UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

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Filed by a Party other than the Registrant    o

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o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12

HARMONIC INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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HARMONIC INC.

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 20, 2010

TO THE STOCKHOLDERS OF HARMONIC INC.:

 

NOTICE IS HEREBY GIVEN that the annual meeting of stockholders of Harmonic Inc., a Delaware corporation (the “Company”), will be held on Thursday, May 20, 2010 at 8:00 a.m., Pacific Time, at the Company’s office, 641 Baltic Way, Sunnyvale, CA 94089, for the following purposes:

 

 

The foregoing items of business are more fully described in the Proxy Statement accompanying this notice.

 

Pursuant to rules promulgated by the Securities and Exchange Commission, we are providing access to our proxy materials over the Internet. Only stockholders of record at the close of business on March 22, 2010 are entitled to Notice of Internet Availability of Proxy Materials and to vote at the annual meeting and any adjournment or postponement thereof. We expect to mail the Notice of Internet Availability of Proxy Materials on or about April 9, 2010.

 

All stockholders are cordially invited to attend the meeting in person. However, to ensure your representation at the meeting, you are urged to vote as instructed in the Notice of Internet Availability of Proxy Materials, via the Internet or by telephone, as promptly as possible to ensure that your vote is recorded. Alternatively, you may follow the procedures outlined in the Notice of Internet Availability of Proxy Materials to request a paper proxy card to submit your vote by mail. Any stockholder of record attending the meeting may vote in person even if such stockholder has previously voted by another method.

 

 

By Order of the Board of Directors,

 

Robin N. Dickson,

Corporate Secretary

Sunnyvale, California

 

April 9, 2010

 

YOUR VOTE IS IMPORTANT

 

In order to assure your representation at the annual meeting, you are requested to vote, at your earliest convenience, by any of the methods described in the accompanying proxy statement. If you decide to attend the meeting and would prefer to vote by ballot, your proxy will be revoked automatically and only your vote at the meeting will be counted. YOUR SHARES CANNOT BE VOTED UNLESS YOU (A) VOTE BY TELEPHONE, BY INTERNET, REQUEST A PAPER PROXY CARD, AND COMPLETE, SIGN, DATE AND RETURN SUCH PAPER PROXY CARD BY MAIL, OR (B) ATTEND THE ANNUAL MEETING AND VOTE IN PERSON.

HARMONIC INC.

 

 

549 BALTIC WAY
SUNNYVALE, CALIFORNIA 94089

 

 

 

 

General

 

The enclosed proxy is solicited on behalf of the Board of Directors of Harmonic Inc., a Delaware corporation (“Harmonic” or the “Company”), for use at the Annual Meeting of Stockholders (the “Annual Meeting”) to be held May 20, 2010 at 8:00 a.m., Pacific Time, or at any adjournments and postponements thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at the Company’s office, 641 Baltic Way, Sunnyvale, California 94089. The telephone number of the Company’s principal executive offices is 1-408-542-2500, and the address of the Company’s principal executive offices is 549 Baltic Way, Sunnyvale, California 94089.

 

NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS AND ANNUAL REPORT FOR STOCKHOLDERS’ MEETING TO BE HELD ON MAY 20, 2010

 

In accordance with rules and regulations of the Securities and Exchange Commission (the “SEC”), instead of mailing a printed copy of our proxy materials to each stockholder of record, we are now furnishing to our stockholders proxy materials, including our Annual Report to Stockholders (collectively, the “Proxy Materials”), on the Internet. This process is designed to expedite stockholders’ receipt of materials, lower the cost of the Annual Meeting, and conserve natural resources. On or about April 9, 2010, we will send a Notice of Internet Availability of Proxy Materials (the “E-Proxy Notice”) by email to those stockholders who previously requested to receive the Proxy Materials electronically and by mail to all other stockholders entitled to vote at the Annual Meeting. If you received the E-Proxy Notice by mail, you will not automatically receive a printed copy of the Proxy Materials, unless you have previously requested to receive printed copies of all Proxy Materials. Instead, the E-Proxy Notice will instruct you as to how you may access and review all of the important information contained in the Proxy Materials on the Internet. The E-Proxy Notice also instructs you as to how you may submit your proxy on the Internet. If you received the E-Proxy Notice by mail and would like to receive a printed copy of our Proxy Materials, you should follow the instructions for requesting such materials included in the E-Proxy Notice.

 

Registered stockholders may also sign up to receive future proxy materials and other stockholder communications electronically instead of by mail. Your election to receive Proxy Materials and other stockholder communications by email will remain in effect until you terminate it. In order to receive the communications electronically, you must have an e-mail account, access to the Internet through an Internet service provider and a web browser that supports secure connections. Visit www.bnymellon.com/shareowner/isd for additional information regarding electronic delivery enrollment. Stockholders with shares registered in their names with BNY Mellon Shareowner Services LLC may authorize a proxy by the Internet at the following Internet address http://bnymellon.mobular.net/bnymellon/hlit, or telephonically by calling BNY Mellon Shareowner Services LLC at 1-888-313-0164. Proxies submitted through BNY Mellon Shareowner Services LLC by the Internet or telephone must be received by 11:59 p.m. Eastern time (8:59 p.m. Pacific time) on May 19, 2010. The giving of a proxy will not affect your right to vote in person if you decide to attend the Annual Meeting.

RECORD DATE AND VOTING SECURITIES

 

Stockholders of record at the close of business on March 22, 2010 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting. At the Record Date, 96,875,597 shares of the Company’s common stock, $0.001 par value per share, were issued and outstanding.

 

REVOCABILITY OF PROXIES

 

Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use at the Annual Meeting by delivering to the Corporate Secretary of the Company at the Company’s principal executive offices a written notice of revocation or a duly executed proxy bearing a later date, or by voting on a later date by telephone or via the Internet (only your latest-dated proxy is counted), or by attending the Annual Meeting and voting in person.

 

VOTING AND SOLICITATION

 

Each stockholder is entitled to one vote for each share of the Company’s common stock held as of the Record Date on all matters presented at the Annual Meeting. Stockholders do not have the right to cumulate their votes in the election of directors.

 

The Company will bear the cost of soliciting proxies, including the preparation, assembly, Internet hosting, printing and mailing of the Notice of Internet Availability of Proxy Materials, this Proxy Statement, the proxy card and any other Proxy Materials furnished to stockholders by the Company in connection with the Annual Meeting. In addition, the Company may reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding the Proxy Materials to such beneficial owners. Solicitation of proxies by mail may be supplemented by telephone, telegram, facsimile or personal solicitation by directors, officers or employees of the Company. No additional compensation will be paid to such persons for such services.

 

QUORUM; ABSTENTIONS; BROKER NON-VOTES

 

The required quorum for the transaction of business at the Annual Meeting is a majority of the votes eligible to be cast by holders of shares of the Company’s common stock issued and outstanding on the Record Date. Shares eligible to vote at the Annual Meeting will be counted as present at the Annual Meeting if the holder of such shares is present and votes in person at the Annual Meeting or has properly submitted a proxy card or voted by telephone or via the Internet. Shares that are voted “FOR,” “AGAINST,” “WITHHELD” or “ABSTAIN” are treated as being present at the Annual Meeting for purposes of establishing a quorum and are also treated as shares entitled to vote in person or by proxy at the Annual Meeting (the “Votes Cast”) with respect to such matter.

 

While there is no definitive statutory or case law authority in Delaware as to the proper treatment of abstentions, the Company believes that abstentions should be counted for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of Votes Cast with respect to a proposal (other than the election of directors). In the absence of controlling precedent to the contrary, the Company intends to treat abstentions in this manner. Accordingly, abstentions on a given proposal will have the same effect as a vote against the proposal, but will not affect the election of directors.

 

The Delaware Supreme Court has held that, while broker non-votes should be counted for purposes of determining the presence or absence of a quorum for the transaction of business, broker non-votes should not be counted for purposes of determining the number of Votes Cast with respect to the particular proposal on which the broker has expressly not voted. The Company intends to treat broker non-votes in a similar manner. Thus, a broker non-vote will not affect the outcome of the voting on a proposal.

If a stockholder holds shares in street name it is critical for that holder to cast a vote if that holder wants it to count in the election of directors (Item 1 of this Proxy Statement). In the past, if a stockholder held shares in street name and did not indicate how the holder wanted the shares voted in the election of directors, the stockholder’s bank or broker was allowed to vote those shares on the stockholder’s behalf in the election of directors as they felt appropriate. Recent changes in regulation were made to take away the ability of a stockholder’s bank or broker to vote uninstructed shares in the election of directors on a discretionary basis. Thus, if a stockholder holds shares in street name and does not instruct the bank or broker how to vote in the election of directors, no votes will be cast on that stockholder’s behalf. The stockholder’s bank or broker will, however, continue to have discretion to vote any uninstructed shares on the ratification of the appointment of the Company’s independent registered public accounting firm (Item 4 of this Proxy Statement). They will not have discretion to vote uninstructed shares on stockholder proposals (Items 2 and 3 of this Proxy Statement). If a stockholder of record does not cast a vote, no votes will be cast on that stockholder’s behalf on any of the items of business at the Annual Meeting.

