Harmonic Posts Losses in Q2, Lawsuit

SUNNYVALE, Calif. -- Harmonic Inc. (Nasdaq:HLIT - News) today announced its results for the quarter ended June 27, 2003.

For the second quarter of 2003, Harmonic reported net sales of $41.7 million, compared to $37.0 million in the previous quarter and $56.3 million in the second quarter of 2002. Domestic sales represented 73% of total sales for the second quarter of 2003.

The CS division, which designs, manufactures and markets digital headend systems for a number of markets, had divisional net sales of $27.1 million, up from $24.0 million in the previous quarter. During the second quarter, the Company saw increased shipments to its cable customers, particularly sales of its NSG product for video-on-demand (VOD) services.

The BAN division, which designs, manufactures and markets fiber optic products for broadband cable networks, had divisional net sales of $14.6 million, up from $13.0 million in the previous quarter. The growth in BAN sales was due to increased shipments to a number of domestic and international cable operators.

"Although our customers remain generally cautious about capital commitments, we are seeing targeted expenditures in areas such as video-on-demand in cable and local channel services in the satellite market," said Anthony J. Ley, Chairman, President and Chief Executive Officer. "We are pleased with our sequential improvement in revenue and gross margin, sustained focus on expense control and continued development and introduction of exciting new products. During the second quarter, Harmonic was recognized as the "Biggest Contributor to Content Delivery" by a leading industry publication for our pioneering IP-based VOD solutions. In addition, we introduced our enhanced NMX Digital Service Manager(TM) to provide visual monitoring capabilities for our VOD platform."

"While the market environment is still challenging, Harmonic's product portfolio remains strongly positioned to address the intensifying competitive pressure on our cable, satellite and telco customers to offer a combination of digital services, including video-on-demand, high-definition video and high-speed data services. In the third quarter, we expect to see continued revenue growth."

The GAAP net loss for the second quarter of 2003 was $11.7 million or $0.19 per share, compared to $11.1 million or $0.19 per share for the same period of 2002. The GAAP net loss for the second quarter of 2003 includes a non-cash charge for the amortization of intangibles of $3.5 million, a credit relating to the sale of previously reserved inventory of $1.0 million, and the litigation settlement charge of $2.7 million described in a separate press release issued today. Excluding the above charges and credit, the non-GAAP loss for the quarter was $6.6 million, or $0.11 per share, compared to a non-GAAP loss of $5.2 million, or $0.09 per share for the second quarter of 2002. The reconciliation between GAAP and non-GAAP net loss is provided in the accompanying tables.

In a separate release:

Harmonic Inc. (Nasdaq: HLIT - News) today announced a settlement of its litigation with Power and Telephone Supply (P&T) in Federal court in Tennessee. Under the terms of the settlement agreement, Harmonic will pay $2.8 million to P&T in release of all outstanding claims. The settlement follows summary judgment against Harmonic on certain of the claims made by P&T under a Tennessee statute relating to retailers and suppliers.

These claims arose from the cancellation of purchase orders on P&T by one of its end-customers in 2000. Although Harmonic's distribution contract with P&T allowed P&T only very limited rights of product return, the Tennessee statute provides distributors significant product return and refund rights and other benefits, including holding costs and interest, regardless of the contract terms.

"Although we are very disappointed about the outcome, we believed that a negotiated settlement was in Harmonic's best interests at this time, particularly in view of the Court's ruling," said Mr. Anthony J. Ley, President and Chief Executive Officer of Harmonic.

Harmonic has accounted for the settlement with P&T in its second quarter ended June 27, 2003, the results of which are announced in a separate press release today. After accounting for the value of products to be returned by P&T and other costs, there is a pre- and post-tax net charge to general and administrative expense of approximately $2.7 million, or $0.04 per share. Harmonic will pay P&T $1.0 million on July 24, 2003, with the balance of $1.8 million payable on January 15, 2004.

Harmonic Inc.