1
EXHIBIT 13.1
FINANCIAL CONTENTS
17 SELECTED FINANCIAL DATA
18 MANAGEMENT'S DISCUSSION AND ANALYSIS
24 CONSOLIDATED BALANCE SHEETS
25 CONSOLIDATED STATEMENT OF OPERATIONS
26 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
27 CONSOLIDATED STATEMENT OF CASH FLOWS
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36 REPORT OF INDEPENDENT ACCOUNTANTS
2
SELECTED FINANCIAL DATA
Year Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
- --------------------------------------------------------------------------------------------------------------------
Net sales $60,894 $39,180 $ 18,224 $ 6,714 $ 3,504
Gross profit (loss) 33,163 17,851 6,467 1,458 (263)
Income (loss) from operations 5,204 3,761 (2,189) (4,956) (4,771)
Net income (loss) 5,918 4,121 (2,368) (5,163) (4,869)
Net income (loss) per share(1) $ 0.52 $ 0.40 $ (0.29) -- --
BALANCE SHEET DATA:
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $16,410 $22,126 $ 1,743 $ 4,699 4,568
Working capital 34,158 32,495 6,893 6,506 5,489
Total assets 54,633 41,817 14,578 11,093 9,055
Long term debt, including current portion -- -- 1,480 1,446 1,457
Mandatorily Redeemable
Convertible Preferred Stock -- -- 29,215 26,454 19,955
Stockholders' equity (deficit)(2) 43,641 37,009 (20,717) (18,600) (13,438)
Fiscal Years by Quarter 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(unaudited, in thousands,
except per share data)
QUARTERLY DATA 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
- ------------------------------------------------------------------------------------------------------------------------
Net sales $19,497 $16,670 $13,485 $11,242 $10,677 $10,659 $9,623 $8,221
Gross profit 8,936 7,824 6,011 4,960 4,902 4,928 4,352 3,669
Income from operations 2,250 1,610 908 436 953 1,150 1,037 621
Net income 2,405 1,741 1,126 646 1,200 1,358 1,034 529
Net income per share(1) $ 0.21 $ 0.15 $ 0.10 $ 0.06 $ 0.11 $ 0.12 $ 0.10 $ 0.06
Common stock price-high $ 23.50 $ 26.00 $ 23.50 $ 14.63 $ 17.50 $ 19.50 $19.13 --
Common stock price-low 15.38 15.38 11.25 9.00 8.50 15.00 13.00 --
The Company's Common Stock (Nasdaq symbol "HLIT") began trading publicly on the
Nasdaq National Market System on May 22, 1995. Prior to that date, there was no
public market for the Common Stock.
(1) The net loss per share for the year ended December 31, 1994 is pro forma.
Net loss per share data for periods prior to 1994 have not been presented as
such presentation is not meaningful. See Note 1 of Notes to Consolidated
Financial Statements for an explanation of the method used to determine the
number of shares used to compute per share amounts.
(2) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
Harmonic Lightwaves 17
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
OVERVIEW
Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") is a worldwide supplier
of highly integrated fiber optic transmission, digital headend and element
management systems for the delivery of interactive services over broadband
networks. The Company designs, manufactures and markets optical transmitters,
nodes, receivers, digital video compression and modulation equipment and element
management hardware and software.These products are used by major communications
providers, such as cable television operators, in bi-directional networks.
From its inception in June 1988 through 1991, the Company was principally
engaged in development of its first optical transmitter and optical receiver
products and began shipment of its initial products in late 1991. Subsequently,
the Company commenced development of additional fiber optic products and began
volume shipments of PWRLink transmitters in June 1994 and MAXLink 1550 nm
transmission systems in June 1996. In March 1997, the Company announced the
introduction of its TRANsend(TM) video and audio product family for digital
broadband headends.
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those set forth under "Factors That May Affect Future Results Of
Operations" below and elsewhere in this annual report.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales 100% 100% 100%
Cost of sales 54 54 64
--------------------------
Gross profit 46 46 36
Operating expenses:
Research and development 15 16 18
Sales and marketing 16 15 23
General and administrative 6 5 7
--------------------------
Total operating expenses 37 36 48
--------------------------
Income (loss) from operations 9 10 (12)
Other income (expense), net 1 1 (1)
--------------------------
Income (loss) before income taxes 10 11 (13)
Provision for income taxes -- -- --
--------------------------
Net income (loss) 10% 11% (13)%
==========================
NET SALES The Company's net sales increased by 55% to $60.9 million in
1996.This growth in net sales was primarily attributable to higher unit sales of
the Company's existing products, particularly the PWRLink transmitter and return
path products. In addition, the Company began shipment of its 1550 nm MAXLink
transmission system during the second quarter of 1996. These factors were
partially offset by lower unit sales of the YAGLink optical transmitter and
lower selling prices for certain products. Net sales increased by 115% to $39.2
million in 1995 from $18.2 million in 1994. This growth in net sales was due
primarily to higher unit sales of the Company's
Harmonic Lightwaves 18
4
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
principal products, particularly the PWRLink transmitter and return path
products. Higher unit sales PWRLink transmitter in 1995 reflected a full year of
shipments of the product, which began initial volume shipments in June 1994 and
was sold only in nominal quantities prior to that time.