 

STOCKHOLDER PROPOSAL PROCEDURES AND DEADLINES

 

Proposals of stockholders of the Company that are intended to be presented by such stockholders at the Company’s 2011 annual meeting of stockholders and that stockholders desire to have included in the Company’s proxy materials relating to such meeting must be received by Harmonic at its principal executive offices at 549 Baltic Way, Sunnyvale, California 94089, Attention: Corporate Secretary no later than December 13, 2010, which is 120 calendar days prior to the anniversary in which the Proxy Statement became available to stockholders, and must be in compliance with applicable laws and regulations in order to be considered for possible inclusion in the Proxy Statement and form of proxy for that meeting.

 

Proposals of stockholders of the Company that are intended to be presented by such stockholders at the Company’s 2011 annual meeting of stockholders and that stockholders do not desire to have included in the Company’s proxy materials relating to such meeting must be received by Harmonic at its principal executive offices at 549 Baltic Way, Sunnyvale, California 94089, Attention: Corporate Secretary, no earlier than February 20, 2011 and no later than March 22, 2011. However, if the date of the Company’s 2011 annual meeting of stockholders has been changed by more than thirty (30) days from May 20, 2010, the date of this year’s annual meeting, then for the notice by the stockholders to be timely it must be received by the Company not later than the close of business on the later of (i) ninety (90) calendar days prior to such annual meeting, or (ii) ten (10) calendar days following the day on which the Company first publicly announces the date of such annual meeting.

 

If a stockholder gives notice of such a proposal after the deadlines described above, the Company’s proxy holders will be allowed to use their discretionary voting authority to vote against the stockholder proposal when and if the proposal is raised at the Company’s 2011 annual meeting of stockholders. The Company has not been notified by any stockholder of his or her intent to present a stockholder proposal from the floor at this year’s Annual Meeting.

 

Furthermore, under the Company’s bylaws, a stockholder’s notice of business to be brought before an annual meeting must set forth, as to each proposed matter: a) a brief description of the business and reason for conducting such business at the meeting; b) the name and address, as they appear on the Company’s books, of the stockholder proposing such business and any associated person of such stockholder; c) the class and number of shares of the Company owned by the stockholder proposing such business and any associated person of such stockholder; d) whether and to the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of such stockholder or any associated person of such stockholder with respect to any securities of the Company, and a description of any other agreement, arrangement or understanding, the effect of which is to mitigate loss to, or manage the risk or benefit from share price changes for, or increase or decrease the voting power of, such stockholder or any associated person of such stockholder with respect to the securities of the Company; e) any material interest of the stockholder or any associated person of such stockholder in such business; and f) a statement whether either such stockholder or any associated person of such stockholder will deliver a proxy statement and form of proxy to holders of at least the percentage of the Company’s voting shares required under applicable law to carry the proposal. In addition, to be in proper written form, a stockholder’s notice to the Corporate Secretary of the Company must be

supplemented not later than ten (10) calendar days following the record date to disclose the information contained in clauses (c) and (d) above as of the record date.

 

MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS

 

In some instances, we may deliver to multiple stockholders sharing a common address only one copy of the E-Proxy Notice. If requested orally or in writing, we will promptly provide a separate copy of the E-Proxy Notice to a stockholder sharing an address with another stockholder. Requests should be directed to our Corporate Secretary at Harmonic Inc., 549 Baltic Way, Sunnyvale, CA 94089 Attention: Corporate Secretary, or to +1-408-542-2500. Stockholders sharing an address who currently receive multiple copies and wish to receive only a single copy should contact their broker or send a signed, written request to us at the address above.

PROPOSAL ONE

 

 

ELECTION OF DIRECTORS

 

Nominees

 

Eight directors are to be elected at the Annual Meeting. Each of the directors elected at the Annual Meeting will hold office until the earlier of the Annual Meeting of Stockholders in 2011 or until such director’s successor has been duly elected and qualified.

 

Unless otherwise instructed, the proxy holders will vote the proxies received by them “FOR” the Company’s eight nominees named below, all of whom are currently directors of the Company. Each of the nominees was recommended for election by the Company’s Corporate Governance and Nominating Committee and the Board of Directors. The Company did not receive any proposals from stockholders for nominations of other candidates for election. In the event that any nominee of the Company becomes unable or declines to serve as a director at the time of the Annual Meeting, the proxy holders will vote the proxies for any substitute nominee who is designated by the Company’s Corporate Governance and Nominating Committee to fill the vacancy. It is not expected that any nominee listed below will be unable or will decline to serve as a director.

 

DIRECTOR QUALIFICATIONS

 

The Board of Directors believes that it is necessary for each of the Company’s directors to possess a broad array of qualities and skills. When searching for new candidates, the Corporate Governance and Nominating Committee considers the evolving needs of the Board of Directors and searches for candidates that fill any current or anticipated future requirements. The Board of Directors also believes that all directors must possess a considerable amount of business, management and educational experience.

 

The Corporate Governance and Nominating Committee first considers a candidate’s business and management experience and then considers issues of judgment, background, stature, conflicts of interest, integrity, diversity and commitment to the goal of maximizing stockholder value. With respect to the nomination of continuing directors for re-election, the individual’s historical and ongoing contributions to the Board of Directors are also considered. The process undertaken by the Corporate Governance and Nominating Committee in recommending qualified director candidates is described below under “Identification and Evaluation of and Criteria for Candidates for Board Membership” (see pages 9 and 10 of this Proxy Statement).

 

DIRECTOR NOMINEES

 

The names of the nominees for director and certain information about each of them are set forth below. The information presented includes age, positions held, principal occupation and business experience for the past five years, and the names of other publicly-held companies of which the nominee currently serves as a director or has served as a director during the past five years. In addition to the information presented below regarding the nominee’s specific experience, qualifications, attributes and skills that led our Board to the conclusion that each nominee is qualified to serve as a director, we also believe that all of our director nominees have a reputation for integrity, honesty and adherence to high ethical standards. They each have demonstrated knowledge of our industry and an ability to exercise sound judgment, as well as a commitment to Harmonic and the Board of Directors. Finally, we value their significant experience on other public company boards of directors and board committees.

 

Except as indicated below, each nominee or incumbent director has been engaged in the principal occupation set forth above during the past five years. There are no family relationships between any directors or executive officers of the Company.

 

Lewis Solomon has been a director since January 2002 and was elected Chairman of the Board in June 2008. Mr. Solomon has been Chairman and CEO of SCC Company, a consulting firm specializing in technology, since 1990. Mr. Solomon also co-founded Broadband Services, Inc. (BSI), an outsource provider of supply chain management, network planning, and fulfillment services and was Chief Executive Officer from 1999 to 2004. From 1983 to 1988, he served as the Executive Vice President of Alan Patricof Associates, a global venture capital firm. Mr. Solomon also spent 14 years at General Instrument Corporation, ultimately as Senior Vice President and Assistant to the Chief Executive Officer. Mr. Solomon is a director of Anadigics Inc. and Lantronix, Inc., and was a director of Terayon Communications Systems Inc. from 1995 until its acquisition in 2007. Mr. Solomon holds a B.S. in Physics from St. Joseph’s College and a M.S. in Industrial Engineering from Temple University. We believe that Mr. Solomon’s qualifications to serve on our Board include his many years of experience in management within the communications industry and his experience in investing in growth companies.

 

Patrick J. Harshman joined us in 1993 and was appointed President and Chief Executive Officer in May 2006. In December 2005, he was appointed Executive Vice President responsible for the majority of our operational functions, including the unified digital video and broadband optical networking divisions as well as global manufacturing. Prior to the consolidation of our product divisions, Mr. Harshman held the position of President of the Convergent Systems division and, for more than four years, was President of the Broadband Access Networks division. Prior to this, Mr. Harshman held key leadership positions in marketing, international sales, and research and development. Mr. Harshman earned a Ph.D. in Electrical Engineering from the University of California, Berkeley and completed an Executive Management Program at Stanford University. We believe that Mr. Harshman’s qualifications to serve on our Board include his many years of industry and management experience with Harmonic and his strong background in, and understanding of, technology within the communications industry.

 

Harold Covert has been a director since June 2007. Since October 2007, Mr. Covert has been with Silicon Image, Inc., a semiconductor company, and currently serves as its President. From October 2007 until January 2010, Mr. Covert was Chief Financial Officer of Silicon Image. From October 2005 to August 2007, Mr. Covert was Executive Vice President and Chief Financial Officer of Openwave Systems Inc., a software applications and infrastructure company. Prior to Openwave, Mr. Covert was Chief Financial Officer at Fortinet Inc. from December 2003 to September 2005, and Chief Financial Officer at Extreme Networks, Inc. from July 2001 to October 2003. Mr. Covert is a Director and Chairman of the Audit Committee at both JDS Uniphase Corporation and Solta Medical Inc. (formerly Thermage Inc.) and was appointed to the Board of Silicon Image in January 2010. Mr. Covert holds a B.S. in Business Administration from Lake Erie College and an M.B.A. from Cleveland State University and is also a Certified Public Accountant. We believe that Mr. Covert’s qualifications to serve on our Board include his extensive and varied experience as Chief Financial Officer of several publicly traded technology companies.

