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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 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) ------------------------ 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 - ----------------------------------------------------- --------------------- 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).
================================================================================ 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. 2 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 1 3 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 2 4 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." 3 5 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. 4 6 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. 5 7 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 6 8 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 7 9 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. 8 10 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 9 11 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. 10 12 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. 11 13 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. 12 14 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)
13 15 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. 14
   1

                                                                  EXHIBIT #10.16
                           HARMONIC LIGHTWAVES, INC.

                          LOAN MODIFICATION AGREEMENT

     This Loan Modification Agreement is entered into as of September 13, 1996,
by and between Harmonic Lightwaves, Inc. (the "Borrower") whose address is 549
Baltic Way, Sunnyvale, CA 94089, and Silicon Valley Bank (the "Lender") whose
address is 3003 Tasman Drive, Santa Clara, CA 95054.

1.   DESCRIPTION OF EXISTING INDEBTEDNESS Among other indebtedness which may be
owing by Borrower to Lender, Borrower is indebted to Lender pursuant to, among
other documents, a Promissory Note, dated August 26, 1993, in the original
principal amount of One Million and 00/100 Dollars ($1,000,000.00) (the
"Note").  The Note has been modified pursuant to Loan Modification Agreements
dated May 15, 1994, August 15, 1994, October 5, 1994 and September 14, 1995,
pursuant to which, among other things, the principal amount of the Note was
increased to Five Million and 00/100 Dollars ($5,000,000.00). The Note,
together with other promissory notes from Borrower to Lender, is governed by
the terms of a Business Loan Agreement, dated August 26, 1993, between Borrower
and Lender, as such agreement may be amended from time to time (the "Loan
Agreement").  Defined terms used but not otherwise defined herein, shall have
the same meanings as in the Loan Agreement.

Hereinafter, all indebtedness owing by Borrower to Lender shall be referred to
as the "Indebtedness."

2.   DESCRIPTION OF COLLATERAL In connection with the repayment of the
Indebtedness, Borrower has agreed not to further encumber or Pledge any of its
assets pursuant to a Negative Pledge Agreement, being executed concurrently
herewith.

Hereinafter, the above-described security documents, together with all other
documents securing payment of the Indebtedness shall be referred to as the
"Security Documents." Hereinafter, the Security Documents, together with all
other documents evidencing or securing the Indebtedness shall be referred to as
the "Existing Loan Documents."

3.   DESCRIPTION OF CHANGE IN TERMS.

     A.       Modification(s) to Note

              1.      Payable in one payment of all outstanding principal plus
                      all accrued unpaid interest on September 12, 1997 (the
                      "Maturity Date").  In addition, Borrower will pay regular
                      monthly payments of all accrued unpaid interest due as of
                      each payment date beginning October 12, 1996, and all
                      subsequent interest payments are due on the same day of
                      each month thereafter.

              2.      The principal amount of the Note is hereby increased to
                      Ten Million and 00/100 Dollars ($10,000,000.00).

              3.      The interest rate to be applied to the unpaid principal
                      balance of the Note shall be at a rate equal to Lender's
                      Index (as described in the Note) or a LIBOR Interest Rate
                      equal to 2.000 percentage points in excess of the LIBOR
                      Base Rate as described in the LIBOR Supplement to Loan
                      Modification Agreement, attached hereto.

              4.      The requirement for Borrower to maintain a zero balance
                      under the Note is hereby deleted in its entirety.
   2

     B.       Modification(s) to Loan Agreement.

              1.      The following paragraphs are hereby incorporated into the
                      Loan Agreement:

                      Accounts Receivable and Accounts Payable.  At such time
                      as outstandings under the line of credit facility exceed
                      Five Million and 00/100 Dollars ($5,000,000.00), Borrower
                      shall provide to Lender, not later than twenty (20) days
                      after the end of each month with a Borrowing Base
                      Certificate and aged lists of accounts receivable and
                      accounts payable.  Semi-annual accounts receivable
                      audits to be performed by Lender's agent.  Borrower's
                      deposit account will be debited for the audit expense and
                      a notification will be mailed to Borrower.

                      Borrowing Base Formula.  At such time as outstandings
                      under the line of credit facility exceed Five Million and
                      00/100 Dollars ($5,000,000.00), funds shall be advanced
                      under the line of credit facility according to a
                      borrowing base formula, as determined by Lender on a
                      monthly basis, defined as follows: the lesser of (a)
                      $10,000,000.00 minus the face amount of outstanding
                      Letters of Credit (including drawn but unreimbursed
                      Letters of Credit) minus the Foreign Exchange Reserve (as
                      defined herein) or (b) the sum of (i) eighty percent
                      (80%) of eligible domestic accounts receivable plus (ii)
                      eighty percent (80%) of pre-approved foreign accounts
                      receivable plus (iii) one hundred percent (100%) of
                      accounts receivable backed by letters of credit, provided
                      such letters of credit are issued by a bank acceptable to
                      Lender and in form and substance acceptable to Lender,
                      minus (iv) the face amount of outstanding Letters of
                      Credit (including drawn but unreimbursed Letters of
                      Credit) minus (v) the Foreign Exchange Reserve.  Eligible
                      domestic accounts receivable shall include, but not be
                      limited to, those accounts outstanding less than 90 days
                      from the date of invoice, excluding foreign, government,
                      contra, and intercompany accounts; and exclude accounts
                      wherein 50% or more of the account is outstanding more
                      than 90 days from the date of invoice.  Foreign accounts
                      may be eligible if approved by Lender on a case-by-case
                      basis.  Any account which alone exceeds 25% of total
                      accounts will be ineligible to the extent said account
                      exceeds 25% of total accounts.  Also exclude any credit
                      balances which are aged past 90 days.  Also ineligible
                      are any accounts which Lender in its sole judgment
                      excludes for valid credit reasons.

                      Foreign Exchange Sublimit.  Subject to the terms of this
                      Agreement, as amended from time to time, Borrower may
                      utilize up to $2,000,000.00 for spot and future foreign
                      exchange contracts (the "Exchange Contracts").  Borrower
                      shall not request an Exchange Contract at any time it is
                      not in compliance with any of the terms of this
                      Agreement.  All Exchange Contracts must provide for
                      delivery of settlement on or before the Maturity Date.
                      The limit available at any time shall be reduced by the
                      following amounts (the "Foreign Exchange Reserve") on
                      each day (the "Determination Date"): (i) on all
                      outstanding Exchange Contracts on which delivery is to be
                      effected or settlement allowed more than two business
                      days from the Determination Date, 10% of the gross amount
                      of the Exchange Contracts; plus (ii) on all outstanding
                      Exchange Contracts on which delivery is to be effected or
                      settlement allowed within two business days after the
                      Determination Date, 100% of the gross amount of the
                      Exchange Contracts.  In lieu of the Foreign Exchange
                      Reserve for 100% of the gross amount of any Exchange
                      Contract, the Borrower may request that Lender debit
                      Borrower's bank account with Lender for such amount,
                      provided Borrower has immediately available funds in such
                      amounts in its bank account.





                                       2
   3
                      Lender may, in its discretion, terminate the Exchange
                      Contracts at any time (a) that an Event of Default occurs
                      or (b) that there is not sufficient availability under
                      the Note and Borrower does not have available funds in
                      its bank account to satisfy the Foreign Exchange Reserve.
                      If Lender terminates the Exchange Contracts, and without
                      limitation of the FX Indemnity Provisions (as referred to
                      below), Borrower agrees to reimburse Lender for any and
                      all fees, costs and expenses relating thereto or arising
                      in connection therewith.

                      Borrower shall not permit the total gross amount of all
                      Exchange Contracts on which delivery is to be effected
                      and settlement allowed in any two business day period to
                      be more than $2,000,000.00 nor shall Borrower permit the
                      total gross amount of all Exchange Contracts to which
                      Borrower is a party, outstanding at any one time, to
                      exceed $2,000,000.00.

                      Borrower shall execute all standard form applications and
                      agreements of Lender in connection with the Exchange
                      Contracts, and without limiting any of the terms of such
                      applications and agreements, Borrower will pay all
                      standard fees and charges of Lender in connection with
                      the Exchange Contracts.

                      Without limiting any of the other terms of this Agreement
                      or any such standard form applications and agreement of
                      Lender, Borrower agrees to indemnify Lender and hold
                      it harmless, from and against any and all claims, debts,
                      liabilities, demands, obligations, actions, costs and
                      expenses (including, without limitation, attorneys' fees
                      of counsel of Lender's choice), of every nature and
                      description which it may sustain or incur, based upon,
                      arising out of, or in any way relating to any of the
                      Exchange Contracts or any transactions relating thereto
                      or contemplated thereby (collectively referred to as the
                      "FX Indemnity Provisions").

              2.      The paragraph entitled "Letter of Credit Sublimit" is
                      hereby amended, in its entirety, to read as follows:

                      Letters of Credit.  Subject to the terms and conditions
                      of this Agreement, Lender agrees to issue or cause to be
                      issued letters of credit for the account of Borrower in
                      an aggregate face amount not to exceed (i) the lesser of
                      the $10,000,000.00 or the Borrowing Base Formula minus
                      (ii) the then outstanding principal balance of the Note
                      provided that the face amount of outstanding Letters of
                      Credit (including drawn but unreimbursed Letters of
                      Credit) shall not in any case exceed Ten Million Dollars
                      ($10,000,000.00). Each such letter of credit shall have
                      an expiry date no later than one hundred eighty (180)
                      days after the Maturity Date of the Note. provided that
                      Borrower's letter of credit reimbursement obligation
                      shall be secured by cash on terms acceptable to Lender at
                      any time after the Maturity Date if the term of the
                      Agreement is not extended by Lender.  All such letters of
                      credit shall be, in form and substance, acceptable to
                      Lender in its sole discretion and shall be subject to the
                      terms and conditions of Lender's form of application and
                      letter of credit agreement.