Historically, the majority of Harmonic's net sales has been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future. In 1996, sales to Tratec (the Company's U.K. distributor),
Capella (the Company's Canadian distributor) and ANTEC Corporation ("ANTEC")
accounted for 15%, 15% and 13%, respectively, of the Company's net sales. In
1995, sales to Tratec, ANTEC and Capella accounted for 22%, 15% and 15%,
respectively, of the Company's net sales. In 1994, sales to ANTEC, Capella,
Siemens, Tratec and Scientific-Atlanta, Inc. accounted for 22%, 15%, 14%, 12%
and 12% of the Company's net sales.
Harmonic has adopted a strategy of selling to major domestic customers through
its own direct sales force and expects that domestic OEM and distributor
revenues will be a smaller percentage of net sales in the future. In this
regard, sales to ANTEC in the fourth quarter of 1996 constituted less than 10%
of net sales, and are expected to be insignificant in the future. Sales to
customers outside the United States represented 57%, 65% and 57% of net sales in
1996, 1995 and 1994, respectively. Harmonic expects international sales to
continue to account for a substantial percentage of its net sales for the
foreseeable future.
GROSS PROFIT Gross profit increased to $27.7 million (46% of net sales) in 1996
from $17.9 million (46% of net sales) in 1995. The increase in gross profit was
principally due to higher unit sales volume which allowed the Company to improve
fixed cost absorption and realize increasing economies of scale through higher
production and purchasing volumes, partially offset by lower selling prices for
certain products. In addition, a more favorable product mix which included a
higher percentage of transmitters also contributed to the increase in gross
profit in 1996. Gross profit increased to $17.9 million (46% of net sales) in
1995 from $6.5 million (36% of net sales) in 1994.The gross profit growth was
due principally to higher unit sales volume and increased efficiencies of a new
manufacturing facility which commenced production in the first quarter of 1995.
RESEARCH AND DEVELOPMENT Research and development expenses increased to $9.2
million from $6.1 million in 1995, but decreased as a percentage of net sales
from 16% to 15%, reflecting higher sales levels. The increase in spending
related primarily to increased headcount, particularly at the Company's Israeli
subsidiary, and increased use of outside subcontractors and consultants in
Israel and in connection with the element management and 1550 nm MAXLink
transmission system development programs. Research and development expenses
increased to $6.1 million from $3.2 million in 1994, but decreased as a
percentage of net sales from 18% to 16%, reflecting higher sales levels. The
increase in research and development expenses in 1995 reflected increased
headcount and use of outside subcontractors and consultants, and higher
prototype material costs in conjunction with the development of the Company's
1550 nm MAXLink transmission system. Research and development expenses for 1996
and 1995 are net of grants from the BIRD Foundation of approximately $140,000
and $300,000, respectively. The Company anticipates that research and
development expenses will continue to increase significantly, although they may
vary as a percentage of net sales.
SALES AND MARKETING Sales and marketing expenses increased to $9.8 million (16%
of net sales) in 1996 from $5.8 million (15% of net sales) in 1995. The increase
in sales and marketing expenses in 1996 was primarily attributable to higher
headcount associated with expansion of the direct sales force and the customer
service and technical support organizations, as well as higher promotional
expenses and commissions to international sales representatives. Sales and
marketing expenses increased to $5.8 million in 1995 from $4.1 million in 1994,
but decreased as a percentage of net sales from 23% to 15%. The increase in
sales and marketing expenses in
Harmonic Lightwaves 19
5
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
1995 was principally due to increased commissions to international sales
representatives and higher payroll and promotional costs. The Company expects
that sales and marketing expenses will continue to increase significantly,
although they may vary as a percentage of net sales.
GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $3.5
million (6% of net sales) in 1996 from $2.2 million (5% of net sales) in 1995.
The increase in expenses was principally attributable to increased staffing and
related costs of supporting the Company's growth, and to a lesser extent, to
certain costs associated with being a public company. General and administrative
expenses increased to $2.2 million in 1995 from $1.3 million in 1994, but
decreased as a percentage of net sales from 7% to 5%, reflecting higher sales
levels. The increase in general and administrative expenses in 1995 was due
primarily to costs of supporting the Company's growth, and to a lesser extent to
certain costs associated with being a public company. The Company expects to
incur higher levels of general and administrative expenses in the future,
although such expenses may vary as a percentage of net sales.
OTHER INCOME (EXPENSE) Interest and other income (expense) was $1.0 million in
1996 compared to $0.6 million in 1995. The increase in interest and other income
in 1996 was principally due to interest earned on higher average cash balances
in 1996 following closing of the Company's initial public offering (the "IPO")
on May 30, 1995, and lower interest expense in 1996 as the Company repaid all
capital leases and bank debt in 1995. Interest and other income (expense) was
$0.6 million in 1995 compared to ($0.2) million in 1994. The income in 1995 was
principally attributable to interest earned on cash balances, following the
closing of the Company's IPO, partially offset by interest expense. The expense
in 1994 was principally attributable to interest paid on capital lease
obligations and on bank debt.
INCOME TAXES The provision for income taxes for 1996 and 1995 is based on an
estimated annual tax rate of 5% resulting from federal and state alternative
minimum taxes. This rate reflects estimated realization of deferred tax assets,
primarily net operating loss carryforwards. In 1994, the Company had no income
tax provision because of a net loss for the year. The Company had available
federal net operating loss carryforwards of approximately $5.8 million at
December 31, 1996. Under current tax law, the Company's utilization of its net
operating loss carryforwards has been limited and in the future may be limited
or impaired in certain circumstances resulting from a change in ownership.The
Company expects to have an effective annual tax rate of 10%-15% in 1997 and a
effective tax rate beyond 1997 that approximates statutory rates after full
utilization of the net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the IPO in May 1995, raising approximately $24.2 million,
net of offering costs. Prior to that, the Company satisfied its liquidity needs
primarily from the net proceeds of private sales of Preferred Stock, and to a
lesser extent, from capital equipment leases and bank borrowings.
