarantee or other support arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each Revolving Loan, Equipment Loan,
Letter of Credit, or any other extension of credit by Bank for the benefit of
Borrower hereunder.
"Current Assets" means, as of any applicable date, all amounts
that should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"Current Liabilities" means, 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
Revolving Loans and the current portion of the outstanding Equipment Loans and
Existing Equipment Loans, the aggregate outstanding face amount (including drawn
but unreimbursed Letters of Credit) of outstanding Letters of Credit (including
the Existing Letters of Credit) in excess of $2,000,000 (exclusive of any cash
collateral which secures Borrower's obligations to Bank in respect of such
Letters of Credit, which cash collateral has been provided on terms and
conditions acceptable to Bank), and all other Indebtedness that is payable upon
demand or within one year from the date of determination thereof unless such
Indebtedness is renewable or extendable at the option of Borrower or any
Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided that
standards of eligibility may be revised from time to time by Bank in Bank's
reasonable judgment effective upon 10 days prior notice to Borrower. Eligible
Accounts shall not include the following:
2
<PAGE> 3
(a) Accounts that the account debtor has failed to pay
within 90 days of invoice date;
(b) Accounts with respect to an account debtor, 50% of whose
Accounts the account debtor has failed to pay within 90 days of invoice date;
(c) Accounts with respect to an account debtor, including
Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, to
the extent such obligations exceed the aforementioned percentage, except as
approved in writing by Bank;
(d) Accounts with respect to which the account debtor does
not have its principal place of business in the United States except for
Eligible Foreign Accounts;
(e) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof;
(f) Accounts with respect to which Borrower is liable to the
account debtor, but only to the extent of any amounts owing to the account
debtor (sometimes referred to as "contra" accounts, e.g. accounts payable,
customer deposits, credit accounts etc.);
(g) Accounts generated by demonstration or promotional
equipment, or with respect to which goods are placed on consignment, guaranteed
sale, sale or return, sale on approval, bill and hold, or other terms by reason
of which the payment by the account debtor may be conditional;
(h) Accounts with respect to which the account debtor is an
Affiliate, officer, employee, or agent of Borrower;
(i) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(j) Accounts subject to any Lien;
(k) Accounts which are in whole or in part the direct or
indirect proceeds of any Excluded Property; and
(j) Accounts the collection of which Bank reasonably
determines after reasonable inquiry and consultation with Borrower to be
doubtful.
"Eligible Foreign Accounts" means Accounts with respect to which
the account debtor is Siemens A.G., a German corporation, or other account
debtors, if any, as may be from time to time approved in writing by Bank.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
3
<PAGE> 4
"Equipment Availability End Date" has the meaning set forth in
Section 2.1.3.
"Equipment Commitment" means a credit extension of up to
$1,500,000 during the period from the Closing Date to March 31, 1999, plus an
additional $1,500,000 thereafter.
"Equipment Loan" has the meaning set forth in Section 2.1.3.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning set forth in Section 8.
"Excluded Property" means any property, rights or licenses to
the extent the granting of a security interest therein to Bank (i) would be
contrary to applicable law or (ii) is prohibited by or would constitute a
default under any agreement or document governing such property, rights or
licenses (but only to the extent such prohibition is enforceable as against the
Bank under applicable law).
"Existing Agreement" means the Amended and Restated Loan and
Security Agreement, dated as of December 24, 1997.
"Existing Equipment Loans" means the "Equipment Advances"
outstanding under the Existing Agreement, which Borrower acknowledges have a
total outstanding principal amount of $543,622.20 on the Closing Date.
"Existing Letters of Credit" means the following letters of
credit issued under the Existing Agreement: (a) letter of credit no. SVB97IS0635
for a liability amount of US$400,000 (as amended) in favor of Barclays Bank PLC
as beneficiary, (b) letter of credit no. SVB98IS0890 for a liability amount of
US$500,000 in favor of Bank Hapoalim, B.M. as beneficiary, (c) letter of credit
no. SVB98IS0905 for a liability amount of US$450,000 (as amended) in favor of
Rockwell Semiconductor Systems as beneficiary, and (d) letter of credit
no.SVB98IS1052 for a liability amount of US$1,019,565 in favor of Golden Channel
as beneficiary.
"GAAP" means generally accepted accounting principles as in
effect in the United States from time to time.
"Guarantor" means any present or future guarantor of the
Obligations.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all right, title, and
interest of Borrower in any of the following, whether now existing or hereafter
acquired or created:
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<PAGE> 5
(a) Copyrights, Trademarks, Patents, and Mask Works;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products;
(c) Any and all design rights;
(d) Any and all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents, Trademarks, or Mask Works, and all license fees and
royalties arising from such use to the extent permitted by such license or
rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks, Patents, or Mask Works; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all 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 at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Letter of Credit" means the Existing Letters of Credit and any
letter of credit or similar undertaking issued by Bank pursuant to Section
2.1.2.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance (or any agreement to grant any of the
foregoing, whether or not contingent on the happening of any future event).
"Loan" means a Revolving Loan, an Equipment Loan, or an Existing
Equipment Loan.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other present or future agreement entered
into between Borrower and/or for the benefit of Bank in connection with this
Agreement, all as amended, extended or restated
5
<PAGE> 6
from time to time.
"Mask Works" means all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or condition (financial or otherwise) of Borrower and
its Subsidiaries taken as a whole, (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents, (iii)
the enforceability or binding effect of the Loan Documents, or (iv) the
attachment, perfection, or priority of Bank's security interests in the
Collateral or the value of the Collateral.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to Bank by Borrower pursuant to this Agreement or any
other Agreement (including, without limitation, Borrower's credit card facility
with Bank), whether absolute or contingent, due or to become due, now existing
or hereafter arising, including any interest that accrues after the commencement
of an Insolvency Proceeding and including any debt, liability, or obligation
owing from Borrower to others that Bank may have obtained by assignment or
otherwise.
"Overadvance" means that at any time (a) the sum of Revolving
Loans, the Equipment Loans, the Existing Equipment Loans, and the face amount of
all outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) exceeds the lesser of the Revolving Commitment or the Borrowing Base, or
(b) the Equipment Loans and the Existing Equipment Loans exceed the Equipment
Commitment. For purposes of calculating whether or not an Overadvance exists,
$20,000 shall be deemed to be at all times outstanding as Revolving Loans (such
amount being the credit limit of Borrower's credit card facility with Bank).