                      Borrower shall indemnify, defend, protect and hold Lender
                      harmless from any loss, cost, expense or liability,
                      including, without limitation, reasonable attorneys'
                      fees, arising out of or in connection with any letters of
                      credit.





                                       3
   4
                      Letter of credit Reimbursement: Reserve.  Borrower may
                      request that Lender issue a letter of credit payable in a
                      currency other than United States Dollars.  If a demand
                      for payment is made under any such letter of credit,
                      Lender shall treat such demand as an advance to Borrower
                      of the equivalent of the amount thereof (plus cable
                      charges) in United States currency at the then prevailing
                      rate of exchange in San Francisco, California, for sales
                      of that other currency for cable transfer to the country
                      of which it is the currency.

                      Upon the issuance of any letter of credit payable in a
                      currency other than United States Dollars, Lender shall
                      create a reserve (the "Letter of Credit Reserve") under
                      the Committed Line for letters of credit against
                      fluctuations in currency exchange rates, in an amount
                      equal to ten percent (10%) of the face amount of such
                      letter of credit.  The amount of such reserve may be
                      amended by Lender from time to time to account for
                      fluctuations in the exchange rate.  The availability of
                      funds under the Note shall be reduced by the amount of
                      such reserve for so long as such letter of credit remains
                      outstanding.

              3.      The paragraph entitled "Financial Covenants" is hereby
                      amended to read in its entirety as follows:

                      Borrower shall maintain on a quarterly basis, a minimum
                      quick ratio of 2.00 to 1.0; a minimum tangible net worth
                      of $35,000,000.00, plus seventy five percent (75%) of
                      quarterly profits after taxes (exclusive of losses),
                      beginning as of October 1, 1996, plus one hundred percent
                      (100%) of net new equity; and a maximum total debt minus
                      subordinated debt to tangible net worth plus subordinated
                      debt ratio of 1.00 to 1.00. Additionally, Borrower shall
                      achieve profitability on a quarterly basis with allowance
                      for one quarterly loss, provided such loss does not
                      exceed $500,000.00.

4.   CONSISTENT CHANGES.  The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.

5.   PAYMENT OF LOAN FEES.  Borrower shall pay to Lender a fee in the amount of
Fifteen Thousand and 00/100 Dollars ($15,000.00) (the "Loan Fee") plus all
out-of-pocket expenses.

6.   NO DEFENSES OF BORROWER.  Borrower (and each guarantor and pledgor signing
below) agrees that, as of this date, it has no defenses against the obligations
to pay any amounts under the Indebtedness.

7.   CONTINUING VALIDITY.  Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness,
Lender is relying upon Borrower's representations, warranties, and agreements,
as set forth in the Existing Loan Documents.  Except as expressly modified
pursuant to this Loan Modification Agreement, the terms of the Existing Loan
Documents remain unchanged and in full force and effect.  Lender's agreement to
modifications to the existing Indebtedness pursuant to this Loan Modification
Agreement in no way shall obligate Lender to make any future modifications to
the Indebtedness.  Nothing in this Loan Modification Agreement shall constitute
a satisfaction of the Indebtedness.  It is the intention of Lender and Borrower
to retain as liable parties all makers and endorsers of Existing Loan Documents,
unless the party is expressly released by Lender in writing.  No maker, 
endorser, or guarantor will be released by virtue of this Loan Modification 
Agreement.  The terms of this Paragraph apply not only to this Loan Modification
Agreement, but also to all subsequent loan modification agreements.

8.   CONDITIONS.  The effectiveness of this Loan Modification Agreement is
conditioned upon payment of the Loan Fee.





                                       4
   5



     This Loan Modification Agreement is executed as of the date first written
above.

BORROWER:                                        LENDER:

HARMONIC LIGHTWAVES, INC.                        SILICON VALLEY BANK

By:  /s/Robin N. Dickson                         By:    /s/Peter A. Kidder    
   ------------------------                        ---------------------------
Name:   Robin N. Dickson                         Name:     Peter A. Kidder    
     -----------------------                          ------------------------
Title:  Chief Financial Officer                  Title:    Vice President     
     -----------------------                           -----------------------






                                       5
   1
                                                             EXHIBIT _________




                           HARMONIC LIGHTWAVES, INC.

                     CHANGE OF CONTROL SEVERANCE AGREEMENT



         This Change of Control Severance Agreement (the "Agreement") is made
and entered into by and between Anthony J. Ley (the "Employee") and Harmonic
Lightwaves, Inc. (the "Company"), effective as of the latest date set forth by
the signatures of the parties hereto below.

                                R E C I T A L S

                 A.       It is expected that the Company from time to time
will consider the possibility of an acquisition by another company or other
change of control.  The Board of Directors of the Company (the "Board")
recognizes that such consideration can be a distraction to the Employee and can
cause the Employee to consider alternative employment opportunities.  The Board
has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.

         B.      The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his employment and to motivate the Employee to maximize the value of
the Company upon a Change of Control for the benefit of its shareholders.

         C.      The Board believes that it is imperative to provide the
Employee with certain severance benefits upon Employee's termination of
employment following a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.

         D.      Certain capitalized terms used in the Agreement are defined in
Section 6 below.

         The parties hereto agree as follows:

         1.      Term of Agreement.  This Agreement shall terminate upon the
date that all obligations of the parties hereto with respect to this Agreement
have been satisfied.

         2.      At-Will Employment.  The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law.  If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
the Employee shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise
be available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
   2
         3.      Severance Benefits.

                 (a)      Termination Following A Change of Control.  If the
Employee's employment terminates at any time within eighteen (18) months
following a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive the following severance benefits:

                            (i)   Involuntary Termination.  If the Employee's
employment is terminated as a result of Involuntary Termination other than for
Cause, then the Employee shall receive the following severance benefits from
the Company:

                                  (1)  Severance Payment.  A cash payment in an
amount equal to three hundred percent (300%) of the Employee's Annual
Compensation;

                                  (2)  Continued Employee Benefits.  One
hundred percent (100%) Company-paid health, dental and life insurance coverage
at the same level of coverage as was provided to such employee immediately
prior to the Change of Control (the "Company-Paid Coverage").  If such coverage
included the Employee's dependents immediately prior to the Change of Control,
such dependents shall also be covered at Company expense.  Company-Paid
Coverage shall continue until the earlier of (i) three years from the date of
the Change of Control, or (ii) the date that the Employee and his dependents
become covered under another employer's group health, dental or life insurance
plans that provide Employee and his dependents with comparable benefits and
levels of coverage.  For purposes of Title X of the Consolidated Budget
Reconciliation Act of 1985 ("COBRA"), the date of the "qualifying event" for
Employee and his dependents shall be the date upon which the Company-Paid
Coverage terminates.

                                  (3)  Option and Restricted Stock Accelerated
Vesting.  One Hundred percent (100%) of the unvested portion of any stock
option or restricted stock held by the Employee shall automatically be
accelerated in full so as to become completely vested; provided, however, that
if such potential vesting acceleration would cause a contemplated Change of
Control transaction that was intended to be accounted for as a
"pooling-of-interests" transaction to become ineligible for such accounting
treatment under generally accepted accounting principles, as determined by the
Company's independent public accountants (the "Accountants") prior to the
Change of Control, Employee's stock options and restricted stock shall not have
their vesting so accelerated.

                                  (4)  Outplacement Assistance.  If desired
by Employee, Company will pay up to five thousand dollars ($5,000.00) for
outplacement assistance selected by Company and approved by Employee.

                 (b)      Timing of Severance Payments.  Any payments to which
Employee is entitled under Sections 3(a)(i)(1) and 5 shall be paid by the
Company to the Employee (or to the Employee's successors in interest, pursuant
to Section 7(b)) in cash and in full, not later than thirty (30) calendar days
following the Termination Date.




                                       -2-
   3
                 (c)      Voluntary Resignation; Termination For Cause.  If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be
established under the Company's then existing severance and benefits plans and
practices or pursuant to other agreements with the Company.

                 (d)      Disability; Death.  If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
for those (if any) as may then be established under the Company's then existing
severance and benefits plans and practices or pursuant to other agreements with
the Company.

                 (e)      Termination Apart from Change of Control.  In the
event the Employee's employment is terminated for any reason, either prior to
the occurrence of a Change of Control or after the twelve (12)-month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.

         4.      Attorney Fees, Costs and Expenses.  The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.

         5.      Excise Tax Payments.  In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee constitute "parachute payments" within the meaning of Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code") and will be subject
to the excise tax imposed by Section 4999 of the Code, then the Employee shall
receive (a) a payment from the Company sufficient to pay such excise tax, and
(b) an additional payment from the Company sufficient to pay the excise tax and
federal and state income taxes arising from the payments made by the Company to
Employee pursuant to this sentence.  Unless the Company and the Employee
otherwise agree in writing, the determination of Employee's excise tax
liability and the amount required to be paid under this Section 5 shall be made
in writing by the Accountants.  In the event that the excise tax incurred by
Employee is determined by the Internal Revenue Service to be greater or lesser
than the amount so determined by the Accountants, the Company and Employee
agree to promptly make such additional payment, including interest and any tax
penalties, to the other party as the Accountants reasonably determine is
appropriate to ensure that the net economic effect to Employee under this
Section 5, on an after-tax basis, is as if the Code Section 4999 excise tax did
not apply to Employee.  For purposes of making the calculations required by
this Section 5, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on interpretations of
the Code for which there is a "substantial authority" tax reporting position.
The Company and the Employee shall furnish to the Accountants such information
and documents as the Accountants may reasonably request in order to make a
determination under this





                                      -3-
   4
Section.  The Company shall bear all costs the Accountants may reasonably incur
in connection with any calculations contemplated by this Section 5.

         6.      Definition of Terms.  The following terms referred to in this
Agreement shall have the following meanings:

                 (a)      Annual Compensation.  "Annual Compensation" means an
amount equal to (i) Employee's Company salary for the twelve months preceding
the Change of Control, and (ii) Employee's 100% "On Target" bonus for the year
in which the Change of Control occurs.

