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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25826
HARMONIC LIGHTWAVES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0201147
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
549 BALTIC WAY
SUNNYVALE, CA 94089
(408) 542-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock,
par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Based on the closing sale price of the Common Stock on the Nasdaq National
Market System on March 11, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $156,102,407. Shares of Common
Stock held by each officer and director and by each person who owns 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's Common Stock, $.001
par value, was 10,215,677 at March 11, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT LOCATION IN FORM 10-K
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1996 Annual Report to Stockholders (pages 17-36). Parts II and IV
Portions of the Proxy Statement for the 1997 Annual Part III
Meeting of Stockholders (which will be filed with
the Securities and Exchange Commission within 120
days of the end of the fiscal year ended December
31, 1996).
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The Board Compensation Committee Report and the Performance Graph to be
included with the 1997 Proxy Statement shall not be deemed to be "soliciting
material" or to be "filed" with the Commission or otherwise incorporated by
reference into this report.
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PART I
ITEM 1. BUSINESS
Harmonic Lightwaves ("Harmonic" or the "Company") develops, manufactures
and markets highly integrated fiber optic transmission, digital headend and
element management systems for delivering interactive services over broadband
networks. The Company's products include optical transmitters, nodes, receivers,
digital video compression and modulation equipment, and element management
hardware and software. These products are used by major communications
providers, such as cable television operators, in bi-directional networks.
Harmonic was incorporated in June 1988 in California. In May 1995, Harmonic
reincorporated into Delaware and completed its initial public offering.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including those set forth under "Factors That May Affect Future Results
of Operations" and elsewhere in this Annual Report on Form 10-K.
INDUSTRY BACKGROUND
The introduction and deployment of fiber optic technology in cable
television networks has significantly increased network quality and reliability.
Fiber optic cables provide significant performance advantages compared to
coaxial cables, including longer transmission distance, greater channel
capacity, reduced cable size and weight, and resistance to interference from
external electronic signals. By eliminating the need for amplifiers in the trunk
section of a traditional coax network, fiber increases the reliability of a
cable television network and the quality of the signal, while substantially
lowering network installation and maintenance cost. The higher bandwidth of
fiber can increase capacity to up to 110 analog channels on a typical hybrid
fiber coax ("HFC") network and, together with the removal of amplifiers,
facilitates the two-way communication necessary for the provision of advanced
interactive services. As a result, HFC architectures are being increasingly
adopted on a worldwide basis. In addition to upgrading network infrastructure
with fiber optics, multiple system operators (MSOs) are beginning to introduce
digital transmission capability. Digital compression technology, which will
permit the system operator to provide new integrated voice, video and data
services over HFC networks, is now becoming available. Transmissions in digital
format are expected to allow operators to provide subscribers up to several
hundred channels of high-quality television, as well as high-speed data
communications, Internet access and telephony services.
Cable television service is currently available to approximately 90% of all
U.S. households. Accordingly, growth in the U.S. cable television equipment
market is being driven primarily by the need to upgrade and rebuild existing
cable television networks to provide improved and expanded services.
Internationally, because of the relatively low availability of cable television
networks and the stringent network performance criteria which have been imposed
by many foreign governments, significant investment in advanced network
infrastructure will be required to bring cable television service to large
segments of the population. These trends are expected to contribute to the
increased use of fiber optic transmission systems in the future.
Cable television operators are facing increasing competition worldwide as a
result of recent and proposed regulatory reform. The communications environment
in the United States is likely to be more competitive as a result of the
Telecommunications Act of 1996 ("the Telecom Act"). Historically, U.S. local
exchange carriers, such as the regional Bell operating companies (RBOCs), have
been prohibited from transmitting video programming in their local service
areas. Likewise, U.S. cable television operators have been prohibited by federal
regulation from offering telephony services. The Telecom Act permits cable
television operators and local exchange carriers to enter each other's markets
and to provide other services, such as high-speed data communications. To
address this more competitive environment, the Company believes that cable
television operators will be under increasing pressure to upgrade and rebuild
their networks.
In addition, the emergence of direct broadcast satellite (DBS) systems and
other alternative video programming delivery systems has already subjected cable
television operators to increasing competitive
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pressures. DBS systems broadcast compressed digital video over satellite to a
receiving dish located at the subscriber's home and offer consumers up to 200
channels of video programming. The continued penetration of DBS is expected to
put increasing pressure on cable television operators to provide additional
programming and better quality service. In addition, other competitive
technologies have emerged to support the delivery of video programming.
Government initiatives and deregulation of telecommunications markets
abroad have fostered substantial growth and competition in many foreign cable
television markets. Because of the early stage of development of many foreign
cable television markets and stringent system performance criteria established
by foreign government regulations, the provision of cable television service in
many foreign countries will require significant investment in advanced video
transmission equipment. The major U.S. MSOs and RBOCs have used this opportunity
to expand their presence internationally, through partnerships, joint ventures
and other initiatives.