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Payment Date" means the 23rd calendar day of each month.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Subordinated Debt;
(c) Indebtedness existing on the Closing Date and disclosed
in the Schedule;
(d) Indebtedness to trade creditors incurred in the ordinary
course of business and not past due;
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<PAGE> 7
(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);
7
<PAGE> 8
(g) Capital leases or indebtedness incurred solely to
purchase equipment which is secured in accordance with clause (c) of "Permitted
Liens" below and is not in excess of the lesser of the purchase price of such
equipment or the fair market value of such equipment on the date of acquisition;
(h) Other Indebtedness not otherwise permitted by Section
7.4 not exceeding $500,000 in the aggregate outstanding at any time; and
(i) Extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (c) through (e) 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 Investment" means:
(a) Investments existing on the Closing Date disclosed in
the Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank;
(c) Investments consisting of negotiable instruments held
for deposit or collection or similar transactions in the ordinary course of
business;
(d) Investments consisting of receivables owing to Borrower
or its Subsidiaries by Persons and advances to customers or suppliers, in each
case, if created, acquired or made in the ordinary course of business; provided
that this paragraph (d) shall not apply to Investments owing by Subsidiaries to
Borrower;
(e) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board of
Directors of Borrower determines that such compensation is in the best interests
of Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower
or its Subsidiaries pursuant to employee stock purchase plans approved by
Borrower's Board of Directors, and (iv) other loans to officers and employees
approved by the Board of Directors in an aggregate amount not in excess of
$250,000 outstanding at any time;
(f) 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;
(g) Investments pursuant to or arising under currency
agreements or interest rate
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swap agreements entered into in the ordinary course of business to mitigate
risks of fluctuation in exchange rates and interest rates and not for
speculative purposes;
(h) Investments consisting of prepaid royalties and other
credit extensions to, customers and suppliers who are not Affiliates, in the
ordinary course of business;
(i) Investments constituting acquisitions permitted under
Section 7.3;
(j) Deposit accounts of Borrower and its Subsidiaries
maintained for the purpose of making deposits, collections, and payments in the
ordinary course of business;
(k) Investments permitted by Borrower's investment policy,
as amended from time to time, provided that such investment policy and any such
amendment thereto has been approved by Bank;
(l) Investments in Subsidiaries or Investments of
Subsidiaries in or to other Subsidiaries or the Borrower so long as (i) the
Subsidiaries receiving such Investment were either Subsidiaries of the Borrower
on the Closing Date or were acquired in a transaction permitted by Section 7.3
and (ii) the aggregate amount of all Investments in Borrower's direct and
indirect Subsidiaries does not at any time exceed 15% of Tangible Net Worth; and
(m) Other Investments not otherwise permitted by Section 7.7
not exceeding $500,000 in the aggregate outstanding at any time.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and as to which adequate reserves are maintained on
Borrower's Books in accordance with GAAP, provided the same have no priority
over any of Bank's security interests;
(c) Liens (i) upon or in any Equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
Equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such Equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens on assets (including the proceeds thereof and
accessions thereto) that existed at the time such assets were acquired by
Borrower or any Subsidiary (including Liens on assets of any corporation that
existed at the time it became or becomes a Subsidiary); provided such Liens are
not granted in contemplation of or in connection with the acquisition of such
asset by Borrower or a Subsidiary;
(e) Liens in favor or customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;
(f) Deposits under worker's compensation, unemployment
insurance, social security and other similar laws, or to secure the performance
of bids, tenders or contracts (other
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than for the repayment of borrowed money) or to secure indemnity, performance or
other similar bonds for the performance of bids, tenders or contracts (other
than for the repayment of borrowed money) or to secure statutory obligations
(other than liens arising under ERISA or environmental liens) or surety or
appeal bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business;
(d) Leases or subleases and non-exclusive licenses or
sublicenses granted to others in the ordinary course of Borrower's business not
interfering in any material respect with the business of Borrower and its
Subsidiaries taken as a whole, provided that such leases, subleases, licenses
and sublicenses do not prohibit the grant of the security interest granted
hereunder; and
(e) Liens arising from judgments, decrees or attachments in
circumstances not otherwise constituting an Event of Default;
(f) 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 Effect;
(g) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or bankers' Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangements entered into with banks in the
ordinary course of business; and
(h) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) and (d) above, provided that any extension, renewal or replacement
Lien shall be limited to the property encumbered by the existing Lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"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.
"Quick Assets" means, as of any applicable date, the
consolidated cash, cash equivalents, accounts receivable (net of reserves) and
investments with maturities of fewer than 90 days of Borrower determined in
accordance with GAAP; provided that accounts receivable due from Golden Channel
and any cash securing any letter of credit or other performance guaranty in
favor of Golden Channel shall not be included in Borrower's Quick Assets.
"Responsible Officer" means each of the Chief Executive Officer,
the President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Commitment" means a credit extension of up to
$10,000,000.
"Revolving Loan" means a loan advance under the Revolving
Commitment.
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"Revolving Maturity Date" means one day prior to the first
anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank). "Subsidiary" means with
respect to any Person, corporation, partnership, company association, joint
venture, 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
such Person.
"Tangible Net Worth" means as of any applicable date, the
consolidated total assets of Borrower and its Subsidiaries minus, without
duplication, (i) the sum of 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) all reserves not already deducted from assets,
and (ii) Total Liabilities.
"Total Liabilities" means as of any applicable date, any date as
of which the amount thereof shall be determined, all obligations that should, in
accordance with GAAP be classified as liabilities on the consolidated balance
sheet of Borrower, including in any event all Indebtedness, but specifically
excluding Subordinated Debt.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Borrower connected
with and symbolized by such trademarks.
"UCC" means the California Uniform Commercial Code.
"Year 2000 Problem" means the inability of computers, as well as
embedded microchips in non-computing devices, to properly perform date-sensitive
functions with respect to certain dates prior to and after December 31, 1999.
1.2. Accounting and Other Terms. All accounting terms not
specifically defined herein shall be construed in accordance with GAAP and all
calculations and determinations made hereunder shall be made in accordance with
GAAP. When used herein, the term "financial statements" shall include the notes
and schedules thereto. In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and including" and
the words "to" and "until" each mean "to but excluding." Periods of days
referred to in this Agreement shall be counted in calendar days unless otherwise
stated. References to the plural include the singular and to the singular
include the plural, references to any gender include any other gender, the part
includes the whole, the term "including" is not limiting, and the term "or" has,
except where otherwise indicated, the inclusive meaning represented by the
phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and
similar terms in this Agreement refer to this Agreement as a whole and not to
any particular provision of this Agreement. Article, section, subsection,
clause, exhibit and schedule references are to this Agreement, unless otherwise
specified. All of the exhibits and schedules attached hereto shall be deemed
incorporated herein by reference. All terms contained in this Agreement which
are not otherwise specifically defined herein (including the term "good faith")
shall have the meanings provided by
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the UCC to the extent the same are used or defined therein.
1.3. No Presumption Against Any Party. Neither this Agreement nor any
other Loan Document nor any uncertainty or ambiguity herein or therein shall be
construed or resolved using any presumption against any party hereto or thereto,
whether under any rule of construction or otherwise. On the contrary, this
Agreement and the other Loan Documents have been reviewed by each of the parties
and their counsel and, in the case of any ambiguity or uncertainty, shall be
construed and interpreted according to the ordinary meaning of the words used so
as to fairly accomplish the purposes and intentions of all parties hereto.
2. LOAN AND TERMS OF PAYMENT
2.1. Credit Extensions. Borrower promises to pay to the order of
Bank, in lawful money of the United States of America, the aggregate unpaid
principal amount of all Credit Extensions made by Bank to Borrower hereunder.
Borrower shall also pay interest on the unpaid principal amount of such Loans at
rates in accordance with the terms hereof.
2.1.1. (a) Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Revolving Loans to Borrower in an aggregate
outstanding amount not to exceed the Revolving Commitment; provided that no such
Loan shall result in an Overadvance. Subject to the terms and conditions of this
Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid and
reborrowed at any time during the term of this Agreement without penalty or
premium.