                 (b)      Cause.  "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, and
(iv)  following delivery to the Employee of a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties, continued violations by
the Employee of the Employee's obligations to the Company which are
demonstrably willful and deliberate on the Employee's part.

                 (c)      Change of Control.  "Change of Control" means the
occurrence of any of the following events:

                            (i)   Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities;

                           (ii)   A change in the composition of the Board
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors.  "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company);

                          (iii)   The consummation of a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty percent (50%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation;





                                      -4-
   5
                          (iv)     The consummation of the sale or disposition 
by the Company of all or substantially all the Company's assets.

                 (d)      Disability.  "Disability" shall mean that the
Employee has been unable to perform his Company duties as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the
Employee or the Employee's legal representative (such Agreement as to
acceptability not to be unreasonably withheld).  Termination resulting from
Disability may only be effected after at least 30 days' written notice by the
Company of its intention to terminate the Employee's employment.  In the event
that the Employee resumes the performance of substantially all of his duties
hereunder before the termination of his employment becomes effective, the
notice of intent to terminate shall automatically be deemed to have been
revoked.

                 (e)      Involuntary Termination.  "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the significant
reduction of the Employee's duties, authority or responsibilities, relative to
the Employee's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Employee of such reduced duties,
authority or responsibilities; (ii) without the Employee's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary of the Employee as in effect immediately prior to
such reduction; (iv) a material reduction by the Company in the kind or level
of employee benefits, including bonuses, to which the Employee was entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee
to a facility or a location more than twenty-five (25) miles from the
Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for
which the grounds relied upon are not valid; (vii) the failure of the Company
to obtain the assumption of this agreement by any successors contemplated in
Section 7(a) below; or (viii) any act or set of facts or circumstances which
would, under California case law or statute constitute a constructive
termination of the Employee.

                 (f)      Termination Date.  "Termination Date" shall mean (i)
if this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30)-day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days
after the Company gives the Employee notice of termination, the Employee
notifies the Company that a dispute exists concerning the termination or the
benefits due pursuant to this Agreement, then the Termination Date shall be the
date on which such dispute is finally determined, either by mutual written
agreement of the parties, or a by final judgment, order or decree of a court of
competent jurisdiction (the time for appeal therefrom having expired and no
appeal having been perfected), or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.





                                      -5-
   6
         7.      Successors.

                 (a)      Company's Successors.  Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession.  For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this Section 7(a) or which becomes bound by the terms of this
Agreement by operation of law.

                 (b)      Employee's Successors.  The terms of this Agreement
and all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.

         8.      Notice.

                 (a)      General.  Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid.  In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing.  In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.

                 (b)      Notice of Termination.  Any termination by the
Company for Cause or by the Employee as a result of a voluntary resignation or
an Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8(a) of this Agreement.
Such notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated,
and shall specify the termination date (which shall be not more than 30 days
after the giving of such notice).  The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.

         9.      Miscellaneous Provisions.

                 (a)      No Duty to Mitigate.  The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may
receive from any other source.





                                      -6-
   7
                 (b)      Waiver.  No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee).  No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.

                 (c)      Whole Agreement.  No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.  This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.

                 (d)      Choice of Law.  The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California.

                 (e)      Severability.  The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.

                 (f)      Withholding.  All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

                 (g)      Counterparts.  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.





                                      -7-
   8
                 IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.


COMPANY                                HARMONIC LIGHTWAVES, INC.



                                       By:_____________________________________

                                       Title:__________________________________

                                       Date:____________________

EMPLOYEE                               ________________________________________
                                                   Anthony J. Ley

                                       Date:____________________





                                      -8-

   1
                                                                EXHIBIT ______




                           HARMONIC LIGHTWAVES, INC.

                     CHANGE OF CONTROL SEVERANCE AGREEMENT



         This Change of Control Severance Agreement (the "Agreement") is made
and entered into by and between _____________________ (the "Employee") and
Harmonic Lightwaves, Inc. (the "Company"), effective as of the latest date set
forth by the signatures of the parties hereto below.

                                R E C I T A L S

                 A.       It is expected that the Company from time to time
will consider the possibility of an acquisition by another company or other
change of control.  The Board of Directors of the Company (the "Board")
recognizes that such consideration can be a distraction to the Employee and can
cause the Employee to consider alternative employment opportunities.  The Board
has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued dedication and
objectivity of the Employee, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined below) of the Company.

         B.      The Board believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his employment and to motivate the Employee to maximize the value of
the Company upon a Change of Control for the benefit of its shareholders.

         C.      The Board believes that it is imperative to provide the
Employee with certain severance benefits upon Employee's termination of
employment following a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.

         D.      Certain capitalized terms used in the Agreement are defined in
Section 6 below.

         The parties hereto agree as follows:

         1.      Term of Agreement.  This Agreement shall terminate upon the
date that all obligations of the parties hereto with respect to this Agreement
have been satisfied.

         2.      At-Will Employment.  The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law.  If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
the Employee shall not be entitled to any payments, benefits, damages, awards
or compensation other than as provided by this Agreement, or as may otherwise
be available in accordance with the Company's established employee plans and
practices or pursuant to other agreements with the Company.
   2
         3.      Severance Benefits.

                 (a)      Termination Following A Change of Control.  If the
Employee's employment terminates at any time within eighteen (18) months
following a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive the following severance benefits:

                            (i)   Involuntary Termination.  If the Employee's
employment is terminated as a result of Involuntary Termination other than for
Cause, then the Employee shall receive the following severance benefits from
the Company:

                                  (1)  Severance Payment.  A cash payment in an
amount equal to two hundred percent (200%) of the Employee's Annual
Compensation;

                                  (2)  Continued Employee Benefits.  One
hundred percent (100%) Company-paid health, dental and life insurance coverage
at the same level of coverage as was provided to such employee immediately
prior to the Change of Control (the "Company-Paid Coverage").  If such coverage
included the Employee's dependents immediately prior to the Change of Control,
such dependents shall also be covered at Company expense.  Company-Paid
Coverage shall continue until the earlier of (i) two years from the date of the
Change of Control, or (ii) the date that the Employee and his dependents become
covered under another employer's group health, dental or life insurance plans
that provide Employee and his dependents with comparable benefits and levels of
coverage.  For purposes of Title X of the Consolidated Budget Reconciliation
Act of 1985 ("COBRA"), the date of the "qualifying event" for Employee and his
dependents shall be the date upon which the Company-Paid Coverage terminates.

                                  (3)  Option and Restricted Stock Accelerated
Vesting.  One Hundred percent (100%) of the unvested portion of any stock
option or restricted stock held by the Employee shall automatically be
accelerated in full so as to become completely vested; provided, however, that
if such potential vesting acceleration would cause a contemplated Change of
Control transaction that was intended to be accounted for as a
"pooling-of-interests" transaction to become ineligible for such accounting
treatment under generally accepted accounting principles, as determined by the
Company's independent public accountants (the "Accountants") prior to the
Change of Control, Employee's stock options and restricted stock shall not have
their vesting so accelerated.

                                  (4)  Outplacement Assistance.  If desired
by Employee, Company will pay up to five thousand dollars ($5,000.00) for
outplacement assistance selected by Company and approved by Employee.

                 (b)      Timing of Severance Payments.  Any severance payment
to which Employee is entitled under Section 3(a)(i)(1) shall be paid by the
Company to the Employee (or to the Employee's successors in interest, pursuant
to Section 7(b)) in cash and in full, not later than thirty (30) calendar days
following the Termination Date.




                                       -2-
   3
                 (c)      Voluntary Resignation; Termination For Cause.  If the
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be
established under the Company's then existing severance and benefits plans and
practices or pursuant to other agreements with the Company.

                 (d)      Disability; Death.  If the Company terminates the
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except
for those (if any) as may then be established under the Company's then existing
severance and benefits plans and practices or pursuant to other agreements with
the Company.

                 (e)      Termination Apart from Change of Control.  In the
event the Employee's employment is terminated for any reason, either prior to
the occurrence of a Change of Control or after the twelve (12)-month period
following a Change of Control, then the Employee shall be entitled to receive
severance and any other benefits only as may then be established under the
Company's existing severance and benefits plans and practices or pursuant to
other agreements with the Company.

         4.      Attorney Fees, Costs and Expenses.  The Company shall promptly
reimburse Employee, on a monthly basis, for the reasonable attorney fees, costs
and expenses incurred by the Employee in connection with any action brought by
Employee to enforce his rights hereunder, regardless of the outcome of the
action.

         5.      Limitation on Payments.  In the event that the severance and
other benefits provided for in this Agreement or otherwise payable to the
Employee (i) constitute "parachute payments" within the meaning of Section 280G
of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, then the Employee's severance benefits under Section 3(a)(i) shall be
either

                 (a)      delivered in full, or

                 (b)      delivered as to such lesser extent which would result
                          in no portion of such severance benefits being
                          subject to excise tax under Section 4999 of the Code,

whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999,
results in the receipt by the Employee on an after-tax basis, of the greatest
amount of severance benefits, notwithstanding that all or some portion of such
severance benefits may be taxable under Section 4999 of the Code.  Unless the
Company and the Employee otherwise agree in writing, any determination required
under this Section 5 shall be made in writing by the Company's Accountants
immediately prior to Change of Control, whose determination shall be conclusive
and binding upon the Employee and the Company for all purposes.  For purposes
of making the calculations required by this Section 5, the Accountants may make
reasonable





                                      -3-
   4
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999 of the Code.  The Company and the Employee shall furnish to the
Accountants such information and documents as the Accountants may reasonably
request in order to make a determination under this Section.  The Company shall
bear all costs the Accountants may reasonably incur in connection with any
calculations contemplated by this Section 5.

         6.      Definition of Terms.  The following terms referred to in this
Agreement shall have the following meanings:

                 (a)      Annual Compensation.  "Annual Compensation" means an
amount equal to (i) Employee's Company salary for the twelve months preceding
the Change of Control, and (ii) Employee's 100% "On Target" bonus for the year
in which the Change of Control occurs.