Cash provided by operations was approximately $0.3 million in 1996 compared to
$2.3 million in 1995 and cash used in operations of approximately $5.3 million
in 1994. The decrease in cash provided by operations in 1996 compared to 1995
was primarily due to higher accounts receivable and inventory to support
increases in sales and production volumes, and prepayment of rents and deposits
of $1.8 million in connection with the Company's new corporate headquarters,
partially offset by higher net income, accounts payable and accrued liabilities.
The increase in cash provided by operations in 1995 compared to 1994 was
primarily due to the Company's profitability in 1995 compared to an operating
loss in 1994, partially offset by increased investments in inventories and
receivables to support higher sales and production volumes.
Harmonic Lightwaves 20
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
Net working capital was approximately $34.2 million at December 31, 1996,
including $16.4 million of cash and cash equivalents. During the third quarter
of 1996, the Company renegotiated its bank line of credit, which now provides
for up to $10.0 million in borrowings and expires in September 1997. The line of
credit bears interest at the bank's prime rate or LIBOR plus 2.0%. There were no
outstanding borrowings under this line during 1996.
Additions to property, plant and equipment were approximately $6.7 million
during 1996 compared to $3.9 million and $1.4 million in 1995 and 1994
respectively. The increase in 1996 was due principally to increased expenditures
for manufacturing and test equipment resulting from higher demand for the
Company's products, introduction of new products including the 1550 nm MAXLink
transmission system, and leasehold improvements and furniture and fixtures for
the new facility. While the Company currently has no material commitments, it
expects to spend approximately $5.0 million on capital expenditures in 1997,
primarily for manufacturing and test equipment.
The Company believes that its existing liquidity sources and anticipated funds
from operations will satisfy its cash requirements for at least the next twelve
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company's operating
results have fluctuated and may continue to fluctuate in the future, on an
annual and a quarterly basis, as a result of a number of factors, many of which
are outside of the Company's control, including the level of capital spending in
the cable television industry, changes in the regulatory environment, changes in
market demand, the timing of customer orders, competitive market conditions,
lengthy sales cycles, new product introductions by the Company or its
competitors, market acceptance of new or existing products, the cost and
availability of components, the mix of the Company's customer base and sales
channels, the mix of products sold, development of custom products, the level of
international sales and general economic conditions. The Company establishes its
expenditure levels for product development and other operating expenses based on
projected sales levels, and expenses are relatively fixed in the short term.
Accordingly, variations in timing of sales can cause significant fluctuations in
operating results. In addition, because a significant portion of the Company's
business is derived from orders placed by a limited number of large customers,
the timing of such orders can also cause significant fluctuations in the
Company's operating results. If sales are below expectations in any given
quarter, the adverse impact of the shortfall on the Company's operating results
may be magnified by the Company's inability to adjust spending to compensate for
the shortfall.
DEPENDENCE ON KEY CUSTOMERS AND END USERS Historically, a substantial majority
of the Company's sales have been to relatively few customers. Sales to the
Company's ten largest customers in 1996, 1995 and 1994 accounted for
approximately 72%, 80% and 88%, respectively, of its net sales. Due in part to
the consolidation of ownership of domestic cable television systems, the Company
expects that sales to relatively few customers will continue to account for a
significant percentage of net sales for the foreseeable future. Harmonic has
adopted a strategy to sell to major domestic customers through its own direct
sales force and expects that domestic OEM and distributor revenues will be a
smaller percentage of net sales in the future. In this regard, net sales to
ANTEC in the fourth quarter of 1996 were less than 10% of net sales, and are
expected to be insignificant in the future. Substantially all of the Company's
sales are made on a purchase order basis, and none of the Company's customers
has entered into a long-term agreement requiring it to purchase the Company's
products. The loss of, or any reduction in orders from, a significant customer
would have a material adverse effect on the Company's business and operating
results.
Harmonic Lightwaves 21
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
DEPENDENCE ON CABLE TELEVISION INDUSTRY CAPITAL SPENDING To date, substantially
all of the Company's sales have been derived, directly or indirectly, from sales
to cable television operators. Demand for the Company's products depends to a
significant extent upon the magnitude and timing of capital spending by cable
television operators for constructing, rebuilding or upgrading their systems.
The capital spending patterns of cable television operators are dependent on a
variety of factors, including access to financing, cable television operators'
annual budget cycles, the status of federal, local and foreign government
regulation of telecommunications and television broadcasting, overall demand for
cable television services, competitive pressures (including the availability of
alternative video delivery technologies such as satellite broadcasting),
discretionary customer spending patterns and general economic conditions. The
Company believes that the consolidation of ownership of domestic cable
television systems, by acquisition and system exchanges, together with
uncertainty over regulatory issues, particularly the debate over the provisions
of the Telecommunications Act of 1996, caused delays in capital spending by
major domestic MSOs during the second half of 1995 and first quarter of 1996.
Although the Act became law in February 1996 and the Company believes that its
provisions will result in increased capital expenditures in the
telecommunications industry, there can be no assurance that capital spending by
domestic MSOs will increase in the near future, or at all, or that Harmonic's
sales will benefit. In addition, cable television capital spending can be
subject to the effects of seasonality, with fewer construction and upgrade
projects typically occurring in winter months and otherwise being affected by
inclement weather.
