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EXHIBIT 13.1
HARMONIC LIGHTWAVES
1997 ANNUAL REPORT
[GRAPHIC]
BREAKING THE BANDWIDTH BARRIER
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PROFILE: MOVING MORE KINDS OF INFORMATION FASTER
HARMONIC LIGHTWAVES, INC. DESIGNS, MANUFACTURES AND MARKETS DIGITAL- AND
LIGHTWAVE-BASED COMMUNICATIONS SYSTEMS THAT DELIVER VIDEO, AUDIO AND DATA OVER
HYBRID FIBER/COAX (HFC), SATELLITE AND WIRELESS NETWORKS. HARMONIC'S ADVANCED
SOLUTIONS ENABLE CABLE TELEVISION AND OTHER NETWORK OPERATORS TO PROVIDE A RANGE
OF BROADCAST AND INTERACTIVE BROADBAND SERVICES THAT INCLUDE HIGH-SPEED INTERNET
ACCESS AND VIDEO-ON-DEMAND.
HEADQUARTERED IN SUNNYVALE, CALIFORNIA, HARMONIC OPERATES ITS NEW MEDIA
COMMUNICATION SUBSIDIARY AND AN R&D FACILITY IN ISRAEL, ALONG WITH A SALES
AND SUPPORT CENTER IN THE UNITED KINGDOM. HARMONIC IS ISO 9001-CERTIFIED
AND EMPLOYS MORE THAN 250 PEOPLE. THE COMPANY'S STOCK IS TRADED ON THE
NASDAQ STOCK MARKET UNDER THE SYMBOL "HLIT."
FOR MORE INFORMATION, PLEASE VISIT THE COMPANY'S WEB SITE AT:
WWW.HARMONIC-LIGHTWAVES.COM
This annual report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those set forth under "Factors That May Affect Future Results of
Operations" and elsewhere in this annual report.
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TO OUR SHAREHOLDERS
WHILE 1997 WAS ANOTHER YEAR OF PROFITABLE GROWTH FOR HARMONIC LIGHTWAVES, IT WAS
ALSO HIGHLIGHTED BY SIGNIFICANT EXPANSION ACTIVITIES DESIGNED TO OPEN UP NEW
POSSIBILITIES FOR THE COMPANY.
We continued to solidify our leadership position in providing
advanced fiber optic transmission products for cable service
providers. Equally important, the combination of new product
introductions, enhancements to existing product lines and a key
acquisition enabled us to extend the horizons of Harmonic Lightwaves
to encompass a much wider range of market opportunities in the
rapidly evolving broadband communications arena.
For the year ended December 31, 1997, Harmonic reported revenues of
$74.4 million, a 22% increase compared to revenues of $60.9 million
in 1996. Net income for the year was $4.9 million, or $0.43 per
share.
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SOLID PROGRESS IN A GROWING MARKET
Harmonic's growth in 1997 underscored our leadership among the new wave of high
technology companies serving the high-speed transmission needs of cable service
providers. Our sales increased by 60% during the first half of the year, before
slowing significantly during the second half due to soft market conditions in
the industry worldwide. In spite of this downturn, we were ranked in the top 20
of the Silicon Valley Technology "Fast 50," an independent survey that
identifies the fastest-growing technology companies in the San Francisco Bay
Area. Harmonic's market is a truly global one, as illustrated by the fact that
international sales continued to account for more than half of our revenues. To
better serve the needs of this worldwide customer base, we opened a new sales
and technical support center in the United Kingdom during the year; plans call
for the opening of additional international offices in 1998.
In the past year, Harmonic introduced a number of new products to support our
fiber optic transmission-based core business. Two additions to our PWRBlazer(TM)
family of optical node receivers -- the PWRBlazer Scaleable Node and the
PWRBlazer Mini Node -- substantially expand the cost effectiveness, flexibility
and upgradability options we offer cable operators and telecommunications
companies. The groundbreaking PWRBlazer Scaleable Node is particularly important
in that it represents the first fiber optic transmission product that enables
operators to incrementally add bandwidth on demand.
We also extended the scope of Harmonic's MAXLink(TM) 1550 nm transmitters with
the introduction of two new high-output family members. Similar enhancements to
our PWRLink(TM) 1310 nm DFB transmitter family are now underway, with
introductions slated for the first quarter of 1998. And Harmonic added to the
element management capabilities we provide service operators using hybrid
fiber/coax (HFC) networks by introducing the NETWatch(TM) Multiple Element
Manager and the NETWatch Management Transponder. All of these enhancements to
our existing HFC product lines provide customers with tremendous flexibility and
price/performance options in designing and implementing their system solutions.
[GRAPH - NET SALES IN MILLIONS]
NEW BROADBAND HORIZONS
While the products just mentioned were important in solidifying Harmonic's
leadership position in fiber optic transmission technology, perhaps the most
compelling news of the year was related to our expansion into the extended
reaches of broadband communications. This migration began with our introduction
of the TRANsend(TM) family of video and audio digital compression products for
the broadband network headend.
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[GRAPH - NET INCOME IN MILLIONS]
Although the lion's share of initial applications for the TRANsend family will
be derived from sales to cable operators deploying HFC networks, Harmonic's new
digital headend products enable us to cultivate new broadband communications
customers, including multichannel, multipoint distribution system (MMDS)
wireless cable service providers and direct broadcast satellite (DBS)
communications suppliers. Our TRANsend QAM modulator became the first
commercially available product of its kind to support the cable industry's Data
Over Cable Service Interface Specification (DOCSIS). And we announced a new
Cable Modem Partnership Program designed to ensure interoperability between our
digital headend products and cable modems from partner companies such as Daewoo,
Panasonic and Thomson. We were the first to demonstrate this interoperability
between two independently developed products at the 1997 Western Cable Show.
Equally important to Harmonic's strategy is the recent acquisition of New Media
Communication Ltd., a leader in broadband, high-speed data delivery software and
hardware technology. The acquisition expands Harmonic's product portfolio by
enabling cable, satellite and wireless operators to provide video, audio,
high-speed Internet and other advanced services over today's networks. The
narrative of this report explains the implications of our digital headend and
New Media products and technologies in greater detail.
BROADBAND
BROAD OPPORTUNITIES
Harmonic's broadband communications activities represent a natural extension of
our integrated systems and core technology, and come at a time of great change
and opportunity in the industry. Microsoft -- which views the cable network as a
highly effective interactive medium to home users -- made a substantial
investment in the cable industry in 1997. Further evidence was supplied by
interactive services provider @Home, whose initial public offering points to the
potential for a significant subscriber base willing to pay for the new wave of
high-speed, interactive services. Throughout the industry, new standards are
continuing to coalesce, and competition among service providers is continuing to
intensify.
All of these service providers are seeking the greater bandwidth, superior
price/performance, ease of use and comprehensive network management capabilities
that Harmonic Lightwaves' products provide.
[GRAPH - NET SALES BY REGION]
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Combined with our world-class customer service and the continued integration and
enhancement of all of our product lines to support the convergence of video,
audio and data, these capabilities place the company in an excellent position to
take advantage of future opportunities for growth.
MOVING FORWARD
In summary, 1997 was a year during which Harmonic Lightwaves continued to grow
profitably while executing a strategy that opens up many new opportunities for
the future. I want to extend my gratitude to all of Harmonic's people, whose
dedication and hard work during the year were instrumental in enabling us to
achieve our solid results.
On behalf of everyone at the company, I want to thank all of our shareholders,
customers and partners for their support. The time has come to break down the
bandwidth barrier. We look forward to tackling that challenge, and continuing to
advance the frontiers of modern communications to bring people and information
closer together than ever before.
Sincerely,
/s/ ANTHONY J. LEY
- -----------------------------------
ANTHONY J. LEY
PRESIDENT, CHIEF EXECUTIVE OFFICER,
AND CHAIRMAN OF THE BOARD
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BREAKING
THE BANDWIDTH
BARRIER
HARMONIC LIGHTWAVES
is about moving information
in todays's application-rich
world
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MOVING DATA USED TO BE SIMPLE
BECAUSE THE DATA WAS SIMPLE
Moving more kinds of information, more kinds of ways. That's what modern
communications is all about.