The competitive pressures to upgrade cable television networks and the
corresponding capital requirements have led to significant cable television
industry consolidation in recent years. The upgrade of existing networks
requires substantial expenditures and the replacement of significant parts of
the transmission network. As a result, MSOs have sought to increase their size
in order both to achieve the economies of scale made possible by the ownership
of adjacent systems ("clustering") and to improve their financial strength. This
has been accomplished largely through acquisitions of smaller MSOs and
independent cable television operators, many of which cannot afford significant
system upgrades. A number of sizable acquisitions and system exchanges by MSOs
has been completed during the past several years.
In order to offer the increased capabilities needed to provide these
advanced services, MSOs are expected to continue to upgrade their systems by
incorporating fiber optic technology and digital transmission capability.
Similarly, telephone companies are expected to be under competitive pressure to
upgrade their copper local loop systems, which have limited video and data
communication capabilities, to incorporate fiber optic technology. In contrast
to the past, when consumers were generally limited to a single choice for their
video service and a single choice for local telephone service, consumers are
expected to be able to choose between two or more providers of highly integrated
services in the future. The factors affecting the selection of services in the
future are expected to include network reliability, price, the number of
television channels offered, the speed of data transmission, interactivity, and
picture, sound and data quality.
PRODUCTS
Harmonic develops, manufactures and markets highly integrated fiber optic
transmission, digital headend and element management systems for delivering
interactive services over broadband networks. The Company has applied its
technical strengths in optics and electronics, including expertise with lasers,
modulators, predistortion linearizers and compression technology, to produce
products which provide enhanced network reliability and allow broadband service
providers to deliver advanced services, including two-way interactive services.
The Company's products incorporate control systems employing internally
developed embedded firmware and software to facilitate a high degree of system
integration. The "plug and play" design philosophy and communication structure
employed in the Company's products enhance ease of installation.
Optical Transmitters
The Company offers PWRLink transmitters, YAGLink transmitters and MAXLink
transmitters and optical amplifiers for a wide range of optical transmission
requirements.
PWRLink Transmitters. The PWRLink series of optical transmitters
incorporates DFB semiconductor lasers and provides optical transmission
primarily for use at a headend for local distribution to optical nodes and
for narrowcasting (the transmission of programming to select subscribers
within one system).
MAXLink Transmitters and Optical Amplifiers. The MAXLink transmitters
and optical amplifiers operate at a wavelength of 1550nm and serve
long-haul applications and fiber dense architectures that are
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beyond the capability of 1310nm transmitters. This system is suited to
evolving cable networks employing such features as redundant rings,
broadcast layer transmission and hub interconnects.
YAGLink Transmitters. The Company's YAGLink transmitters are
high-powered 1310nm optical transmitters designed primarily for the
transmission of optical signals over long distances, such as between
headends on a redundant ring network, or in dense urban environments where
a single headend supports a very large number of optical nodes. The
increasing acceptance among cable operators of 1550nm transmitters for
broadcast transmission has led to a decline in demand for YAGLink
transmitters. This has resulted in a decrease in sales of YAGLink
transmitters in 1996 and the Company expects sales of YAGLink transmitters
to continue to decline.
Optical Node Receivers
The Company's optical node receivers convert optical signals received from
the transmitters into RF signals for transmission to the home via coaxial cable.
Harmonic's receivers cause low levels of distortion, which maintain the high
performance levels provided by the Company's optical transmitters. The receivers
are installed in rack mount or strand mount housings, each of which can
accommodate return path transmitters and transponders in addition to the optical
node receiver.
Return Path and Element Management Products
The Company offers a number of return path transmitters, return path
receivers and element management hardware and software to provide two way
transmission capability to enable the network operator to monitor and control
the entire transmission network.
Return Path Transmitters. The Company's return path transmitters send
video, voice and data signals from the optical node to the headend. Signals
originating at the home can be sent via the coaxial cable to the optical
node and then transmitted in optical form to the headend by the return path
transmitter.
Return Path Receivers. Harmonic's return path receivers operate at
the headend to receive return path optical transmission from the return
path transmitters.
Element Management System (EMS). Harmonic's EMS consists of
transponders and element management software. The transponders operate in
broadband networks to capture measurement data. Harmonic's Windows-based
EMS software enables the broadband service operator to monitor and control
the entire HFC network from a central office or remote locations. The
Company's EMS software is designed to be integrated into larger network
management systems through the use of simple network management protocol
(SNMP).
Digital Headend Products
The company has recently announced the introduction of its initial products
for digital headend applications.
Encoders. The Company's encoders convert analog video and audio
signals to compressed digital format fully compliant with the MPEG-2
standard.
Modulators. Harmonic's modulators accept digital signals for
modulation on to a radio frequency (RF) carrier for transmission over a
broadband network.