 

Patrick Gallagher has been a director since October 2007. Since March 2008, Mr. Gallagher has been Chairman of Ubiquisys Ltd., a UK company which develops and supplies femtocells for the 3G mobile wireless market. From January 2008 until

February 2009, Mr. Gallagher was Chairman of Macro4 Plc, a FTSE-listed global software solutions company, and from May 2006 until March 2008, he was Vice Chairman of Golden Telecom Inc., a NASDAQ-listed facilities-based provider of integrated communications. From 2003 until 2006, Mr. Gallagher was Executive Vice Chairman and served as Chief Executive Officer of FLAG Telecom Group, a global telecommunications company which owns and manages a subsea optical fiber network. From 1985 to 2002, Mr. Gallagher held senior management positions at BT Group, including Group Director of Strategy & Development, President of BT Europe and a member of the BT Executive Committee. In 2009, Mr. Gallagher was appointed to the board of Ciena Corporation. Mr. Gallagher holds a B.A. in Economics with honors from Warwick University. We believe that Mr. Gallagher’s qualifications to serve on our Board include his extensive international business experience and perspective and his many years of management experience as a senior executive of a major European telecommunications service provider.

 

E. Floyd Kvamme has been a director since 1990. From 1984 to 2008, Mr. Kvamme was a General Partner and most recently, Partner Emeritus of Kleiner Perkins Caufield & Byers, a venture capital firm. Mr. Kvamme is also a director of Power Integrations, Inc., as well as two private companies. He was a director of National Semiconductor from 1998 to 2009. Mr. Kvamme holds a B.S.E.E. from the University of California, Berkeley and an M.S.E. from Syracuse University. We believe that Mr. Kvamme’s qualifications to serve on our Board include his years of management experience with major technology companies as well as his experience with financing and growth planning for technology companies as a partner of a major venture capital firm

 

Anthony J. Ley served as Harmonic’s President and Chief Executive Officer from November 1988 to May 2006 and as Chairman of the Board of Directors from 1995 until June 2008. Following his retirement as President and Chief Executive Officer of Harmonic, Mr. Ley was Chief Executive Officer of CollabRx, Inc., a privately-held biotech services company from December 2007 to December 2008. From 1963 to 1987, Mr. Ley was employed at Schlumberger Limited, both in Europe and the U.S., holding various senior business management and research and development positions, most recently as Vice President, Research and 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 29 patents and is a Fellow of the Institution of Engineering and Technology (UK) and a senior member of the Institute of Electrical and Electronics Engineers, Inc. We believe that Mr. Ley’s qualifications to serve on our Board include his international business experience, his strong background in technology and his 18 years of experience as our President and CEO until his retirement.

 

William F. Reddersen has been a director since July 2002. Mr. Reddersen acts as an advisor to venture capital funds active in the technology services market. Previously, until 2000, he spent 31 years at BellSouth Corp. and AT&T Inc., most recently as Executive Vice President of Corporate Strategy. Earlier, he directed Bell South’s entry into new businesses in addition to its broadband market deployment. Mr. Reddersen currently serves on the board of Otelco, Inc., an independent telephone company. Mr. Reddersen holds a B.S. in Mathematics from the University of Maryland and an M.S. in Management from the Massachusetts Institute of Technology, where he was a Sloan fellow. We believe that Mr. Reddersen’s qualifications to serve on our Board include his expertise in developing and executing corporate strategies and his extensive experience and knowledge of the telecommunications industry.

 

David R. Van Valkenburg has been a director since October 2001. Mr. Van Valkenburg currently serves as Chairman of Balfour Associates, Inc., a firm providing counsel to chief executive officers, boards of directors and private equity funds, and is also Chairman and President of privately-held Zero Point Corporation, a computer network engineering company. From 1995 to 2000, he was Executive Vice President of MediaOne Group, Inc. While at MediaOne Group, Mr. Van Valkenburg was seconded to Telewest Communications, PLC (UK) where he served as Chief Executive Officer and Chief Operating Officer from 1997 to 1999. He has also held the position of President at both Multivision Cable TV Corporation and Cox Cable Communications Inc. He was a director of Moscow CableCom Corporation, from 2005 until its acquisition in 2007. He holds a B.A. from Malone College, an M.S. from the University of Kansas, and an M.B.A. from Harvard University. We believe that Mr. Van Valkenburg’s qualifications to serve on our Board include his extensive experience in and knowledge of the cable television industry, both in the United States and in many international markets.

BOARD MEETINGS AND COMMITTEES

 

The Board of Directors of the Company held a total of five meetings during the fiscal year ended December 31, 2009. No incumbent director attended fewer than 75% of the meetings of the Board of Directors or the committees upon which such director served in 2009.

 

The Board of Directors has determined that Messrs. Covert, Gallagher, Kvamme, Reddersen, Solomon and Van Valkenburg are independent under applicable NASDAQ listing standings and have no material relationships with the Company. The Board of Directors considered that a director was on a board of directors that is a supplier to the Company and concluded that the nature of this relationship did not compromise the director’s independence.

 

The Board of Directors has an Audit Committee, a Compensation and Equity Ownership Committee and a Corporate Governance and Nominating Committee. The charters for each of these committees are posted on our website at www.harmonicinc.com.

 

The Audit Committee currently consists of Messrs. Covert, Gallagher and Reddersen, each of whom is independent under Rule 10A-3 of the Securities Exchange Act of 1934, as amended, and under applicable NASDAQ Stock Market listing standards. The Audit Committee of the Board of Directors of Harmonic serves as the representative of the Board of Directors for general oversight of the quality and integrity of Harmonic’s financial accounting and reporting process, system of internal control over financial reporting, management of financial risks, audit process, and process for monitoring the compliance with related laws and regulations. The Audit Committee engages the Company’s independent registered public accounting firm and approves the scope of both audit and non-audit services. The Audit Committee held nine meetings during 2009.

 

The Company’s Board of Directors has determined that Mr. Covert is an “audit committee financial expert” as defined by the current rules of the Securities and Exchange Commission. The Board of Directors believes that Mr. Covert’s experience as the chief financial officer of several companies publicly traded on U.S. stock exchanges qualifies him as an “audit committee financial expert” because he has acquired relevant expertise and experience from performing his duties as a chief financial officer.

 

The Compensation and Equity Ownership Committee currently consists of Messrs. Van Valkenburg, Kvamme, and Reddersen, none of whom is an employee of the Company and each of whom is independent under applicable NASDAQ Stock Market listing standards. The Compensation and Equity Ownership Committee is responsible for approval of the Company’s compensation policies, compensation paid to executive officers, and administration of the Company’s equity compensation plans. The Compensation and Equity Ownership Committee held eight meetings during 2009. Matters within the scope of the Compensation and Equity Ownership Committee were also discussed in executive sessions at each meeting of our Board of Directors. See “Meetings of Non-Employee Directors.”

 

The Corporate Governance and Nominating Committee serves as the representative of the Board of Directors for establishment and oversight of governance policy and the operation, composition and compensation of the Board of Directors. The Corporate Governance and Nominating Committee is composed of Messrs. Solomon, Gallagher, Kvamme, and Van Valkenburg, each of whom are independent under applicable NASDAQ Stock Market listing standards. The Corporate Governance and Nominating Committee held no meetings in 2009. Matters within the scope of the Corporate Governance and Nominating Committee were discussed in executive sessions at each meeting of our Board of Directors. See “Board Leadership.”

 

The Corporate Governance and Nominating Committee has proposed, and the Board of Directors has approved, the nomination of all eight current board members for re-election by stockholders at this Annual Meeting. No candidates have been proposed for nomination by stockholders at this Annual Meeting or at any previous annual meeting.

BOARD LEADERSHIP

 

We separate the roles of CEO and Chairman of the Board in recognition of the differences between the two roles. The CEO is responsible for setting the strategic direction of the Company and for its operational management, leadership and performance, while the Chairman of the Board provides guidance to the CEO, sets the agenda for Board meetings and presides over meetings of the full Board.

 

At each Board meeting, the non-employee directors meet in an executive session without any management directors or employees present. The Chairman of the Board of Directors and of the Corporate Governance and Nominating Committee, Mr. Solomon, has the responsibility of presiding over periodic executive sessions of the Board of Directors in which the CEO and other members of management do not participate. Last year, the non-employee directors discussed corporate strategy, risk oversight, management and Board of Directors succession planning, and board policies, processes and practices in executive sessions.

 

ROLE OF THE BOARD IN RISK OVERSIGHT

 

Management is responsible for the day-to-day management of risks the Company faces, while the Board has responsibility, as a whole and also at the committee level for the oversight of the Company’s risk management. The Board regularly reviews the Company’s long-term business strategy, including industry trends and their potential impact on the Company, our competitive positioning, potential acquisitions and divestitures, as well as the Company’s technology and market direction. The Board also reviews information regarding the Company’s actual and planned financial position and operational performance, as well as the risks associated with each. The Company’s Compensation and Equity Ownership Committee is responsible for overseeing the management of risks relating to the Company’s executive compensation and the Company’s incentive, equity award and other benefit plans. The Audit Committee oversees management of financial risks, including but not limited to accounting matters, tax positions, insurance coverage and security of the Company’s cash reserves. The Nominating and Corporate Governance Committee manages risks associated with the independence and remuneration of the Board of Directors and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board of Directors is regularly informed about such risks by committee reports as well as advice and counsel from expert advisers.