The Internet is everywhere. Networks of all kinds -- from the wide area to the
local area, enterprise intranets to the desktop -- are ubiquitous. And with each
year, the information they carry becomes more complex. Voice, data, graphics,
video, audio -- all are competing for limited bandwidth in a multimedia age.
That's because all of this information is still largely transmitted through
standard modems, over standard twisted-pair telephone lines, creating a classic
bottleneck where the World Wide Web slows down to become the World Wide Wait.
The simplest way to understand the concept of bandwidth is to think of
today's transmission media -- phone lines, cable, etc. -- as pipes. A
small pipe can only let so much information through, with only so much
speed, no matter how advanced the technology leading into or out of the
pipe may be. The equation is simple: the bigger the pipe, the greater the
potential bandwidth.
Today, many different companies from seemingly disparate corners of the
communications industry are trying to find ways to widen the pipes and
surmount the bandwidth barrier. From traditional telecommunications
providers to cable operators, Internet service providers to direct
broadcast satellite and wireless transmission companies -- all are looking
for a competitive edge, a better way to provide bandwidth and interactive
services to a market ready to embrace the benefits of what promises to be
a truly interactive age.
AND THAT'S WHERE
HARMONIC LIGHTWAVES CAN HELP
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[GRAPHIC]
MOVING DATA TODAY IS MUCH MORE COMPLEX
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VOICE
AUDIO
DATA
VIDEO
[LOGO]
ALL COMPETING FOR LIMITED BANDWIDTH
AT THE SPEED OF LIGHT
Since its founding in 1988, Harmonic Lightwaves has established itself as the
technology leader in providing advanced fiber optic transmission solutions to
cable operators around the world. Over the years, our array of optical
transmitters, nodes, receivers and element management hardware and software have
enabled us to provide customers with better and faster ways of transmitting
information, by harnessing the incredible speed of light within the framework of
an electronic medium.
In the cable world, Harmonic leads the way. We've attained this position
thanks to our proprietary leading-edge technology, our unique system and
network management capabilities, the superior price/performance of our
products, and -- perhaps most important of all for the future -- the
return path capabilities we've pioneered to pave the way for interactive
applications, for business and home users.
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But cable communications is just part of a much larger picture. Recently,
Harmonic embarked on a strategy to integrate digital headend technology into our
product lines. Today, that technology works hand in hand with our fiber optic
transmission solutions to provide our traditional cable customers not only with
better and faster ways to transmit information, but also with the means to
exploit new business and application opportunities.
Even more important, Harmonic's new technology -- some of which we acquired in
1997 -- opens up much broader opportunities for us. From our roots as a provider
of fiber optic solutions for cable operators, we've now grown to become a
supplier of integrated broadband systems for delivering video, audio and data --
not only over cable, but via wireless and satellite communications as well.
ACROSS THE STREET OR AROUND THE WORLD. [GRAPHIC]
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[GRAPHIC]
SATELLITE OPTICS
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[GRAPHICS]
...more kinds of data moving in
MORE KINDS OF WAYS
THE DIGITAL IMPERATIVE
Harmonic's first foray beyond our fiber optic roots occurred with the 1997
introduction of the TRANsend(TM) video and audio compression product
family for the broadband network headend. The TRANsend family -- which
includes a quadrature amplitude modulation (QAM) modulator, an MPEG
(Motion Picture Experts Group)-2 program encoder, and a video transmission
platform -- offers service providers enhanced picture quality and greater
flexibility and reliability when adding advanced services that require
digital compression.
Combined with Harmonic's fiber optic offerings, our TRANsend products
provide a complete solution that will not only help our existing cable
operator customer base to stay competitive, but will also open up new
market opportunities for them. By the turn of the century, it's likely
that digital compression technology will be deployed to millions of homes,
providing subscribers with such advanced services as Internet access,
video services, telecommunications and videoconferencing.
Because of their bandwidth, capacity and overall cost-effectiveness, broadband
networks are ideally suited to provide all advanced data services into the home.
Harmonic's TRANsend products, which integrate seamlessly with our fiber optic
transmission and element management product lines, are positioned to anticipate
this convergence. Equally important, the new digital headends enable Harmonic to
move beyond the cable industry and serve the needs of satellite and wireless
communications providers as well.
But the TRANsend family was merely the first of two important steps that helped
Harmonic expand its horizons in 1997. The other was our first corporate
acquisition: New Media Communication Ltd.
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NEW MEDIA: NEW POSSIBILITIES
Following the introduction of the TRANsend family, one of the most significant
pieces of the digital puzzle that remained for Harmonic to solve was gaining
expertise in high-speed data transmission technology. We accomplished this goal
by acquiring New Media Communication Ltd., a company whose advanced digital
headend software for managing and transmitting data supports multicasting and
unicasting over broadband media. Complementing this innovative multimedia
delivery software is New Media's range of extremely high-speed end user PCI
receiver cards, which are compatible with cable, satellite and LMDS/MMDS
wireless transmission technologies.
New Media is the only company offering commercially available, high-speed data
solutions on all broadband platforms, and has become the first to deploy its
technology in a commercial LMDS system. Such varied wireless and satellite
customers as New York City's Cellularvision and Germany's KMS/Thyssen -- the
latter serving a huge market comprised of more than 25 million potential
satellite and cable service subscribers -- expand our focus beyond our
traditional customer base of cable operators. The acquisition now allows
Harmonic to move more kinds of information, in more different ways, than ever
before.
BUT BACK TO THE BANDWIDTH ISSUE. HOW FAST IS FAST?
FIG. A: HARMONIC LIGHTWAVES ENHANCED TRANSMISSION BANDWIDTH
[GRAPHIC]
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HARMONIC LIGHTWAVES IS MOVING
THE FRONTIERS OF
BROADBAND COMMUNICATIONS
SPEED MERCHANTS FOR THE INTERACTIVE AGE
To finally put the bandwidth issue into perspective, it's important to
understand the magnitude of Harmonic's technology and products. A few
comparisons are in order. Today, most standard modems transmit information
over twisted-pair telephone lines at a rate of 28.8 Kbps (kilobits per
second). ISDN lines, meanwhile, have the capability of transmitting data
at speeds of up to 128 Kbps.
Cable modems, by comparison, up the ante to 10 Mbps (megabits per second) --
almost eighty times as fast as ISDN, and more than 300 times the speed of a
standard telephone modem. Satellite communications today top out at 400 Kbps;
wireless and DSL communications at 6-10 Mbps.
And now for the clincher. Harmonic's combined fiber optic, digital and New Media
products support Internet content delivery and data broadcasting at speeds of up
to 52 Mbps via cable and MMDS wireless. Our performance for satellite and LMDS
wireless is just a shade behind, at 48 Mbps. By any measure, that's extremely
fast.
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To be sure, a number of things have to happen across the industry and throughout
today's communications infrastructures for this kind of bandwidth to be
available for everyone; the process is just getting underway. But it's more than
just a pipedream. It's happening now, and it's going to happen even faster
tomorrow. And as it does, Harmonic intends to be there every step of the way.
Which leaves one message for all those struggling to overcome the bandwidth
barrier:
THE LINES ARE OPEN
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FINANCIAL CONTENTS
16. selected financial data
17. management's discussion and analysis
23. consolidated balance sheets
24. consolidated statement of operations
25. consolidated statement of stockholders' equity
26. consolidated statement of cash flows
27. notes to consolidated financial statements
34. report of independent accountants
35. corporate information
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SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales $74,442 $60,894 $39,180 $ 18,224 $ 6,714
Gross profit 34,605 27,731 17,851 6,467 1,458
Income (loss) from operations 4,506 5,204 3,761 (2,189) (4,956)
Net income (loss) 4,929 5,918 4,121 (2,368) (5,163)
Basic net income per share(1) 0.48 0.59 0.71 -- --
Diluted net income per share(1) 0.43 0.52 0.40 -- --
BALANCE SHEET DATA:
Cash and cash equivalents $13,670 $16,410 $22,126 $ 1,743 $ 4,699
Working capital 38,772 34,321 32,495 6,893 6,506
Total assets 58,887 54,633 41,817 14,578 11,093
Long term debt, including current portion -- -- -- 1,480 1,446
Mandatorily Redeemable Convertible
Preferred Stock -- -- -- 29,215 26,454
Stockholders' equity (deficit)(2) 49,931 43,641 37,009 (20,717) (18,600)
FISCAL YEARS BY QUARTER 1997 1996
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(UNAUDITED, IN THOUSANDS,
EXCEPT PER SHARE DATA)
QUARTERLY DATA: 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
Net sales $17,350 $17,545 $20,514 $19,033 $19,497 $16,670 $13,485 $11,242
Gross profit 7,979 7,899 9,736 8,991 8,936 7,824 6,011 4,960
Income (loss) from operations (97) 360 2,016 2,227 2,250 1,610 908 436
Net income 580 413 1,838 2,098 2,405 1,741 1,126 646
Basic net income per share 0.06 0.04 0.18 0.20 0.24 0.17 0.11 0.07
Diluted net income per share 0.05 0.04 0.16 0.18 0.21 0.15 0.10 0.06
Common stock price-high $ 16.50 $ 20.88 $ 20.75 $ 25.22 $ 23.50 $ 26.00 $ 23.50 $ 14.63
Common stock price-low 10.75 15.63 12.00 13.38 15.38 15.38 11.25 9.00
The Company's Common Stock (Nasdaq symbol "HLIT") began trading publicly on the
Nasdaq National Market System on May 22, 1995. Prior to that date, there was no
public market for the Common Stock.