(b) Whenever Borrower desires a Revolving Loan,
Borrower will notify Bank by facsimile transmission or telephone no later than
3:00 p.m. Pacific time, on the Business Day that such Revolving Loan is to be
made. Each such notification shall be promptly confirmed by a Payment/Loan Form
in substantially the form of Exhibit B hereto. Bank is authorized to make Loans
under this Agreement, based upon instructions received from a Responsible
Officer or a designee of a Responsible Officer, or without instructions if in
Bank's discretion such Loans are necessary to meet Obligations which have become
due and remain unpaid. Bank shall be entitled to rely on any telephonic notice
given by a person who Bank reasonably believes to be a Responsible Officer or a
designee thereof, and Borrower shall indemnify and hold Bank harmless for any
damages or loss suffered by Bank as a result of such reliance. Bank will credit
the amount of Loans made under this Section 2.1 to Borrower's deposit account.
(c) Interest Rate. Except as set forth in Section
2.3(b), the outstanding principal amount of the Revolving Loans shall bear
interest, on the average daily balance thereof, at a per annum rate equal to
0.50 percentage points above the Prime Rate.
(d) The Revolving Commitment shall terminate on the
Revolving Maturity Date, at which time all Revolving Loans and accrued interest
thereon shall be immediately due and payable.
2.1.2. Letters of Credit.
(a) On and after the Closing Date, the Existing
Letters of Credit shall be deemed for all purposes, including for purposes of
the fees to be collected pursuant to Section 2.5, and reimbursement of costs and
expenses to the extent provided herein, Letters of Credit outstanding under this
Agreement and entitled to the benefits of this Agreement and the other
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Loan Documents, and shall be governed by the applications and agreements
pertaining thereto and by this Agreement. Subject to the terms and conditions of
this Agreement, Bank agrees to issue or cause to be issued Letters of Credit for
the account of Borrower in an aggregate outstanding face amount (including drawn
but unreimbursed Letters of Credit) not to exceed $5,000,000, including the
Existing Letters of Credit; provided that the issuance of any such Letter of
Credit shall not result in an Overadvance. Each Letter of Credit shall have an
expiry date no later than 180 days after the Revolving Maturity Date; provided
that Borrower's Letter of Credit reimbursement obligation shall 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. All Letters of Credit
shall be, in form and substance, acceptable to Bank in its sole discretion and
shall be subject to the terms and conditions of Bank's form of standard
Application and Letter of Credit Agreement.
(b) The obligation of Borrower to immediately
reimburse Bank for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Borrower shall indemnify, defend, protect, and hold
Bank harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
Letters of Credit.
(c) Borrower may request that Bank issue a Letter of
Credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such Letter of Credit, Bank shall treat such demand as
a Revolving Loan to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(d) Upon the issuance of any letter of credit
payable in a currency other than United States Dollars, Bank shall create a
reserve under the Revolving Commitment for letters of credit against
fluctuations in currency exchange rates, in an amount equal to ten percent (10%)
of the face amount of such letter of credit. The amount of such reserve may be
amended by Bank from time to time to account for fluctuations in the exchange
rate. The availability of funds under the Revolving Commitment shall be reduced
by the amount of such reserve for so long as such letter of credit remains
outstanding.
2.1.3. Equipment Loans.
(a) Availability. Subject to and upon the terms and
conditions of this Agreement, at any time from the date hereof through the
Revolving Maturity Date (the "Equipment Availability End Date"), Bank agrees to
make advances (each an "Equipment Loan") to Borrower in an aggregate amount not
to exceed the Equipment Commitment. Borrower shall deliver to Bank, at the time
of each Equipment Loan request, an invoice for the equipment to be financed by
such Equipment Loan. The Equipment Loans shall be used only to purchase new
Equipment purchased on or after 90 days prior to the date hereof and shall not
exceed 100% of the invoice amount of such equipment approved from time to time
by Bank, excluding taxes, shipping, warranty charges, freight discounts and
installation expense. Software and used Equipment may, however, constitute up to
25% of each Equipment Loan. Each Equipment Loan must be in a minimum amount of
$50,000.
(b) Interest Rate. Except as set forth in Section
2.3(b), the outstanding principal amount of the Equipments Loans and the
Existing Equipment Loans shall bear interest,
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on the average daily balance thereof, at a per annum rate equal to 1.00
percentage points above the Prime Rate. Accrued interest on each such Loan shall
be payable monthly on each Payment Date and on the date the final installment of
principal on the Equipment Loans is due.
(c) Repayment. Any Equipment Loans that are
outstanding on the Equipment Availability End Date will be payable in 36 equal
monthly installments of principal beginning on the Payment Date next following
the Equipment Availability End Date and continuing on each Payment Date
thereafter until the 35th such Payment Date, when any remaining balance on the
Equipment Loans shall be immediately due and payable. Equipment Loans, once
repaid, may not be reborrowed.
(d) Repayment (Existing Equipment Loans). The
Existing Equipment Loans will be payable in 33 equal monthly installments of
principal (i.e., $16,473.40 per month) beginning on the Payment Date next
following the Closing Date and continuing on each Payment Date thereafter until
November 23, 2001, when any remaining balance on the Existing Equipment Loans
shall be immediately due and payable.
(e) Notice of Borrowing. When Borrower desires to
obtain an Equipment Loan, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later than 3:00 p.m.
Pacific time one Business Day before the day on which the Equipment Loan is to
be made. Such notice shall be substantially in the form of Exhibit B. The notice
shall be signed by a Responsible Officer or its designee and include a copy of
the invoice for the Equipment to be financed.
2.2. Overadvances. If, at any time or for any reason, any Overadvance
shall occur, Borrower shall immediately pay to Bank, in cash, the amount of such
Overadvance.
2.3. Default Rates, Payments, and Calculations.
(a) Default Rate. All Obligations shall bear
interest, from and after the occurrence and during the continuance of an Event
of Default, at a rate equal to five percentage points above the interest rate
applicable immediately prior to such occurrence of an Event of Default.
(b) Payments. Interest hereunder shall be due and
payable on each Payment Date. Borrower hereby authorizes Bank to debit any
accounts with Bank, including, without limitation, Account Number 341964970 for
payments of principal and interest due on the Obligations and any other amounts
owing by Borrower to Bank. Bank will notify Borrower of all debits which Bank
has made against Borrower's accounts. Any such debits against Borrower's
accounts in no way shall be deemed a set-off. Any interest not paid when due
shall be compounded by becoming a part of the Obligations, and such interest
shall thereafter accrue interest at the rate then applicable hereunder.
(c) Computation. In the event the Prime Rate is
changed from time to time hereafter, the applicable rate of interest hereunder
shall be increased or decreased effective as of 12:01 a.m. on the day the Prime
Rate is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis of a
360-day year for the actual number of days elapsed.
2.4. Crediting Payments. So long as no Event of Default has occurred
and is continuing, Bank shall credit a wire transfer of funds, check or other
item of payment to such deposit account
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or Obligation as Borrower specifies. After the occurrence and during the
continuance of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment, whether directed to Borrower's deposit
account with Bank or to the Obligations or otherwise, shall be immediately
applied to conditionally reduce Obligations, but shall not be considered a
payment in respect of the Obligations unless such payment is of immediately
available federal funds or unless and until such check or other item of payment
is honored when presented for payment. Notwithstanding anything to the contrary
contained herein, any wire transfer or payment received by Bank after 12:00 noon
Pacific time shall be deemed to have been received by Bank as of the opening of
business on the immediately following Business Day. Whenever any payment to Bank
under the Loan Documents would otherwise be due (except by reason of
acceleration) on a date that is not a Business Day, such payment shall instead
be due on the next Business Day, and additional fees or interest, as the case
may be, shall accrue and be payable for the period of such extension.