                 (b)      Cause.  "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony, (iii) a willful act by the Employee
which constitutes gross misconduct and which is injurious to the Company, and
(iv)  following delivery to the Employee of a written demand for performance
from the Company which describes the basis for the Company's belief that the
Employee has not substantially performed his duties, continued violations by
the Employee of the Employee's obligations to the Company which are
demonstrably willful and deliberate on the Employee's part.

                 (c)     Change of Control.  "Change of Control" means the 
occurrence of any of the following events:

                           (i)    Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities;

                          (ii)    A change in the composition of the Board
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors.  "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board with the affirmative
votes of at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company);

                         (iii)    The consummation of a merger or consolidation
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty





                                      -4-
   5
percent (50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation;

                          (iv)     The consummation of the sale or disposition
by the Company of all or substantially all the Company's assets.

                 (d)      Disability.  "Disability" shall mean that the Employee
has been unable to perform his Company duties as the result of his incapacity
due to physical or mental illness, and such inability, at least 26 weeks after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Employee or the
Employee's legal representative (such Agreement as to acceptability not to be
unreasonably withheld).  Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment.  In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.

                 (e)      Involuntary Termination.  "Involuntary Termination"
shall mean (i) without the Employee's express written consent, the significant
reduction of the Employee's duties, authority or responsibilities, relative to
the Employee's duties, authority or responsibilities as in effect immediately
prior to such reduction, or the assignment to Employee of such reduced duties,
authority or responsibilities; (ii) without the Employee's express written
consent, a substantial reduction, without good business reasons, of the
facilities and perquisites (including office space and location) available to
the Employee immediately prior to such reduction; (iii) a reduction by the
Company in the base salary of the Employee as in effect immediately prior to
such reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits, including bonuses, to which the Employee was entitled
immediately prior to such reduction with the result that the Employee's overall
benefits package is significantly reduced; (v) the relocation of the Employee to
a facility or a location more than twenty-five (25) miles from the Employee's
then present location, without the Employee's express written consent; (vi) any
purported termination of the Employee by the Company which is not effected for
Disability or for Cause, or any purported termination for which the grounds
relied upon are not valid; (vii) the failure of the Company to obtain the
assumption of this agreement by any successors contemplated in Section 7(a)
below; or (viii) any act or set of facts or circumstances which would, under
California case law or statute constitute a constructive termination of the
Employee.

                 (f)      Termination Date.  "Termination Date" shall mean (i)
if this Agreement is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the Employee
shall not have returned to the performance of the Employee's duties on a
full-time basis during such thirty (30)-day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, provided that if within thirty (30) days after
the Company gives the Employee notice of termination, the Employee notifies the
Company that a dispute exists concerning the termination or the benefits due
pursuant to this Agreement, then the Termination Date shall be the date on which
such dispute is finally determined, either by mutual written agreement of the
parties, or a by final judgment, order or





                                      -5-
   6
decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected), or (iii) if the Agreement
is terminated by the Employee, the date on which the Employee delivers the
notice of termination to the Company.

         7.      Successors.

                 (a)      Company's Successors.  Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner
and to the same extent as the Company would be required to perform such
obligations in the absence of a succession.  For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption agreement
described in this Section 7(a) or which becomes bound by the terms of this
Agreement by operation of law.

                 (b)      Employee's Successors.  The terms of this Agreement
and all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.

         8.      Notice.

                 (a)      General.  Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid.  In the case of
the Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing.  In the case of
the Company, mailed notices shall be addressed to its corporate headquarters,
and all notices shall be directed to the attention of its Secretary.

                 (b)      Notice of Termination.  Any termination by the
Company for Cause or by the Employee as a result of a voluntary resignation or
an Involuntary Termination shall be communicated by a notice of termination to
the other party hereto given in accordance with Section 8(a) of this Agreement.
Such notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated,
and shall specify the termination date (which shall be not more than 30 days
after the giving of such notice).  The failure by the Employee to include in
the notice any fact or circumstance which contributes to a showing of
Involuntary Termination shall not waive any right of the Employee hereunder or
preclude the Employee from asserting such fact or circumstance in enforcing his
rights hereunder.





                                      -6-
   7

         9.      Miscellaneous Provisions.

                 (a)      No Duty to Mitigate.  The Employee shall not be
required to mitigate the amount of any payment contemplated by this Agreement,
nor shall any such payment be reduced by any earnings that the Employee may
receive from any other source.

                 (b)      Waiver.  No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee).  No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.

                 (c)      Whole Agreement.  No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.  This Agreement
represents the entire understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior arrangements and understandings
regarding same.

                 (d)      Choice of Law.  The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California.

                 (e)      Severability.  The invalidity or unenforceability of
any provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.

                 (f)      Withholding.  All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.

                 (g)      Counterparts.  This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.





                                      -7-
   8
                 IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year set forth below.


COMPANY                                 HARMONIC LIGHTWAVES, INC.



                                        By:_____________________________________

                                        Title:__________________________________

                                        Date:___________________

EMPLOYEE                                ________________________________________


                                        Date:___________________





                                      -8-

   1
 
                                                                    EXHIBIT 11.1
 
                           HARMONIC LIGHTWAVES, INC.
 
                COMPUTATION OF NET INCOME (LOSS) PER SHARE(1)(2)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
YEAR ENDED ------------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Net income (loss)......................................... $ 5,918 $ 4,121 $ (2,368) ======= ======= ======= Weighted average shares outstanding: Common stock............................................ 10,106 5,797 443 Mandatorily redeemable convertible preferred stock...... -- 3,129 7,095 Common stock issuable upon exercise of options and warrants............................................. 1,368 1,456 638 ------- ------- ------- Weighted average common shares and equivalents............ 11,474 10,382 8,176 ======= ======= ======= Net income (loss) per share(1)(2)......................... $ 0.52 $ 0.40 $ (0.29) ======= ======= =======
- --------------- (1) Computed in the manner described in Note 1 to Notes to Consolidated Financial Statements. (2) Share and per share data adjusted to reflect a 1-for-3 reverse stock split effective upon the reincorporation of the Company into Delaware in May 1995.
   1
                                                                    EXHIBIT 13.1


FINANCIAL CONTENTS

17  SELECTED FINANCIAL DATA
18  MANAGEMENT'S DISCUSSION AND ANALYSIS
24  CONSOLIDATED BALANCE SHEETS
25  CONSOLIDATED STATEMENT OF OPERATIONS
26  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
27  CONSOLIDATED STATEMENT OF CASH FLOWS
28  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36  REPORT OF INDEPENDENT ACCOUNTANTS
   2
                                                         SELECTED FINANCIAL DATA