(1) Net loss per share data for periods prior to the commencement of public
trading of the Company's Common Stock on May 22, 1995 have not been
presented as such presentation is not meaningful.
(2) The Company has not paid and does not intend to pay dividends in the
foreseeable future.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") designs, manufactures
and markets digital- and lightwave-based communications systems that deliver
video, audio and data over hybrid fiber/coax ("HFC"), satellite and wireless
networks. The Company's advanced solutions enable cable television and other
network operators to provide a range of broadcast and interactive broadband
services that include high-speed Internet access and video-on-demand. The
Company offers a broad range of fiber optic transmission and digital headend
products for HFC networks, and through its acquisition of New Media
Communication Ltd. ("NMC") in January 1998, expanded its product offerings to
include high-speed data delivery software and hardware.
This Annual Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including those set forth under "Factors That May Affect Future Results of
Operations" below and elsewhere in this annual report.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated:
YEAR ENDED DECEMBER 31, 1997 1996 1995
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Net sales 100% 100% 100%
Cost of sales 54 54 54
---- ---- ----
Gross profit 46 46 46
Operating expenses:
Research and development 16 15 16
Sales and marketing 18 16 15
General and administrative 6 6 5
---- ---- ----
Total operating expenses 40 37 36
---- ---- ----
Income from operations 6 9 10
Other income, net 1 1 1
---- ---- ----
Income before income taxes 7 10 11
Provision for income taxes -- -- --
---- ---- ----
Net income 7% 10% 11%
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Net Sales
The Company's net sales increased by 22% to $74.4 million in 1997. This growth
in net sales was primarily attributable to higher unit sales of the Company's
receiver and return path products and sales of the 1550 nm MAXLink transmission
system, which began shipment during the second quarter of 1996. These factors
were partially offset by lower unit sales of the YAGLink transmitters due in
part to the increasing acceptance of 1550 nm transmitters among cable operators
for broadcast transmission. Net sales in the second half of 1997 were lower than
in the first half of 1997 due principally to slowed capital spending in the
cable television industry. The factors contributing to this slow capital
spending include consolidation and system exchanges by domestic cable customers,
which generally has had the effect of delaying certain system upgrades,
uncertainty related to development of industry standards for digital
transmission, evaluation by many cable customers of which advanced services and
system architectures to provide and use, and emphasis on marketing and customer
service strategies by certain international customers rather than continued
construction of networks. The Company is unable to predict when cable television
industry capital spending will increase. See "Factors That May Affect Future
Results of Operations."
The Company's net sales increased by 55% to $60.9 million in 1996 from $39.2
million in 1995. This growth in net sales was primarily attributable to higher
unit sales of the Company's existing products, particularly the PWRLink
transmitter and return path products. In addition, the Company began shipment of
its 1550 nm MAXLink transmission system during the second quarter of 1996. These
factors were partially offset by lower unit sales of the YAGLink transmitters
and lower selling prices for certain products.
Historically, the majority of Harmonic's net sales have been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future. In 1997, sales to Capella (the Company's Canadian
distributor) accounted for 17% of the Company's net sales. In 1996, sales to
Tratec (the Company's former U.K. distributor), Capella and ANTEC Corporation
("ANTEC") accounted for 15%, 15% and 13%, respectively, of the Company's net
sales. In 1995, sales to Tratec, ANTEC and Capella accounted for 22%, 15% and
15%, respectively, of the Company's net sales.
Harmonic has adopted a strategy of selling to major domestic customers through
its own direct sales force; as a result, domestic OEM and distributor revenues
were a smaller percentage of net sales in 1997 than they were in prior years.
Sales to customers outside the United States represented 59%, 57% and 65% of net
sales in 1997, 1996 and 1995, respectively. Harmonic expects international sales
to continue to account for a substantial percentage of its net sales for the
foreseeable future.
Gross Profit
Gross profit increased to $34.6 million (46% of net sales) in 1997 from $27.7
million (46% of net sales) in 1996. The increase in gross profit was principally
due to higher unit sales volume and lower manufacturing costs, particularly for
the Company's MAXLink products, which commenced shipment during the second
quarter of 1996, and improved margins on return path products resulting from
product design changes. These factors were partially offset by a less favorable
product mix which included lower sales of transmitters as a percentage of net
sales, and lower selling prices for certain products. Gross profit increased to
$27.7 million (46% of net sales) in 1996 from $17.9 million (46% of net sales)
in 1995. The increase in gross profit was principally due to higher unit sales
volume which allowed the Company to improve fixed cost absorption and realize
increasing economies of scale through higher production and purchasing volumes,
partially offset by lower selling prices for certain products. A more favorable
product mix, which included a higher percentage of transmitters, also
contributed to the increase in gross profit in 1996.
Research and Development
Research and development expenses increased to $11.7 million (16% of net sales)
in 1997 from $9.2 million (15% of net sales) in 1996. The increase in research
and development expenses was principally due to increased headcount,
particularly at the Company's Israeli subsidiary, which is developing Harmonic's
digital headend products, and higher prototype material costs in connection with
the node and digital development programs. Research and development expenses
increased to $9.2 million in 1996 from $6.1 million in 1995, but decreased as a
percentage of net sales from 16% to 15%, reflecting higher sales levels. The
increase in spending related primarily to increased headcount, particularly at
the Company's Israeli subsidiary, and increased use of outside subcontractors
and consultants in Israel and in connection with the element management and 1550
nm MAXLink transmission system development programs. Research and development
expenses for 1997, 1996 and 1995 are net of grants from the BIRD Foundation of
approximately $120,000, $140,000 and $300,000, respectively. The Company
anticipates that research and development expenses will continue to increase
significantly, although they may vary as a percentage of net sales.
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Sales and Marketing
Sales and marketing expenses increased to $13.6 million (18% of net sales) in
1997 from $9.8 million (16% of net sales) in 1996. The increase in sales and
marketing expenses in 1997 was primarily due to higher headcount associated with
expansion of the direct sales force, customer service and technical support
organizations; expenses associated with establishing international sales
offices, and higher promotional expenses. Sales and marketing expenses increased
to $9.8 million (16% of net sales) in 1996 from $5.8 million (15% of net sales)
in 1995. The increase in 1996 was primarily attributable to higher headcount,
promotional expenses and commissions to international sales representatives. The
Company expects that sales and marketing expenses will continue to increase
significantly, although they may vary as a percentage of net sales.
General and Administrative
General and administrative expenses increased to $4.8 million in 1997 from $3.5
million in 1996 but remained constant as a percentage of net sales at 6%. The
increase in absolute expenses was principally attributable to costs of
supporting the Company's growth in headcount and operations and providing for a
higher accounts receivable reserve. General and administrative expenses
increased to $3.5 million (6% of net sales) in 1996 from $2.2 million (5% of net
sales) in 1995. The increase in expenses was primarily due to increased staffing
and related costs of supporting the Company's growth, and to a lesser extent, to
certain costs associated with being a public company. The Company expects to
incur higher levels of general and administrative expenses in the future,
although such expenses may vary as a percentage of net sales.