These products for headend applications have not yet been shipped to
customers and are not expected to be shipped in volume until the fall of 1997.
There can be no assurance that successful development of these products will be
completed in a timely manner, if at all, that they will be successfully
manufactured in volume, or that they will achieve market acceptance. See
"Factors That May Affect Future Results of Operations -- Rapid Technological
Change."
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In 1996, 1995 and 1994, sales of optical transmitters accounted for
approximately 71%, 63%, and 72%, respectively, of net sales. In 1996, 1995 and
1994, sales of optical node receivers accounted for approximately 8%, 12%, and
15%, respectively, of net sales.
SALES AND MARKETING
Harmonic markets its products worldwide through its own direct sales force
as well as through system integrators and distributors. The Company's direct
sales force supports domestic and international sales and operates from the
Company's headquarters in Sunnyvale, California and from several sales offices.
Harmonic has adopted a strategy to sell to major domestic customers through its
own direct sales force and expects that domestic distributor and OEM revenues
will be a smaller percentage of net sales in the future. In this regard, net
sales to ANTEC Corporation ("ANTEC"), a leading manufacturer, system integrator
and distributor of cable television equipment, and one of the Company's largest
customers since 1992, are expected to be insignificant in the future. In
September 1996, Harmonic and ANTEC terminated an agreement pursuant to which the
Company manufactured ANTEC's LaserLink II(TM) DFB transmitter.
Historically, the majority of Harmonic's sales have been to relatively few
customers, and Harmonic expects this customer concentration to continue in the
foreseeable future, notwithstanding the Company's strategy to sell to domestic
customers through its own direct sales force. In 1996, sales to Tratec (the
Company's U.K. distributor), Capella (the Company's Canadian distributor), and
ANTEC accounted for 15%, 15%, and 13%, respectively, of net sales. In 1995,
sales to Tratec, ANTEC and Capella accounted for 22%, 15% and 15%, respectively,
of net sales. In 1994, sales to ANTEC, Capella, Siemens, Tratec and
Scientific-Atlanta, Inc. accounted for 22%, 15%, 14%, 12% and 12%, respectively,
of net sales. No other customer accounted for more than 10% of the Company's net
sales in 1996, 1995 or 1994. Harmonic's products have been purchased by most of
the ten largest domestic MSOs and by a number of large cable television
operators outside the United States. These end users include Time-Warner, Inc.,
Cox Communications, Inc., and Tele-Communications, Inc. ("TCI"), in the U.S.,
Rogers Communications in Canada, CableTel and TeleWest in the U.K., Wharf Cable
in Hong Kong and VCC in Argentina. The loss of a significant customer or any
reduction in orders by any significant customer, or the failure of the Company
to qualify its products with a significant MSO could adversely affect the
Company's business and operating results.
Sales to customers outside of the United States in 1996, 1995 and 1994
represented approximately 57%, 65% and 57% of net sales, respectively. Harmonic
expects international sales to continue to account for a substantial portion of
its net sales for the foreseeable future. International sales are made primarily
to distributors, which are generally responsible for importing the products,
installation and technical support and service to cable television operators
within their territory. International sales are subject to a number of risks,
including changes in foreign government regulations and telecommunications
standards, export license requirements, tariffs and taxes, other trade barriers,
fluctuations in foreign currency exchange rates, difficulty in collecting
accounts receivable, difficulty in staffing and managing foreign operations,
managing distributor relations and political and economic instability. There can
be no assurance that international markets will continue to develop or that the
Company will receive future orders to supply its products in international
markets at rates equal to or greater than those experienced in recent periods.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing processes consist primarily of integration and
final assembly and test, performed by highly trained personnel employing
technologically advanced electronic equipment and proprietary test programs. The
manufacturing of the Company's products and subassemblies is a complex process
and there can be no assurance that the Company will not experience production
problems or manufacturing delays in the future. Because the Company utilizes its
own manufacturing facility for this production, and because such manufacturing
capabilities are not readily available from third parties, any interruption in
operations could have a material adverse effect on the Company's business and
operating results.
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The Company uses third party contract manufacturers to assemble certain
standard parts for its products, including such items as printed circuit boards,
metal frames and power supplies. The Company intends to subcontract an
increasing number of tasks to third parties in the future. The Company's
increasing reliance on subcontractors involves several risks, including a
potential inability to obtain an adequate supply of components on a timely
basis.