 

IDENTIFICATION AND EVALUATION OF AND CRITERIA FOR CANDIDATES FOR BOARD MEMBERSHIP

 

Pursuant to the charter of the Corporate Governance and Nominating Committee, the Corporate Governance and Nominating Committee may utilize a variety of methods to identify and evaluate candidates for service on the Company’s Board of Directors. Candidates may come to the attention of the Corporate Governance and Nominating Committee through current directors, management, professional search firms, stockholders or other persons. Any candidate presented would be evaluated at regular or special meetings of the Corporate Governance and Nominating Committee or at executive sessions at regular board meetings and may be considered at any point during the year. The Corporate Governance and Nominating Committee may take such measures that it considers appropriate in connection with its evaluation of a candidate, including candidate interviews, inquiry of the person recommending the candidate or reliance on the knowledge of the members of the Corporate Governance and Nominating Committee, the Board of Directors or management. In the past, the Corporate Governance and Nominating Committee has hired a consulting firm to assist it in identifying and screening potential candidates for election to the Board of Directors. In evaluating a candidate, the Corporate Governance and Nominating Committee may consider a variety of criteria. These criteria include demonstrated relevant business and industry experience, particular expertise to act as a committee chair or member, the ability to devote the necessary time to the Board of Directors and committee service, personal character and integrity, and sound business judgment. Other criteria include the candidate’s integrity, age, potential conflicts of interest and the ability to act in the interests of all stockholders. The Corporate Governance and Nominating Committee seeks nominees with a broad diversity of experience, professions, skills, geographic representation and backgrounds. The Corporate Governance and

Nominating Committee does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees. Harmonic’s Board believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. Nominees are not discriminated against on the basis of race, religion, national origin, sexual orientation, disability or any other basis proscribed by law. The Corporate Governance and Nominating Committee has not set either term limits or age limits for members of the Board of Directors, believing that the Company’s interests are best served by members of the Board of Directors with substantial experience and knowledge of the Company’s business and that age is generally not a barrier to effective performance as a member of the Board of Directors.

 

NOMINATION PROPOSALS FROM STOCKHOLDERS

 

He Corporate Governance and Nominating Committee will consider proposals from stockholders for Board of Directors nominees at the 2011 annual meeting of stockholders, provided that such proposals are submitted in a timely manner in accordance with the Company’s bylaws, as amended, in writing to the Corporate Secretary of the Company at Harmonic Inc., 549 Baltic Way, Sunnyvale, California 94089, Attention: Corporate Secretary. If a stockholder desires to have a nominee considered by the Nominating and Corporate Governance Committee for nomination by the Board of Directors, such nomination must be received no later than December 13, 2010, which is 120 calendar days prior to the anniversary of the date the Proxy Statement became available to stockholders, and must be in compliance with applicable laws and regulations. In evaluating director candidates proposed by stockholders, the Corporate Governance and Nominating Committee will use the same criteria as it uses to evaluate all prospective members of the Board of Directors. For stockholder nominations of persons for election to the Board of Directors of the Company at the 2011 annual meeting of stockholders that a stockholder does not desire to have considered by the Nominating and Corporate Governance Committee for nomination by the Board of Directors, timely written notice of such nomination must be delivered to the Corporate Secretary of the Company no earlier than February 20, 2011 and no later than March 22, 2011. However, if the date of the Company’s 2011 annual meeting of stockholders has been changed by more than thirty (30) days from May 20, 2010, the date of this year’s annual meeting, then notice by the stockholders to be timely must be so received not later than the close of business on the later of (i) ninety (90) calendar days prior to such annual meeting, or (ii) ten (10) calendar days following the day on which the Company first publicly announces the date of such annual meeting. To be in proper written form, a stockholder’s notice must contain (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director (a) the name, age, business address and residence address of the nominee, (b) the principal occupation or employment of the nominee, (c) the class and number of shares of the Company which are beneficially owned by the nominee and any derivative positions held or beneficially held by the nominee, (d) whether and to the extent to which any hedging or other transaction or series of transactions has been entered into by or on behalf of the nominee with respect to any securities of the Company, and a description of any other agreement, arrangement or understanding, the effect or intent of which is to mitigate loss to, or manage the risk or benefit from share price changes for, or increase or decrease the voting power of the nominee with respect to any securities of the Company, (e) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nominations are to be made by the stockholder, (f) a written statement executed by the nominee acknowledging that as a director of the Company, the nominee will owe fiduciary duties under Delaware law with respect to the Company and its stockholders, and (g) any other information relating to the nominee that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation the nominee’s written consent to being named in the proxy statement, if any, as a nominee and to serving as a director if elected); and (ii) as to such stockholder proposing a nominee for election to the Board of Directors of the Company, (a) the information set forth in “Stockholder Proposal Procedures and Deadlines” for a stockholder notice of business to be brought before an annual meeting, and (b) a statement whether either such stockholder or any associated person of such stockholder will deliver a proxy statement and form of proxy to holders of a number of the Company’s voting shares reasonably believed by such stockholder or associated person of such stockholder to be necessary to elect such nominee(s). A copy of the full text of the bylaw provisions discussed herein may be obtained by writing to the Company’s Corporate Secretary at our principal executive offices, or can be accessed from the Company’s filings with the SEC at www.sec.gov.

 

COMPENSATION OF DIRECTORS

 

We use a combination of cash and equity-based incentive compensation. Directors who are employees of Harmonic do not receive additional compensation for their service as directors.

 

Cash Compensation. Each non-employee director is paid an annual retainer of $35,000. In addition, the Chair of the Audit Committee receives an annual retainer of $20,000, the Chair of the Compensation and Equity Ownership Committee is paid an annual retainer of $12,000, and the Chair of the Corporate Governance and Nominating Committee is paid an annual retainer of $7,500. Other members of the Board committees receive an annual retainer as follows: Audit Committee — $10,000; Compensation and Equity Ownership Committee — $6,000; Corporate Governance and Nominating Committee — $3,500. The non-executive Chairman of the Board of Directors receives an additional annual retainer of $25,000. No fees are paid for attending in-person or telephonic Board of Directors and committee meetings.

 

Equity Compensation. The 2002 Director Stock Plan, as amended, currently provides for grants of stock options or restricted stock units to be made in three ways:

 

 

2009 COMPENSATION OF DIRECTORS

 

 

 

 

 

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2009

 

The following table provides the number of shares of common stock subject to outstanding options and restricted stock units held at December 31, 2009.

 

 

 

 

COMMUNICATION WITH THE BOARD OF DIRECTORS

 

The Board of Directors believes that management should be the primary means of communication between the Company and all of its constituencies, including stockholders, customers, suppliers and employees. However, stockholders may communicate with individual members of the Board of Directors, committees of the Board of Directors, or the full Board of Directors by addressing correspondence to a board member’s attention at 549 Baltic Way, Sunnyvale, California, 94089.

 

ATTENDANCE OF THE BOARD OF DIRECTORS AT ANNUAL MEETINGS

 

Three members of the Board of Directors attended the 2009 Annual Meeting of Stockholders. The Board of Directors has a policy encouraging the Board of Directors to be represented at annual stockholder meetings and anticipates that the Chairman of the Board of Directors will be present at the 2010 Annual Meeting.

 

VOTE REQUIRED AND RECOMMENDATION

 

The eight nominees receiving the highest number of affirmative votes of the shares entitled to vote on this matter shall be elected as directors. Votes withheld from any director will be counted for purposes of determining the presence or absence of a quorum but are not counted as affirmative votes.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” EACH OF THE DIRECTOR NOMINEES SET FORTH ABOVE.

PROPOSAL TWO

 

 

AMENDMENT TO THE 1995 STOCK PLAN

 

The Company’s stockholders are being asked to approve amendments to the 1995 Stock Plan (the “1995 Plan”) which will (i) increase the number of shares of common stock reserved for issuance by 10,600,000 shares, (ii) amend the counting provisions for full value equity awards, and (iii) the decrease the maximum term of stock options to seven (7) years.

 

As of March 22, 2010, options to purchase an aggregate of 10,990,835 shares of the Company’s common stock were outstanding under all of our equity plans, with a weighted average exercise price of $8.78 per share and a weighted average term of four years. In addition, a total of 2,551,857 restricted stock units issued under all plans had not yet vested. In 2004, stockholders approved the use of up to 1,800,000 forfeitures in the 1995 Plan from the 1999 Non-Statutory Option Plan. As of March 22, 2010, only 739,013 shares were available for future grant under the equity plans, including 87,820 shares from potential additional forfeitures from the 1999 Plan (excluding the 10,600,000 shares subject to approval at the Annual Meeting). The Company intends to make annual option and/or restricted stock unit awards to current employees during its open trading window period in February 2011 and the planned grant of these awards would not be possible unless this amendment is approved by stockholders.

 

 

The 1994 Plan was assumed in connection with the Company’s acquisition of the DiviCom business of C-Cube Microsystems Inc. in May 2000. Awards of options from the 1999 Plan were discontinued in 2004 and shares remaining as available for grant were transferred to the 1995 Plan. No further shares are available for grant under any of the above plans except for the 1995 Plan and the 2002 Plan.

