Harmonic Inc.

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Harmonic Inc.

549 Baltic Way
Sunnyvale, California 94089
U.S.A.
Telephone: (408) 542-2500
Toll Free: (800) 788-1330
Fax: (408) 542-2510
Web site:http://www.harmonicinc.com

Public Company
Incorporated: 1988 as Harmonic Lightwaves, Inc.
Employees: 925
Sales: $184.1 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HLIT
NAIC: 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing

Harmonic Inc., formerly Harmonic Lightwaves, Inc., provides a range of products and solutions that enable satellite, wireless, fiber, and cable television companies to offer interactive services. The company is organized into two divisions, the Broadband Access Networks Division and the Convergent Systems Division. In addition, the company has a research and development subsidiary located in Israel. Its Broadband Access Networks Division provides optical networking products that enable the delivery of interactive services in networks originally designed for one-way cable transmission. Its Convergent Systems Division develops solutions for operators to maximize the capacity of their broadband networks through advanced compression, processing, and multiplexing technology. In May 2000 Harmonic completed its acquisition of DiviCom, a provider of open solutions for digital television, from C-Cube Microsystems, Inc. for $1.7 billion.

Developed Broadband Solutions for Cable TV Systems, 1988-94

The company was founded in 1988 as Harmonic Lightwaves, Inc. in Sunnyvale, California. One of the founders was Moshe Nazarathy, the company’s vice-president of research and later senior vice-president, general manager of the company’s Israel R&D Center. Prior to cofounding Harmonic Lightwaves, he served as principal scientist at Hewlett-Packard’s Photonics and Instruments Laboratory.

In November 1988 Anthony Ley was named president and CEO. He had spent 25 years at Schlumberger Ltd., both in Europe and the United States. Schlumberger was a multibillion dollar oil exploration and industrial aviation corporation based in England. It owned Fairchild Semiconductor Corp. from 1983 to 1985; during that period Ley was vice-president of research and engineering at Fairchild’s Palo Alto location. Ley, who was born in London, England, has advanced mechanical engineering degrees from Cambridge University in England and from the Massachusetts Institute of Technology. He became a consultant in 1985 and was hired by Harmonic Lightwaves in 1988, first as a consultant, then as president and CEO. He would add the title of chairman of the board in 1995.

When Ley joined the company it was involved in fiber-optic measurement projects. Over the next decade he would guide Harmonic Lightwaves in the emerging market of fiber optics for cable television. The company’s first product was introduced in 1992, the high-power YAGLink transmitter. At the time of its introduction, it was the industry’s highest powered laser transmitter for broadband video services. YAGLink enabled cable operators to enjoy substantial savings by consolidating their headends, which receive and process content from a variety of sources. Following YAGLink, Harmonic introduced a complementary suite of standards-based, high-performance optical transmission platforms capable of delivering both broadcast and two-way interactive services.

In 1994 Harmonic added the PWRLink DFB laser transmitter to its product line. This transmitter provided operators with a variety of transmission technologies. In 1995 the company introduced the MAXLink 1550 nm transmission system, which could reach farther than the PWRLink 1310 nm DFB laser transmitter.

Expanded Product Line Through Internal Growth and Acquisitions, 1995-2000

Harmonic Lightwaves went public in 1995 with an initial public offering of 2.6 million shares priced at $6.75 a share. For the year the company reported revenue of $39.2 million and net income of $4.1 million. It had about 230 employees. Over the next five years the company would see its revenue grow dramatically, rising to $60.9 million in 1996, $74.4 million in 1997, $83.9 million in 1998, and $184.1 million in 1999. The company would report a profit in four of the next five years; a net loss of $21.5 million in 1998, which included a $14 million acquisition charge for in-process research and development, was followed by a profit of $23.7 million in 1999.

In 1997 Harmonic introduced the industry’s first scaleable node, the PWRBlazer, which could be reconfigured to support a growing demand for bandwidth. In January 1998 Harmonic acquired New Media Communications Ltd., which was renamed Harmonic Data Systems Ltd., for $17.6 million in stock. This acquisition allowed Harmonic to expand its products to include high-speed data delivery software and hardware. New Media Communications Ltd. was a privately held Israeli developmental company with 15 employees.

In 1998 the company introduced METROLink, the cable industry’s first DWDM (dense wave division multiplexing) system, which allowed operators to dramatically increase the two-way bandwidth capacity of their networks. During the year it also introduced the TRANSend digital headend, a platform for encoding, compressing, multiplexing, and modulating digital signals prior to transmission over broadband networks. Sales for 1998 rose 13 percent to $83.9 million, compared to $74.4 million in 1997. The growth was attributed mainly to the sale of new products, including TRANSend digital headend products, METROLink DWDM systems, and PWRBlazer scaleable nodes. Also, domestic customers began to spend more in the second half of 1998.

At the end of 1999 the company had 454 employees. During the year sales to AT&T accounted for 41 percent of revenue, compared to 17 percent in 1998. Over the past three years sales to customers outside the United States had declined from 59 percent in 1997 to 30 percent in 1999. Sales in 1999 increased 119 percent to $184.1 million, compared to $83.9 million in 1998. The increase was attributed primarily to higher unit sales of METROLink DWDM systems and PWRBlazer scaleable nodes, which began volume shipment in mid-1998. The company’s domestic and international customers also increased their spending during 1999. Domestic sales rose 172 percent, mainly due to increased shipments to AT&T. International sales were up 51 percent on higher shipments to Canada and the United Kingdom. During the year Harmonic raised $58.3 million through a secondary public stock offering.