HIGHLY COMPETITIVE INDUSTRY The market for cable television transmission
equipment is extremely competitive and has been characterized by rapid
technological change. Most of the Company's competitors are substantially larger
and have greater financial, technical, marketing and other resources than the
Company. Many of such large competitors are in a better position to withstand
any significant reduction in capital spending by cable television operators. In
addition, many of the Company's competitors have more long standing and
established relationships with domestic and foreign cable television operators
than does the Company. There can be no assurance that the Company will be able
to compete successfully in the future or that competition will not have a
material adverse effect on the Company's business and operating results.
RAPID TECHNOLOGICAL CHANGE The market for the Company's products is relatively
new, making it difficult to accurately predict the market's future growth rate,
size and technological direction. In view of the evolving nature of this market,
there can be no assurance that cable television operators, telephone companies
or other suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has announced and demonstrated initial products for digital
applications, there can be no assurance that the Company will successfully
complete development of, or successfully introduce, products for digital
applications, or that such products will achieve commercial acceptance. In
addition, in order to successfully develop and market its planned products for
digital applications, the Company may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing
Harmonic Lightwaves 22
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
of Financial Condition and Results of Operations
to enter into such technology development or licensing agreements, there can be
no assurance that such agreements will be negotiated on terms acceptable to the
Company, or at all. The failure to enter into technology development or
licensing agreements, when necessary, could limit the Company's ability to
develop and market new products and could have a material adverse effect on the
Company's business and operating results.
The failure of the Company to successfully develop and introduce new products
that address the changing needs of the broadband communications market could
have a material adverse effect on the Company's business and operating results.
In addition, there can be no assurance that the successful introduction by the
Company of new products will not have an adverse effect on the sales of the
Company's existing products. For instance, an emerging trend in the domestic
market toward narrowcasting (targeted delivery of advanced services to small
groups of subscribers) is causing changes in the network architectures of some
cable operators. This may have the effect of changing the Company's product mix
toward lower price transmitters, which could adversely affect the Company's
gross margins.
SOLE OR LIMITED SOURCES OF SUPPLY Certain components and subassemblies necessary
for the manufacture of the Company's products are obtained from a sole supplier
or a limited group of suppliers. The reliance on sole or limited suppliers and
the Company's increasing reliance on subcontractors involve several risks,
including a potential inability to obtain an adequate supply of required
components or subassemblies and reduced control over pricing, quality and timely
delivery of components or subassemblies. The Company does not maintain long-term
agreements with any of its suppliers or subcontractors. An inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply could affect the Company's ability to ship
its products on a timely basis, which could damage relationships with current
and prospective customers and could have a material adverse effect on the
Company's business and operating results. The Company believes that investment
in inventories will constitute a significant portion of its working capital in
the future. As a result of such investment in inventories, the Company may be
subject to an increasing risk of inventory obsolescence in the future, which
would materially and adversely affect its business and operating results.
RISKS OF INTERNATIONAL OPERATIONS Sales to customers outside of the United
States in 1996, 1995 and 1994 represented 57%, 65% and 57% of net sales,
respectively, and the Company expects that international sales will continue to
represent a substantial portion of its net sales for the foreseeable future. In
addition, the Company has an Israeli subsidiary that engages primarily in
research and development. International operations are subject to a number of
risks, including changes in foreign government regulations and
telecommunications standards, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations and political and economic instability. While international sales are
typically denominated in U.S. dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Payment cycles for international customers are
typically longer than those for customers in the United States. There can be no
assurance that foreign markets will continue to develop or that the Company will
receive additional orders to supply its products for use in foreign broadband
systems.
Harmonic Lightwaves 23
9
Consolidated
BALANCE SHEETS
December 31 1996 1995
- --------------------------------------------------------------------------------
(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents $16,410 $22,126
Accounts receivable, net 12,643 5,802
Inventories 14,782 9,176
Prepaid expenses and other assets 1,315 199
------- -------
Total current assets 45,150 37,303
Property and equipment, net 8,751 4,514
Other assets 732 --
------- -------
$54,633 $41,817
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,604 $ 2,201
Accrued liabilities 5,388 2,607
------- -------
Total current liabilities 10,992 4,808
------- -------
Commitments (Notes 8 and 10)
Stockholders'equity:
Preferred Stock, $.001 par value, 5,000,000
shares authorized; no shares issued
or outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares
authorized; 10,160,876 and 9,903,501 shares
issued and outstanding 10 10
Capital in excess of par value 54,579 53,865
Accumulated deficit (10,948) (16,866)
------- -------
Total stockholders'equity 43,641 37,009
------- -------
$54,633 $41,817
======= =======
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 24
10
Consolidated Statement of
OPERATIONS
