Harmonic Announces Tentative Agreement to Settle Shareholder Class Action

Harmonic Inc. (NASDAQ:HLIT), a leading provider of broadcast and on-demand video delivery solutions, today announced that it had reached a tentative agreement for the settlement of a securities class action filed against the Company and certain of its officers and directors in 2000. The Company believes that it is in its best interests to avoid the cost, management distraction and risk associated with a trial, currently scheduled for August 2008. The tentative agreement is subject to certain contingencies, including execution of a definitive agreement and court approval. The agreement will provide a full release of Harmonic and the other named defendants in connection with the allegations in the lawsuit without any admission of fault on the part of Harmonic or its officers and directors. The cost of the settlement is $15 million, plus an estimated aggregate of $1.4 million in related legal fees and expenses in connection with proceedings in the securities class action and derivative lawsuits. Of this aggregate cost of settlement, Harmonic will pay $6.4 million and the Company’s insurance carriers, having funded most litigation costs to date, will contribute the remaining $10 million. As a result of this tentative agreement, the Company will record a charge of $6.4 million in its financial statements for the year ended December 31, 2007 to be included in its Annual Report on Form 10-K to be filed with the SEC later today. In addition, following the completion of year-end audit procedures, the Company has identified certain adjustments to its preliminary unaudited financial statements announced on January 29, 2008 for the quarter and year ended December 31, 2007. These adjustments result in the reduction of quarterly and annual revenue and net income by $984,000 and $253,000, respectively, and will also be included in the financial statements in the Annual Report on Form 10-K for 2007. The impact of the litigation settlement and these other adjustments will reduce the Company’s reported diluted GAAP EPS for the quarter and year by $0.08 for both periods, but non-GAAP EPS reported on January 29 will remain unchanged. Approximately $820,000 of the adjusted revenue and associated cost of sales of $413,000 are expected to be recognized in the first quarter of 2008. Revised unaudited financial statements, which include the litigation settlement charge and related expenses, the effect of the year-end adjustments and a revised GAAP to non-GAAP reconciliation, are attached at the end of this release. About Harmonic Inc. Harmonic Inc. is a leading provider of versatile and high performance video solutions that enable service providers to efficiently deliver the next generation of broadcast and on-demand video services, including high definition, video-on-demand, network personal video recording and time-shifted TV. Cable, satellite, broadcast and telecom service providers can utilize Harmonic’s digital video, broadband optical access and software solutions to offer consumers a compelling and personalized viewing experience. Harmonic (NASDAQ:HLIT) is headquartered in Sunnyvale, California with R&D, sales and system integration centers worldwide. The Company’s customers, including many of the world’s largest communications providers, deliver services in virtually every country. Visit www.harmonicinc.com for more information. Legal Notice Regarding Forward-Looking Statements This press release 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, including statements related to: our expectations regarding the settlement of the securities class action litigation, including our expectation that a final settlement agreement will be executed by the parties and approved by the court; our belief that the final settlement agreement will provide a full release of Harmonic and the other named defendants in connection with the allegations in the securities class action lawsuit without any admission of fault on the part of Harmonic or its officers and directors; and our expectation that the aggregate fees and expenses in connection with proceedings in the securities class action and derivative lawsuits will be approximately $1.4 million. Our expectations and beliefs regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include the possibility that: we will not be able to reach a definitive settlement agreement with the plaintiffs in the securities class action litigation, or that any such settlement agreement that is reached with the plaintiffs will be rejected by the court; the