 

Proposed Amendments

 

The 1995 Plan currently permits us to grant a broad range of equity awards to eligible employees and consultants of the Company. We established the 1995 Plan in order to assist the Company in attracting, retaining and motivating the best available personnel for the successful conduct and growth of the Company’s business. The Company believes that the 1995 Plan is an essential tool to link the long-term interests of stockholders and employees and serves to motivate executives to make decisions that will, in the long run, give the best returns to stockholders. The Company has, therefore, consistently included equity incentives as a significant component of compensation for a broad range of the Company’s employees. In addition, the Company believes this practice is critical to the Company’s ability to attract and retain employees in a highly competitive market for managerial and technical talent. The Company’s geographic location in Silicon Valley exposes it to particularly intense competition in the labor market from both private and public companies. Equity incentives are offered by most companies with which the Company competes for employees, and the Company believes it is essential to provide restricted stock units and/or stock options to both new and existing employees.

In April 2010, our Board of Directors approved amending the 1995 Plan subject to stockholder approval at this Annual Meeting. These proposed amendments would increase the number of shares reserved for issuance thereunder by 10,600,000 shares to a total of 26,400,000 shares, amend the counting provisions for full value equity awards, and decrease the maximum term of stock options to seven (7) years, subject to stockholder approval at this Annual Meeting.

 

Our Board also approved a change in the 1995 Plan share counting provisions to provide that each award with an exercise price below 100% of the fair market value on the grant date (or no exercise price) will debit the 1995 Plan reserve 1.5 shares for every unit or share granted. Conversely, any forfeitures of these awards due to their not vesting will result in a credit to the 1995 Plan reserve of 1.5 shares for every unit or share forfeited.

 

Our Board also approved a change in the 1995 Plan to reduce the term of the options granted on or after approval of this proposal by our stockholders to seven (7) years from ten (10).

 

The changes in accounting provisions and the option term are also subject to shareholder approval.

 

The Company’s Named Executive Officers have an interest in this proposal as they may receive awards under the 1995 Plan.

 

SUMMARY OF THE 1995 PLAN

 

The following is a summary of the principal features of the 1995 Plan, as proposed to be amended, and its operation. This summary is qualified in its entirety by reference to the 1995 Plan, as set forth in Exhibit 1.

 

Purposes

 

The purposes of the 1995 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants, and to promote the success of the Company’s business.

 

Term

 

The 1995 Plan will expire on March 1, 2018.

 

Types of Awards

 

The 1995 Plan provides for the grant of options to purchase shares of our common stock, stock appreciation rights (“SARs”), restricted stock (“Restricted Stock”), performance shares (“Performance Shares”), performance units (“Performance Units”) and deferred stock units (“Deferred Stock Units”) to employees and consultants of the Company. As of March 22, 2010, there were approximately 844 employees (including officers) eligible to participate in the 1995 Plan. Options granted under the 1995 Plan may either be “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), or nonstatutory stock options.

 

Administration

 

The 1995 Plan may be administered by our Board of Directors or its Compensation and Equity Ownership Committee (the “Committee”). Subject to the other provisions of the 1995 Plan, the administrator has the authority to: (i) interpret the 1995 Plan and apply its provisions; (ii) prescribe, amend or rescind rules and regulations relating to the 1995 Plan; (iii) select the persons to whom awards are to be granted; (iv) subject to individual fiscal year limits applicable to each type of award, determine the number of shares to be made subject to each award; (v) determine whether and to what extent awards are to be granted; (vi) prescribe the terms and conditions of each award (including the provisions of the award agreement to be entered into between the Company and the grantee); (vii) amend any outstanding award subject to applicable legal restrictions; except for the reduction of the exercise price of an option or SAR (unless stockholder approval is obtained); (viii) authorize any person to execute, on behalf of the Company, any instrument required to effect the grant of an award; and (ix) subject to certain

limitations, take any other actions deemed necessary or advisable for the administration of the 1995 Plan. All decisions, interpretations and other actions of the committee shall be final and binding on all holders of options or rights and on all persons deriving their rights therefrom.

 

Eligibility

 

The 1995 Plan provides that awards may be granted to the Company’s employees and independent consultants. Incentive stock options may be granted only to employees. Any optionee who owns more than 10% of the combined voting power of all classes of outstanding stock of the Company (a “10% Stockholder”) is not eligible for the grant of an incentive stock option unless the exercise price of the option is at least 110% of the fair market value of the common stock on the date of grant.

 

Limitations

 

Section 162(m) of the Code places limits on the deductibility for federal income tax purposes of compensation paid to certain executive officers of the Company. In order to preserve the Company’s ability to deduct the compensation income associated with options and SARs granted to such persons, the 1995 Plan provides that no employee may be granted, in any fiscal year of the Company, options and SARs that relate to more than 600,000 shares of common stock.

 

We have designed the 1995 Plan so that it permits us to also issue other awards that qualify as performance-based under Section 162(m) of the Code. Thus, the Committee may make performance goals applicable to a participant with respect to an award. At the Committee’s discretion, one or more of the following performance goals may apply: annual revenue, cash position, earnings per share, net income, operating cash flow, operating income, return on assets, return on equity, return on sales and total shareholder return. Except for cash position and total shareholder return, these performance goals may apply to either Harmonic or to one of our business units. These performance milestones may be established in accordance with U.S. generally accepted accounting principles (“GAAP”), or may exclude items otherwise includible under GAAP, as specified by our Committee.

 

Terms and Conditions of Options

 

Each option granted under the 1995 Plan is evidenced by a written stock option agreement between the optionee and the Company and is subject to other terms and conditions, as set forth below.

 

Exercise Price; No Repricing. Our Board of Directors or the Committee determines the exercise price of options at the time the options are granted. However, the exercise price of any stock option must not be less than 100% of the fair market value of the common stock on the grant date. In addition, no option granted under the 1995 Plan may be repriced, without stockholder approval, including by means of an exchange for another award.

 

Form of Consideration. The means of payment for shares issued upon exercise of an option is specified in each option agreement and generally may be made by cash, check, other shares of common stock of the Company owned by the optionee, delivery of an exercise notice together with irrevocable instructions to a broker to deliver the exercise price to the Company from sale proceeds, or by a combination thereof.

 

Exercise of the Option. Each stock option agreement will specify the term of the option and the date when the option is to become exercisable. However, in no event shall an option granted under the 1995 Plan be exercised more than 7 years after the date of grant (ten years in the case of options granted prior to February 27, 2006). Moreover, in the case of an incentive stock option granted to a 10% Stockholder, the term of the option shall be for no more than five years from the date of grant. To date, most options granted under the 1995 Plan have vested 25% on the first anniversary from the date of grant and 1/48 per month thereafter.

 

Termination of Employment. If an optionee’s employment terminates for any reason (other than death or permanent disability), then all options held by such optionee under the 1995 Plan expire upon the earlier of (i) such period of time as is set forth in his

or her option agreement, or (ii) the expiration date of the option. The optionee may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment.

 

Permanent Disability. If an employee is unable to continue employment with the Company as a result of permanent and total disability (as defined in the Code), then all options held by such optionee under the 1995 Plan shall expire upon the earlier of (i) 12 months after the date of termination of the optionee’s employment or (ii) the expiration date of the option. The optionee may exercise all or part of his or her option at any time before such expiration to the extent that such option was exercisable at the time of termination of employment.

 

Death. If an optionee dies while employed by the Company, his or her option shall expire upon the earlier of (i) 12 months after the optionee’s death or (ii) the expiration date of the option. The executors or other legal representative of the optionee may exercise all or part of the optionee’s option at any time before such expiration to the extent that such option was exercisable at the time of death.

 

Termination of Options. Each stock option agreement will specify the term of the option and the date when all or any installment of the option is to become exercisable. Notwithstanding the foregoing, however, the term of any stock option shall not exceed 7 years from the date of grant. No options may be exercised by any person after the expiration of its term.

 

Limitations. If the aggregate fair market value of all shares of common stock subject to an optionee’s incentive stock option which are exercisable for the first time during any calendar year exceeds $100,000, the excess options shall be treated as nonstatutory options.

 

Other Provisions. The stock option agreement may not contain such terms, provisions and conditions that are inconsistent with the 1995 Plan as may be determined by the board of directors or the committee.

 

Terms and Conditions of Other Awards

 

Exercise Price and Other Terms of Stock Appreciation Rights; No Repricing. The committee, subject to the provisions of the 1995 Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the 1995 Plan. However, no SAR may be repriced, including by means of an exchange for another award, without stockholder approval.

 

Payment of Stock Appreciation Right Amount. Upon exercise of a SAR, the holder of the SAR shall be entitled to receive payment from us in an amount determined by multiplying (X) the difference between the fair market value of a share on the date of exercise over the exercise price; times (Y) the number of shares with respect to which the SAR is exercised.

 

Payment upon Exercise of Stock Appreciation Right. At the discretion of the committee, and as specified in the agreement evidencing the SAR, payment to the holder of a SAR may be in cash, shares of our common stock or a combination thereof. In the event that payment to the holder of a SAR is settled in cash, the shares available for issuance under the 1995 Plan shall not be diminished as a result of the settlement.