Year Ended December 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net sales $ 60,894 $ 39,180 $ 18,224
Cost of sales 33,163 21,329 11,757
-------- -------- --------
Gross profit 27,731 17,851 6,467
-------- -------- --------
Operating expenses:
Research and development 9,237 6,144 3,209
Sales and marketing 9,827 5,750 4,108
General and administrative 3,463 2,196 1,339
-------- -------- --------
Total operating expenses 22,527 14,090 8,656
-------- -------- --------
Income (loss) from operations 5,204 3,761 (2,189)
Interest expense (21) (202) (237)
Interest and other income (expense), net 1,046 779 58
-------- -------- --------
Income (loss) before income taxes 6,229 4,338 (2,368)
Provision for income taxes 311 217 --
-------- -------- --------
Net income (loss) $ 5,918 $ 4,121 $ (2,368)
======== ======== ========
Net income (loss) per share $ 0.52 $ 0.40 $ (0.29)
======== ======== ========
Weighted average common shares and equivalents 11,474 10,382 8,176
======== ======== ========
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 25
11
Consolidated Statement of
STOCKHOLDERS' EQUITY (DEFICIT)
Capital in Stockholders'
Common Stock Excess of Accumulated Equity
Shares Amount Par Value Deficit (Deficit)
- ----------------------------------------------------------------------------------------------------------------------
(in thousands)
Balance at December 31, 1993 418 $ 1 $ 18 $(18,619) $(18,600)
Exercise of stock options and warrants 51 -- 51 -- 51
Issuance of Common Stock warrant -- -- 200 -- 200
Net loss -- -- -- (2,368) (2,368)
------ ------ ------- -------- --------
Balance at December 31, 1994 469 1 269 (20,987) (20,717)
Conversion of Mandatorily Redeemable
Preferred Stock 7,095 7 29,208 -- 29,215
Issuance of Common Stock in initial public
offering, net 2,000 2 24,198 -- 24,200
Exercise of stock options and warrants 340 -- 190 -- 190
Net income -- -- -- 4,121 4,121
------ ------ ------- -------- --------
Balance at December 31, 1995 9,904 10 53,865 (16,866) 37,009
Exercise of stock options and warrants 208 -- 240 -- 240
Issuance of Common Stock under
Stock Purchase Plan 49 -- 474 -- 474
Net Income -- -- -- 5,918 5,918
------ ------ ------- -------- --------
Balance at December 31, 1996 10,161 $ 10 $54,579 $(10,948) $ 43,641
====== ====== ======= ======== ========
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 26
12
Consolidated Statement of
CASH FLOWS
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 5,918 $ 4,121 $(2,368)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,506 1,799 1,151
Issuance of Common Stock warrant -- -- 200
Changes in assets and liabilities:
Accounts receivable (6,841) (1,246) (3,242)
Inventories (5,606) (3,523) (2,918)
Prepaid expenses and other assets (1,848) (15) (43)
Accounts payable 3,403 2 1,300
Accrued liabilities 2,781 1,128 585
-------- -------- -------
Net cash provided by (used in)
operating activities 313 2,266 (5,335)
-------- -------- -------
Cash flows used in investing activities for the acquisition of
property and equipment (6,743) (3,119) (679)
-------- -------- -------
Cash flows from financing activities:
Borrowings (repayment) under bank line of credit -- (922) 922
Proceeds from issuance of Common Stock, net 714 24,390 51
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock, net -- -- 2,761
Repayments of long-term debt -- (2,232) (676)
-------- -------- -------
Net cash provided by financing activities 714 21,236 3,058
-------- -------- -------
Net increase (decrease) in cash and cash equivalents (5,716) 20,383 (2,956)
Cash and cash equivalents at beginning of period 22,126 1,743 4,699
-------- -------- -------
Cash and cash equivalents at end of period $ 16,410 $ 22,126 $ 1,743
======= ======= ======
Supplemental schedule of cash flow information and
non-cash financing activities:
Interest paid during the period $ 21 $ 193 $ 211
Income taxes paid during the period $ 285 $ 126 $ --
Issuance of Mandatorily Redeemable Convertible
Preferred Stock upon conversion of convertible
promissory notes and accrued interest $ -- $ -- $ 3,000
Acquisition of property and equipment under
capital leases and equipment term loan $ -- $ 752 $ 710
======== ======== =======
The accompanying notes are an integral part of these financial statements.
Harmonic Lightwaves 27
13
NOTES
to Consolidated Financial Statements
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harmonic Lightwaves, Inc. (the "Company") is a worldwide supplier of highly
integrated fiber optic transmission, digital headend and element management
systems for the delivery of interactive services over broadband networks. The
Company operates in one industry segment. See Note 9 for geographic information
and information regarding sales to significant customers.
REINCORPORATION AND REVERSE STOCK SPLIT The Company originally incorporated in
California in June 1988. In May 1995, the Company reincorporated in Delaware. In
conjunction with the reincorporation, all outstanding shares of the predecessor
California company were exchanged into common stock of the Delaware company in a
one-for-three reverse stock split. All applicable share and per share amounts in
the accompanying consolidated financial statements have been retroactively
adjusted to reflect this reverse stock split.
BASIS OF PRESENTATION The consolidated financial statements of the Company
include the financial statements of the Company and its wholly-owned subsidiary.
All intercompany accounts and balances have been eliminated. The Company's
fiscal quarters end on the Friday nearest the calendar quarter end.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts. Actual results could differ
from these estimates.
CASH EQUIVALENTS The Company considers all highly liquid investments purchased
with an original maturity date of three months or less at the date of purchase
to be cash equivalents. The Company's investments are classified as
held-to-maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair value due to their
short maturities.
REVENUE RECOGNITION Revenue is generally recognized upon shipment of product. A
provision for the estimated cost of warranty is recorded at the time revenue is
recognized.
INVENTORIES Inventories are stated at the lower of cost, using the weighted
average method, or market.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation
and amortization are computed using the straight-line method based upon the
shorter of the estimated useful lives of the assets, which range from two to ten
years, or the lease term of the respective assets, if applicable.
CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are maintained with high quality
financial institutions and are invested in short-term, highly liquid investment
grade obligations of government and commercial issuers, in accordance with the
Company's investment policy. The investment policy limits the amount of credit
exposure to any one financial institution or commercial issuer. The Company's
accounts receivable are derived from sales to cable television operators and
distributors as discussed in Note 9. The Company performs ongoing credit
evaluations of its customers, and provides for expected losses but to date has
not experienced any material losses. At December 31, 1996, receivables from
three customers represented 20%, 17% and 11%, respectively, of accounts
receivable. At December 31, 1995, receivables from two customers represented
32% and 19%, respectively, of accounts receivable.
Harmonic Lightwaves 28
14
NOTES
to Consolidated Financial Statements
FOREIGN CURRENCY The functional currency of the Company's subsidiary is the U.S.
dollar. Foreign currency translation gains and losses, which have not been
material to date, are included in the statement of operations.
INCOME TAXES Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts under the provisions
of Statement on Financial Accounting Standards No. 109 ("SFAS No. 109"), which
has been applied for all periods presented.
ACCOUNTING FOR STOCK BASED COMPENSATION The Company's stock-based compensation
plans are accounted for in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees." In January 1996, the Company
adopted the disclosure requirements of Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123").
NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the
weighted average number of common and common equivalent shares outstanding
during the period. Common equivalent shares consist of Mandatorily Redeemable
Convertible Preferred Stock (using the if converted method), and stock options
and warrants (using the treasury stock method). Common equivalent shares are
excluded from the computation if their effect is anti-dilutive except that,
pursuant to the requirements of the Securities and Exchange Commission, common
equivalent shares relating to stock options and warrants (using the treasury
stock method and the initial public offering price) issued from April 1, 1994
through the Company's initial public offering ("IPO") have been included in the
computation for all periods presented through the Company's IPO even if
anti-dilutive. The net loss per share for the year ended December 31, 1994, is
pro forma.
RECLASSIFICATION Certain amounts in prior years' financial statements and
related notes have been reclassified to conform to the 1996 presentation. These
reclassifications are not material.
NOTE 2: CASH AND CASH EQUIVALENTS
At December 31, 1996 and 1995, the Company had the following amounts in cash and
cash equivalents, with original maturity dates of three months or less. Realized
gains and losses for the years ended December 31, 1996 and 1995 and the
difference between gross amortized cost and estimated fair value at December 31,
1996 and 1995 were immaterial.
December 31, 1996 1995
- ---------------------------------------------------------
(in thousands)
Commercial paper $15,964 $14,769
Cash and money market accounts 446 7,357
---------------------
Total cash and cash equivalents $16,410 $22,126
=====================
Harmonic Lightwaves
29
15
NOTES
to Consolidated Financial Statements
NOTE 3: BALANCE SHEET DETAILS
December 31, 1996 1995
- ---------------------------------------------------------------------------------------
(in thousands)
Accounts receivable:
Gross accounts receivable $ 12,943 $ 5,902
Less: allowance for doubtful accounts (300) (100)
-----------------------
$ 12,643 $ 5,802
=======================
Inventories:
Raw materials $ 3,104 $ 2,866
Work-in-process 4,704 2,372
Finished goods 6,974 3,938
-----------------------
$ 14,782 $ 9,176
=======================
Property and equipment:
Furniture and fixtures $ 1,124 $ 201
Machinery and equipment 12,183 8,427
Leasehold improvements 1,982 655
-----------------------
15,289 9,283
Less: accumulated depreciation and amortization (6,538) (4,769)
-----------------------
$ 8,751 $ 4,514
=======================
Accrued liabilities:
Accrued compensation $ 2,166 $ 1,090
Accrued warranties 733 569
Other 2,489 948
-----------------------
$ 5,388 $ 2,607
=======================
NOTE 4: LINE OF CREDIT
The Company has a bank line-of-credit agreement, providing for borrowings of up
to $ 10,000,000. The agreement contains certain financial covenants and is
available until September 1997. The borrowings bear interest at the bank's prime
rate or LIBOR plus 2%. There were no outstanding borrowings under the line at
December 31, 1996 or 1995.
NOTE 5: CAPITAL STOCK
INITIAL PUBLIC OFFERING In May 1995,the Company completed its initial public
offering ("IPO") of 2,600,000 shares of common stock, 600,000 of which were sold
by existing stockholders, at a price of $13.50 per share. Net proceeds to the
Company were approximately $24.2 million, after underwriter commissions and
associated costs. Upon the closing of the IPO, all outstanding shares of
Mandatorily Redeemable Convertible Preferred Stock automatically converted into
7,094,748 shares of Common Stock. Also effective with the closing of the IPO,
the Company was authorized to issue 5,000,000 shares of undesignated preferred
stock, of which none were issued or outstanding at December 31, 1996 and 1995.
COMMON STOCK WARRANTS In June 1994,the Company entered into a distribution
agreement, in connection with which it issued a warrant to purchase up to
798,748 shares of Common Stock at $5.55 per share. The warrant had a fair value
of $200,000, which was charged to results of operations in the second quarter of
1994. The warrants will become exercisable in June 1999 and expire at the
earlier of six years from the date of issuance
Harmonic Lightwaves
30
16
NOTES
to Consolidated Financial Statements
or the closing of a significant acquisition transaction, as defined in the
warrant. Under certain conditions, the ability to exercise may be accelerated
and the warrant may be exercisable as early as June 14, 1997. The Company has
reserved 798,748 shares of Common Stock for issuance upon exercise of this
warrant.