2.5. Fees. Borrower shall pay to Bank the following:
(a) Facility Fees. The following facility fees which
shall be fully earned and non-refundable on the date when payable:
(i) A revolving facility fee of $50,000,
which shall be payable as follows: (A) $37,250 on the Closing Date and (B)
$12,750 on July 31, 1999; provided that such $12,750 shall not be payable if as
of July 2, 1999, Borrower's financial performance (including profit and loss and
tangible net worth) equals or exceeds that set forth for such date and the
forecasted fiscal period then ending in the financial forecasts delivered to
Bank on October 2, 1998; and
(ii) An equipment facility fee of $15,000,
which shall be payable on the date the first Equipment Loan is made;
(b) Letter of Credit Fees. Borrower shall pay to
Bank from time to time on demand the normal issuance, presentation, amendment
and processing fees, and other standard costs and charges, of Bank relating to
letters of credit as from time to time in effect.
(c) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
(d) Bank Expenses. Upon demand from Bank, including,
without limitation, upon the date hereof, all Bank Expenses incurred through the
date hereof, including reasonable attorneys' fees and expenses, and, after the
date hereof, all Bank Expenses, including reasonable attorneys' fees and
expenses, as and when they become due.
2.6. Term. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to Section 12.7, shall
continue in full force and effect until the Loans and all interest thereon have
been fully and finally paid. Notwithstanding the foregoing, Bank shall have the
right to terminate its obligation to make Loans under this Agreement immediately
and without notice upon the occurrence and during the continuance of an Event of
Default.
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2.7 Existing Credit Agreement. This Agreement amends and restates
the Existing Agreement in its entirety, and the rights, obligations, and
remedies of the parties hereto shall be governed by this Agreement, the Loan
Documents, and the Loan Documents under the Existing Agreement to the extent not
modified hereby, and without limiting the generality of the foregoing (a) the
Existing Equipment Loans shall bear interest at the rate applicable to the
Equipment Loans as set forth in this Agreement and (b) the Existing Letters of
Credit shall be governed by Section 2.1.2(c) of this Agreement; provided that
any rights existing in favor of Bank arising from any commitment fees,
indemnification, yield protection, taxes, and similar provisions of the Existing
Agreement, relating in each case to the period prior to the Closing Date, shall
survive the effectiveness of this Agreement. Bank's agreement to modifications
to the Existing Agreement pursuant to this Agreement in no way shall obligate
Bank to make any future modifications to the Existing Agreement. Nothing in this
Agreement shall constitute a satisfaction of the obligations under the Existing
Agreement. It is the intention of Bank and Borrower to retain as liable parties
all makers and endorsers of the Existing Agreement, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Agreement. Borrower agrees that it has no defenses
against the obligations to pay any amounts under the Existing Agreement.
3. CONDITIONS OF LOANS
3.1. Conditions Precedent to Initial Credit Extension. The obligation
of Bank to make the initial Credit Extension is subject to the condition
precedent that Bank shall have received, in form and substance satisfactory to
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to articles, bylaws, incumbency and resolutions authorizing the
execution and delivery of this Agreement;
(c) an intellectual property security agreement;
(d) financing statements (Forms UCC-1);
(e) insurance certificate, together with a loss
payment endorsement in form satisfactory to Bank;
(f) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(g) certificate of foreign qualification (if
applicable), together with evidence of an appropriate fictitious name filing for
each county, if any, in which Borrower does business using any d/b/a or other
fictitious name;
(h) guaranties by the Guarantors, if applicable;
(i) an operating budget for Borrower for the 1999
fiscal year; and
(j) such other documents, and completion of such
other matters, as Bank may reasonably deem necessary or appropriate.
3.2. Conditions Precedent to all Credit Extensions. The obligation of
Bank to make each Credit Extension, including the initial Credit Extension, is
further subject to the following
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conditions:
(a) timely receipt by Bank of the Payment/Loan Form
as provided in Section 2.1;
(b) no Overadvance exists or will result from such
Credit Extension; and
(c) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Loan Form and on the effective date of each Credit
Extension as though made at and as of each such date (except to the extent they
relate specifically to an earlier date, in which case such representations and
warranties shall continue to have been true and accurate as of such date), and
no Default shall have occurred and be continuing, or would result from such
Credit Extension. The making of each Credit Extension shall be deemed to be a
representation and warranty by Borrower on the date of such Credit Extension as
to the accuracy of the facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1. Grant of Security Interest. Borrower grants and pledges to Bank
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt payment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Borrower acknowledges that Bank
may, upon the occurrence and during the continuance of an Event of Default,
place a hold on any deposit account pledged as Collateral to secure the
Obligations. Notwithstanding termination of this Agreement, Bank's Lien on the
Collateral shall remain in effect for so long as any Obligations are
outstanding.
4.2. Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3. Right to Inspect. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
4.4. Release of Collateral. Bank agrees to terminate (at Borrower's
cost and expense) its security interest in the Collateral if Borrower, pursuant
to financial information delivered to Bank under Section 6.3, has a net income
greater than zero for any two consecutive fiscal quarter period, beginning with
the 4FQ98 and 1FQ99 and has a Quick Ratio of at least 2.00 to 1.00 as at the end
of any such two fiscal quarter period; provided that Bank shall have no
obligation to terminate any security interests (a) if a Default has occurred and
is at that time continuing and (b) unless Bank has received the certificate, in
form and substance satisfactory to Bank, of Borrower's chief financial officer
that the foregoing financial tests have been satisfied and that the warranties
and representations set forth in Article 5 below are true and correct on the
date of such certificate with the same force and effect as though made on and as
of such date, except to the extent that such representations and warranties
expressly relate to an earlier date, in which case such representations and
warranties shall continue to be true as of such date.
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5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1. Due Organization and Qualification. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified, except where the failure to be so
qualified could reasonably be expected to have a Material Adverse Effect.
5.2. Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles/Certificate of Incorporation or
Bylaws, nor will they constitute an event of default under any material
agreement to which Borrower is a party or by which Borrower is bound except to
the extent that certain intellectual property agreements prohibit the assignment
of the rights thereunder to a third party without Borrower's or other party's
consent and the Loan Documents constitute an assignment. Borrower is not in
default under any agreement to which it is a party or by which it is bound,
which default could reasonably be expected to have a Material Adverse Effect.
5.3. No Prior Encumbrances, No Excluded Property. Borrower has good
and indefeasible title to its property, free and clear of Liens, except as set
forth in the Schedule and for Permitted Liens. Bank has a valid and perfected
security interest in all Collateral, and such security interest constitutes a
first priority security interest in all Collateral, except, in the case of
Collateral other than accounts, inventory, and equipment financed with Equipment
Loans and Existing Equipment Loans, as set forth in the Schedule and for
Permitted Liens. There is no Excluded Property, except (a) as set forth in the
Schedule, (b) for Equipment financed by lenders or lessors other than Bank, or
(c) has been notified to Bank by Borrower under Section 7.1.
5.4. Bona Fide Eligible Accounts. The Eligible Accounts are bona fide
existing obligations. The service or property giving rise to such Eligible
Accounts has been performed or delivered to the account debtor or to the account
debtor's agent for immediate shipment to and unconditional acceptance by the
account debtor. Borrower has not received notice of actual or imminent
Insolvency Proceeding of any account debtor whose accounts are included in any
Borrowing Base Certificate as an Eligible Account.