Other Income
Interest and other income was $0.7 million in 1997 compared to $1.0 million in
1996. The decrease in 1997 was principally due to interest earned on lower
average cash balances. Interest and other income was $1.0 million in 1996
compared to $0.6 million in 1995. The increase in 1996 compared to 1995 was
principally attributable to interest earned on higher average cash balances in
1996 following the Company's initial public offering (the "IPO") in May 1995,
and lower interest expense in 1996 as the Company repaid all capital leases and
bank debt in 1995. The income in 1995 was principally attributable to interest
earned on cash balances, following the Company's IPO, partially offset by
interest expense.
Income Taxes
The provision for income taxes for 1997, 1996 and 1995 was based on an estimated
annual tax rate of 5% resulting from federal and state alternative minimum
taxes. This rate reflects estimated realization of deferred tax assets,
primarily net operating loss carryforwards. The Company had available federal
net operating loss carryforwards of approximately $0.8 million at December 31,
1997. Under current tax law, the Company's utilization of its net operating loss
carryforwards has been limited and in the future may be limited or impaired in
certain circumstances resulting from a change in ownership. The Company expects
to have an effective annual tax rate of 10 - 15% in 1998, exclusive of
consideration of the one-time, in-process technology charge associated with the
NMC acquisition. The Company expects to have an effective annual tax rate beyond
1998 that approximates statutory rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company completed the IPO in May 1995, raising approximately $24.2 million,
net of offering costs. Prior to that, the Company satisfied its liquidity needs
primarily from the net proceeds of private sales of Preferred Stock, and to a
lesser extent, from capital equipment leases and bank borrowings.
Cash provided by operations was approximately $2.0 million in 1997, $0.3 million
in 1996 and $2.3 million in 1995. The increase in cash provided by operations in
1997 compared to 1996 was principally attributable to slower growth in
receivables, inventory and prepaid expenses and other assets, partially offset
by lower net income, accounts payable and accrued liabilities. The decrease in
cash provided by operations in 1996 compared to 1995 was primarily due to higher
accounts receivable, inventory and prepaid expenses to support increases in
sales and production volumes, and prepayment of rents and deposits of $1.8
million in connection with the Company's new corporate headquarters, partially
offset by higher net income, accounts payable and accrued liabilities.
Net working capital was approximately $38.8 million at December 31, 1997,
including $13.7 million of cash and cash equivalents. During the fourth quarter
of 1997, the Company renegotiated its bank line of credit, which now provides
for up to $12.0 million in borrowings and expires in December 1998. The line of
credit bears interest at the bank's prime rate or LIBOR plus 2.0%. The bank has
also extended a term loan facility not to exceed $3.0 million to be used for the
purchase of capital equipment. This loan facility expires in December 1998 and
bears interest at the bank's prime rate plus 0.5%. There were no outstanding
borrowings under either the bank line of credit or term loan during 1997.
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Additions to property, plant and equipment were approximately $4.8 million
during 1997 compared to $6.7 million and $3.9 million in 1996 and 1995
respectively. The decrease in 1997 was due principally to nonrecurring
expenditures in 1996 for leasehold improvements and furniture and fixtures for
the Company's new headquarters. While the Company currently has no material
commitments, it expects to spend approximately $6.0 million on capital
expenditures in 1998, primarily for manufacturing and test equipment.
The Company believes that its existing liquidity sources and anticipated funds
from operations will satisfy its cash requirements for at least the next twelve
months.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Future Operating Results
The Company's operating results have fluctuated and are likely to continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside of the Company's control. Such
factors include the level of capital spending in the cable television industry,
changes in the regulatory environment, changes in market demand, the timing of
customer orders, competitive market conditions, lengthy sales cycles, new
product introductions by the Company and its competitors, market acceptance of
new or existing products, the cost and availability of components, the mix of
the Company's customer base and sales channels, the mix of products sold,
development of custom products, the level of international sales and general
economic conditions. In addition, in each quarter of 1997 the Company recognized
a substantial portion of its revenues in the last month of the quarter. The
Company establishes its expenditure levels for product development and other
operating expenses based on projected sales levels, and expenses are relatively
fixed in the short term. Accordingly, variations in timing of sales can cause
significant fluctuations in operating results. In addition, because a
significant portion of the Company's business is derived from orders placed by a
limited number of large customers, the timing of such orders can also cause
significant fluctuations in the Company's operating results. If sales are below
expectations in any given quarter, the adverse impact of the shortfall on the
Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall.
Dependence on Cable Television Industry Capital Spending
To date, substantially all of the Company's sales have been derived, directly or
indirectly, from sales to cable television operators. Demand for the Company's
products depends to a significant extent upon the magnitude and timing of
capital spending by cable television operators for constructing, rebuilding or
upgrading their systems. The capital spending patterns of cable television
operators are dependent on a variety of factors, including access to financing,
cable television operators' annual budget cycles, the status of federal, local
and foreign government regulation of telecommunications and television
broadcasting, overall demand for cable television services, competitive
pressures (including the availability of alternative video delivery technologies
such as satellite broadcasting), discretionary customer spending patterns and
general economic conditions. The Company believes that the consolidation of
ownership of domestic cable television systems, by acquisition and system
exchanges, together with uncertainty over regulatory issues, particularly the
debate over the provisions of the Telecommunications Act of 1996, caused delays
in capital spending by major domestic MSOs during the second half of 1995 and
first quarter of 1996. Also, the Company's net sales in the second half of 1997
were adversely affected by a slow-down in spending by cable television
operators. The factors contributing to this slow capital spending include
consolidation and system exchanges by domestic cable customers, which generally
has had the effect of delaying certain system upgrades, uncertainty related to
development of industry standards for digital transmission, evaluation by many
cable customers of which advanced services and system architectures to provide
and use, and emphasis on marketing and customer service strategies by certain
international customers rather than continued construction of networks. The
Company is unable to predict when cable television industry capital spending
will increase. In addition, cable television capital spending can be subject to
the effects of seasonality, with fewer construction and upgrade projects
typically occurring in winter months and otherwise being affected by inclement
weather.
Dependence on Key Customers and End Users
Historically, a majority of the Company's sales have been to relatively few
customers. Sales to the Company's ten largest customers in 1997, 1996 and 1995
accounted for approximately 56%, 72% and 80%, respectively, of its net sales.
Due in part to the consolidation of ownership of domestic cable television
systems, the Company expects that sales to relatively few customers will
continue to account for a significant percentage of net sales for the
foreseeable future. Harmonic has adopted a strategy to sell to major domestic
customers through its
20
23
own direct sales force and domestic OEM and distributor revenues were a smaller
percentage of net sales in 1997 than they have been in prior years.
Substantially all of the Company's sales are made on a purchase order basis, and
none of the Company's customers has entered into a long-term agreement requiring
it to purchase the Company's products. The loss of, or any reduction in orders
from, a significant customer would have a material adverse effect on the
Company's business and operating results.
Highly Competitive Industry
The market for cable television transmission equipment is extremely competitive
and has been characterized by rapid technological change. Most of the Company's
competitors are substantially larger and have greater financial, technical,
marketing and other resources than the Company. Many of such large competitors
are in a better position to withstand any significant reduction in capital
spending by cable television operators. In addition, many of the Company's
competitors have more long standing and established relationships with domestic
and foreign cable television operators than does the Company. There can be no
assurance that the Company will be able to compete successfully in the future or
that competition will not have a material adverse effect on the Company's
business and operating results.
Rapid Technological Change
The market for the Company's products is relatively new, making it difficult to
accurately predict the market's future growth rate, size and technological
direction. In view of the evolving nature of this market, there can be no
assurance that cable television operators, telephone companies or other
suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has commenced shipment of products for digital applications, there can
be no assurance that the Company will successfully complete development of, or
successfully introduce, products for digital applications, or that such products
will achieve commercial acceptance. In addition, in order to successfully
develop and market its planned products for digital applications, the Company
may be required to enter into technology development or licensing agreements
with third parties. Although many companies are often willing to enter into such
technology development or licensing agreements, there can be no assurance that
such agreements will be negotiated on terms acceptable to the Company, or at
all. The failure to enter into technology development or licensing agreements,
when necessary, could limit the Company's ability to develop and market new
products and could have a material adverse effect on the Company's business and
operating results.
The failure of the Company to successfully develop and introduce new products
that address the changing needs of the broadband communications market could
have a material adverse effect on the Company's business and operating results.