Certain components and subassemblies necessary for the manufacture of the
Company's products are obtained from a sole supplier or a limited group of
suppliers. In particular, the Company relies on Fujitsu as a major source of DFB
lasers for its PWRLink and return path transmitters, for which there are limited
alternative suppliers. In addition, the optical modulators used in the Company's
MAXLink and YAGLink products are currently available only from Uniphase
Corporation. Although the Company has qualified alternative suppliers for its
lasers, in the event that the supply of optical modulators or lasers is
interrupted for any reason, products from alternative suppliers are unlikely to
be immediately available in sufficient volume to meet the Company's production
needs. Further, certain key elements of the Company's digital headend products
are expected to be provided initially by a sole foreign supplier. The reliance
on sole or limited suppliers, particularly foreign suppliers, involves several
risks, including a potential inability to obtain an adequate supply of required
components or subassemblies and reduced control over pricing, quality and timely
delivery of components. Although the Company attempts to minimize its supply
risks by holding safety stocks and continuously evaluating other sources, any
interruption in supply could have a material adverse effect on the Company's
business and operating results. The Company does not maintain long-term
agreements with any of its suppliers. While the Company has historically been
able to obtain adequate supplies of components in a timely manner from its
principal suppliers, there can be no assurance that the Company will be able to
obtain such adequate supplies in the future. Because the purchase of certain key
components involves long lead times, in the event of unanticipated increases in
demand for the Company's products, the Company could be unable to manufacture
certain products in a quantity sufficient to meet its customers' demand. Any
inability to obtain adequate deliveries of key components could affect the
Company's ability to ship its products on a timely basis, which could damage
relationships with its current and prospective customers and could have a
material adverse effect on the Company's business and operating results.
INTELLECTUAL PROPERTY
The Company currently holds nine United States patents and nine foreign
patents, and has a number of patent applications pending. Although the Company
attempts to protect its intellectual property rights through patents,
trademarks, copyrights, maintaining certain technology as trade secrets and
other measures, there can be no assurance that any patent, trademark, copyright
or other intellectual property right owned by the Company will not be
invalidated, circumvented or challenged, such intellectual property right will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. There can be no assurance that others
will not develop technologies that are similar or superior to the Company's
technology, duplicate the Company's technology or design around the patents
owned by the Company. In addition, effective patent, copyright and trade secret
protection may be unavailable or limited in certain foreign countries in which
the Company does business or intends to do business in the future.
The Company believes that the future success of its business will depend on
its ability to translate the technological expertise and innovation of its
personnel into new and enhanced products. The Company generally enters into
confidentiality or license agreements with its employees, consultants, vendors
and customers as needed, and generally limits access to and distribution of its
proprietary information. Nevertheless, there can be no assurance that the steps
taken by the Company will prevent misappropriation of its technology. In
addition, the Company has taken in the past, and may take in the future, legal
action to enforce the Company's patents and other intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business and
operating results.
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In order to successfully develop and market its recently announced products
for digital headend applications, the Company may be required to enter into
technology development or licensing agreements with third parties. Although many
companies are often willing to enter into such technology development or
licensing agreements, there can be no assurance that such agreements will be
negotiated on terms acceptable to the Company, or at all. The failure to enter
into technology development or licensing agreements, when necessary, could limit
the Company's ability to develop and market new products and could have a
material adverse effect on the Company's business and operating results.
As is common in its industry, the Company has from time to time received
notification from other companies of intellectual property rights held by those
companies upon which the Company's products may infringe. Any claim or
litigation, with or without merit, could be costly, time consuming and could
results in a diversion of management's attention, which could have a material
adverse effect on the Company's business operating results and financial
condition. If the Company were found to be infringing on the intellectual
property rights of any third party, the Company could be subject to liabilities
for such infringement, which could be material, and could be required to seek
licenses from other companies or to refrain from using, manufacturing or selling
certain products or using certain processes. Although holders of patents and
other intellectual property rights often offer licenses to their patent or other
intellectual property rights, no assurance can be given that licenses would be
offered, that the terms of any offered license would be acceptable to the
Company or that failure to obtain a license would not adversely affect the
Company's operating results.
BACKLOG
The Company schedules production of its systems based upon its backlog,
informal commitments from customers and sales projections. The Company's backlog
consists of firm purchase orders by customers for delivery within the next
twelve months. At December 31, 1996, order backlog amounted to $9.8 million,
compared to $4.8 million at December 31, 1995. Anticipated orders from customers
may fail to materialize and delivery schedules may be deferred or canceled for a
number of reasons, including reductions in capital spending by cable television
operators or changes in specific customer requirements. In addition, due to
weather-related seasonal factors and annual capital spending budget cycles at
many of its major end-users, the Company's backlog at December 31, 1996 or any
other date, is not necessarily indicative of actual sales for any succeeding
period.
The Company has excluded from its December 31, 1996 backlog significant
orders from TCI which have been on hold since the Company received a letter from
TCI dated October 17, 1996 asking it to stop product shipments until further
notice. Based on published reports, the Company believes that it was one of
approximately thirty equipment vendors to receive such a letter. The Company can
not presently estimate when, if ever, it will resume shipments to TCI.