5.5. Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.6. Intellectual Property. Borrower is the sole owner of the
Intellectual Property Collateral, except for non-exclusive licenses granted by
Borrower to its customers in the ordinary course of business. Each of the
Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party. Except for and upon the filing with the
United States Patent and Trademark Office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights and
Mask Works necessary to perfect the security interests created hereunder, and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any United States governmental
authority or United States regulatory body is required either (i) for the grant
by Borrower of the security interest granted hereby or for
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the execution, delivery or performance of Loan Documents by Borrower in the
United States or (ii) for the perfection in the United States or the exercise by
Bank of its rights and remedies hereunder.
5.7. Name; Location of Chief Executive Office. Except as disclosed in
the Schedule, Borrower has not done business and will not without at least 30
days prior written notice to Bank do business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.8. Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending, or, to Borrower's knowledge, threatened by or
against Borrower or any Subsidiary before any court or administrative agency in
which an adverse decision could reasonably be expected to have a Material
Adverse Effect.
5.9. No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank on or about the Closing Date.
5.10. Regulatory Compliance. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could reasonably be expected to have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940.
Borrower is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System). Borrower has complied with all the provisions of
the Federal Fair Labor Standards Act. Borrower has not violated any statutes,
laws, ordinances or rules applicable to it, violation of which could reasonably
be expected to have a Material Adverse Effect.
5.11. Environmental Condition. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any environmental
protection statute as a hazardous waste or hazardous substance disposal site, or
a candidate for closure pursuant to any environmental protection statute; no
lien arising under any environmental protection statute has attached to any
revenues or to any real or personal property owned by Borrower or any
Subsidiary; and neither Borrower nor any Subsidiary has received a summons,
citation, notice, or directive from the Environmental Protection Agency or any
other federal, state or other governmental agency concerning any action or
omission by Borrower or any Subsidiary resulting in the release, or other
disposition of hazardous waste or hazardous substances into the environment.
5.12. Taxes. Borrower and each Subsidiary has filed or caused to be
filed all tax returns
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required to be filed on a timely basis, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein, except those being
contested in good faith by proper proceedings with adequate reserves under GAAP.
5.13. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14. Government Consents. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted except
where the failure to obtain such consent, approval or authorization, to make any
such declaration or filing or to give any such notice could not reasonably be
expected to have a Material Adverse Effect.
5.15. Year 2000 Compliance. Borrower has conducted a comprehensive
review and assessment of Borrower's systems and equipment applications with
respect to the Year 2000 Problem. Based on that review and inquiry, Borrower
does not believe the Year 2000 Problem, including costs of remediation, will
have a Material Adverse Effect. Borrower has developed adequate contingency
plans to ensure uninterrupted and unimpaired business operation in the event of
a failure of its own systems or equipment due to the Year 2000 Problem,
including a general failure of or interruption in its communications and
delivery infrastructure.
5.16. Full Disclosure. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank by
Borrower in connection with the transaction contemplated by this Agreement,
taken as a whole, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained in
such certificates or statements not misleading it being recognized by the Bank
that the projections and forecasts provided by Borrower are based on Borrower's
reasonable and good faith assessment of the probabilities of future events 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 covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
a Credit Extension hereunder, Borrower shall do all of the following:
6.1. Good Standing. Borrower shall maintain, or cause to be
maintained, its and each of its Subsidiaries' corporate existence and good
standing in its jurisdiction of incorporation and maintain qualification in each
jurisdiction in which the failure to so qualify could reasonably be expected to
have a Material Adverse Effect. Borrower shall maintain, and shall cause each of
its Subsidiaries to maintain, to the extent consistent with prudent management
of Borrower's business, in force all licenses, approvals and agreements, the
loss of which would reasonably be expected to have a Material Adverse Effect.
6.2. Government Compliance. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect.
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6.3. Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within 30 days after
the end of each month, a company prepared consolidated balance sheet and income
statement covering Borrower's consolidated operations during such period, in a
form and certified by an officer of Borrower reasonably acceptable to Bank; (b)
as soon as available, but in any event within 90 days after the end of
Borrower's fiscal year, audited consolidated financial statements of Borrower
(which may be in the form of a Form 10-K of the Securities and Exchange
Commission) prepared in accordance with GAAP, consistently applied, together
with an unqualified opinion on such financial statements of an independent
certified public accounting firm reasonably acceptable to Bank; (c) within five
days of filing, copies of all statements, reports and notices sent or made
available generally by Borrower to its 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; (d) promptly upon receipt of notice thereof,
a 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 $100,000.00 or more; (e) prompt notice of any material change in the
composition of the Intellectual Property Collateral, including, but not limited
to, any subsequent ownership right of Borrower in or to any Copyright, Patent or
Trademark not specified in any intellectual property security agreement between
Borrower and Bank or knowledge of an event that materially adversely effects the
value of the Intellectual Property Collateral; and (f) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within 30 days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable and an inventory schedule.
Within 30 days after the last day of each month, Borrower shall
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in substantially the form of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit
Borrower's Accounts at Borrower's expense, provided that such audits will be
conducted no more often than every six months unless an Event of Default has
occurred and is continuing.
6.4. Inventory; Returns. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than
$50,000.00.
6.5. Taxes. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon
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request, furnish Bank with proof satisfactory to Bank indicating that Borrower
or a Subsidiary has made such payments or deposits; provided that Borrower or a
Subsidiary need not make any payment if the amount or validity of such payment
is (I) contested in good faith by appropriate proceedings , (ii) is reserved
against (to the extent required by GAAP) by Borrower and (iii) no lien other
than a Permitted Lien results.
6.6. Insurance.
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(a) Borrower, at its expense, shall keep the
Collateral insured against loss or damage by fire, theft, explosion, sprinklers,
and all other hazards and risks, and in such amounts, as ordinarily insured
against by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral in
amounts and of a type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as are reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least 20 days notice to Bank before canceling its policy for any reason. At
Bank's request, Borrower shall deliver to Bank certified copies of such policies
of insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations; provided that so long as no Event
of Default has occurred and is continuing, Borrower shall have the option of
applying the proceeds of any casualty policy to the replacement or repair of
destroyed or damaged property.
6.7. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8. Quick Ratio. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.25
to 1.00 (2.00 to 1.00 following any termination of Bank's security interest in
the Collateral pursuant to Section 4.4.).
6.9. Debt-Net Worth Ratio. Borrower shall maintain, as of the last
day of each calendar month, a ratio of Total Liabilities less Subordinated Debt
less deferred revenue to Tangible Net Worth plus Subordinated Debt of not more
than 0.75 to 1.00.
6.10. Profitability. Borrower shall be profitable for each fiscal
quarter, except Borrower may suffer a loss of up to $200,000 in the fourth
fiscal quarter of the 1998 fiscal year and a loss of up to $1,000,000 in the
first fiscal quarter of the 1999 fiscal year.
6.11. Registration of Intellectual Property Rights.
(a) Borrower shall register or cause to be
registered (to the extent not already registered) with the United States Patent
and Trademark Office or the United States Copyright Office, as applicable, those
intellectual property rights listed on Exhibits A, B and C to the Intellectual
Property Security Agreement delivered to Bank by Borrower in connection with
this Agreement within 10 days of the date of this Agreement. Borrower shall
register or cause to be registered with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those additional
intellectual property rights developed or acquired by Borrower from time to time
in connection with any product prior to the sale or licensing of such product to
any third party, including without limitation revisions or additions to the
intellectual property rights listed on such Exhibits A, B and C.