In addition, there can be no assurance that the successful introduction by the
Company of new products will not have an adverse effect on the sales of the
Company's existing products. For instance, an emerging trend in the domestic
market toward narrowcasting (targeted delivery of advanced services to small
groups of subscribers) is causing changes in the network architectures of some
cable operators. This may have the effect of changing the Company's product mix
toward lower price transmitters, which could adversely affect the Company's
gross margins.
Risks Associated with the Acquisition of NMC
The growth in the Company's business has placed, and is expected to continue to
place, a significant strain on the Company's limited personnel, management and
other resources. Through its acquisition of NMC in January 1998, the Company
increased the scope of its product line to include broadband, high-speed data
delivery software and hardware and increased the scope of its international
operations in Israel. The acquisition of NMC involves numerous risks and
challenges, including: difficulties in the assimilation of operations, research
and development efforts, products, personnel and cultures of Harmonic Lightwaves
and NMC; the potential adverse effects of the acquisition on relationships with
customers, distributors, suppliers and other business partners of the two
companies; the dependence on the evolution and growth of the market for wireless
and satellite broadband services; regulatory developments; rapid technological
change; the highly competitive nature of the telecommunications industry; the
Company's ability to successfully develop, manufacture and gain market
acceptance of the products of NMC; the ability to manage geographically remote
units; the integration of NMC's management information systems with those of the
21
24
Company; potential adverse short-term effects on the Company's operating
results; the amortization of acquired intangible assets; the risk of entering
emerging markets in which the Company has limited or no direct experience; and
the potential loss of key employees of NMC. The Company's future operating
results will be significantly affected by its ability to successfully integrate
NMC, to implement operating, manufacturing and financial procedures and
controls, to improve coordination among different operating functions, to
strengthen management information and telecommunications systems and to continue
to attract, train and motivate additional qualified personnel in all areas.
There can be no assurance that the Company will be able to manage these
activities and implement these additional systems and controls successfully, and
any failure to do so could have a materially adverse effect upon the Company's
operating results. The Company expects that the inclusion of NMC's operations,
combined with seasonally low sales to domestic cable customers, will result in
an operating loss for the Company in the first quarter of 1998. In addition, the
acquisition of NMC has resulted in significant additional working capital
requirements. While the Company believes that it currently has sufficient funds
to finance its operations for at least the next twelve months, to the extent
that such funds are insufficient to fund the Company's activities, including any
potential acquisitions, the Company may need to raise additional funds through
public or private equity or debt financing from other sources. The sale of
additional equity or convertible debt may result in additional dilution to the
Company's stockholders and such securities may have rights, preferences or
privileges senior to those of the Common Stock. There can be no assurance that
additional equity or debt financing will be available or that if available it
can be obtained on terms favorable to the Company or its stockholders.
Sole or Limited Sources of Supply
Certain components and subassemblies necessary for the manufacture of the
Company's products are obtained from a sole supplier or a limited group of
suppliers. The reliance on sole or limited suppliers and the Company's
increasing reliance on subcontractors involve several risks, including a
potential inability to obtain an adequate supply of required components or
subassemblies and reduced control over pricing, quality and timely delivery of
components or subassemblies. The Company does not maintain long-term agreements
with any of its suppliers or subcontractors. An inability to obtain adequate
deliveries or any other circumstance that would require the Company to seek
alternative sources of supply could affect the Company's ability to ship its
products on a timely basis, which could damage relationships with current and
prospective customers and could have a material adverse effect on the Company's
business and operating results. The Company believes that investment in
inventories will continue to constitute a significant portion of its working
capital in the future. As a result of such investment in inventories, the
Company may be subject to an increasing risk of inventory obsolescence in the
future, which could materially and adversely affect its business and operating
results.
Risks of International Operations
Sales to customers outside of the United States in 1997, 1996 and 1995
represented 59%, 57% and 65% of net sales, respectively, and the Company expects
that international sales will continue to represent a substantial portion of its
net sales for the foreseeable future. In addition, the Company has two Israeli
subsidiaries, NMC and a subsidiary that engages primarily in research and
development. International operations are subject to a number of risks,
including changes in foreign government regulations and telecommunications
standards, export license requirements, tariffs and taxes, other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, difficulty in staffing and managing foreign operations and political
and economic instability. While international sales are typically denominated in
U.S. dollars, fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country.
Payment cycles for international customers are typically longer than those for
customers in the United States. There can be no assurance that foreign markets
will continue to develop or that the Company will receive additional orders to
supply its products for use in foreign broadband systems. In recent months,
certain Asian currencies have devalued significantly in relation to the U.S.
dollar. The Company is currently evaluating the effect of recent developments in
Asia on the Company's business, and there can be no assurance that the Company's
sales in Asia will not be materially adversely affected by such developments.
Risks of Information Systems
The Company has commenced, for all its information systems, a Year 2000 date
conversion project to address all necessary changes to be Year 2000 compliant.
The Company is expensing the costs of addressing the "Year 2000 issue" as
incurred. The Company does not expect that Year 2000 issues from its own
information systems will have a material adverse impact on its financial
position or results of operations. However, the Company could be adversely
impacted by Year 2000 issues faced by major customers and suppliers and other
organizations with which the Company interacts. The Company is in the process of
determining the impact that third parties who are not Year 2000 compliant may
have on the operations of the Company.
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25
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents $ 13,670 $ 16,410
Accounts receivable, net 16,458 12,643
Inventories 15,474 14,782
Prepaid expenses and other assets 1,774 1,315
-------- --------
Total current assets 47,376 45,150
Notes receivable 1,300 --
Property and equipment, net 10,077 8,751
Other assets 134 732
-------- --------
$ 58,887 $ 54,633
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,708 $ 5,604
Accrued liabilities 4,896 5,225
-------- --------
Total current liabilities 8,604 10,829
Other liabilities 352 163
Commitments (Notes 9 and 11)
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common Stock, $.001 par value, 50,000,000 shares authorized;
10,414,297 and 10,160,876 shares issued and outstanding 10 10
Capital in excess of par value 55,917 54,579
Accumulated deficit (6,019) (10,948)
Currency translation 23 --
-------- --------
Total stockholders' equity 49,931 43,641
-------- --------
$ 58,887 $ 54,633
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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26
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 74,442 $ 60,894 $ 39,180
Cost of sales 39,837 33,163 21,329
-------- -------- --------
Gross profit 34,605 27,731 17,851
-------- -------- --------
Operating expenses:
Research and development 11,676 9,237 6,144
Sales and marketing 13,599 9,827 5,750
General and administrative 4,824 3,463 2,196
-------- -------- --------
Total operating expenses 30,099 22,527 14,090
-------- -------- --------
Income from operations 4,506 5,204 3,761
Interest and other income, net 682 1,025 577
-------- -------- --------
Income before income taxes 5,188 6,229 4,338
Provision for income taxes 259 311 217
-------- -------- --------
Net income $ 4,929 $ 5,918 $ 4,121
======== ======== ========
Basic net income per share $ 0.48 $ 0.59 $ 0.71
======== ======== ========
Diluted net income per share $ 0.43 $ 0.52 $ 0.40
======== ======== ========
Average number of shares outstanding 10,345 10,106 5,797
======== ======== ========
Average number of shares outstanding assuming dilution 11,523 11,474 10,382
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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27
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK CAPITAL IN STOCKHOLDERS'
----------------- EXCESS OF ACCUMULATED CURRENCY EQUITY
SHARES AMOUNT PAR VALUE DEFICIT TRANSLATION (DEFICIT)
------ ------ ------- ----------- ----------- ----------
(IN THOUSANDS)
Balance at December 31, 1994 469 $ 1 $ 269 $ (20,987) $ -- $ (20,717)
Conversion of Mandatorily
Redeemable Preferred Stock 7,095 7 29,208 -- -- 29,215
Issuance of Common Stock in
initial public offering, net 2,000 2 24,198 -- -- 24,200
Exercise of stock options
and warrants 340 -- 190 -- -- 190
Net income -- -- -- 4,121 -- 4,121
------ ----- ------- ---------- ------ ----------
Balance at December 31, 1995 9,904 10 53,865 (16,866) -- 37,009
Exercise of stock options
and warrants 208 -- 240 -- -- 240
Issuance of Common Stock
under Stock Purchase Plan 49 -- 474 -- -- 474
Net income -- -- -- 5,918 -- 5,918
------ ----- ------- ---------- ------ ----------
Balance at December 31, 1996 10,161 10 54,579 (10,948) -- 43,641
Exercise of stock options
and warrants 185 -- 612 -- -- 612
Issuance of Common Stock
under Stock Purchase Plan 68 -- 726 -- -- 726
Currency translation 23 23
Net income -- -- -- 4,929 -- 4,929
------ ----- ------- ---------- ------ ----------
Balance at December 31, 1997 10,414 $ 10 $55,917 $ (6,019) $ 23 $ 49,931
====== ===== ======= ========== ====== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income $ 4,929 $ 5,918 $ 4,121
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,441 2,506 1,799
Changes in assets and liabilities:
Accounts receivable (3,815) (6,841) (1,246)
Inventories (692) (5,606) (3,523)
Prepaid expenses and other assets 139 (1,848) (15)
Accounts payable (1,896) 3,403 2
Accrued and other liabilities (140) 2,781 1,128
-------- -------- --------
Net cash provided by operating activities 1,966 313 2,266
Cash flows used in investing activities:
Acquisition of property and equipment (4,767) (6,743) (3,119)
Advances to New Media Communication Ltd. (1,300) -- --
-------- -------- --------
Net cash used in investing activities (6,067) (6,743) (3,119)
Cash flows from financing activities:
Repayment under bank line of credit -- -- (922)
Proceeds from issuance of Common Stock, net 1,338 714 24,390
Repayments of long-term debt -- -- (2,232)
-------- -------- --------
Net cash provided by financing activities 1,338 714 21,236
Effect of exchange rate changes on cash and cash equivalents 23 -- --
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,740) (5,716) 20,383
Cash and cash equivalents at beginning of period 16,410 22,126 1,743
-------- -------- --------
Cash and cash equivalents at end of period $ 13,670 $ 16,410 $ 22,126
-------- -------- --------
Supplemental schedule of cash flow information and non-cash financing
activities:
Interest paid during the period $ -- $ 21 $ 193
Income taxes paid during the period 323 285 126
Acquisition of property and equipment under
capital leases and equipment term loan $ -- $ -- $ 752
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Harmonic Lightwaves, Inc. (the "Company") designs, manufactures and markets
digital and lightwave based communications systems that deliver video, audio and
data over hybrid fiber/coax ("HFC"), satellite and wireless networks. The
Company operates in one industry segment. See Note 10 for geographic information
and information regarding sales to significant customers.