 

Stock Appreciation Right Agreement. Each SAR grant shall be evidenced by an agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the committee, in its sole discretion, shall determine.

 

Expiration of SARs. SARs granted under the 1995 Plan expire as determined by the committee, but in no event later than seven (7) years from date of grant. No SAR may be exercised by any person after its expiration.

 

Grant of Restricted Stock. Subject to the terms and conditions of the 1995 Plan, Restricted Stock may be granted to our employees and consultants, at any time and from time to time as shall be determined by the committee, in its sole discretion. Restricted Stock shall be issued in the form of units to acquire shares of common stock. The committee shall have complete

discretion to determine (i) the number of shares subject to a Restricted Stock award granted to any participant, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on continued provision of services but may include a performance-based component, upon which is conditioned the grant or vesting of Restricted Stock. However, no participant shall be granted a Restricted Stock award covering more than 200,000 shares in any of the Company’s fiscal years. Until the shares are issued, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the underlying shares.

 

Restricted Stock Award Agreement. Each Restricted Stock grant shall be evidenced by an agreement that shall specify the purchase price (if any) and such other terms and conditions as the committee, in its sole discretion, shall determine; provided; however, that if the Restricted Stock grant has a purchase price, such purchase price must be paid no more than seven (7) years following the date of grant.

 

Grant of Performance Shares. Subject to the terms and conditions of the 1995 Plan, Performance Shares may be granted to Service Providers at any time and from time to time as shall be determined by the committee, in its sole discretion. The committee shall have complete discretion to determine (i) the number of shares of our common stock subject to a Performance Share award granted to any Service Provider, and (ii) the conditions that must be satisfied, which typically will be based principally or solely on achievement of performance milestones but may include a service-based component, upon which is conditioned the grant or vesting of Performance Shares. However, no participant shall be granted a Performance Share award covering more than 200,000 shares in any of the Company’s fiscal years.

 

Performance Share Award Agreement. Each Performance Share grant shall be evidenced by an agreement that shall specify such other terms and conditions as the committee, in its sole discretion, shall determine.

 

Grant of Performance Units. Performance Units are similar to Performance Shares, except that they shall be settled in cash equivalent to the fair market value of the underlying shares of our common stock, determined as of the vesting date. The shares available for issuance under the 1995 Plan shall not be diminished as a result of the settlement of a Performance Unit.

 

Performance Unit Award Agreement. Each Performance Unit grant shall be evidenced by an agreement that shall specify such terms and conditions as the committee, in its sole discretion, shall determine. However, no participant shall be granted a Performance Unit award covering more than one million dollars in any of the Company’s fiscal years, except that a newly hired participant may receive a Performance Unit award covering up to two million dollars.

 

Deferred Stock Units. Deferred Stock Units shall consist of a Restricted Stock, Performance Share or Performance Unit Award that the committee, in its sole discretion permits to be paid out in installments or on a deferred basis, in accordance with rules and procedures established by the committee. Deferred Stock Units are subject to the individual annual limits that apply to each type of award.

 

Non-Transferability of Awards

 

Unless determined otherwise by the committee, an award granted under the 1995 Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the recipient, only by the recipient. If the committee makes an award granted under the 1995 Plan transferable, such award shall contain such additional terms and conditions as the committee deems appropriate. In no event may an award be transferred to any third party for value, unless separately approved by our stockholders in advance. In the event that the Company is acquired in any merger, consolidation, acquisition of assets or like occurrence, each outstanding award granted under the 1995 Plan shall be assumed or an equivalent right substituted by a successor corporation. If such awards granted under the 1995 Plan are not assumed, they become fully vested prior to the closing of such merger or consolidation.

Adjustment Upon Changes in Capitalization, Corporate Transactions

 

In the event that the stock of the Company is changed by reason of any stock split, reverse stock split, stock dividend, recapitalization or other change in the capital structure of the Company, appropriate proportional adjustments shall be made in the number and class of shares of stock subject to the 1995 Plan, the individual fiscal year limits applicable to restricted stock, performance share awards, SARS and options, the number and class of shares of stock subject to any award outstanding under the 1995 Plan, and the exercise price of any such outstanding option or SAR or other award. Any such adjustment shall be made upon approval of the Compensation and Equity Ownership Committee of the board of directors whose determination shall be conclusive. In the event that we are acquired in any merger, consolidation, acquisition of assets or like occurrence, each outstanding award granted under the 1995 Plan shall be assumed or an equivalent right substituted by a successor corporation. If such awards granted under the 1995 Plan are not assumed, they become fully vested prior to the closing of such merger or consolidation.

 

Amendment, Suspensions and Termination of the 1995 Plan

 

The Board of Directors may amend, suspend or terminate the 1995 Plan at any time; provided, however, that stockholder approval is required for any amendment to the extent necessary to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934 (“Rule 16b-3”) or Section 422 of the Code, or any similar rule or statute.

 

Federal Tax Information

 

Options. Options granted under the 1995 Plan may be either “incentive stock options,” as defined in Section 422 of the Code, or nonstatutory options.

 

An optionee who is granted an incentive stock option will not recognize taxable income either at the time the option is granted or upon its exercise, although the exercise may subject the optionee to alternative minimum tax. Upon the sale or exchange of the shares more than two years after grant of the option and one year after exercising the option, any gain or loss will be treated as long-term capital gain or loss. If these holding periods are not satisfied, the optionee will recognize ordinary income at the time of sale or exchange equal to the difference between the exercise price and the lower of (i) the fair market value of the shares at the date of the option exercise or (ii) the sale price of the shares. A different rule for measuring ordinary income upon such a premature disposition may apply if the optionee is also an officer, director, or 10% Stockholder of the Company. Any gain or loss recognized on such a premature disposition of the shares in excess of the amount treated as ordinary income will be characterized as long-term or short-term capital gain or loss, depending on the holding period.

 

All other options which do not qualify as incentive stock options are referred to as nonstatutory options. An optionee will not recognize any taxable income at the time the optionee is granted a nonstatutory option. However, upon its exercise, the optionee will recognize taxable income generally measured as the excess of the then fair market value of the shares purchased over the purchase price. Any taxable income recognized in connection with an option exercise by an optionee who is also an employee of the Company will be subject to tax withholding by the Company. Upon resale of such shares by the optionee, any difference between the sale price and the optionee’s purchase price, to the extent not recognized as taxable income as described above, will be treated as long-term or short-term capital gain or loss, depending on the holding period.

 

The foregoing is only a summary of the effect of federal income taxation upon the participant and the Company, does not purport to be complete, and does not discuss the tax consequences of the participant’s death or the income tax laws of any municipality, state or foreign country in which a participant may reside.

 

Stock Appreciation Rights. No taxable income is reportable when a stock appreciation right is granted to a participant. Upon exercise, the participant will recognize ordinary income in an amount equal to the amount of cash received and the fair market value of any shares of our common stock received. Any additional gain or loss recognized upon any later disposition of the shares of our common stock would be capital gain or loss.

Restricted Stock, Performance Units and Performance Shares. A participant will not have taxable income upon grant. Instead, he or she will recognize ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the vested shares or cash received minus any amount paid for the shares of our vested common stock.

 

Tax Effect for Us. We generally will be entitled to a tax deduction in connection with an award under the 1995 Plan in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonqualified stock option). Special rules limit the deductibility of compensation paid to our Chief Executive Officer and to each of our four most highly compensated executive officers. Under Section 162(m) of the Code, the annual compensation paid to any of these specified executives will be deductible only to the extent that it does not exceed $1,000,000. However, we can preserve the deductibility of certain compensation in excess of $1,000,000 if the conditions of Section 162(m) are met with respect to awards. These conditions include stockholder approval of the 1995 Plan and performance goals under the 1995 Plan, setting individual annual limits on each type of award, and certain other requirements. The 1995 Plan has been designed to permit the committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such awards.

 

Stock Issuances

 

The Company is unable to predict the amount of benefits that will be received by or allocated to any particular participant under the 1995 Plan. The table that follows shows as to each of the Company’s executive officers named in the Summary Compensation Table of the Executive Compensation and Additional Information section of this Proxy Statement and the various indicated groups, the restricted stock units and the options granted to purchase common stock under the 1995 Plan and other employee option plans during 2009 together with the weighted average purchase price paid per share for stock options.

 

 

For the full text of the 1995 Plan, please see Exhibit 1.

 

VOTE REQUIRED AND RECOMMENDATION

 

The affirmative vote of a majority of the Votes Cast will be required to approve the amendment to the 1995 Plan.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” THE AMENDMENT TO THE COMPANY’S 1995 PLAN TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE 1995 PLAN BY 10,600,000 SHARES, TO AMEND THE COUNTING PROVISIONS FOR FULL VALUE EQUITY AWARDS AND TO DECREASE THE MAXIMUM TERM OF FUTURE OPTIONS GRANTED TO SEVEN (7) YEARS.

 

 

AMENDMENTS TO THE 2002 DIRECTOR OPTION PLAN

 

The Company’s stockholders are being asked to approve the increase in the number of shares of common stock reserved for issuance by 400,000 shares to the 2002 Director Stock Plan (the “2002 Plan”).