Year Ended December 31, 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: - -------------------------------------------------------------------------------------------------------------------- Net sales $60,894 $39,180 $ 18,224 $ 6,714 $ 3,504 Gross profit (loss) 33,163 17,851 6,467 1,458 (263) Income (loss) from operations 5,204 3,761 (2,189) (4,956) (4,771) Net income (loss) 5,918 4,121 (2,368) (5,163) (4,869) Net income (loss) per share(1) $ 0.52 $ 0.40 $ (0.29) -- -- BALANCE SHEET DATA: - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $16,410 $22,126 $ 1,743 $ 4,699 4,568 Working capital 34,158 32,495 6,893 6,506 5,489 Total assets 54,633 41,817 14,578 11,093 9,055 Long term debt, including current portion -- -- 1,480 1,446 1,457 Mandatorily Redeemable Convertible Preferred Stock -- -- 29,215 26,454 19,955 Stockholders' equity (deficit)(2) 43,641 37,009 (20,717) (18,600) (13,438)
Fiscal Years by Quarter 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ (unaudited, in thousands, except per share data) QUARTERLY DATA 4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST - ------------------------------------------------------------------------------------------------------------------------ Net sales $19,497 $16,670 $13,485 $11,242 $10,677 $10,659 $9,623 $8,221 Gross profit 8,936 7,824 6,011 4,960 4,902 4,928 4,352 3,669 Income from operations 2,250 1,610 908 436 953 1,150 1,037 621 Net income 2,405 1,741 1,126 646 1,200 1,358 1,034 529 Net income per share(1) $ 0.21 $ 0.15 $ 0.10 $ 0.06 $ 0.11 $ 0.12 $ 0.10 $ 0.06 Common stock price-high $ 23.50 $ 26.00 $ 23.50 $ 14.63 $ 17.50 $ 19.50 $19.13 -- Common stock price-low 15.38 15.38 11.25 9.00 8.50 15.00 13.00 --
The Company's Common Stock (Nasdaq symbol "HLIT") began trading publicly on the Nasdaq National Market System on May 22, 1995. Prior to that date, there was no public market for the Common Stock. (1) The net loss per share for the year ended December 31, 1994 is pro forma. Net loss per share data for periods prior to 1994 have not been presented as such presentation is not meaningful. See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute per share amounts. (2) The Company has not paid and does not intend to pay dividends in the foreseeable future. Harmonic Lightwaves 17 3 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations OVERVIEW Harmonic Lightwaves, Inc. ("Harmonic" or the "Company") is a worldwide supplier of highly integrated fiber optic transmission, digital headend and element management systems for the delivery of interactive services over broadband networks. The Company designs, manufactures and markets optical transmitters, nodes, receivers, digital video compression and modulation equipment and element management hardware and software.These products are used by major communications providers, such as cable television operators, in bi-directional networks. From its inception in June 1988 through 1991, the Company was principally engaged in development of its first optical transmitter and optical receiver products and began shipment of its initial products in late 1991. Subsequently, the Company commenced development of additional fiber optic products and began volume shipments of PWRLink transmitters in June 1994 and MAXLink 1550 nm transmission systems in June 1996. In March 1997, the Company announced the introduction of its TRANsend(TM) video and audio product family for digital broadband headends. This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, including those set forth under "Factors That May Affect Future Results Of Operations" below and elsewhere in this annual report. RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated:
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- Net sales 100% 100% 100% Cost of sales 54 54 64 -------------------------- Gross profit 46 46 36 Operating expenses: Research and development 15 16 18 Sales and marketing 16 15 23 General and administrative 6 5 7 -------------------------- Total operating expenses 37 36 48 -------------------------- Income (loss) from operations 9 10 (12) Other income (expense), net 1 1 (1) -------------------------- Income (loss) before income taxes 10 11 (13) Provision for income taxes -- -- -- -------------------------- Net income (loss) 10% 11% (13)% ==========================
NET SALES The Company's net sales increased by 55% to $60.9 million in 1996.This growth in net sales was primarily attributable to higher unit sales of the Company's existing products, particularly the PWRLink transmitter and return path products. In addition, the Company began shipment of its 1550 nm MAXLink transmission system during the second quarter of 1996. These factors were partially offset by lower unit sales of the YAGLink optical transmitter and lower selling prices for certain products. Net sales increased by 115% to $39.2 million in 1995 from $18.2 million in 1994. This growth in net sales was due primarily to higher unit sales of the Company's Harmonic Lightwaves 18 4 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations principal products, particularly the PWRLink transmitter and return path products. Higher unit sales PWRLink transmitter in 1995 reflected a full year of shipments of the product, which began initial volume shipments in June 1994 and was sold only in nominal quantities prior to that time. Historically, the majority of Harmonic's net sales has been to relatively few customers, and Harmonic expects this customer concentration to continue in the foreseeable future. In 1996, sales to Tratec (the Company's U.K. distributor), Capella (the Company's Canadian distributor) and ANTEC Corporation ("ANTEC") accounted for 15%, 15% and 13%, respectively, of the Company's net sales. In 1995, sales to Tratec, ANTEC and Capella accounted for 22%, 15% and 15%, respectively, of the Company's net sales. In 1994, sales to ANTEC, Capella, Siemens, Tratec and Scientific-Atlanta, Inc. accounted for 22%, 15%, 14%, 12% and 12% of the Company's net sales. Harmonic has adopted a strategy of selling to major domestic customers through its own direct sales force and expects that domestic OEM and distributor revenues will be a smaller percentage of net sales in the future. In this regard, sales to ANTEC in the fourth quarter of 1996 constituted less than 10% of net sales, and are expected to be insignificant in the future. Sales to customers outside the United States represented 57%, 65% and 57% of net sales in 1996, 1995 and 1994, respectively. Harmonic expects international sales to continue to account for a substantial percentage of its net sales for the foreseeable future. GROSS PROFIT Gross profit increased to $27.7 million (46% of net sales) in 1996 from $17.9 million (46% of net sales) in 1995. The increase in gross profit was principally due to higher unit sales volume which allowed the Company to improve fixed cost absorption and realize increasing economies of scale through higher production and purchasing volumes, partially offset by lower selling prices for certain products. In addition, a more favorable product mix which included a higher percentage of transmitters also contributed to the increase in gross profit in 1996. Gross profit increased to $17.9 million (46% of net sales) in 1995 from $6.5 million (36% of net sales) in 1994.The gross profit growth was due principally to higher unit sales volume and increased efficiencies of a new manufacturing facility which commenced production in the first quarter of 1995. RESEARCH AND DEVELOPMENT Research and development expenses increased to $9.2 million from $6.1 million in 1995, but decreased as a percentage of net sales from 16% to 15%, reflecting higher sales levels. The increase in spending related primarily to increased headcount, particularly at the Company's Israeli subsidiary, and increased use of outside subcontractors and consultants in Israel and in connection with the element management and 1550 nm MAXLink transmission system development programs. Research and development expenses increased to $6.1 million from $3.2 million in 1994, but decreased as a percentage of net sales from 18% to 16%, reflecting higher sales levels. The increase in research and development expenses in 1995 reflected increased headcount and use of outside subcontractors and consultants, and higher prototype material costs in conjunction with the development of the Company's 1550 nm MAXLink transmission system. Research and development expenses for 1996 and 1995 are net of grants from the BIRD Foundation of approximately $140,000 and $300,000, respectively. The Company anticipates that research and development expenses will continue to increase significantly, although they may vary as a percentage of net sales. SALES AND MARKETING Sales and marketing expenses increased to $9.8 million (16% of net sales) in 1996 from $5.8 million (15% of net sales) in 1995. The increase in sales and marketing expenses in 1996 was primarily attributable to higher headcount associated with expansion of the direct sales force and the customer service and technical support organizations, as well as higher promotional expenses and commissions to international sales representatives. Sales and marketing expenses increased to $5.8 million in 1995 from $4.1 million in 1994, but decreased as a percentage of net sales from 23% to 15%. The increase in sales and marketing expenses in Harmonic Lightwaves 19 5 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations 1995 was principally due to increased commissions to international sales representatives and higher payroll and promotional costs. The Company expects that sales and marketing expenses will continue to increase significantly, although they may vary as a percentage of net sales. GENERAL AND ADMINISTRATIVE General and administrative expenses increased to $3.5 million (6% of net sales) in 1996 from $2.2 million (5% of net sales) in 1995. The increase in expenses was principally attributable to increased staffing and related costs of supporting the Company's growth, and to a lesser extent, to certain costs associated with being a public company. General and administrative expenses increased to $2.2 million in 1995 from $1.3 million in 1994, but decreased as a percentage of net sales from 7% to 5%, reflecting higher sales levels. The increase in general and administrative expenses in 1995 was due primarily to costs of supporting the Company's growth, and to a lesser extent to certain costs associated with being a public company. The Company expects to incur higher levels of general and administrative expenses in the future, although such expenses may vary as a percentage of net sales. OTHER INCOME (EXPENSE) Interest and other income (expense) was $1.0 million in 1996 compared to $0.6 million in 1995. The increase in interest and other income in 1996 was principally due to interest earned on higher average cash balances in 1996 following closing of the Company's initial public offering (the "IPO") on May 30, 1995, and lower interest expense in 1996 as the Company repaid all capital leases and bank debt in 1995. Interest and other income (expense) was $0.6 million in 1995 compared to ($0.2) million in 1994. The income in 1995 was principally attributable to interest earned on cash balances, following the closing of the Company's IPO, partially offset by interest expense. The expense in 1994 was principally attributable to interest paid on capital lease obligations and on bank debt. INCOME TAXES The provision for income taxes for 1996 and 1995 is based on an estimated annual tax rate of 5% resulting from federal and state alternative minimum taxes. This rate reflects estimated realization of deferred tax assets, primarily net operating loss carryforwards. In 1994, the Company had no income tax provision because of a net loss for the year. The Company had available federal net operating loss carryforwards of approximately $5.8 million at December 31, 1996. Under current tax law, the Company's utilization of its net operating loss carryforwards has been limited and in the future may be limited or impaired in certain circumstances resulting from a change in ownership.The Company expects to have an effective annual tax rate of 10%-15% in 1997 and a effective tax rate beyond 1997 that approximates statutory rates after full utilization of the net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES The Company completed the IPO in May 1995, raising approximately $24.2 million, net of offering costs. Prior to that, the Company satisfied its liquidity needs primarily from the net proceeds of private sales of Preferred Stock, and to a lesser extent, from capital equipment leases and bank borrowings. Cash provided by operations was approximately $0.3 million in 1996 compared to $2.3 million in 1995 and cash used in operations of approximately $5.3 million in 1994. The decrease in cash provided by operations in 1996 compared to 1995 was primarily due to higher accounts receivable and inventory to support increases in sales and production volumes, and prepayment of rents and deposits of $1.8 million in connection with the Company's new corporate headquarters, partially offset by higher net income, accounts payable and accrued liabilities. The increase in cash provided by operations in 1995 compared to 1994 was primarily due to the Company's profitability in 1995 compared to an operating loss in 1994, partially offset by increased investments in inventories and receivables to support higher sales and production volumes. Harmonic Lightwaves 20 6 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations Net working capital was approximately $34.2 million at December 31, 1996, including $16.4 million of cash and cash equivalents. During the third quarter of 1996, the Company renegotiated its bank line of credit, which now provides for up to $10.0 million in borrowings and expires in September 1997. The line of credit bears interest at the bank's prime rate or LIBOR plus 2.0%. There were no outstanding borrowings under this line during 1996. Additions to property, plant and equipment were approximately $6.7 million during 1996 compared to $3.9 million and $1.4 million in 1995 and 1994 respectively. The increase in 1996 was due principally to increased expenditures for manufacturing and test equipment resulting from higher demand for the Company's products, introduction of new products including the 1550 nm MAXLink transmission system, and leasehold improvements and furniture and fixtures for the new facility. While the Company currently has no material commitments, it expects to spend approximately $5.0 million on capital expenditures in 1997, primarily for manufacturing and test equipment. The Company believes that its existing liquidity sources and anticipated funds from operations will satisfy its cash requirements for at least the next twelve months. FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS The Company's operating results have fluctuated and may continue to fluctuate in the future, on an annual and a quarterly basis, as a result of a number of factors, many of which are outside of the Company's control, including the level of capital spending in the cable television industry, changes in the regulatory environment, changes in market demand, the timing of customer orders, competitive market conditions, lengthy sales cycles, new product introductions by the Company or its competitors, market acceptance of new or existing products, the cost and availability of components, the mix of the Company's customer base and sales channels, the mix of products sold, development of custom products, the level of international sales and general economic conditions. The Company establishes its expenditure levels for product development and other operating expenses based on projected sales levels, and expenses are relatively fixed in the short term. Accordingly, variations in timing of sales can cause significant fluctuations in operating results. In addition, because a significant portion of the Company's business is derived from orders placed by a limited number of large customers, the timing of such orders can also cause significant fluctuations in the Company's operating results. If sales are below expectations in any given quarter, the adverse impact of the shortfall on the Company's operating results may be magnified by the Company's inability to adjust spending to compensate for the shortfall. DEPENDENCE ON KEY CUSTOMERS AND END USERS Historically, a substantial majority of the Company's sales have been to relatively few customers. Sales to the Company's ten largest customers in 1996, 1995 and 1994 accounted for approximately 72%, 80% and 88%, respectively, of its net sales. Due in part to the consolidation of ownership of domestic cable television systems, the Company expects that sales to relatively few customers will continue to account for a significant percentage of net sales for the foreseeable future. Harmonic has adopted a strategy to sell to major domestic customers through its own direct sales force and expects that domestic OEM and distributor revenues will be a smaller percentage of net sales in the future. In this regard, net sales to ANTEC in the fourth