COMPETITION
The market for cable television transmission equipment is extremely
competitive and is characterized by rapid technological change. The principal
competitive factors in this market include product performance, reliability,
price, breadth of product line, network management capabilities, sales and
distribution capability, technical support and service, relationships with cable
television operators and general industry and economic conditions. Certain of
these factors are outside of the Company's control.
The Company's competitors for its fiber optic transmission products include
established suppliers of cable television and telecommunications equipment such
as ADC Telecommunications, ANTEC, Lucent Technologies, General Instrument,
Philips and Scientific-Atlanta, as well as a number of smaller, more specialized
companies. For digital headend products, the Company's competitors are expected
to include many of the same competitors as in fiber optic transmission products,
and may also include new competitors. Most of the Company's competitors are
substantially larger and have greater financial, technical, marketing and other
resources than the Company. Many of such large competitors are in a better
position to withstand any significant reduction in capital spending by cable
television operators and other broadband service
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providers. In addition, many of the Company's competitors have more long
standing and established relationships with domestic and foreign MSOs than does
the Company.
RESEARCH AND DEVELOPMENT
The Company has historically devoted a significant amount of its resources
to research and development. Research and development expenses in 1996, 1995 and
1994 were $9.2 million, $6.1 million, and $3.2 million, respectively. The
Company expects that research and development expenses will continue to increase
in the future.
In 1994, the Company established a subsidiary in Israel in order to develop
technologies and products for digital video communication systems. The Company
has received a grant of $560,000, to be funded over an expected period of 31
months, from the BiNational Research & Development (BIRD) Foundation, a joint
U.S.-Israel program to foster research and development activities beneficial to
both countries. As of December 31, 1996, the Company had recognized
approximately $440,000 of this grant as a credit to research and development
expense. The full funding of the grant is conditioned upon the completion of the
scope of work outlined in the funding application by certain deadlines. If the
Company sells products which incorporate the technology developed in this
program, the Company will be obligated to repay the grant by means of the
payment of royalties to the BIRD Foundation. Royalties payable pursuant to the
grant are capped at an aggregate of 150% of the original grant.
Any success of the Company in designing, developing, manufacturing and
selling new and/or enhanced products will depend on a variety of factors,
including the identification of market demand for new products, product
selection, timely implementation of product design and development, product
performance and effective manufacturing and assembly processes and sales and
marketing. Because of the complexity inherent in such research and development
efforts, there can be no assurance that the Company will successfully develop
new products, or that new products developed by the Company will achieve market
acceptance. Any failure of the Company to successfully develop and introduce new
products could have a material adverse effect on the Company's business and
operating results.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Potential Fluctuations in Future Operating Results
The Company's operating results have fluctuated and may continue to
fluctuate in the future, on an annual and a quarterly basis, as a result of a
number of factors, many of which are outside of the Company's control, including
the level of capital spending in the cable television industry, changes in the
regulatory environment, changes in market demand, the timing of customer orders,
competitive market conditions, lengthy sales cycles, new product introductions
by the Company or its competitors, market acceptance of new or existing
products, the cost and availability of components, the mix of the Company's
customer base and sales channels, the mix of products sold, development of
custom products, the level of international sales and general economic
conditions. The Company establishes its expenditure levels for product
development and other operating expenses based on projected sales levels, and
expenses are relatively fixed in the short term. Accordingly, variations in
timing of sales can cause significant fluctuations in operating results. In
addition, because a significant portion of the Company's business is derived
from orders placed by a limited number of large customers, the timing of such
orders can also cause significant fluctuations in the Company's operating
results. If sales are below expectations in any given quarter, the adverse
impact of the shortfall on the Company's operating results may be magnified by
the Company's inability to adjust spending to compensate for the shortfall.
Dependence on Key Customers and End Users
Historically, a substantial majority of the Company's sales have been to
relatively few customers. Sales to the Company's ten largest customers in 1996,
1995 and 1994 accounted for approximately 72%, 80% and 88%, respectively, of its
net sales. Due in part to the consolidation of ownership of domestic cable
television systems, the Company expects that sales to relatively few customers
will continue to account for a significant
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percentage of net sales for the foreseeable future. Harmonic has adopted a
strategy to sell to major domestic customers through its own direct sales force
and expects that domestic OEM and distributor revenues will be a smaller
percentage of net sales in the future. In this regard, net sales to ANTEC in the
fourth quarter of 1996 were less than 10% of net sales, and are expected to be
insignificant in the future. Substantially all of the Company's sales are made
on a purchase order basis, and none of the Company's customers has entered into
a long-term agreement requiring it to purchase the Company's products. The loss
of, or any reduction in orders from, a significant customer would have a
material adverse effect on the Company's business and operating results.