 

Proposed Amendments

 

In 2008, our Board of Directors approved 2002 Plan amendments permitting the grant of restricted stock units and also providing that the general mix and terms and conditions of initial and annual automatic grants to our non-employee directors can be set by our Board of Directors. The Board of Directors also approved an amendment permitting discretionary grants under the 2002 Plan.

 

We are seeking stockholder approval to increase the number of shares issuable under the 2002 Plan by 400,000 shares and to change the 2002 Plan share counting provisions to provide that each award of restricted stock units will debit the 2002 Plan reserve 1.5 shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of 1.5 shares for every unit forfeited.

 

Approval of this proposal requires the affirmative vote of the holders of a majority of the shares of our common stock that are present in person or by proxy and entitled to vote at our 2010 Annual Stockholders’ Meeting.

 

Our Company’s non-employee directors have an interest in this proposal as they may receive options or restricted stock units under the terms of the 2002 Plan.

 

SUMMARY OF THE 2002 PLAN

 

The following is a summary of the principal features of the 2002 Plan, as proposed to be amended, and its operation. This summary is qualified in its entirety by reference to the 2002 Plan as set forth in Exhibit 2.

 

Purposes

 

The purposes of the 2002 Plan are to attract and retain the best available personnel for service as non-employee directors of our Company and to encourage their continued service on the Board of Directors.

 

Term of Plan

 

The 2002 Plan will expire on May 14, 2018.

 

Eligibility

 

Only non-employee directors are eligible to receive awards under the 2002 Plan. Currently, our Board of Directors consists of eight (8) directors of whom seven (7) are non-employee directors. Mr. Harshman, our current President and Chief Executive Officer, is not eligible to receive awards under the 2002 Plan.

Shares Subject to the Plan

 

The maximum aggregate number of shares which may be currently optioned and sold under the 2002 Plan is 800,000 shares. If this proposal is approved by our stockholders, an additional 400,000 shares will become available to be awarded under the 2002 Plan. The shares may be authorized, but unissued, or reacquired common stock.

 

Share Counting Provisions

 

If approved by our stockholders, each award of restricted stock units will debit the 2002 Plan reserve 1.5 shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of 1.5 shares for every unit forfeited.

 

No Repricing

 

No option granted under the 2002 Plan may be repriced without stockholder approval, including by means of an exchange for another award.

 

Administration

 

The 2002 Plan provides for grants of awards to be made in three ways:

 

 

Terms of Awards

 

Each award of restricted stock units or stock options is evidenced by written option agreements between us and the relevant non-employee director in such form, and subject to such terms and conditions, including vesting provisions, as the Board shall approve. Options are subject to the following terms and conditions:

 

 

 

Terms of 2010 Awards

 

If this Proposal Three is approved by our stockholders, our Board of Directors expect to make equity awards to incumbent non-employee directors. The timing and amounts of these awards have not yet been determined.

 

Adjustments upon Changes in Capitalization, Dissolution, Merger or Change-in-Control

 

In the event of a stock split, reverse stock split, stock dividend, or any combination or reclassification of our common stock, or other similar change in our capital structure effected without receipt of consideration by us, proportionate adjustments will be made to the number of shares covered by each outstanding award, the number of shares authorized for issuance that remain available to be granted under the 2002 Plan, and the exercise price of each outstanding stock option. For this purpose, any conversion of convertible securities is not considered effected without our receiving consideration.

 

In the event of a proposed dissolution or liquidation of our Company, any unexercised options and unvested restricted stock units will terminate prior to the consummation of such proposed action.

 

If a successor corporation assumes or substitutes the options under the 2002 Plan as a result of a merger of our Company with or into another corporation or a Change-in-Control of our Company, such options will remain exercisable in accordance with the 2002 Plan. In the event of a Change-in-Control, all options and restricted stock units held by non-employee directors immediately become fully vested.

 

Amendment and Termination of the 2002 Plan

 

The Board may at any time amend, alter, suspend, or discontinue the 2002 Plan to the extent such actions do not impair the rights of any recipient of awards under the 2002 Plan, unless he or she consents. To the extent necessary and desirable to comply with any applicable law, regulation or stock exchange rule, our Company must obtain stockholder approval of any 2002 Plan amendment in the manner or to the degree required.

 

Certain Federal Income Tax Information

 

Stock Options. Options granted under the 2002 Plan are nonstatutory options and do not qualify as incentive stock options under Section 422 of the Code. An optionee will not recognize any taxable income at the time of grant of a nonstatutory option. However, upon its exercise, the optionee will recognize ordinary income for tax purposes measured by the excess of the fair market value of the shares on the date of exercise over the exercise price. Because the optionee is a director and therefore subject to Section 16 of the Exchange Act, the date of taxation (and the date of measurement of taxable ordinary income) may be deferred unless the optionee files an election under Section 83(b) of the Code. Upon resale of such shares by the optionee, any difference between the sales price and the exercise price, to the extent not recognized as ordinary income as provided above, will be treated as capital gain or loss. We will be entitled to a tax deduction in the amount and at the time that the optionee recognizes ordinary income with respect to shares acquired upon exercise of an option.

Restricted Stock Units. A participant will not have taxable income upon grant of a restricted stock unit. Instead, he or she will recognize ordinary income at the time of settlement equal to the fair market value of the delivered shares. We will be entitled to a tax deduction in the amount and at the time that the non-employee director recognizes ordinary income with respect to shares acquired upon settlement of a restricted stock unit.

 

The foregoing summary of the federal income tax consequences of the 2002 Plan transactions is based on federal income tax laws in effect on the date of this Proxy Statement. This summary is not intended to be complete and does not describe foreign, state, or local tax consequences.

 

The following table summarizes the approximate dollar value and number of restricted stock units granted under the 2002 Plan in 2009 to (i) each director who is not an executive officer and (ii) all directors who are not executive officers as a group. Only directors who are not also executive officers are eligible to receive restricted stock units under the 2002 Plan.

 

 

 

 

VOTE REQUIRED AND RECOMMENDATION

 

The affirmative vote of a majority of the Votes Cast will be required to approve the amendments to the 2002 Plan.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE BY 400,000 SHARES AND TO AMEND THE ACCOUNT PROVISIONS.

 

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors has appointed PricewaterhouseCoopers LLP, independent registered public accounting firm, to audit the financial statements of the Company for the year ending December 31, 2010. PricewaterhouseCoopers LLP has served as the Company’s independent registered public accounting firm since 1989 and has provided certain tax and other audit-related services. PricewaterhouseCoopers LLP has rotated Harmonic’s audit partners in compliance with current SEC regulations.

 

Stockholder approval is not required for the appointment of PricewaterhouseCoopers LLP, since the Audit Committee of the Board of Directors has the responsibility for selecting an independent registered public accounting firm. However, the Board of Directors is submitting the selection of PricewaterhouseCoopers LLP to the stockholders for ratification as a matter of good corporate practice. In the event of a negative vote on the ratification of PricewaterhouseCoopers LLP, the Audit Committee of the Board of Directors may reconsider its selection. Representatives of PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting and will have the opportunity to make a statement if they so desire. The representatives also are expected to be available to respond to appropriate questions from stockholders.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS VOTING “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2010.

 

Independent Registered Public Accounting Firm

 

Aggregate fees for professional services rendered for the Company by PricewaterhouseCoopers LLP for the years ended December 31, 2009 and 2008 were:

 

 

AUDIT FEES

 

The audit fees for the years ended December 31, 2009 and 2008 were for professional services rendered for the audits of the consolidated financial statements of the Company and statutory and subsidiary audits, issuance of consents, and assistance with the review of documents, including registration statements, filed with the SEC.

 

AUDIT-RELATED FEES

 

The audit related fees for the years ended December 31, 2009 and 2008 were for due diligence assignments in 2009 and 2008 and certain audit work related to the opening balance sheet of an acquired company in 2009.

TAX FEES

 

The tax fees for the years ended December 31, 2009 and 2008 included services related to the preparation of tax returns, discussions with tax authorities, claims for tax refunds, assistance with indirect tax issues and assistance with tax audits and appeals. For the years ended December 31, 2009 and 2008, approximately $435,000 and $345,000, respectively, of the tax fees shown above were for advisory services related to the Company’s international support center and intercompany research and development cost-sharing arrangements.

 

ALL OTHER FEES

 

All other fees for the years ended December 31, 2009 and 2008 were for license fees for various technical accounting reference software.

 

Consistent with its charter, our Audit Committee pre-approves all audit and non-audit services from our independent registered public accounting firm and did so in 2009. Pre-approval authority may be delegated by the Audit Committee to the Chairman of the Audit Committee.

 

The Audit Committee has considered whether the services provided by PricewaterhouseCoopers LLP are compatible with maintaining the independence of PricewaterhouseCoopers LLP, and has concluded that the independence of PricewaterhouseCoopers LLP is maintained and is not compromised by the non-audit services provided.

 

The Audit Committee has engaged PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2010.