(b) Borrower shall execute and deliver such
additional instruments and documents from time to time as Bank shall reasonably
request to perfect Bank's security interest
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in the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain
the validity and enforceability of the Trademarks, Patents, Copyrights, and Mask
Works, (ii) use its best efforts to detect infringements of the Trademarks,
Patents, Copyrights and Mask Works and promptly advise Bank in writing of
material infringements detected and (iii) not allow any Trademarks, Patents,
Copyrights, or Mask Works to be abandoned, forfeited or dedicated to the public
without the written consent of Bank, which shall not be unreasonably withheld.
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(d) Bank shall have the right, but not the
obligation, to take, at Borrower's sole expense, any actions that Borrower is
required under this section to take but which Borrower fails to take, after 15
days' notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this section.
6.12. Further Assurances. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any Credit Extension
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Loans,
Borrower will not do any of the following:
7.1. Dispositions. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "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; (iii) that constitute payment of normal and
usual operating expenses in the ordinary course of business;; (iv) of worn-out
or obsolete Equipment, or (v) other Transfers not otherwise permitted under this
Section 7.1 in an aggregate amount not to exceed $10,000 in any fiscal year of
the Borrower..
7.2. Changes in Business, Ownership, or Management, Business
Locations. Engage in any business, or permit any of its Subsidiaries to engage
in any business, other than the businesses currently engaged in by Borrower and
any business substantially similar or related thereto (or incidental thereto),
or suffer a material change in Borrower's ownership or management. Borrower will
not, without at least 30 days prior written notification to Bank, relocate its
chief executive office or add any new offices or business locations.
7.3. Mergers or Acquisitions. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person except the
merger or consolidation of one Subsidiary into another Subsidiary or into
Borrower.
7.4. Indebtedness. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5. Encumbrances. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6. Distributions. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock except for (i) repurchases of stock from former employees or consultants
of Borrower in accordance with the
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terms of repurchase or similar agreements between Borrower and such employees in
an aggregate amount not to exceed $100,000 during the term of this Agreement,
(ii) distributions payable solely in capital stock of Borrower, (iii)
conversions and exchanges of securities of the Borrower into equity securities
of the Borrower not constituting Indebtedness, and (iv) repurchases of
Borrower's capital stock solely from the proceeds of the issuance by Borrower of
capital stock but only if such repurchases are effectuated immediately upon the
consummation of such transaction ; provided that in the case of (i) through (iv)
above, immediately prior to and following such transaction, there exists no
Event of Default.
7.7. Investments. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8. Transactions with Affiliates. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9. Intellectual Property Agreements. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way prevent the creation of a security interest in
Borrower's rights and interests in any property included within the definition
of the Intellectual Property Collateral acquired under such contracts, except to
the extent that such provisions are necessary in Borrower's exercise of its
reasonable business judgement and has been notified to Bank.
7.10. Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.11. Inventory. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of any warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.12. Compliance. Become an "investment company" or a company
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Loan for such
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, which violation could reasonably be expected to have a Material
Adverse Effect; or permit any of its Subsidiaries to do any of the foregoing.
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8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an "Event of
Default" by Borrower under this Agreement:
8.1. Payment Default. If Borrower fails to pay the principal
(including Letter of Credit reimbursement obligations) of, or any interest on,
any Credit Extensions when due and payable; or fails to pay any portion of any
other Obligations not constituting the principal (including Letter of Credit
reimbursement obligations) or interest of such Credit Extensions, including
without limitation Bank Expenses, within five days of receipt by Borrower of an
invoice for such other Obligations;
8.2. Covenant Default.
(a) If Borrower fails to perform any obligation
under Sections 6.3, 6.6, 6.7, 6.8, 6.9, 6.10, 6.11, 6.12, 6.13 or 6.14 or
violates any of the covenants contained in Article 7 of this Agreement, or
(b) If Borrower fails or neglects to perform, keep,
or observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten days after the occurrence
thereof; provided that if the default cannot by its nature be cured within the
ten day period or cannot after diligent attempts by Borrower be cured within
such 10 day period, and such default is likely to be cured within a reasonable
time, then Borrower shall have an additional reasonable period (which shall not
in any case exceed 30 days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Loans will be required to be made
during such cure period);
8.3. Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Credit Extensions will be required to be made during such cure period);
8.4. Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within 30 days (provided that no
Loans will be made prior to the dismissal of such Insolvency Proceeding);
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8.5. Other Agreements. If there is:
(a) any event of default under the Existing
Agreement; or
(b) a default in any agreement to which Borrower is
a party with a third party or parties resulting in a right by such third party
or parties, whether or not exercised, to accelerate the maturity of any
Indebtedness in an amount in excess of $100,000.00 or that could have a Material
Adverse Effect;
8.6. Subordinated Debt. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.7. Judgments. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least $100,000 shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a period
of ten days (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment); or
8.8. Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate or writing delivered to Bank by Borrower
or any Person acting on Borrower's behalf pursuant to this Agreement or to
induce Bank to enter into this Agreement or any other Loan Document.
8.9. Guaranty. Any guaranty of all or a portion of the Obligations
ceases for any reason to be in full force and effect, or any Guarantor fails to
perform any obligation under any guaranty of all or a portion of the
Obligations, or any material misrepresentation or material misstatement exists
now or hereafter in any warranty or representation set forth in any guaranty of
all or a portion of the Obligations or in any certificate delivered to Bank in
connection with such guaranty, or any of the circumstances described in Sections
8.4, 8.5 or 8.8 occur with respect to any Guarantor.
9. BANK'S RIGHTS AND REMEDIES
9.1. Rights and Remedies. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Demand that Borrower (i) deposit cash with Bank
in an amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
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(d) Settle or adjust disputes and claims directly
with account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon Borrower, make
such payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(f) Without notice to Borrower set off and apply to
the Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a non-exclusive, royalty-free
license or other right, solely pursuant to the provisions of this Section 9.1,
to use, without charge, Borrower's labels, patents, copyrights, mask works,
rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and, in connection with Bank's exercise of its rights
under this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(h) Sell the Collateral at either a public or
private sale, or both, by way of one or more contracts or transactions, for cash
or on terms, in such manner and at such places (including Borrower's premises)
as Bank determines is commercially reasonable, and apply the proceeds thereof to
the Obligations in whatever manner or order it deems appropriate;
(i) Bank may credit bid and purchase at any public
sale, or at any private sale as permitted by law; and
(j) Any deficiency that exists after disposition of
the Collateral as provided above will be paid immediately by Borrower.
9.2. Power of Attorney. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and
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<PAGE> 30
claims respecting the accounts directly with account debtors, for amounts and
upon terms which Bank determines to be reasonable; (f) to modify, in its sole
discretion, any intellectual property security agreement entered into between
Borrower and Bank without first obtaining Borrower's approval of or signature to
such modification by amending Exhibit A, Exhibit B, Exhibit C, and Exhibit D,
thereof, as appropriate, to include reference to any right, title or interest in
any Copyrights, Patents, Trademarks, Mask Works acquired by Borrower after the
execution hereof or to delete any reference to any right, title or interest in
any Copyrights, Patents, Trademarks, or Mask Works in which Borrower no longer
has or claims any right, title or interest; (g) to file, in its sole discretion,
one or more financing or continuation statements and amendments thereto,
relative to any of the Collateral without the signature of Borrower where
permitted by law; and (h) to transfer the Intellectual Property Collateral into
the name of Bank or a third party to the extent permitted under the UCC provided
Bank may exercise such power of attorney to sign the name of Borrower on any of
the documents described in Section 4.2 regardless of whether an Event of Default
has occurred. The appointment of Bank as Borrower's attorney in fact, and each
and every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide Loans hereunder is terminated.