In 1993, the Company issued a warrant to purchase up to 22,222 shares of the
Company's Common Stock at an exercise price of $4.50 per share in conjunction
with an equipment lease line facility. The fair value of the warrant was
nominal, and the warrant expires at the earlier of seven years from the date of
issuance or the merger or sale of the Company, meeting certain criteria. The
Company has reserved 22,222 shares of Common Stock for issuance upon exercise of
this warrant.
NOTE 6: BENEFIT AND COMPENSATION PLANS
STOCK OPTION PLANS In 1988, the Company adopted an incentive and non-statutory
stock option plan (the "1988 Plan") for which 1,125,917 shares have been
reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995
Plan") at the effectiveness of the Company's IPO, no further grants have been,
or will be, made under the 1988 Plan. Options granted under the 1988 Plan and
the 1995 Plan are for periods not to exceed ten years. Exercise prices of
incentive stock option grants under both plans must be at least 100% of the
fair market value of the stock at the date of grant and for nonstatutory stock
options must be at least 85% of the fair market value of the stock at the date
of grant, all as determined by the Board of Directors. Under both plans, the
options generally vest 25% at one year from date of grant, and an additional
1/48th per month thereafter. The Company has reserved 565,000 shares of Common
Stock for issuance under the 1995 Plan.
The following table summarizes activities under the Plans:
Shares Available Stock Options Weighted Average
For Grant Outstanding Exercise Price
- ----------------------------------------------------------------------------------------------------
(in thousands, except exercise price)
Balance at December 31, 1993 46 872 $ 0.38
Shares authorized 566 -- --
Options granted (373) 373 2.36
Options exercised -- (38) 0.35
Options canceled 60 (60) 1.11
---- ----- ------
Balance at December 31, 1994 299 1,147 0.99
Shares authorized 351 -- --
Options granted (276) 276 11.98
Options exercised -- (252) 0.53
Options canceled 20 (20) 5.81
---- ----- ------
Balance at December 31, 1995 394 1,151 3.65
Options granted (340) 340 12.70
Options exercised -- (208) 0.98
Options canceled 7 (48) 5.75
---- ----- ------
Balance at December 31, 1996 61 1,235 6.52
==== ===== ======
Harmonic Lightwaves
31
17
NOTES
to Consolidated Financial Statements
The following table summarizes information regarding stock options outstanding
at December 31, 1996:
Stock Options Outstanding Stock Options Exercisable
------------------------------------------------------------- -------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 1996 Contractual Life (Years) Exercise Price December 31, 1996 Exercise Price
- -----------------------------------------------------------------------------------------------------------------------
(in thousands, except exercise price and life)
$ 0.30 - 1.20 386 5.4 $ 0.41 372 $ 0.41
1.80 - 4.65 264 7.5 2.42 154 2.31
7.20 - 13.50 447 8.7 10.74 94 11.18
14.13 - 22.75 138 9.4 17.52 22 17.71
===================================================================================================================
1,235 642
DIRECTOR OPTION PLAN Effective upon the IPO,the Company adopted the 1995
Director Option Plan (the "Director Plan") and reserved 50,000 shares of Common
Stock for issuance thereunder. The Director Plan provides for the grant of
nonstatutory stock options to certain nonemployee directors of the Company
pursuant to an automatic, nondiscretionary grant mechanism. Grants of options to
purchase 4,000 shares were made during 1996 under the Director Plan at exercise
prices of $10.00 - $18.00. A grant of options to purchase 2,000 shares was made
during 1995 under the Director Plan at an exercise price of $13.50. At December
31, 1996, options to purchase 6,000 shares were outstanding, of which 4,999
shares were exercisable.
EMPLOYEE STOCK PURCHASE PLAN Effective upon the IPO, the Company adopted the
1995 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 200,000
shares of Common Stock for issuance thereunder. The Purchase Plan enables
employees to purchase shares at 85% of the fair market value of the Common Stock
at the beginning or end of each six month purchase period. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Internal Revenue Code. 48,977 and zero shares were issued under the Purchase
Plan during 1996 and 1995, respectively.
FAIR VALUE DISCLOSURES The Company accounts for its stock-based compensation
plans in accordance with the provisions of Accounting Principles Board Opinion
No. 25. If compensation cost for the Company's stock-based compensation plans
had been determined based on the fair market value at the grant dates, as
prescribed in SFAS 123, the Company's net income and net income per share would
have been as follows:
1996 1995
- --------------------------------------------------------------------------------
(in thousands, except per share data)
Net income:
As reported $ 5,918 $4,121
Pro forma 4,859 3,674
Net income per share:
As reported $ 0.52 $ 0.40
Pro forma 0.42 0.35
------- -------
The fair value of each option grant, under the 1988 Plan, 1995 Plan and Director
Plan were estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants during 1996 and 1995:
dividend yield of 0.0%; expected weighted average volatility of 47.5%; and
expected weighted average lives of four years, during both years; and risk-free
interest rates of 5.2% to 6.5% and 5.4% to 7.1% for options granted during
1996 and 1995, respectively.
Harmonic Lightwaves
32
18
NOTES
to Consolidated Financial Statements
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following
weighted average assumptions for 1996 and 1995: dividend yield of 0.0%; expected
volatility of 47.5%; expected lives of two years during both years; and
risk-free interest rates of 5.7% and 5.3% for 1996 and 1995, respectively.