Dependence on Cable Television Industry Capital Spending
To date, substantially all of the Company's sales have been derived,
directly or indirectly, from sales to cable television operators. Demand for the
Company's products depends to a significant extent upon the magnitude and timing
of capital spending by cable television operators for constructing, rebuilding
or upgrading their systems. The capital spending patterns of cable television
operators are dependent on a variety of factors, including access to financing,
cable television operators' annual budget cycles, the status of federal, local
and foreign government regulation of telecommunications and television
broadcasting, overall demand for cable television services, competitive
pressures (including the availability of alternative video delivery technologies
such as satellite broadcasting), discretionary customer spending patterns and
general economic conditions. The Company believes that the consolidation of
ownership of domestic cable television systems, by acquisition and system
exchanges, together with uncertainty over regulatory issues, particularly the
debate over the provisions of the Telecommunications Act of 1996, caused delays
in capital spending by major domestic MSOs during the second half of 1995 and
first quarter of 1996. Although the Act became law in February 1996 and the
Company believes that its provisions will result in increased capital
expenditures in the telecommunications industry, there can be no assurance that
capital spending by domestic MSOs will increase in the near future, or at all,
or that Harmonic's sales will benefit. In addition, cable television capital
spending can be subject to the effects of seasonality, with fewer construction
and upgrade projects typically occurring in winter months and otherwise being
affected by inclement weather.
Rapid Technological Change
The market for the Company's products is relatively new, making it
difficult to accurately predict the market's future growth rate, size and
technological direction. In view of the evolving nature of this market, there
can be no assurance that cable television operators, telephone companies or
other suppliers of broadband services will not decide to adopt alternative
architectures or technologies that are incompatible with the Company's products,
which would have a material adverse effect on the Company's business and
operating results.
The broadband communications markets are characterized by continuing
technological advancement. To compete successfully, the Company must design,
develop, manufacture and sell new products that provide increasingly higher
levels of performance and reliability. As new markets for broadband
communications equipment continue to develop, the Company must successfully
develop new products for these markets in order to remain competitive. For
example, to compete successfully in the future, the Company believes that it
must successfully develop and introduce products that will facilitate the
processing and transmission of digital signals over optical networks. While the
Company has announced and demonstrated initial products for digital
applications, there can be no assurance that the Company will successfully
complete development of, or successfully introduce, products for digital
applications, or that such products will achieve commercial acceptance. In
addition, in order to successfully develop and market its planned products for
digital applications, the Company may be required to enter into technology
development or licensing agreements with third parties. Although many companies
are often willing to enter into such technology development or licensing
agreements, there can be no assurance that such agreements will be negotiated on
terms acceptable to the Company, or at all. The failure to enter into technology
development or licensing agreements, when necessary, could limit the Company's
ability to develop and market new products and could have a material adverse
effect on the Company's business and operating results.
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The failure of the Company to successfully develop and introduce new
products that address the changing needs of the broadband communications market
could have a material adverse effect on the Company's business and operating
results. In addition, there can be no assurance that the successful introduction
by the Company of new products will not have an adverse effect on the sales of
the Company's existing products. For instance, an emerging trend in the domestic
market toward narrowcasting (targeted delivery of advanced services to small
groups of subscribers) is causing changes in the network architectures of some
cable operators. This may have the effect of changing the Company's product mix
toward lower price transmitters, which could adversely affect the Company's
gross margins.
Risks of International Operations
Sales to customers outside of the United States in 1996, 1995 and 1994
represented 57%, 65% and 57% of net sales, respectively, and the Company expects
that international sales will continue to represent a substantial portion of its
net sales for the foreseeable future. In addition, the Company has an Israeli
subsidiary that engages primarily in research and development. International
operations are subject to a number of risks, including changes in foreign
government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable, difficulty in
staffing and managing foreign operations and political and economic instability.
While international sales are typically denominated in U.S. dollars,
fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. Payment cycles for
international customers are typically longer than those for customers in the
United States. There can be no assurance that foreign markets will continue to
develop or that the Company will receive additional orders to supply its
products for use in foreign broadband systems.
EMPLOYEES
As of December 31, 1996, the Company employed a total of 215 people,
including 92 in manufacturing operations, 65 in research and development, 40 in
sales and marketing and 18 in a general and administrative capacity. The Company
also employs a number of temporary employees and consultants on a contract
basis. None of the Company's employees is represented by a labor union with
respect to his or her employment by the Company. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
The Company's future success will depend, in part, upon its ability to attract
and retain qualified personnel. Competition for qualified personnel in the
communications industry is intense, and there can be no assurance that the
Company will be successful in retaining its key employees or that it will be
able to attract skilled personnel as the Company grows.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company and their ages as of March 1, 1997:
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
Anthony J. Ley......................... 58 Chairman of the Board of Directors,
President and Chief Executive Officer
Moshe Nazarathy........................ 45 Senior Vice President, General Manager
of Israel R&D Center, and Director
Robin N. Dickson....................... 49 Chief Financial Officer
Michael Yost........................... 53 Vice President, Operations
John E. Dahlquist...................... 50 Vice President, Marketing
Anthony J. Ley has served as the Company's President and Chief Executive
Officer since November 1988. Mr. Ley was elected Chairman of the Board of
Directors in February 1995. From 1963 to 1987, Mr. Ley was employed at
Schlumberger, both in Europe and the United States, holding various senior
business management and research and development positions, most recently as
Vice President, Research and
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Engineering at Fairchild Semiconductor/Schlumberger in Palo Alto, California.