Reincorporation and Reverse Stock Split
The Company originally incorporated in California in June 1988. In May 1995, the
Company reincorporated in Delaware. In conjunction with the reincorporation, all
outstanding shares of the predecessor California company were exchanged into
common stock of the Delaware company in a one-for-three reverse stock split.
Basis of Presentation
The consolidated financial statements of the Company include the financial
statements of the Company and its wholly-owned subsidiaries. All intercompany
accounts and balances have been eliminated. The Company's fiscal quarters end on
the Friday nearest the calendar quarter end.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts. Actual results could differ
from these estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity date of three months or less at the date of purchase to be cash
equivalents. The Company's investments are classified as held-to-maturity.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value due to their short maturities.
Revenue Recognition
Revenue is generally recognized upon shipment of product. A provision for the
estimated cost of warranty is recorded at the time revenue is recognized.
Inventories
Inventories are stated at the lower of cost, using the weighted average method,
or market.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
computed using the straight-line method based upon the shorter of the estimated
useful lives of the assets, which range from two to ten years, or the lease term
of the respective assets, if applicable.
Concentrations of Credit Risk
Financial instruments which subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable. Cash and
cash equivalents are maintained with high quality financial institutions and are
invested in short-term, highly liquid investment grade obligations of government
and commercial issuers, in accordance with the Company's investment policy. The
investment policy limits the amount of credit exposure to any one financial
institution or commercial issuer. The Company's accounts receivable are derived
from sales to cable television operators and distributors as discussed in Note
10. The Company performs ongoing credit evaluations of its customers, and
provides for expected losses but to date has not experienced any material
losses. At December 31, 1997, receivables from one customer represented 25% of
accounts receivable. At December 31, 1996, receivables from three customers
represented 20%, 17% and 11%, respectively.
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30
Currency Translation
The assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at year-end exchange rates, and revenues and expenses are translated at
average exchange rates during the year. Cumulative currency translation
adjustments are included in stockholders' equity. Realized gains and losses from
currency exchange transactions have not been material.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts under the provisions
of Statement on Financial Accounting Standards No. 109 ("SFAS 109"), which has
been applied for all periods presented.
Accounting for Stock-Based Compensation
The Company's stock-based compensation plans are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards 123 ("SFAS 123").
Reclassification
Certain amounts in prior years' financial statements and related notes have been
reclassified to conform to the 1997 presentation. These reclassifications are
not material.
NOTE 2: CASH AND CASH EQUIVALENTS
At December 31, 1997 and 1996, the Company had the following amounts in cash and
cash equivalents, with original maturity dates of three months or less at the
date of purchase. Realized gains and losses for the years ended December 31,
1997 and 1996 and the difference between gross amortized cost and estimated fair
value at December 31, 1997 and 1996 were immaterial.
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Commercial paper $ 7,956 $ 15,964
Cash and money market accounts 5,714 446
-------- --------
Total cash and cash equivalents $ 13,670 $ 16,410
======== ========
NOTE 3: BALANCE SHEET DETAILS
DECEMBER 31, 1997 1996
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Accounts receivable:
Gross accounts receivable $ 17,208 $ 12,943
Less: allowance for doubtful accounts (750) (300)
-------- --------
$ 16,458 $ 12,643
======== ========
Inventories:
Raw materials $ 4,356 $ 3,104
Work-in-process 3,127 4,704
Finished goods 7,991 6,974
-------- --------
$ 15,474 $ 14,782
======== ========
Property and equipment:
Furniture and fixtures $ 1,585 $ 1,124
Machinery and equipment 15,692 12,183
Leasehold improvements 2,779 1,982
20,056 15,289
Less: accumulated depreciation and amortization (9,979) (6,538)
-------- --------
$ 10,077 $ 8,751
======== ========
Accrued liabilities:
Accrued compensation $ 1,837 $ 2,166
Accrued warranties 626 733
Other 2,433 2,326
-------- --------
$ 4,896 $ 5,225
======== ========
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31
NOTE 4: NET INCOME PER SHARE
During the quarter ended December 31, 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires presentation of both Basic EPS and Diluted EPS on the face of the
statement of operations. Basic EPS, which replaces primary EPS, is computed by
dividing net income available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the period.
Unlike the computation of primary EPS, Basic EPS excludes the dilutive effect of
stock options, warrants and Mandatorily Redeemable Convertible Preferred Stock.
Diluted EPS replaces fully diluted EPS and gives effect to all dilutive
potential common shares outstanding during a period. In computing Diluted EPS,
the average price for the period is used in determining the number of shares
assumed to be purchased from exercise of stock options and warrants rather than
the higher of the average or ending price as used in the computation of fully
diluted EPS. Mandatorily Redeemable Convertible Preferred Stock is included in
the net income per share calculation using the if-converted method when
applicable. Net income per share for all prior periods presented has been
restated to conform to the provisions of SFAS 128.
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted EPS computations for the periods presented below:
1997 1996 1995
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Net income (numerator) $ 4,929 $ 5,918 $ 4,121
======== ======== ========
Shares calculation (denominator):
Average shares outstanding -- basic 10,345 10,106 5,797
Effect of Dilutive Securities:
Potential Common Stock
Stock options and warrants 1,178 1,368 1,456
Mandatorily Redeemable Convertible Preferred Stock -- -- 3,129
-------- -------- --------
Average shares outstanding -- diluted 11,523 11,474 10,382
======== ======== ========
Net income per share -- basic $ 0.48 $ 0.59 $ 0.71
======== ======== ========
Net income per share -- diluted $ 0.43 $ 0.52 $ 0.40
======== ======== ========
Options to purchase 514,150 shares of common stock at prices ranging from $16.50
to $22.75 per share were outstanding during 1997, but were not included in the
computation of diluted EPS because either the option's exercise price was
greater than the average market price of the common shares or inclusion of such
options would have been antidilutive.