definitive settlement agreement will not be on the same terms that were reached in the tentative settlement; and that the aggregate fees and expenses in connection with proceedings in the securities class action and derivative lawsuits will exceed $1.4 million. The forward-looking statements contained in this press release are also subject to other risks and uncertainties, including those more fully described in Harmonic’s filings with the Securities and Exchange Commission, including our annual report filed on Form 10-K for the year ended December 31, 2006, our quarterly report on Form 10-Q for the quarterly period ended September 28, 2007, and our annual report on Form 10-K for the year ended December 31, 2007 that is expected to be filed on March 17, 2008. Harmonic does not undertake to update any forward-looking statements. EDITOR’S NOTE – Product and company names used herein are trademarks or registered trademarks of their respective owners. Harmonic Inc. Condensed Consolidated Balance Sheets (Unaudited)     December 31, 2007 December 31, 2006   (In thousands) Assets Current assets: Cash and cash equivalents $ 129,005 $ 33,454 Short-term investments 140,255 58,917 Accounts receivable, net 69,302 64,674 Inventories 34,251 42,116 Deferred income taxes 3,506   ? Prepaid expenses and other current assets   17,489     12,807     Total current assets 393,808 211,968   Property and equipment, net 14,082 14,816   Intangibles and other assets   67,889     55,178     $ 475,779   $ 281,962     Liabilities and stockholders’ equity Current liabilities: Current portion of long-term debt $ ? $ 460 Accounts payable 20,500 33,863 Income taxes payable 481 7,098 Deferred revenue 37,865 29,052 Accrued liabilities   51,686     44,097     Total current liabilities 110,532 114,570   Accrued excess facilities costs, noncurrent 9,907 16,434 Other non-current liabilities   20,927     5,824     Total liabilities   141,366     136,828     Stockholders’ equity: Common stock 2,246,969 2,078,941 Accumulated deficit (1,912,386 ) (1,933,708 ) Accumulated other comprehensive loss   (170 )   (99 )   Total stockholders’ equity   334,413     145,134     $ 475,779   $ 281,962     Harmonic Inc. Condensed Consolidated Statements of Operations (Unaudited)     Three Months Ended Year Ended   December 31, 2007   December 31, 2006   December 31, 2007   December 31, 2006   (In thousands, except per share data) Net sales $ 87,390   $ 75,338 $ 311,204   $ 247,684   Cost of sales   46,675   45,174   177,129   146,238     Gross profit   40,715   30,164   134,075   101,446     Operating expenses: Research and development 11,287 9,901 42,902 39,455 Selling, general and administrative 24,332 16,621 70,690 65,243 Write-off of acquired in-process technology   ?   ? 700   ? Amortization of intangibles   160   291   525   470     Total operating expenses   35,779   26,813   114,817   105,168     Income (loss) from operations 4,936 3,351 19,258 (3,722 )   Interest and other income, net   2,997   1,816   6,263   5,338     Income before income taxes 7,933 5,167 25,521 1,616   Provision for income taxes   1,294   126   2,100   609     Net income $ 6,639 $ 5,041 $ 23,421 $ 1,007     Net income per share Basic $ 0.08 $ 0.07 $ 0.29 $ 0.01     Diluted $ 0.07 $ 0.07 $ 0.28 $ 0.01     Shares used to compute net income per share: Basic   88,469   75,670   81,882   74,639     Diluted   90,377   76,547   83,249   75,183     Harmonic Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)   Year Ended December 31, 2007   December 31, 2006 (In thousands) Cash flows from operating activities: Net income $ 23,421 $ 1,007 Adjustments to reconcile net income to cash provided by operating activities: Amortization of intangibles 5,338 2,200 Write-off of acquired in-process technology 700   ? Depreciation 6,661 7,383 Stock-based compensation 6,196 5,722 Loss on disposal and impairment of fixed assets 74 297 Deferred income taxes   ?   ? Changes in assets and liabilities: Accounts receivable (4,191 ) (20,550 ) Inventories 7,865 (3,224 ) Prepaid expenses and other assets (6,354 ) (4,316 ) Accounts payable (13,129 ) 13,396 Deferred revenue 10,205 7,774 Income taxes payable 208 493 Accrued excess facilities costs (6,684 ) (877 ) Accrued and other liabilities   5,050     (671 ) Net cash provided by operating activities   35,360     8,634     Cash flows from investing activities: Purchases of investments (178,123 ) (70,398 ) Proceeds from sale of investments 98,300 84,820 Acquisition of property and equipment, net (5,868 ) (5,143 ) Acquisition of Rhozet, net of cash received (1,950 )   ? Purchase of Entone, Inc. note receivable (2,500 )   ? Acquisition of Entone Technologies, Inc., net of cash received   (2,465 )   (26,232 ) Net cash used in investing activities   (92,606 )   (16,953 )   Cash flows from financing activities: Proceeds from issuance of common stock, net 153,337 4,778 Excess tax benefits from stock-based compensation 70   ? Repayments under bank line and term loan (460 ) (812 ) Repayments of capital lease obligations   (72 )   (82 ) Net cash provided by financing activities   152,875     3,884     Effect of exchange rate changes on cash and cash equivalents   (78 )   (71 )   Net increase (decrease) in cash and cash equivalents 95,551 (4,364 ) Cash and cash equivalents at beginning of period   33,454     37,818     Cash and cash equivalents at end of period $ 129,005   $ 33,454     Harmonic Inc. Revenue Information (Unaudited)     Three Months Ended Year Ended December 31,2007   December 31,2006   December 31,2007   December 31,2006 (In thousands) Product             Video Processing $ 41,954 48% $ 30,492 41% $ 134,744 43% $ 96,855 39% Edge & Access 29,379 34% 32,500 43% 125,270 40% 109,529 44% Software, Services and Other   16,057   18%   12,346   16%   51,190   17%   41,300   17% Total $ 87,390 100% $ 75,338 100% $ 311,204 100% $ 247,684 100%   Geography United States $ 49,810 57% $ 44,449 59% $ 175,257 56% $ 126,420 51% International   37,580   43%   30,889   41%   135,947   44%   121,264   49% Total $ 87,390 100% $ 75,338 100% $ 311,204 100% $ 247,684 100%   Market Cable $ 46,493 53% $ 53,236 71% $ 185,803 60% $ 155,736 63% Satellite 21,637 25% 8,405 11% 65,343 21% 26,189 11% Telco & Other   19,260   22%   13,697   18%   60,058   19%   65,759   26% Total $ 87,390 100% $ 75,338 100% $ 311,204 100% $ 247,684 100% Use of Non-GAAP Financial Measures In establishing operating budgets, managing its business performance, and setting internal measurement targets, the Company excludes a number of items required by GAAP. Management believes that these accounting charges and credits, most of which are non-cash or non-recurring in nature, are not useful in managing its operations and business. Historically, the Company has also publicly presented these supplemental non-GAAP measures in order to assist the investment community to see the Company "through the eyes of management,” and thereby enhance understanding of its operating performance. The non-GAAP measures presented here are gross margins, operating expense, net income and net income per share. The presentation of non-GAAP information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and is not necessarily comparable to non-GAAP results published by other companies. A reconciliation of non-GAAP financial measures to GAAP financial measures is included with the financial statements contained in this press release. The non-GAAP adjustments described below have historically been excluded from our non-GAAP measures. These adjustments, and the basis for excluding them, are: --   Restructuring Activities   -- Severance Costs The Company has incurred severance costs in cost of sales and in operating expenses in connection with the closing of its manufacturing and research and development facilities in the UK. In addition, severance costs were incurred due to a reorganization of its senior management following the appointment of a new Chief Executive Officer. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these costs do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results.   -- Excess Facilities The Company has incurred excess facilities charges and credits in operating expenses due to adjustments related to vacating and subleasing portions of its Sunnyvale campus and to the closing of its manufacturing and research and development facilities in the UK. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these costs do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results.   -- Product Discontinuance In connection with the restructuring of its operations in the UK, the Company recorded charges for excess inventory in connection with discontinued products. The Company excludes one-time costs of this nature in evaluating its ongoing operational performance. We believe that these costs do not reflect expected future expenses nor do they provide a meaningful comparison of current versus prior operating results.   -- Litigation Settlement Costs   The Company incurred a litigation settlement charge and related expenses in 2007. We exclude one-time costs of this nature in evaluating our operating performance as it is difficult to estimate the amount or timing of these items in advance. Generally, in the case of legal settlements, these gains or losses are recorded in the period in which the matter is concluded or resolved even though the subject matter in this instance related to litigation originally initiated in 2000. We believe that these costs do not reflect future expenses nor do they provide a meaningful comparison of current versus prior operating results.   -- Non-Cash Items   -- Stock-Based Compensation Expense The Company has incurred stock-based compensation expense in cost of sales and operating expenses as required under FAS 123R. The Company excludes stock-based compensation expense because it believes that this measure is not relevant in evaluating its core operating performance, either for internal measurement purposes or for period-to-period comparisons and benchmarking against other public companies.   -- Impairment and Amortization of Intangibles The Company has incurred amortization of intangibles and has taken a charge for acquired in-process technology related to acquisitions the Company has made. In addition, the Company recorded an impairment of its fixed assets and intangibles due to its decision to discontinue a product line. Management excludes these items when it evaluates its core operating performance. We believe that eliminating these expenses is useful to investors when comparing historical and prospective results and comparing such results to other public companies because these expenses will vary if and when the Company makes additional acquisitions.   Harmonic Inc. GAAP to Non-GAAP Income Reconciliation (Unaudited)   Three Months Ended December 31, 2007   Three Months Ended December 31, 2006 Gross Margin   Operating Expense Net Income     Gross Margin   Operating Expense Net Income (In thousands) GAAP $ 40,715   $ 35,779 $ 6,639 $ 30,164   $ 26,813 $ 5,041   Cost of sales related to severance costs 287 287 Cost of sales related to product discontinuance 1,134 1,134 Cost sales related to stock based compensation expense 280 280 202 202 Research and development expense related to stock based compensation expense (573 ) 573 (334 ) 334 Selling, general and administrative expense related to severance costs (198 ) 198 Selling, general and administrative expense related to excess facilities costs (482 ) 482 (116 ) 116 Selling, general and administrative expense related to stock based compensation expense (868 ) 868 (810 ) 810 Selling, general and administrative expense related to litigation settlement (6,400 ) 6,400 Impairment and amortization of fixed assets and intangibles 1,474 (160 ) 1,634 1,237 (491 ) 1,728                                   Non-GAAP $ 42,469   $ 27,296   $ 16,876   $ 33,024   $ 24,864   $ 9,850   GAAP income per share – basic $ 0.08   $ 0.07 GAAP income per share – diluted $ 0.07   $ 0.07 Non-GAAP income per share – basic $ 0.19   $ 0.13 Non-GAAP income per share – diluted $ 0.19   $ 0.13 Shares used in per-share calculation – basic   88,469     75,670 Shares used in per-share calculation – diluted   90,377     76,547   Year Ended December 31, 2007 Year Ended December 31, 2006 Gross Margin   Operating Expense Net Income   Gross Margin   Operating Expense Net Income   GAAP $ 134,075 $ 114,817 $ 23,421 $ 101,446 $ 105,168 $ 1,007   Cost of sales related to severance costs 188 188 587 587 Cost of sales related to product discontinuance 772 772 1,134 1,134 Cost of sales related to stock based compensation expense 998 998 957 957 Research and development expense related to severance costs (334 ) 334 (12 ) 12 Research and development expense related to stock based compensation expense (2,012 ) 2,012 (1,638 ) 1,638 Selling, general and administrative expense related to severance costs (131 ) 131 (848 ) 848 Selling, general and administrative expense related to stock based compensation expense (3,186 ) 3,186 (3,124 ) 3,124 Selling, general and administrative expense related to excess facilities expense (recovery) 331 (331 ) (2,174 ) 2,174 Selling, general and administrative expense related to litigation settlement (6,400 ) 6,400 Impairment and amortization of fixed assets and intangibles 4,740 (1,225 ) 5,965 1,730 (670 ) 2,400                                   Non-GAAP $ 140,773   $ 101,860   $ 43,076   $ 105,854   $ 96,702   $ 13,881   GAAP income per share – basic $ 0.29   $ 0.01 GAAP income per share – diluted $ 0.28   $ 0.01 Non-GAAP income per share – basic $ 0.53   $ 0.19 Non-GAAP income per share – diluted $ 0.52   $ 0.18 Shares used in per-share calculation – basic   81,882     74,639 Shares used in per-share calculation – diluted   83,249     75,183