9.3. Accounts Collection. Upon the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and if requested or required by Bank,
immediately deliver such payments to Bank in their original form as received
from the account debtor, with proper endorsements for deposit.
9.4. Bank Expenses. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the following:
(a) make payment of the same or any part thereof; (b) set up such reserves under
the Revolving Commitment as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in Section 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5. Bank's Liability for Collateral. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
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<PAGE> 31
9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not expressly set forth herein as
provided under the UCC, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, 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 at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below for such party on the signature pages hereof. The parties hereto
may change the address at which they are to receive notices hereunder, by notice
in writing in the foregoing manner given to the other.
11. CHOICE OF LAW AND VENUE; WAIVER OF JURY TRIAL
The Loan Documents shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1. Successors and Assigns. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided that neither this Agreement nor any rights hereunder may be
assigned by Borrower without Bank's prior written consent, which consent may be
granted or withheld in Bank's sole discretion. Bank shall have the right without
the consent of or notice to Borrower to sell, transfer, negotiate, or grant
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<PAGE> 32
participation in all or any part of, or any interest in, Bank's obligations,
rights and benefits hereunder.
12.2. Indemnification. Borrower shall , indemnify ,defend, protect and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by the Loan Documents;
and (b) all losses or Bank Expenses in any way suffered, incurred, or paid by
Bank as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under the Loan Documents, or
otherwise (including without limitation 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 set forth in this Agreement.
12.4. Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5. Amendments in Writing, Integration. This Agreement cannot be
amended or terminated except by a writing signed by Borrower and Bank. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties hereto with respect to the subject matter of this Agreement,
if any, are merged 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, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7. Survival. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8. Confidentiality. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower, (iii) as required by law, regulations, rule or order, subpoena,
judicial order or similar order, (iv) as may be required in connection with the
examination, audit or similar investigation of Bank, and (v) as Bank may deem
appropriate in connection with the exercise of any remedies hereunder.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
32
<PAGE> 33
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
as of the date first above written.
HARMONIC LIGHTWAVES, INC. (doing business in California as DELAWARE HARMONIC
LIGHTWAVES, INC.), a Delaware corporation
By __________________________________________
Title: ______________________________________
By __________________________________________
Title: ______________________________________
Address for Notices:
Attention: Marty McFarland, Controller
549 Baltic Way
Sunnyvale, CA, 94089-1140
SILICON VALLEY BANK
By __________________________________________
Title: ______________________________________
Address for Notices:
Attention: Scott Poland, Vice President
Communications and Online Services
3003 Tasman Drive
Santa Clara, CA 95054
33
<PAGE> 34
DEBTOR: HARMONIC LIGHTWAVES, INC. ("Borrower")
SECURED PARTY: SILICON VALLEY BANK ("Bank")
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower, whether now existing or hereafter acquired or created and wherever
located, in and to the following:
(a) All goods, equipment, machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing;
(b) All inventory, merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
(c) All contract rights, general intangibles, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All accounts, contract rights, royalties, license rights and all
other forms of obligations owing to Borrower, whether or not arising out of the
sale or lease of goods, the licensing of technology or the rendering of services
by Borrower, and whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower;
(e) All documents, cash, deposit accounts, securities, investment
property, letters of credit, certificates of deposit, instruments and chattel
paper and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished; all trade secret rights,
including all rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information; all mask work or
similar rights available for the protection of semiconductor chips; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
(g) All Borrower's Books relating to the foregoing and any and all
claims, rights and interests in any of the above and all substitutions for,
additions and accessions to and proceeds thereof.
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<PAGE> 35
EXHIBIT B
LOAN PAYMENT/LOAN 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) _____________________ TIME: _____________________
FROM: HARMONIC LIGHTWAVES, INC.
by____________________________
Name: _________________________
Title:___________________________
Telephone:_______________________
FROM ACCOUNT #________________________ TO ACCOUNT#__________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (Loan) $
--------
PRINCIPAL PAYMENT (ONLY) $
--------
INTEREST PAYMENT (ONLY) $
--------
PRINCIPAL AND INTEREST (PAYMENT) $
--------
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan and
Security Agreement are true, correct and complete in all material respects as of
the date of the telephone request for and Loan confirmed by this Loan Request;
provided that those representations and warranties expressly referring to
another date shall be true, correct and complete in all material respects as of
such 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: ____________________________
Authorized Signature (Bank)
Phone # _______________________
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<PAGE> 36
EXHIBIT C
BORROWING BASE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: HARMONIC LIGHTWAVES, INC. ("Borrower")
Commitment Amount: $
<TABLE>
<S> <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. Concentration Limits $______________________
7. Foreign Accounts $______________________
8. Governmental Accounts $______________________
9. Contra Accounts $______________________
10. Promotion or Demo Accounts $______________________
11. Intercompany/Employee Accounts $______________________
12. Other (please explain on reverse) $______________________
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $______________________
CALCULATION OF LOAN VALUE
14. Eligible Accounts (#3 minus #13) $______________________
15. LOAN VALUE OF ACCOUNTS (____% of #14) $______________________
BALANCES
16. Maximum Loan Amount $______________________
17. Total Funds Available [Lesser of #16 or #15)] $______________________
18. Present balance owing on Line of Credit $______________________
19. Outstanding under Sublimits ( ) $______________________
20. RESERVE POSITION (#17 minus #18 and #19) $______________________
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
BORROWER: _________________________
By: _______________________
Authorized Signer
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<PAGE> 37
COMMENTS (FOR BANK USE ONLY):
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No___________________________
2
<PAGE> 38
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: HARMONIC LIGHTWAVES, INC. ("Borrower")
The undersigned authorized officer of the above Borrower hereby
certifies that in accordance with the terms and conditions of the 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 of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer expressly acknowledges that no
borrowings may be requested by Borrower at any time or date of determination
that Borrower is not in compliance with any of the terms of the Agreement, and
that such 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>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Monthly Basis:
(unless otherwise stated)
Minimum Quick Ratio 1.25:1.00 _____:1.0 Yes No
Maximum Liabilities/
Net Worth Ratio 0.75:1.00 _____:1.0 Yes No
Profitability $___________ $___________ Yes No
</TABLE>
Sincerely,
_______________________ Date:_______________
SIGNATURE
_________________________
TITLE
BANK USE ONLY
Received By:____________________
Date:________________
Reviewed By:____________________
Compliance Status: Yes / No
1
<PAGE> 39
DISBURSEMENT REQUEST AND AUTHORIZATION
TO: SILICON VALLEY BANK
FROM: HARMONIC LIGHTWAVES, INC. ("Borrower")
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $_______________.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: _______________.
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:
Amount paid to Borrower directly: $______
Undisbursed Funds $______
Principal $______
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $______
$______ Loan Fee
$______ Accounts Receivables Audit
Other Charges Paid in Cash: $______
$______ UCC Search Fees
$______ UCC Filing Fees
$______ PATENT FILING FEES
$______ TRADEMARK FILING FEES
$______ COPYRIGHT FILING FEES
$______ OUTSIDE COUNSEL FEES AND EXPENSES
[ESTIMATE, DO NOT LEAVE BLANK]
Total Charges Paid in Cash $______
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 ________________, 19___.