NOTE 5: BORROWING FACILITIES
The Company has a bank line of credit agreement, providing for borrowings of up
to $12,000,000. The agreement contains certain financial covenants and is
available until December 1998. Borrowings pursuant to the agreement bear
interest at the bank's prime rate or LIBOR plus 2%. The Company also has an
equipment term loan (the "term loan") facility, providing for borrowings of up
to $3,000,000 on a secured basis. The term loan is available until December 1998
and bears interest at the bank's prime rate plus 0.5%, payable monthly. The
outstanding balance is payable in monthly installments beginning June 1998
through December 2001. There were no outstanding borrowings at December 31, 1997
or 1996.
NOTE 6: CAPITAL STOCK
Initial Public Offering
In May 1995, the Company completed its initial public offering ("IPO") of
2,600,000 shares of common stock, 600,000 of which were sold by existing
stockholders, at a price of $13.50 per share. Net proceeds to the Company were
approximately $24.2 million, after underwriter commissions and associated costs.
Upon the closing of the IPO, all outstanding shares of Mandatorily Redeemable
Convertible Preferred Stock automatically converted into 7,094,748 shares of
Common Stock. Also effective with the closing of the IPO, the Company was
authorized to issue 5,000,000 shares of undesignated preferred stock, of which
none were issued or outstanding at December 31, 1997 and 1996.
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32
Common Stock Warrants
In June 1994, the Company entered into a distribution agreement, in connection
with which it issued a warrant to purchase up to 798,748 shares of Common Stock
at $5.55 per share. The warrant had a fair value of $200,000, which was charged
to results of operations in the second quarter of 1994. The warrants will become
exercisable in June 1999 and expire at the earlier of six years from the date of
issuance or the closing of a significant acquisition transaction, as defined in
the warrant. The Company has reserved 798,748 shares of Common Stock for
issuance upon exercise of this warrant.
In 1993, the Company issued a warrant to purchase up to 22,222 shares of the
Company's Common Stock at an exercise price of $4.50 per share in conjunction
with an equipment lease line facility. The fair value of the warrant was
nominal, and the warrant expires at the earlier of seven years from the date of
issuance or the merger or sale of the Company meeting certain criteria. The
Company has reserved 22,222 shares of Common Stock for issuance upon exercise of
this warrant.
NOTE 7: BENEFIT AND COMPENSATION PLANS
Stock Option Plans
In 1988, the Company adopted an incentive and non-statutory stock option plan
(the "1988 Plan") for which 1,125,917 shares have been reserved for issuance.
Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness
of the Company's IPO, no further grants have been, or will be, made under the
1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods
not to exceed ten years. Exercise prices of incentive stock option grants under
both plans must be at least 100% of the fair market value of the stock at the
date of grant and for nonstatutory stock options must be at least 85% of the
fair market value of the stock at the date of grant. Under both plans, the
options generally vest 25% at one year from date of grant, and an additional
1/48th per month thereafter. The Company has reserved 1,045,000 shares of Common
Stock for issuance under the 1995 Plan.
Director Option Plan
Effective upon the IPO, the Company adopted the 1995 Director Option Plan (the
"Director Plan") and reserved 50,000 shares of Common Stock for issuance
thereunder. The Director Plan provides for the grant of nonstatutory stock
options to certain nonemployee directors of the Company pursuant to an
automatic, nondiscretionary grant mechanism.
The following table summarizes activities under the Plans:
WEIGHTED
SHARES AVAILABLE STOCK OPTIONS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE)
Balance at December 31, 1994 299 1,147 $ 0.99
Shares authorized 401 -- --
Options granted (278) 278 11.99
Options exercised -- (252) 0.53
Options canceled 20 (20) 5.81
------ ------ ------
Balance at December 31, 1995 442 1,153 3.67
Options granted (344) 344 12.72
Options exercised -- (208) 0.98
Options canceled 7 (48) 5.75
------ ------ ------
Balance at December 31, 1996 105 1,241 6.56
Shares authorized 480 -- --
Options granted (504) 504 18.08
Options exercised -- (185) 3.31
Options canceled 154 (177) 14.26
------ ------ ------
Balance at December 31, 1997 235 1,383 $10.22
====== ====== ======
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The following table summarizes information regarding stock options outstanding
at December 31, 1997:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------------------------------- ------------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING NUMBER
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DEC. 31, 1997 (YEARS) EXERCISE PRICE DEC. 31, 1997 EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT EXERCISE PRICE AND LIFE)
$ 0.30 - 1.20 307 4.4 $ 0.41 307 $ 0.41
1.80 - 4.65 175 6.5 2.40 149 2.33
7.20 - 13.75 434 7.9 10.98 219 10.75
14.13 - 22.75 467 9.3 18.89 43 17.45
----- --- ------ --- ------
1,383 7.4 $10.22 718 $ 4.98
===== === ====== === ======
Employee Stock Purchase Plan
Effective upon the IPO, the Company adopted the 1995 Employee Stock Purchase
Plan (the "Purchase Plan") and reserved 200,000 shares of Common Stock for
issuance thereunder. The Purchase Plan enables employees to purchase shares at
85% of the fair market value of the Common Stock at the beginning or end of each
six month purchase period. The Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code.
68,271, 48,977 and no shares were issued under the Purchase Plan during 1997,
1996 and 1995, respectively.
Fair Value Disclosures
The Company accounts for its stock-based compensation plans in accordance with
the provisions of Accounting Principles Board Opinion No. 25. If compensation
cost for the Company's stock-based compensation plans had been determined based
on the fair market value at the grant dates, as prescribed in SFAS 123, the
Company's net income and net income per share would have been as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported $4,929 $5,918 $4,121
Pro forma 3,209 4,474 3,610
Basic net income per share
As reported $ 0.48 $ 0.59 $ 0.71
Pro Forma 0.31 0.44 0.62
Diluted net income per share:
As reported $ 0.43 $ 0.52 $ 0.40
Pro forma 0.28 0.39 0.35
The fair value of each option grant under the 1988 Plan, 1995 Plan and Director
Plan was estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions used for grants during 1997, 1996 and 1995:
dividend yield of 0.0%; expected weighted average volatility of 55%, 47.5%, and
47.5%, respectively; and expected weighted average lives of four years, during
each year; and risk-free interest rates of 5.6% to 6.7%, 5.2% to 6.5% and 5.4%
to 7.1% for options granted during 1997, 1996 and 1995, respectively.
The fair value of the employees' purchase rights under the Employee Stock
Purchase Plan was estimated using the Black-Scholes model with the following
weighted average assumptions for 1997, 1996 and 1995: dividend yield of 0.0%;
expected volatility of 55%, 47.5%, and 47.5%, respectively; expected lives of
two years during each year; and risk-free interest rates of 5.1% to 6.3% for
1997 and, 5.7% and 5.3% for 1996 and 1995, respectively.
Retirement/Savings Plan
Effective April 1, 1992, the Company implemented a retirement/savings plan which
qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code.
This plan allows participants to contribute up to 20% of total compensation,
subject to applicable Internal Revenue Service limitations. Effective April 1,
1997, the Company began to make discretionary contributions to the plan of $0.25
per dollar contributed by eligible participants up to a maximum contribution per
participant of $750 per year.
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NOTE 8: INCOME TAXES
The Company incurred net operating losses in each year through December 31,
1994. Foreign income (losses) were not significant for all years presented. The
provision for income taxes for the year ended December 31, 1997 consists of the
following:
DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Current:
Federal $168 $246 $174
Foreign 90 41 16
State 1 24 27
---- ---- ----
$259 $311 $217
==== ==== ====
The income tax provision reconciles to the provision at the federal statutory
rate as follows:
DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Provision at statutory rate $ 1,764 $ 2,118 $ 1,475
Differential in rates on foreign earnings (111) -- --
State taxes, net of federal benefit 1 16 18
Foreign sales corporation benefit (176) -- --
Utilization of net operating loss carryovers (1,661) (2,490) (2,052)
Future benefits not currently recognized 364 429 567
Alternative minimum tax 51 162 116
Other 27 76 93
------- ------- -------
$ 259 $ 311 $ 217
======= ======= =======
Deferred tax assets comprise the following:
DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Net operating loss carryovers $ 303 $ 1,964 $ 3,960
Research and development carryovers 2,452 2,112 1,396
Capitalized research and development costs 234 254 931
Reserves not currently deductible 1,657 1,187 574
Other 96 12 746
------- ------- -------
Total deferred tax assets 4,742 5,529 7,607
Valuation allowance (4,742) (5,529) (7,607)
------- ------- -------
Net deferred assets $ -- $ -- $ --
======= ======= =======
The deferred tax assets valuation allowance at December 31, 1997, 1996 and 1995
is attributed to federal and state deferred tax assets. Management believes that
sufficient uncertainty exists regarding the realizability of these items such
that a full valuation allowance has been recorded.