RETIREMENT/SAVINGS PLAN Effective April 1, 1992, the Company implemented a
retirement/savings plan which qualifies as a thrift plan under Section 401(k)
of the Internal Revenue Code. This plan allows participants to contribute up to
20% of total compensation, subject to applicable Internal Revenue Service
limitations. The Company may make discretionary contributions to the plan. To
date, the Company has not made any contributions.
NOTE 7: INCOME TAXES
The Company incurred net operating losses in each year through December 31,
1994. Foreign income (losses) were not significant for all years presented. The
provision for income taxes for the year ended December 31, 1996 consists of the
following:
December 31, 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Current:
Federal $246 $174
Foreign 41 16
State 24 27
---- ----
$311 $217
==== ====
The income tax provision reconciles to the provision at the federal statutory
rate as follows:
December 31, 1996 1995
- --------------------------------------------------------------------------------
(in thousands)
Provision at statutory rate $ 2,118 $ 1,475
State taxes, net of federal benefit 16 18
Utilization of net operating loss carryovers (2,490) (2,052)
Future benefits not currently recognized 429 567
Alternative minimum tax 162 116
Other 76 93
------- -------
$ 311 $ 217
======= =======
Deferred tax assets comprise the following:
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------
(in thousands)
Net operating loss carryovers $ 1,964 $ 3,960 $ 6,354
Research and development carryovers 2,112 1,396 1,396
Capitalized research and development costs 254 931 615
Reserves not currently deductible 1,187 574 422
Other 12 746 229
------- ------- -------
Total deferred tax assets 5,529 7,607 9,016
Valuation allowance (5,529) (7,607) (9,016)
------- ------- -------
Net deferred assets $ -- $ -- $ --
======= ======= =======
Harmonic Lightwaves
33
19
NOTES
to Consolidated Financial Statements
The deferred tax assets valuation allowance at December 31, 1996, 1995 and 1994
is attributed to federal and state deferred tax assets. Management believes
sufficient uncertainty exists regarding the realizability of these items such
that a full valuation allowance has been recorded.
At December 31, 1996, the Company had approximately $5,800,000 of net operating
loss carryovers for federal tax reporting purposes available to offset future
taxable income; such carryovers expire through 2009.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and research and development credits that can be carried
forward may be impaired or limited in certain circumstances. Events which may
cause changes in the Company's net operating loss and research and development
credit carryovers include, but are not limited to, a cumulative stock ownership
change of greater than 50%, as defined, over a three year period.
NOTE 8: RESEARCH AND DEVELOPMENT GRANT
In accordance with an agreement signed with the Israel-U.S. Binational
Industrial Research and Development Foundation ("BIRD") in December 1994, the
Company will obtain grants for a research and development project amounting to
50% of the actual expenditures incurred on the project subject to a maximum of
$560,000. The Company is not obligated to repay the grants regardless of the
outcome of its development efforts; however, it is obligated to pay the BIRD
royalties at the rate of up to 2%-5% of sales of any products or development
resulting from such research, but not in excess of 150% of the grant. Grants
earned of approximately $140,000, and $300,000 during 1996 and 1995,
respectively, were offset against research and development expenses for the same
period.The Company did not receive any funding and did not incur any significant
expenditures on the project during 1994.
NOTE 9: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Sales and purchase transactions are denominated in U.S. dollars. The Company has
one manufacturing facility located in the United States.The Company has no
significant assets located outside of the U.S.
International net sales were as follows:
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
(in thousands)
Americas (excluding U.S.) $12,216 $ 8,281 $ 3,688
Europe 12,214 9,819 5,038
Asia 10,342 7,331 1,669
------- ------- -------
$34,772 $25,431 $10,395
======= ======= =======
The Company sells to a significant number of its end users through distributors.
In 1996, sales to three distributors represented 15%, 15% and 13% of total
net sales, respectively. In 1995, sales to three distributors accounted for 22%,
15% and 15% of total net sales, respectively. In 1994, sales to five
distributors represented 22%, 15%, 14%, 12% and 12%, respectively, of total net
sales.
Harmonic Lightwaves
34
20
NOTES
to Consolidated Financial Statements
NOTE 10: COMMITMENTS
The Company leases its facilities under noncancelable operating leases which
expire at various dates through 2006. Total rent expense related to these
operating leases were $828,000, $555,000, and $468,000, for 1996, 1995 and 1994,
respectively. Future minimum lease payments under noncancelable operating leases
at December 31, 1996, were as follows:
(in thousands)
1997 $ 160
1998 610
1999 1,304
2000 1,358
2001 1,375
Thereafter 6,171
-------
$10,978
=======
At December 31, 1996, the Company had prepaid approximately $1,765,000 of rents
and deposits under the terms of its 10 year lease agreement for the new
corporate headquarters in Sunnyvale, California, which it occupied in August
1996. The Company has subleased a portion of its headquarters through July 1998.
Under the terms of the sublease, the sublessee is required to make payments of
$382,000 and $223,000 for 1997 and 1998, respectively.
Harmonic Lightwaves
35
21
Report of
INDEPENDENT ACCOUNTANTS
To The Board of Directors & Shareholders of Harmonic Lightwaves, Inc.,
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders'equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Harmonic Lightwaves, Inc. and its subsidiary at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.We believe that our audits provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
San Jose, California
January 21, 1997
Harmonic Lightwaves
36