Mr. Ley holds an M.A. in mechanical sciences from the University of Cambridge
and an S.M.E.E. from the Massachusetts Institute of Technology, is named as an
inventor on 28 patents and is a Fellow of the I.E.E. (U.K.) and a senior member
of the I.E.E.E.
Moshe Nazarathy, a founder of the Company, has served as Senior Vice
President, General Manager of Israel R&D Center, since December 1993, as a
director of the Company since the Company's inception and as Vice President,
Research, from the Company's inception through December 1993. From 1985 to 1988,
Dr. Nazarathy was employed in the Photonics and Instruments Laboratory of
Hewlett-Packard Company, most recently serving as Principal Scientist from 1987
to 1988. From 1982 to 1984, Dr. Nazarathy held post-doctoral and adjunct
professor positions at Stanford University. Dr. Nazarathy holds a B.S. and a
Ph.D. in electrical engineering from Technion-Israel Institute of Technology and
is named as an inventor on twelve patents.
Robin N. Dickson joined the Company in April 1992 as Chief Financial
Officer. From 1989 to March 1992, Mr. Dickson was corporate controller of
Vitelic Corporation, a semiconductor manufacturer. From 1976 to 1989, Mr.
Dickson held various positions at Raychem Corporation, a materials science
company, including regional financial officer of the Asia-Pacific Division of
the International Group. Prior to joining Raychem Corporation, Mr. Dickson
worked with the accounting firm of Deloitte, Haskins & Sells in Brussels,
Belgium. Mr. Dickson holds a Bachelor of Laws from the University of Edinburgh
and is a member of the Institute of Chartered Accountants of Scotland.
Michael Yost joined the Company in September 1991 as Vice President,
Operations. From 1983 until December 1990, Mr. Yost was employed at Vitalink
Communications, a satellite communications systems manufacturer, holding various
senior management positions, most recently as Vice President, Operations. Mr.
Yost holds a B.S. in management from San Jose State University.
John E. Dahlquist joined the Company in November 1993 as Vice President
Marketing. From September 1990 to October 1993, Mr. Dahlquist served as Vice
President, Marketing at Philips Broadband Networks, Inc. From 1967 to August
1990, Mr. Dahlquist was employed at the Jerrold Division of General Instrument
Corporation, where he held various engineering and marketing management
positions, including Director International Business Programs from 1989 to 1990
and Director of European Cable Operations, U.K. from 1984 to 1989. Mr. Dahlquist
holds a B.S.E.E. and an M.B.A. from Drexel University.
ITEM 2. PROPERTIES
The Company's principal operations are located at its corporate
headquarters in Sunnyvale, California. The lease on its headquarters building,
of approximately 110,000 square feet, expires in July 2006. The Company has
subleased approximately 25,000 square feet of its headquarters through July
1998. The Company also has a regional sales and support office in Pennsylvania,
several sales offices in the United States and a research and development
facility in Israel. The Company believes that its existing facilities will be
adequate to meet its needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or to which any of its properties is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The information required by this Item is set forth on page 17 of the 1996
Annual Report to Stockholders under the caption "Selected Financial Data" and is
incorporated herein by reference. At December 31, 1996, there were 207 holders
of record of the Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
A summary of selected financial data for the Company for each of the last
five fiscal years appears on page 17 of the 1996 Annual Report to Stockholders
under the caption "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appears on pages 18-23 of the 1996 Annual Report to Stockholders and
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to pages 24 to 36 of the 1996 Annual Report to Stockholders filed as Exhibit
13.1 to this Annual Report on Form 10-K. Selected quarterly financial data for
the Company appear on page 17 of the 1996 Annual Report to Stockholders under
the caption "Selected Financial Data" and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on April 30, 1997, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers -- See the section entitled "Executive Officers" in
Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the 1997 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the 1997 Proxy
Statement under the caption "Executive Compensation" and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information related to security ownership of certain beneficial owners and
security ownership of management is set forth in the 1997 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference.
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ITEM 13. CERTAIN RELATIONSHIPS AND TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company and
subsidiary and Report of Independent Accountants are included in the 1996 Annual
Report to Stockholders filed herewith as Exhibit 13.1 and are incorporated
herein by reference:
1996 ANNUAL
REPORT PAGE
------------
Consolidated Balance Sheet as at December 31, 1996 and 1995.............. 24
Consolidated Statement of Operations for the years ended 25
December 31, 1996, 1995 and 1994.......................................