quarter of 1996 were less than 10% of net sales, and are expected to be insignificant in the future. Substantially all of the Company's sales are made on a purchase order basis, and none of the Company's customers has entered into a long-term agreement requiring it to purchase the Company's products. The loss of, or any reduction in orders from, a significant customer would have a material adverse effect on the Company's business and operating results. Harmonic Lightwaves 21 7 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations DEPENDENCE ON CABLE TELEVISION INDUSTRY CAPITAL SPENDING To date, substantially all of the Company's sales have been derived, directly or indirectly, from sales to cable television operators. Demand for the Company's products depends to a significant extent upon the magnitude and timing of capital spending by cable television operators for constructing, rebuilding or upgrading their systems. The capital spending patterns of cable television operators are dependent on a variety of factors, including access to financing, cable television operators' annual budget cycles, the status of federal, local and foreign government regulation of telecommunications and television broadcasting, overall demand for cable television services, competitive pressures (including the availability of alternative video delivery technologies such as satellite broadcasting), discretionary customer spending patterns and general economic conditions. The Company believes that the consolidation of ownership of domestic cable television systems, by acquisition and system exchanges, together with uncertainty over regulatory issues, particularly the debate over the provisions of the Telecommunications Act of 1996, caused delays in capital spending by major domestic MSOs during the second half of 1995 and first quarter of 1996. Although the Act became law in February 1996 and the Company believes that its provisions will result in increased capital expenditures in the telecommunications industry, there can be no assurance that capital spending by domestic MSOs will increase in the near future, or at all, or that Harmonic's sales will benefit. In addition, cable television capital spending can be subject to the effects of seasonality, with fewer construction and upgrade projects typically occurring in winter months and otherwise being affected by inclement weather. HIGHLY COMPETITIVE INDUSTRY The market for cable television transmission equipment is extremely competitive and has been characterized by rapid technological change. Most of the Company's competitors are substantially larger and have greater financial, technical, marketing and other resources than the Company. Many of such large competitors are in a better position to withstand any significant reduction in capital spending by cable television operators. In addition, many of the Company's competitors have more long standing and established relationships with domestic and foreign cable television operators than does the Company. There can be no assurance that the Company will be able to compete successfully in the future or that competition will not have a material adverse effect on the Company's business and operating results. RAPID TECHNOLOGICAL CHANGE The market for the Company's products is relatively new, making it difficult to accurately predict the market's future growth rate, size and technological direction. In view of the evolving nature of this market, there can be no assurance that cable television operators, telephone companies or other suppliers of broadband services will not decide to adopt alternative architectures or technologies that are incompatible with the Company's products, which would have a material adverse effect on the Company's business and operating results. The broadband communications markets are characterized by continuing technological advancement. To compete successfully, the Company must design, develop, manufacture and sell new products that provide increasingly higher levels of performance and reliability. As new markets for broadband communications equipment continue to develop, the Company must successfully develop new products for these markets in order to remain competitive. For example, to compete successfully in the future, the Company believes that it must successfully develop and introduce products that will facilitate the processing and transmission of digital signals over optical networks. While the Company has announced and demonstrated initial products for digital applications, there can be no assurance that the Company will successfully complete development of, or successfully introduce, products for digital applications, or that such products will achieve commercial acceptance. In addition, in order to successfully develop and market its planned products for digital applications, the Company may be required to enter into technology development or licensing agreements with third parties. Although many companies are often willing Harmonic Lightwaves 22 8 MANAGEMENT'S DISCUSSION AND ANALYSIS of Financial Condition and Results of Operations to enter into such technology development or licensing agreements, there can be no assurance that such agreements will be negotiated on terms acceptable to the Company, or at all. The failure to enter into technology development or licensing agreements, when necessary, could limit the Company's ability to develop and market new products and could have a material adverse effect on the Company's business and operating results. The failure of the Company to successfully develop and introduce new products that address the changing needs of the broadband communications market could have a material adverse effect on the Company's business and operating results. In addition, there can be no assurance that the successful introduction by the Company of new products will not have an adverse effect on the sales of the Company's existing products. For instance, an emerging trend in the domestic market toward narrowcasting (targeted delivery of advanced services to small groups of subscribers) is causing changes in the network architectures of some cable operators. This may have the effect of changing the Company's product mix toward lower price transmitters, which could adversely affect the Company's gross margins. SOLE OR LIMITED SOURCES OF SUPPLY Certain components and subassemblies necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The reliance on sole or limited suppliers and the Company's increasing reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components or subassemblies and reduced control over pricing, quality and timely delivery of components or subassemblies. The Company does not maintain long-term agreements with any of its suppliers or subcontractors. An inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply could affect the Company's ability to ship its products on a timely basis, which could damage relationships with current and prospective customers and could have a material adverse effect on the Company's business and operating results. The Company believes that investment in inventories will constitute a significant portion of its working capital in the future. As a result of such investment in inventories, the Company may be subject to an increasing risk of inventory obsolescence in the future, which would materially and adversely affect its business and operating results. RISKS OF INTERNATIONAL OPERATIONS Sales to customers outside of the United States in 1996, 1995 and 1994 represented 57%, 65% and 57% of net sales, respectively, and the Company expects that international sales will continue to represent a substantial portion of its net sales for the foreseeable future. In addition, the Company has an Israeli subsidiary that engages primarily in research and development. International operations are subject to a number of risks, including changes in foreign government regulations and telecommunications standards, export license requirements, tariffs and taxes, other trade barriers, fluctuations in currency exchange rates, difficulty in collecting accounts receivable, difficulty in staffing and managing foreign operations and political and economic instability. While international sales are typically denominated in U.S. dollars, fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Payment cycles for international customers are typically longer than those for customers in the United States. There can be no assurance that foreign markets will continue to develop or that the Company will receive additional orders to supply its products for use in foreign broadband systems. Harmonic Lightwaves 23 9 Consolidated BALANCE SHEETS
December 31 1996 1995 - -------------------------------------------------------------------------------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents $16,410 $22,126 Accounts receivable, net 12,643 5,802 Inventories 14,782 9,176 Prepaid expenses and other assets 1,315 199 ------- ------- Total current assets 45,150 37,303 Property and equipment, net 8,751 4,514 Other assets 732 -- ------- ------- $54,633 $41,817 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,604 $ 2,201 Accrued liabilities 5,388 2,607 ------- ------- Total current liabilities 10,992 4,808 ------- ------- Commitments (Notes 8 and 10) Stockholders'equity: Preferred Stock, $.001 par value, 5,000,000 shares authorized; no shares issued or outstanding -- -- Common Stock, $.001 par value, 50,000,000 shares authorized; 10,160,876 and 9,903,501 shares issued and outstanding 10 10 Capital in excess of par value 54,579 53,865 Accumulated deficit (10,948) (16,866) ------- ------- Total stockholders'equity 43,641 37,009 ------- ------- $54,633 $41,817 ======= =======
The accompanying notes are an integral part of these financial statements. Harmonic Lightwaves 24 10 Consolidated Statement of OPERATIONS
Year Ended December 31 1996 1995 1994 - --------------------------------------------------------------------------------------------- (in thousands, except per share data) Net sales $ 60,894 $ 39,180 $ 18,224 Cost of sales 33,163 21,329 11,757 -------- -------- -------- Gross profit 27,731 17,851 6,467 -------- -------- -------- Operating expenses: Research and development 9,237 6,144 3,209 Sales and marketing 9,827 5,750 4,108 General and administrative 3,463 2,196 1,339 -------- -------- -------- Total operating expenses 22,527 14,090 8,656 -------- -------- -------- Income (loss) from operations 5,204 3,761 (2,189) Interest expense (21) (202) (237) Interest and other income (expense), net 1,046 779 58 -------- -------- -------- Income (loss) before income taxes 6,229 4,338 (2,368) Provision for income taxes 311 217 -- -------- -------- -------- Net income (loss) $ 5,918 $ 4,121 $ (2,368) ======== ======== ======== Net income (loss) per share $ 0.52 $ 0.40 $ (0.29) ======== ======== ======== Weighted average common shares and equivalents 11,474 10,382 8,176 ======== ======== ========
The accompanying notes are an integral part of these financial statements. Harmonic Lightwaves 25 11 Consolidated Statement of STOCKHOLDERS' EQUITY (DEFICIT)
Capital in Stockholders' Common Stock Excess of Accumulated Equity Shares Amount Par Value Deficit (Deficit) - ---------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at December 31, 1993 418 $ 1 $ 18 $(18,619) $(18,600) Exercise of stock options and warrants 51 -- 51 -- 51 Issuance of Common Stock warrant -- -- 200 -- 200 Net loss -- -- -- (2,368) (2,368) ------ ------ ------- -------- -------- Balance at December 31, 1994 469 1 269 (20,987) (20,717) Conversion of Mandatorily Redeemable Preferred Stock 7,095 7 29,208 -- 29,215 Issuance of Common Stock in initial public offering, net 2,000 2 24,198 -- 24,200 Exercise of stock options and warrants 340 -- 190 -- 190 Net income -- -- -- 4,121 4,121 ------ ------ ------- -------- -------- Balance at December 31, 1995 9,904 10 53,865 (16,866) 37,009 Exercise of stock options and warrants 208 -- 240 -- 240 Issuance of Common Stock under Stock Purchase Plan 49 -- 474 -- 474 Net Income -- -- -- 5,918 5,918 ------ ------ ------- -------- -------- Balance at December 31, 1996 10,161 $ 10 $54,579 $(10,948) $ 43,641 ====== ====== ======= ======== ========
The accompanying notes are an integral part of these financial statements. Harmonic Lightwaves 26 12 Consolidated Statement of CASH FLOWS
Year Ended December 31, 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- (in thousands) Cash flows from operating activities: Net income (loss) $ 5,918 $ 4,121 $(2,368) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,506 1,799 1,151 Issuance of Common Stock warrant -- -- 200 Changes in assets and liabilities: Accounts receivable (6,841) (1,246) (3,242) Inventories (5,606) (3,523) (2,918) Prepaid expenses and other assets (1,848) (15) (43) Accounts payable 3,403 2 1,300 Accrued liabilities 2,781 1,128 585 -------- -------- ------- Net cash provided by (used in) operating activities 313 2,266 (5,335) -------- -------- ------- Cash flows used in investing activities for the acquisition of property and equipment (6,743) (3,119) (679) -------- -------- ------- Cash flows from financing activities: Borrowings (repayment) under bank line of credit -- (922) 922 Proceeds from issuance of Common Stock, net 714 24,390 51 Proceeds from issuance of Mandatorily Redeemable Convertible Preferred Stock, net -- -- 2,761 Repayments of long-term debt -- (2,232) (676) -------- -------- ------- Net cash provided by financing activities 714 21,236 3,058 -------- -------- ------- Net increase (decrease) in cash and cash equivalents (5,716) 20,383 (2,956) Cash and cash equivalents at beginning of period 22,126 1,743 4,699 -------- -------- ------- Cash and cash equivalents at end of period $ 16,410 $ 22,126 $ 1,743 ======= ======= ====== Supplemental schedule of cash flow information and non-cash financing activities: Interest paid during the period $ 21 $ 193 $ 211 Income taxes paid during the period $ 285 $ 126 $ -- Issuance of Mandatorily Redeemable Convertible Preferred Stock upon conversion of convertible promissory notes and accrued interest $ -- $ -- $ 3,000 Acquisition of property and equipment under capital leases and equipment term loan $ -- $ 752 $ 710 ======== ======== =======
The accompanying notes are an integral part of these financial statements. Harmonic Lightwaves 27 13 NOTES to Consolidated Financial Statements NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Harmonic Lightwaves, Inc. (the "Company") is a worldwide supplier of highly integrated fiber optic transmission, digital headend and element management systems for the delivery of interactive services over broadband networks. The Company operates in one industry segment. See Note 9 for geographic information and information regarding sales to significant customers. REINCORPORATION AND REVERSE STOCK SPLIT The Company originally incorporated in California in June 1988. In May 1995, the Company reincorporated in Delaware. In conjunction with the reincorporation, all outstanding shares of the predecessor California company were exchanged into common stock of the Delaware company in a one-for-three reverse stock split. All applicable share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to reflect this reverse stock split. BASIS OF PRESENTATION The consolidated financial statements of the Company include the financial statements of the Company and its wholly-owned subsidiary. All intercompany accounts and balances have been eliminated. The Company's fiscal quarters end on the Friday nearest the calendar quarter end. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts. Actual results could differ from these estimates. CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity date of three months or less at the date of purchase to be cash equivalents. The Company's investments are classified as held-to-maturity. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities. REVENUE RECOGNITION Revenue is generally recognized upon shipment of product. A provision for the estimated cost of warranty is recorded at the time revenue is recognized. INVENTORIES Inventories are stated at the lower of cost, using the weighted average method, or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method based upon the shorter of the estimated useful lives of the assets, which range from two to ten years, or the lease term of the respective assets, if applicable. CONCENTRATIONS OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained with high quality financial institutions and are invested in short-term, highly liquid investment grade obligations of government and commercial issuers, in accordance with the Company's investment policy. The investment policy limits the amount of credit exposure to any one financial institution or commercial issuer. The Company's accounts receivable are derived from sales to cable television operators and distributors as discussed in Note 9. The Company performs ongoing credit evaluations of its customers, and provides for expected losses but to date has not experienced any material losses. At December 31, 1996, receivables from three customers represented 20%, 17% and 11%, respectively, of accounts receivable. At December 31, 1995, receivables from two customers represented 32% and 19%, respectively, of accounts receivable. Harmonic Lightwaves 28 14 NOTES to Consolidated Financial Statements FOREIGN CURRENCY The functional currency of the Company's subsidiary is the U.S. dollar. Foreign currency translation gains and losses, which have not been material to date, are included in the statement of operations. INCOME TAXES Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their financial statement reported amounts under the provisions of Statement on Financial Accounting Standards No. 109 ("SFAS No. 109"), which has been applied for all periods presented. ACCOUNTING FOR STOCK BASED COMPENSATION The Company's stock-based compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In January 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"). NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of Mandatorily Redeemable Convertible Preferred Stock (using the if converted method), and stock options and warrants (using the treasury stock method). Common equivalent shares are excluded from the computation if their effect is anti-dilutive except that, pursuant to the requirements of the Securities and Exchange Commission, common equivalent shares relating to stock options and warrants (using the treasury stock method and the initial public offering price) issued from April 1, 1994 through the Company's initial public offering ("IPO") have been included in the computation for all periods presented through the Company's IPO even if anti-dilutive. The net loss per share for the year ended December 31, 1994, is pro forma. RECLASSIFICATION Certain amounts in prior years' financial statements and related notes have been reclassified to conform to the 1996 presentation. These reclassifications are not material. NOTE 2: CASH AND CASH EQUIVALENTS At December 31, 1996 and 1995, the Company had the following amounts in cash and cash equivalents, with original maturity dates of three months or less. Realized gains and losses for the years ended December 31, 1996 and 1995 and the difference between gross amortized cost and estimated fair value at December 31, 1996 and 1995 were immaterial.