In May 2000 Harmonic completed its acquisition of DiviCom, the leading provider of high-quality standards-based digital video, audio, and data products and systems for satellite, wireless, fiber, and cable companies. DiviCom’s products and systems enabled its customers to deliver digital video, audio, and data over a variety of networks. The acquisition of an open solutions provider for digital video gave Harmonic the resources to expand its penetration into satellite, wireless, telecommunications, and other emerging markets for broadband communications. DiviCom was acquired from C-Cube Microsystems, Inc. for $1.7 billion, in a complex merger that resulted in C-Cube Microsystems continuing independently as purely a semiconductor company.

Another acquisition was completed in July 2000. Harmonic issued about 284,000 shares to acquire privately held Cogent Technologies, Inc. of Santa Cruz, California. Cogent was a developer of MPEG-2 technology for digital television.

Harmonic is Organized into Two Divisions

Harmonic organized into two divisions, the Broadband Access Networks Division and the Convergent Systems Division. Its Broadband Access Networks Division provides optical networking products that enable the delivery of interactive services in networks originally designed for one-way cable transmission. The division’s principal product lines are optical transmitters, optical nodes, and data gateways. The firm’s three principal lines of optical transmitters are designed to dramatically increase the bandwidth capacity of existing Hybrid Fiber Coax (HFC) cable networks for the delivery of services that require two-way communication. Harmonic’s METROLink DWDM system, first introduced in 1998, allows operators to increase the two-way bandwidth capacity of their networks without expensive system upgrades. METROLink enables operators to provide narrowcast services directly from the headend and eliminates the need to put costly and complex equipment in multiple hubs. Harmonic’s 1550 nm MAXLink transmission system, introduced in 1995, provides a cost-effective solution for various applications and architectures, including long haul applications that are beyond the reach of 1310 nm transmitters. MAXLink is also used with fiber-deep architectures that utilize high-power optical amplifiers. The company’s third line of optical transmitters is PWRLink, a family of 1310 nm DFB laser transmitters that were first introduced in 1994.

Harmonic’s scaleable optical node platform, PWRBlazer, was first introduced in 1997. It provides operators with a range of transmission technologies for fiber-rich network architectures. The scaleable nodes can be reconfigured at any time to support growing demand for bandwidth in HFC networks. They can also meet the need for smaller node sizes resulting from large-scale deployment of interactive services, including highspeed Internet access, telephony, and video-on-demand.

Company Perspectives:

Harmonic is a leading provider of innovative broadband solutions that deliver video, voice and data to communications providers around the world. Harmonic’s technically advanced fiber-optic, digital video and IP [Internet protocol] data delivery systems enable network operators to provide a range of interactive and advanced digital services that include high-speed Internet access, telephony, digital video, HDTV, video and audio streaming, and video-on-demand.

A key element of Harmonic’s strategy has been to develop products, or data gateways, that enable operators to introduce new broadband services. In 2000 the company introduced the world’s first NODE CMTS, a new transmission technology for HFC access networks. By placing the CMTS in the node, NODEcmts provides Ethernet-over-HFC capability, resulting in significantly increased upstream IP data capacity, which gives operators an advanced tool for delivering interactive services to their customers. Another data gateway developed by Harmonic is called InterSect, which is an interactive set-top box controller that provides digital cable television operators with the ability to deliver TCP/IP traffic to set-top boxes.

Harmonic’s Convergent Systems Division develops solutions for operators to maximize the capacity of their broadband networks through advanced compression, processing, and multiplexing technology. Its principal product lines include encoders, multiplexing and stream processing products, and high-speed data delivery software and hardware technology. Harmonic’s TRANSend digital headend platform, first introduced in 1997, includes a range of products for encoding, compressing, multiplexing, and modulating digital signals prior to transmission over broadband networks. The company’s CyberStream product line, which was introduced in 1998 following the acquisition of New Media Communications Ltd., enables Internet access and high-speed data delivery primarily over satellite or wireless networks to residential and business subscribers.

Principal Divisions

Broadband Access Networks Division; Convergent Systems Division.

Principal Subsidiaries

Harmonic Data Systems Ltd. (Israel).

Principal Competitors

ADC Telecommunications, Inc.; ANTEC Corp.; General Instrument Corp. (subsidiary of Motorola, Inc.); Philips Electronics North America Corp.; Scientific-Atlanta, Inc.; Lucent Technologies, Inc.; Broadlogic, Inc.; SkyStream Corp.; Hybrid Networks, Inc.; SAGEM.

Key Dates:

1988:: Company is founded in California as Harmonic Lightwaves, Inc.
1998:: Company acquires New Media Communications Ltd., which becomes Harmonic Data Systems Ltd.
2000:: Harmonic acquires DiviCom business unit, a provider of open solutions for digital television, from C-Cube Microsystems, Inc. for $1.7 billion.