Consolidated Statement of Stockholders' Equity (Deficit) for the years 26
ended
December 31, 1996, 1995 and 1994.......................................
Consolidated Statement of Cash Flows for the years ended 27
December 31, 1996, 1995 and 1994.......................................
Notes to Consolidated Financial Statements............................... 28 - 35
Report of Independent Accountants........................................ 36
(a)(2) Financial Statement Schedules
Schedules have been omitted because they are inapplicable, because the
required information has been included in the financial statements or notes
thereto, or the amounts are immaterial.
(a)(3) Exhibits
The documents listed on the Exhibit Index appearing at page 14 of this
Report are filed herewith. The 1996 Annual Report to Stockholders and 1997 Proxy
Statement shall be deemed to have been "filed" with the Securities and Exchange
Commission only to the extent portions thereof are expressly incorporated herein
by reference. Copies of the exhibits listed in the Exhibit Index will be
furnished, upon request, to holders or beneficial owners of the Company's Common
Stock.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Harmonic Lightwaves, Inc., a Delaware
corporation, has duly caused this Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State
of California, on March 26, 1997.
HARMONIC LIGHTWAVES, INC.
By: /s/ ANTHONY J. LEY
------------------------------------
Anthony J. Ley, Chairman of the
Board, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Anthony J. Ley and Robin N. Dickson, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
/s/ ANTHONY J. LEY Chairman of the Board, President March 26, 1997
- ------------------------------------------ and Chief Executive Officer
(Anthony J. Ley) (Principal Executive Officer)
/s/ ROBIN N. DICKSON Chief Financial Officer March 26, 1997
- ------------------------------------------ (Principal Financial and
(Robin N. Dickson) Accounting Officer)
/s/ BARRY LEMIEUX Director March 26, 1997
- ------------------------------------------
(Barry Lemieux)
/s/ E. FLOYD KVAMME Director March 26, 1997
- ------------------------------------------
(E. Floyd Kvamme)
/s/ DAVID A. LANE Director March 26, 1997
- ------------------------------------------
(David A. Lane)
/s/ MOSHE NAZARATHY Director March 26, 1997
- ------------------------------------------
(Moshe Nazarathy)
/s/ MICHEL L. VAILLAUD Director March 26, 1997
- ------------------------------------------
(Michel L. Vaillaud)
/s/ JOSEF BERGER Director March 26, 1997
- ------------------------------------------
(Josef Berger)
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EXHIBIT INDEX
The following Exhibits to this report are filed herewith, or if marked with
an asterisk (*) or double asterisk (**), are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------
3.1* Certificate of Incorporation of Registrant
3.2* Form of Restated Certificate of Incorporation of Registrant
3.3* Bylaws of Registrant
4.1* Form of Common Stock Certificate
10.1*+ Form of Indemnification Agreement
10.2*+ 1988 Stock Option Plan and form of Stock Option Agreement
10.3*+ 1995 Stock Plan and form of Stock Option Agreement
10.4*+ 1995 Employee Stock Purchase Plan and form of Subscription Agreement
10.5*+ 1995 Director Option Plan and form of Director Option Agreement
10.6* Registration and Participation Rights and Modification Agreement dated as of July
22, 1994 among Registrant and certain holders of Registrant's Common Stock
10.7* Distributor Agreement dated June 15, 1994 by and between Registrant and
Scientific- Atlanta, Inc.
10.8* Warrant to purchase Common Stock of Registrant issued to Scientific-Atlanta, Inc.
on June 15, 1994
10.10* Warrant to purchase Series D Preferred Stock of Registrant issued to Comdisco,
Inc. on February 10, 1993
10.14** Business Loan Agreement, Commercial Security Agreement and Promissory Note dated
August 26, 1993, as amended on September 14, 1995, between Registrant and Silicon
Valley Bank
10.15** Facility lease dated as of January 12, 1996 by and between Eastrich No. 137
Corporation and Company
10.16 Loan Modification Agreement dated September 13, 1996 between Registrant and
Silicon Valley Bank
10.17+ Change of Control Severance Agreement dated March 27, 1997 between Registrant and
Anthony J. Ley
10.18+ Form of Change of Control Severance Agreement between Registrant and certain
executive officers of Registrant
11.1 Computation of Net Income (Loss) Per Share
13.1 1996 Annual Report (to be deemed filed with the Securities and Exchange Commission
only to the extent required by the instruction to exhibits for reports on Form
10-K)
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney
- ---------------
* Previously filed as an Exhibit to the Company's Registration Statement on
Form S-1 [No. 33-90752].
** Previously filed as an Exhibit to the Company's 10-K for the year ended
December 31, 1995.
+ Management Contract or Compensatory Plan or Arrangement required to be filed
as an exhibit to this report on Form 10-K pursuant to Item 14(c) of this
report.
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