December 31, 1996 1995 - --------------------------------------------------------- (in thousands) Commercial paper $15,964 $14,769 Cash and money market accounts 446 7,357 --------------------- Total cash and cash equivalents $16,410 $22,126 =====================
Harmonic Lightwaves 29 15 NOTES to Consolidated Financial Statements NOTE 3: BALANCE SHEET DETAILS
December 31, 1996 1995 - --------------------------------------------------------------------------------------- (in thousands) Accounts receivable: Gross accounts receivable $ 12,943 $ 5,902 Less: allowance for doubtful accounts (300) (100) ----------------------- $ 12,643 $ 5,802 ======================= Inventories: Raw materials $ 3,104 $ 2,866 Work-in-process 4,704 2,372 Finished goods 6,974 3,938 ----------------------- $ 14,782 $ 9,176 ======================= Property and equipment: Furniture and fixtures $ 1,124 $ 201 Machinery and equipment 12,183 8,427 Leasehold improvements 1,982 655 ----------------------- 15,289 9,283 Less: accumulated depreciation and amortization (6,538) (4,769) ----------------------- $ 8,751 $ 4,514 ======================= Accrued liabilities: Accrued compensation $ 2,166 $ 1,090 Accrued warranties 733 569 Other 2,489 948 ----------------------- $ 5,388 $ 2,607 =======================
NOTE 4: LINE OF CREDIT The Company has a bank line-of-credit agreement, providing for borrowings of up to $ 10,000,000. The agreement contains certain financial covenants and is available until September 1997. The borrowings bear interest at the bank's prime rate or LIBOR plus 2%. There were no outstanding borrowings under the line at December 31, 1996 or 1995. NOTE 5: CAPITAL STOCK INITIAL PUBLIC OFFERING In May 1995,the Company completed its initial public offering ("IPO") of 2,600,000 shares of common stock, 600,000 of which were sold by existing stockholders, at a price of $13.50 per share. Net proceeds to the Company were approximately $24.2 million, after underwriter commissions and associated costs. Upon the closing of the IPO, all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock automatically converted into 7,094,748 shares of Common Stock. Also effective with the closing of the IPO, the Company was authorized to issue 5,000,000 shares of undesignated preferred stock, of which none were issued or outstanding at December 31, 1996 and 1995. COMMON STOCK WARRANTS In June 1994,the Company entered into a distribution agreement, in connection with which it issued a warrant to purchase up to 798,748 shares of Common Stock at $5.55 per share. The warrant had a fair value of $200,000, which was charged to results of operations in the second quarter of 1994. The warrants will become exercisable in June 1999 and expire at the earlier of six years from the date of issuance Harmonic Lightwaves 30 16 NOTES to Consolidated Financial Statements or the closing of a significant acquisition transaction, as defined in the warrant. Under certain conditions, the ability to exercise may be accelerated and the warrant may be exercisable as early as June 14, 1997. The Company has reserved 798,748 shares of Common Stock for issuance upon exercise of this warrant. In 1993, the Company issued a warrant to purchase up to 22,222 shares of the Company's Common Stock at an exercise price of $4.50 per share in conjunction with an equipment lease line facility. The fair value of the warrant was nominal, and the warrant expires at the earlier of seven years from the date of issuance or the merger or sale of the Company, meeting certain criteria. The Company has reserved 22,222 shares of Common Stock for issuance upon exercise of this warrant. NOTE 6: BENEFIT AND COMPENSATION PLANS STOCK OPTION PLANS In 1988, the Company adopted an incentive and non-statutory stock option plan (the "1988 Plan") for which 1,125,917 shares have been reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness of the Company's IPO, no further grants have been, or will be, made under the 1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods not to exceed ten years. Exercise prices of incentive stock option grants under both plans must be at least 100% of the fair market value of the stock at the date of grant and for nonstatutory stock options must be at least 85% of the fair market value of the stock at the date of grant, all as determined by the Board of Directors. Under both plans, the options generally vest 25% at one year from date of grant, and an additional 1/48th per month thereafter. The Company has reserved 565,000 shares of Common Stock for issuance under the 1995 Plan. The following table summarizes activities under the Plans:
Shares Available Stock Options Weighted Average For Grant Outstanding Exercise Price - ---------------------------------------------------------------------------------------------------- (in thousands, except exercise price) Balance at December 31, 1993 46 872 $ 0.38 Shares authorized 566 -- -- Options granted (373) 373 2.36 Options exercised -- (38) 0.35 Options canceled 60 (60) 1.11 ---- ----- ------ Balance at December 31, 1994 299 1,147 0.99 Shares authorized 351 -- -- Options granted (276) 276 11.98 Options exercised -- (252) 0.53 Options canceled 20 (20) 5.81 ---- ----- ------ Balance at December 31, 1995 394 1,151 3.65 Options granted (340) 340 12.70 Options exercised -- (208) 0.98 Options canceled 7 (48) 5.75 ---- ----- ------ Balance at December 31, 1996 61 1,235 6.52 ==== ===== ======
Harmonic Lightwaves 31 17 NOTES to Consolidated Financial Statements The following table summarizes information regarding stock options outstanding at December 31, 1996:
Stock Options Outstanding Stock Options Exercisable ------------------------------------------------------------- ------------------------------------- Number Weighted-Average Number Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average Exercise Prices December 31, 1996 Contractual Life (Years) Exercise Price December 31, 1996 Exercise Price - ----------------------------------------------------------------------------------------------------------------------- (in thousands, except exercise price and life) $ 0.30 - 1.20 386 5.4 $ 0.41 372 $ 0.41 1.80 - 4.65 264 7.5 2.42 154 2.31 7.20 - 13.50 447 8.7 10.74 94 11.18 14.13 - 22.75 138 9.4 17.52 22 17.71 =================================================================================================================== 1,235 642
DIRECTOR OPTION PLAN Effective upon the IPO,the Company adopted the 1995 Director Option Plan (the "Director Plan") and reserved 50,000 shares of Common Stock for issuance thereunder. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company pursuant to an automatic, nondiscretionary grant mechanism. Grants of options to purchase 4,000 shares were made during 1996 under the Director Plan at exercise prices of $10.00 - $18.00. A grant of options to purchase 2,000 shares was made during 1995 under the Director Plan at an exercise price of $13.50. At December 31, 1996, options to purchase 6,000 shares were outstanding, of which 4,999 shares were exercisable. EMPLOYEE STOCK PURCHASE PLAN Effective upon the IPO, the Company adopted the 1995 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 200,000 shares of Common Stock for issuance thereunder. The Purchase Plan enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning or end of each six month purchase period. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. 48,977 and zero shares were issued under the Purchase Plan during 1996 and 1995, respectively. FAIR VALUE DISCLOSURES The Company accounts for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. If compensation cost for the Company's stock-based compensation plans had been determined based on the fair market value at the grant dates, as prescribed in SFAS 123, the Company's net income and net income per share would have been as follows:
1996 1995 - -------------------------------------------------------------------------------- (in thousands, except per share data) Net income: As reported $ 5,918 $4,121 Pro forma 4,859 3,674 Net income per share: As reported $ 0.52 $ 0.40 Pro forma 0.42 0.35 ------- -------
The fair value of each option grant, under the 1988 Plan, 1995 Plan and Director Plan were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants during 1996 and 1995: dividend yield of 0.0%; expected weighted average volatility of 47.5%; and expected weighted average lives of four years, during both years; and risk-free interest rates of 5.2% to 6.5% and 5.4% to 7.1% for options granted during 1996 and 1995, respectively. Harmonic Lightwaves 32 18 NOTES to Consolidated Financial Statements The fair value of the employees' purchase rights under the Employee Stock Purchase Plan was estimated using the Black-Scholes model with the following weighted average assumptions for 1996 and 1995: dividend yield of 0.0%; expected volatility of 47.5%; expected lives of two years during both years; and risk-free interest rates of 5.7% and 5.3% for 1996 and 1995, respectively. RETIREMENT/SAVINGS PLAN Effective April 1, 1992, the Company implemented a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to 20% of total compensation, subject to applicable Internal Revenue Service limitations. The Company may make discretionary contributions to the plan. To date, the Company has not made any contributions. NOTE 7: INCOME TAXES The Company incurred net operating losses in each year through December 31, 1994. Foreign income (losses) were not significant for all years presented. The provision for income taxes for the year ended December 31, 1996 consists of the following:
December 31, 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Current: Federal $246 $174 Foreign 41 16 State 24 27 ---- ---- $311 $217 ==== ====
The income tax provision reconciles to the provision at the federal statutory rate as follows:
December 31, 1996 1995 - -------------------------------------------------------------------------------- (in thousands) Provision at statutory rate $ 2,118 $ 1,475 State taxes, net of federal benefit 16 18 Utilization of net operating loss carryovers (2,490) (2,052) Future benefits not currently recognized 429 567 Alternative minimum tax 162 116 Other 76 93 ------- ------- $ 311 $ 217 ======= =======
Deferred tax assets comprise the following:
December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- (in thousands) Net operating loss carryovers $ 1,964 $ 3,960 $ 6,354 Research and development carryovers 2,112 1,396 1,396 Capitalized research and development costs 254 931 615 Reserves not currently deductible 1,187 574 422 Other 12 746 229 ------- ------- ------- Total deferred tax assets 5,529 7,607 9,016 Valuation allowance (5,529) (7,607) (9,016) ------- ------- ------- Net deferred assets $ -- $ -- $ -- ======= ======= =======
Harmonic Lightwaves 33 19 NOTES to Consolidated Financial Statements The deferred tax assets valuation allowance at December 31, 1996, 1995 and 1994 is attributed to federal and state deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of these items such that a full valuation allowance has been recorded. At December 31, 1996, the Company had approximately $5,800,000 of net operating loss carryovers for federal tax reporting purposes available to offset future taxable income; such carryovers expire through 2009. Under the Tax Reform Act of 1986, the amounts of and the benefit from net operating losses and research and development credits that can be carried forward may be impaired or limited in certain circumstances. Events which may cause changes in the Company's net operating loss and research and development credit carryovers include, but are not limited to, a cumulative stock ownership change of greater than 50%, as defined, over a three year period. NOTE 8: RESEARCH AND DEVELOPMENT GRANT In accordance with an agreement signed with the Israel-U.S. Binational Industrial Research and Development Foundation ("BIRD") in December 1994, the Company will obtain grants for a research and development project amounting to 50% of the actual expenditures incurred on the project subject to a maximum of $560,000. The Company is not obligated to repay the grants regardless of the outcome of its development efforts; however, it is obligated to pay the BIRD royalties at the rate of up to 2%-5% of sales of any products or development resulting from such research, but not in excess of 150% of the grant. Grants earned of approximately $140,000, and $300,000 during 1996 and 1995, respectively, were offset against research and development expenses for the same period.The Company did not receive any funding and did not incur any significant expenditures on the project during 1994. NOTE 9: GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS Sales and purchase transactions are denominated in U.S. dollars. The Company has one manufacturing facility located in the United States.The Company has no significant assets located outside of the U.S. International net sales were as follows:
Year Ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------- (in thousands) Americas (excluding U.S.) $12,216 $ 8,281 $ 3,688 Europe 12,214 9,819 5,038 Asia 10,342 7,331 1,669 ------- ------- ------- $34,772 $25,431 $10,395 ======= ======= =======
The Company sells to a significant number of its end users through distributors. In 1996, sales to three distributors represented 15%, 15% and 13% of total net sales, respectively. In 1995, sales to three distributors accounted for 22%, 15% and 15% of total net sales, respectively. In 1994, sales to five distributors represented 22%, 15%, 14%, 12% and 12%, respectively, of total net sales. Harmonic Lightwaves 34 20 NOTES to Consolidated Financial Statements NOTE 10: COMMITMENTS The Company leases its facilities under noncancelable operating leases which expire at various dates through 2006. Total rent expense related to these operating leases were $828,000, $555,000, and $468,000, for 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancelable operating leases at December 31, 1996, were as follows:
(in thousands) 1997 $ 160 1998 610 1999 1,304 2000 1,358 2001 1,375 Thereafter 6,171 ------- $10,978 =======
At December 31, 1996, the Company had prepaid approximately $1,765,000 of rents and deposits under the terms of its 10 year lease agreement for the new corporate headquarters in Sunnyvale, California, which it occupied in August 1996. The Company has subleased a portion of its headquarters through July 1998. Under the terms of the sublease, the sublessee is required to make payments of $382,000 and $223,000 for 1997 and 1998, respectively. Harmonic Lightwaves 35 21 Report of INDEPENDENT ACCOUNTANTS To The Board of Directors & Shareholders of Harmonic Lightwaves, Inc., In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of stockholders'equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Harmonic Lightwaves, Inc. and its subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP San Jose, California January 21, 1997 Harmonic Lightwaves 36
   1
 