BORROWER:
By:____________________________________
Authorized Officer
2
<PAGE> 40
Mrs. Susan Wang
Bob Aeschliman, Esq.
Solectron Corporation
847 Gibraltar Drive
Milpitas, CA 95035
-1-
<PAGE> 41
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of June 10, 1999, by
and between Harmonic, Inc. (formerly known as Harmonic Lightwaves, Inc.)
("Borrower") and Silicon Valley Bank ("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, a Second Amended and Restated Loan and Security Agreement,
dated March 5, 1999, as may be amended from time to time, (the "Loan
Agreement"). The Loan Agreement provided for, among other things, a Revolving
Commitment in the original principal amount of Ten Million Dollars
($10,000,000). Defined terms used but not otherwise defined herein shall have
the same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the indebtedness is
secured by the Collateral as described in the Loan Agreement and that certain
Intellectual Property Security Agreement dated March 5, 1999. Bank hereby
releases its security interest in the Collateral, including Intellectual
Property pursuant to the terms of this Loan Modification Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing of securing the indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement
1. The following defined terms set forth in Section 1.1 entitled
"Definitions" are hereby amended to read as follows:
"Current Liabilities" means, 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, at such date, plus, to the extent not
already included therein, all outstanding Revolving Loans and the
current portion of the outstanding Equipment Loans and Existing
Equipment Loans, and all other indebtedness that is payable upon
demand or within one year from the date of determination thereof
unless such indebtedness is renewable or extendable 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 Foreign Accounts" means Accounts with respect which
the account debtor is Siemens A.G., a German corporation, or
other account debtors, if any, as may be from time to time
approved in writing by Bank, provided such Eligible Foreign
Accounts do not exceed $500,000.
2. Sub-section (a) of Section 6.3 entitled "Financial Statements,
Reports, Certificates" is hereby amended to read as follows:
...(a) as soon as available, but in any event within 30 days
after the end of each quarter, a company prepared consolidated
balance sheet and income statement covering Borrower's
consolidated operations during such period, in a form and
certified by an officer of Borrower reasonably acceptable to
Bank; ...
<PAGE> 42
3. The second paragraph of Section 6.3 entitled "Financial
Statements, Reports, Certificates" is hereby amended to read as
follows:
Within 30 days after the last day of each quarter, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a
Reasonable Officer, together with aged listings of accounts
receivable and accounts payable.
4. The third paragraph of Section 6.3 entitled "Financial
Statements, Reports, Certificates" is hereby amended to read as
follows:
Within 30 days after the last day of each quarter, Borrower
shall deliver to Bank with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer.
5. Section 6.8 entitled "Quick Ratio" and Section 6.9 entitled
"Debt-Net Worth Ratio" are hereby amended in part to provide for
Borrower's quarterly (rather than monthly) compliance with said
covenants.
B. Release of Security Interest
1. Bank, by its acceptance hereof, agrees to release its security
interest in the Collateral, including Intellectual Property,
provided, however, no Event of Default has occurred and is
continuing under any of the Existing Loan Documents. All parties
to this Loan Modification Agreement acknowledge and agree that
Bank's release of its security interest in the Collateral,
including Intellectual Property in no way shall limit or impair
Bank's rights against Borrower.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Bank to make any future modifications to the
Indebtedness. Nothing in this Loan Modification Agreement shall constitute a
satisfaction of the Indebtedness. It is the intention of Bank and Borrower to
retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Bank in writing. No maker, endorser,
or guarantor will be released by virtue of this Loan Modification Agreement.
The terms of this paragraph apply not only to this Loan Modification Agreement,
but also to all subsequent loan modification agreements.
SIGNATURE BLOCK CONTINUED ON NEXT PAGE
2
<PAGE> 43
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
HARMONIC, INC. (f/k/a Harmonic SILICON VALLEY BANK
Lightwaves, Inc.)
By: /s/ ROBIN N. DICKSON By: /s/ SCOTT POLAND
-------------------------------- ------------------------------------
Name: Robin N. Dickson Name: Scott Poland
------------------------------ ----------------------------------
Title: C.F.O. Title: SVP
----------------------------- ---------------------------------
3
<PAGE> 44
AMENDMENT
TO SECOND AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
This Amendment to Second Amended and Restated Loan and Security
Agreement (the "Amendment") is entered into as of March 24, 2000, by and between
Silicon Valley Bank ("Bank") and Harmonic, Inc. (the "Borrower").
RECITALS
Borrower and Bank are parties to that certain Second Amended and
Restated Loan and Security Agreement dated as of March 5, 1999, as amended from
time to time, including as amended by a Loan Modification Agreement dated as of
June 10, 1999 (the "Agreement"). The parties desire to amend the Agreement in
accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Section 1.1 of the Agreement is amended by amending the following
defined terms:
"Revolving Maturity Date" means July 24, 2000.
2. Section 2.1.1(c) is amended to read as follows: "Interest Rate.
Except as set forth in Section 2.3(b), the outstanding principal amount of the
Revolving Loans shall bear interest, on the average daily balance thereof, at a
per annum rate equal to the Prime Rate."
3. Section 2.1.3(b) is amended to read as follows: "Interest Rate.
Except as set forth in Section 2.3(b), the outstanding principal amount of the
Equipment Loans and the Existing Equipment Loans shall bear interest, on the
average daily balance thereof, at a per annum rate equal to One Half (0.5)
percentage point above the Prime Rate. Accrued interest on each such Loan shall
be payable monthly on each Payment Date and on the date the final installment of
principal on the Equipment Loans is due."
4. As a condition to the effectiveness of this Amendment, Borrower shall
pay Bank an amount equal to Six Thousand Six Hundred Sixty Seven Dollars
($6,667) plus the Bank Expenses incurred in connection with the preparation of
this Amendment.
5. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, that no Event of Default has occurred and is continuing, and
that Borrower has no defenses against the obligations to pay any Obligations.
Nothing in this Amendment shall constitute a satisfaction of any Obligations.
Unless otherwise defined, all capitalized terms in this Amendment shall be as
defined in the Agreement. Except as amended, the Agreement remains in full force
and effect as of the date of this Amendment.
6. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
1
<PAGE> 45
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
HARMONIC, INC.
By:
--------------------------------------------
Title:
-----------------------------------------
SILICON VALLEY BANK
By:
--------------------------------------------
Title:
-----------------------------------------
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-94138, 333-38025, 333-44265, 333-65051 and
333-86649) of Harmonic Inc. of our report dated January 18, 2000, which appears
on page 29 of this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,822
<SECURITIES> 64,877
<RECEIVABLES> 36,732
<ALLOWANCES> 1,311
<INVENTORY> 35,310
<CURRENT-ASSETS> 169,700
<PP&E> 33,890
<DEPRECIATION> 18,959
<TOTAL-ASSETS> 185,693
<CURRENT-LIABILITIES> 40,284
<BONDS> 0
0
0
<COMMON> 148,582
<OTHER-SE> (3,694)
<TOTAL-LIABILITY-AND-EQUITY> 185,693
<SALES> 184,075
<TOTAL-REVENUES> 184,075
<CGS> 103,470
<TOTAL-COSTS> 103,470
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,556)
<INCOME-PRETAX> 31,573
<INCOME-TAX> 7,893
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,680
<EPS-BASIC> 0.84
<EPS-DILUTED> 0.76
</TABLE>