At December 31, 1997, the Company had approximately $800,000 of net operating
loss carryovers for federal tax reporting purposes available to offset future
taxable income; such carryovers expire through 2009. The net operating loss
carryovers do not include approximately $1,200,000 resulting from disqualifying
dispositions or exercises of non-incentive stock options, the tax benefit of
which, when realized, will be accounted for as an addition to capital in excess
of par value, rather than as a reduction of the provision for income taxes.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and research and development credits that can be carried
forward may be impaired or limited in certain circumstances. Events which may
cause changes in the Company's net operating loss and research and development
credit carryovers include, but are not limited to, a cumulative stock ownership
change of greater than 50%, as defined, over a three year period.
32
35
NOTE 9: RESEARCH AND DEVELOPMENT GRANTS
In accordance with separate agreements signed with the Israel - U.S. Binational
Industrial Research and Development Foundation ("BIRD") in December 1994 and
December 1997, the Company obtained grants for research and development projects
amounting to 50% of the actual expenditures incurred on each of the two projects
subject to a maximum of $560,000 and $845,000, respectively. The Company is not
obligated to repay the grants regardless of the outcome of its development
efforts; however, it is obligated to pay the BIRD royalties at the rate of 2.5%
- - 5% of sales of any products or development resulting from such research, but
not in excess of 150% of each grant. Under the first grant the Company earned
approximately $120,000, $140,000, and $300,000 during 1997, 1996 and 1995,
respectively, which were offset against research and development expenses for
the same period. The Company did not receive any funding and did not incur any
significant expenditures on the new project during 1997.
NOTE 10: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Sales and purchase transactions are denominated in U.S. dollars. The Company has
one manufacturing facility located in the U.S. The Company has no significant
assets located outside of the U.S.
International net sales were as follows:
YEAR ENDED DECEMBER 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Americas (excluding U.S.) $18,045 $12,216 $ 8,281
Asia 15,406 10,342 7,331
Europe 10,339 12,214 9,819
------- ------- -------
$43,790 $34,772 $25,431
======= ======= =======
The Company sells to a significant number of its end users through distributors.
In 1997, sales to one distributor represented 17% of total net sales. In 1996,
sales to three distributors represented 15%, 15% and 13% of total net sales,
respectively. In 1995, sales to three distributors accounted for 22%, 15% and
15% of total net sales, respectively.
NOTE 11: COMMITMENTS AND CONTINGENCIES
Commitments
The Company leases its facilities under noncancelable operating leases which
expire at various dates through 2006. Total rent expense related to these
operating leases were $1,413,000, $828,000, and $555,000, for 1997, 1996 and
1995, respectively. Future minimum lease payments under noncancelable operating
leases at December 31, 1997, were as follows:
(IN THOUSANDS)
- --------------------------------------------
1998 $ 650
1999 1,344
2000 1,398
2001 1,415
2002 1,290
Thereafter 4,880
-------
$10,977
=======
At December 31, 1997, the Company had prepaid approximately $655,000 of rents
and deposits under the terms of its 10 year lease agreement for its corporate
headquarters in Sunnyvale, California, which it occupied in August 1996. The
Company has subleased a portion of its headquarters through July 1998. Under the
terms of the sublease, the sublessee is required to make payments aggregating
$223,000 for 1998.
Contingencies
The Company is a party to certain litigation matters and claims which are normal
in the course of its operations and, while the results of litigation and claims
cannot be predicted with certainty, management believes that the final outcome
of such matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
33
36
NOTE 12: SUBSEQUENT EVENTS (UNAUDITED)
In January 1998, the Company acquired New Media Communication Ltd. ("NMC"), a
privately held supplier of broadband, high-speed data delivery software and
hardware, in exchange for the issuance of 1,037,911 shares of Harmonic common
stock and the assumption of all outstanding NMC stock options. The acquisition
will be accounted for using the purchase method of accounting with the purchase
price of approximately $17.6 million being allocated to the acquired assets,
in-process technology and goodwill. Approximately $14.0 million of the purchase
price will be charged to in-process technology as a one-time charge in the first
quarter of 1998. Goodwill of approximately $1.5 million will be amortized over
the estimated useful life of five years. NMC has been a development stage
company since its founding in 1996 and its revenues to date have not been
material in relation to those of the Company. NMC had a net loss of
approximately $2.6 million for 1997. The Company made advances to NMC starting
in September 1997 which totaled $1.3 million at December 31, 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors & Shareholders of Harmonic Lightwaves, Inc.,
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Harmonic Lightwaves, Inc. and its subsidiaries at December 31, 1997, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE, LLP
- -------------------------
San Jose, California
January 20, 1998
34
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[LOGO]
HARMONIC LIGHTWAVES, INC.
549 BALTIC WAY
SUNNYVALE, CALIFORNIA 94089
TELEPHONE: (408) 542-2500
FACSIMILE: (408) 542-2511
WWW.HARMONIC-LIGHTWAVES.COM
38
CORPORATE INFORMATION
BOARD OF DIRECTORS
Anthony J. Ley
Chairman, President and
Chief Executive Officer
Harmonic Lightwaves, Inc.
Moshe Nazarathy
Senior Vice President
Harmonic Lightwaves, Inc.
E. Floyd Kvamme*+
General Partner
Kleiner Perkins Caufield & Byers
David A. Lane
General Partner
Alpine Technology Ventures
Barry D. Lemieux*
Former President
American Cablesystems Corporation
Michel L. Vaillaud+
Former Chairman and
Chief Executive Officer
Schlumberger Limited
*Member, Compensation Committee
+Member, Audit Committee
EXECUTIVE OFFICERS
Anthony J. Ley
Chairman, President and
Chief Executive Officer
Moshe Nazarathy
Senior Vice President,
General Manager,
Israel R&D Center
Robin N. Dickson
Chief Financial Officer
John E. Dahlquist
Vice President, Marketing
Michael Yost
Vice President, Operations
LEGAL COUNSEL
Wilson, Sonsini, Goodrich & Rosati
Palo Alto, California
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Jose, California
TRANSFER AGENT/REGISTRAR
ChaseMellon Shareholder
Services, LLC
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 777-3694
www.chasemellon.com
SHAREHOLDER INFORMATION
Harmonic Lightwaves welcomes inquiries from shareholders and other interested
investors. Additional copies of this report and/or the Form 10-K, filed with the
Securities and Exchange Commission, may be obtained without charge by contacting
Investor Relations at (408) 542-2760 or via e-mail at
investor@harmonic-lightwaves.com.
ANNUAL MEETING
Shareholders are invited to attend Harmonic Lightwaves' annual meeting at 8:00
a.m. on April 29, 1998 at The Westin - Santa Clara, 101 Great America Parkway,
Santa Clara, California 95054.
(408) 986-0700
STOCK LISTING
Stock traded on the Nasdaq National Market System under the symbol HLIT.
CORPORATE HEADQUARTERS
Harmonic Lightwaves, Inc.
549 Baltic Way
Sunnyvale, California 94089
Telephone: (408) 542-2500
Facsimile: (408) 542-2511
SUBSIDIARIES
Harmonic Lightwaves (Israel) Ltd.
19 Alon Hatavor St. - Zone 3
P.O. Box 3600
Caesarea Industrial Park
Pardes Hana, Israel 38900
Harmonic Lightwaves, Ltd.
Unit #17, Alban Park, Hatfield Rd.
St. Albans, Herts A1L40JJ
United Kingdom
New Media Communication, Ltd.
10 Beit Shamai St.
Tel Aviv, Israel 67018
(C)Harmonic Lightwaves, Inc. Printed in the USA. MAXLink, PWRLink, PWRBlazer,
NETWatch and TRANsend are trademarks of Harmonic Lightwaves, Inc.