                                                                    EXHIBIT 21.1
 
                   HARMONIC LIGHTWAVES, INC. AND SUBSIDIARIES
 
                         SUBSIDIARIES OF THE REGISTRANT
 
     The following table shows certain information with respect to the active
significant subsidiaries of the Company as of December 31, 1996.
 
STATE OR OTHER PERCENT OF VOTING JURISDICTION OF SECURITIES OWNED NAME INCORPORATION BY HARMONIC - ---------------------------------------------------------------- ---------------- ----------------- Harmonic Lightwaves (Israel), Ltd............................... Israel 100%
   1
 
                                                                    EXHIBIT 23.1
 
                       CONSENT OF INDEPENDENT ACCOUNTANTS
 
     We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 [No. 33-94138] of Harmonic Lightwaves, Inc. of our report
dated January 21, 1997, appearing on page 36 of the Annual Report to
Shareholders which is incorporated in this Annual Report on Form 10-K.
 


/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
 
San Jose, California
March 28, 1997
   1
 
                                                                    EXHIBIT 24.1
 
                           HARMONIC LIGHTWAVES, INC.
 
                               POWER OF ATTORNEY
 
     See page 17 of Form 10-K.
 

5 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 16,410 0 12,643 0 14,782 45,150 8,751 0 54,633 10,992 0 0 0 54,589 (10,948) 54,633 60,894 60,894 33,163 33,163 0 0 0 6,229 311 6,229 0 0 0 5,918 .52 .52