 

Report of the Audit Committee of the Board of Directors

 

In accordance with a written charter adopted by Harmonic’s Board of Directors posted on the Company’s website at www.harmonicinc.com. The Audit Committee of the Board of Directors of Harmonic serves as the representative of the Board of Directors for general oversight of the quality and integrity of Harmonic’s financial accounting and reporting process, system of internal control over financial reporting, audit process, and process for monitoring compliance with related laws and regulations. The Audit Committee engages the Company’s independent registered public accounting firm and approves the scope of both audit and non-audit services. Harmonic’s management has primary responsibility for preparing financial statements and the financial reporting process.

 

Harmonic’s independent registered public accounting firm, PricewaterhouseCoopers LLP, is responsible for performing an independent audit of the Company’s consolidated financial statements and internal control over financial reporting in accordance with the standards set by the Public Company Accounting Oversight Board (“PCAOB”) and to issue reports thereon.

 

The Audit Committee of the Board of Directors has:

 

 

 

The Audit Committee meets regularly with the Company’s independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal control over financial reporting and the overall quality of the Company’s accounting principles and practices.

 

In performing all of these functions, the Audit Committee acts only in an oversight capacity and necessarily relies on the work and assurances of Harmonic’s management, which has primary responsibility for preparing financial statements and the financial reporting process, and the independent registered public accounting firm, which, in their report, express an opinion on the conformity of Harmonic’s annual consolidated financial statements to accounting principles generally accepted in the United States and of the Company’s internal control over financial reporting in accordance with the standards set by the PCAOB. In reliance on the reviews and discussions referred to in this report, and in light of its role and responsibilities, the Audit Committee recommended to the Board of Directors, and the Board of Directors has approved that the audited financial statements of Harmonic for the three years ended December 31, 2009 be included for filing with the Securities and Exchange Commission in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

The Audit Committee

 

Harold Covert

 

Patrick Gallagher

 

William Reddersen

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Role of the Compensation and Equity Ownership Committee

 

The Compensation and Equity Ownership Committee (“Compensation Committee”) of our Board of Directors is responsible for approval of the Company’s executive compensation policies, compensation paid to executive officers, and administration of the Company’s equity ownership plans. The Compensation Committee currently consists of Messrs. Van Valkenburg, Kvamme, and Reddersen, none of whom is an employee of the Company, and each of whom is independent under applicable NASDAQ listing standards and for the purposes of Section 162(m) of the Code and Section 16 of the Securities and Exchange Act of 1934, as amended. The charter of the Compensation Committee was adopted by our Board of Directors and is posted on Harmonic’s website at www.harmonicinc.com.

 

The Compensation Committee has retained the services of Meyercord Associates (“Meyercord”), an independent compensation consulting firm, to assist the Compensation Committee in the evaluation of appropriate cash and equity compensation

for executive management. Meyercord provides no other services to the Company. Meyercord makes recommendations to the Compensation Committee on the design and implementation of compensation plans, assists in determining the appropriate number of shares to be used for equity awards granted under the Company’s equity plans, reviews data and recommendations provided by management and also reviews specific compensation proposals for each of the Company’s executive officers named in the Summary Compensation Table in the “Executive Compensation and Additional Information” section of this Proxy Statement (“NEO”). Meyercord attends all or part of certain Compensation Committee meetings, as requested by the Compensation Committee.

 

Role of Management

 

Our CEO, assisted by our Vice President of Human Resources, works with the Compensation Committee to establish meeting agendas. Our CEO makes recommendations to the Compensation Committee with respect to the compensation of other members of executive management and the design and implementation of incentive compensation programs for NEOs and all other employees. For 2009 executive compensation, these recommendations were developed with the assistance of Compensia, an independent consultant engaged by the Company. The Compensation Committee considers the recommendations of management but is not bound by such recommendations. The CEO does not make recommendations to the Compensation Committee with respect to his own compensation and is not present at portions of Compensation Committee meetings when his compensation is discussed or when the Compensation Committee elects to meet in executive session.

 

Compensation Philosophy and Programs

 

The Company’s executive compensation programs are designed to attract, motivate and retain executives who will contribute significantly to the long-term success of the Company and the enhancement of stockholder value. Consistent with this philosophy, the following goals provide a framework for our executive compensation program:

 

 

Management of Risk Arising from Incentive Compensation Policies

 

The Compensation Committee has considered whether the Company’s overall compensation program for employees creates incentives for employees to take excessive or unreasonable risks that could materially harm the Company. The Committee believes that our incentive plans are typical for our industry and conservative in nature and that risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on the Company. Several features of our compensation policies for management employees appropriately mitigate such risks, including a mix of long- and short-term compensation incentives that we believe are properly weighted, the uniformity of compensation policies across the Company, caps on payments from the plans and the use of our business plan, which the Compensation Committee regards as setting an appropriate level of risk for the Company, as a baseline for our incentive bonus plan targets. We also believe the Company’s internal legal and financial controls appropriately mitigate the probability and

potential impact of an individual employee committing the Company to inappropriate transactions in exchange for short-term compensation benefits.

 

Elements of Compensation

 

In order to achieve the above goals, our total compensation packages include base salary and annual bonus paid in cash, as well as long-term equity compensation in the form of stock options or restricted stock units, or a combination thereof. We also make available benefit plans to our executive officers which are generally provided to all regular full-time employees of Harmonic. We believe that appropriately balancing the total compensation package and ensuring the viability of each component of the package is necessary in order to provide market-competitive compensation. We focus on ensuring that the balance of the various components of our compensation program is optimized to motivate executives to improve our results on a cost-effective basis. The factors which are used to determine individual compensation packages are generally similar for each NEO, including our CEO.

 

In order to assess our compensation competitiveness against peer companies, Compensia recommended a peer group, established in consultation with management, which included approximately twenty-four (24) companies. These peer companies were selected from the telecommunications equipment industry based principally on revenue and market capitalization data that placed Harmonic approximately in the middle of the range.

 

The Compensation Committee then asked Meyercord to develop its own recommendations as to an appropriate peer company group for Harmonic. Meyercord selected the peer group companies based principally on revenue and market capitalization data, including many technology companies in the Company’s immediate geographic area with whom the Company competes for executive talent. These peer group recommendations from Compensia and Meyercord were reviewed and discussed by the Compensation Committee and a final list was approved by the Compensation Committee as shown below. Data prepared by Compensia for the approved peer group was used by management in formulating recommendations for 2009 cash and equity compensation to the Compensation Committee. Information from Compensia was also used in formulating the CEO’s recommendations to the Compensation Committee with respect to the design and implementation of compensation packages and for specific proposals related to the individual elements and total compensation packages for other NEOs, as well as for other employees. In order to independently evaluate the competitive position of the Company’s compensation structure, the Compensation Committee in 2009 reviewed Compensia’s cash and equity compensation data with Meyercord, including the data on CEO compensation. The approved peer group consisted of the following companies:

 

 

Base Salary

 

Base salaries for NEOs, including that of the CEO, were set according to the responsibilities of the position, the specific skills and experience of the individual and the competitive market for executive talent. The Compensation Committee reviews salaries annually and adjusts them as appropriate to reflect changes in market conditions, individual performance and responsibilities,

and the Company’s financial position. The aggregate value of our total cash compensation (base salary and bonus) for executives is generally targeted at approximately the fiftieth (50th) percentile of executive compensation of the approved peer group with the intent that superior performance under incentive bonus plans would enable the executive to elevate his total cash compensation to levels that are above the average of comparable companies. Following a review of the above factors and the data regarding our peer group provided by Compensia and reviewed with Meyercord by the Compensation Committee, the Committee decided that no action should be taken to increase base salaries at the beginning of 2009, in part because the Committee believed that significant adjustments were unnecessary, and in part because of management’s desire to control expenses in response to the global economic recession and its impact on the Company’s business. Subsequently, in June 2009, following recommendations from management, the Committee approved a 4% increase in the base salary of Mr. Bonasera, who at that time took on additional responsibilities in his role as Vice President, Operations. Base salaries for NEOs are disclosed in the Summary Compensation Table on page 34.

 

Incentive Bonus Plan

 

The Company’s annual incentive bonus plan in which NEOs participate reflects the Compensation Committee’s belief that a meaningful component of executive compensation should be contingent on the performance of the Company, thereby introducing a significant element of “pay for performance” and appropriate incentives to produce superior results. In 2007 and 2008, the Company’s incentive bonus plan for key employees, including NEOs, was weighted more heavily towards attainment of a non-GAAP operating income target (excluding certain non-cash and non-recurring charges and credits) in order to incentivize management to increase the Company’s profitability from the level achieved in 2006 and 2007, respectively. Operating income was weighted at 60% and revenue at 40%. A target bonus was established for each NEO participant by reference to the data from the peer group for the relevant year, and such targets were reviewed with Meyercord. In addition, the 2008 and 2009 incentive bonus plans had minimum thresholds for each component which had to be met in order for any payout to be made, and a cap of 200% of target bonus for any individual, including NEOs. Total payouts for all participants, including NEOs, from the 2008 and 2009 incentive bonus plans were limited to ten percent (10%) of pre-bonus operating income, as defined. In 2009, the Compensation Committee changed the weighting of operating income and revenue from the 60/40 ratios in 2007 and 2008 to 50/50. The Compensation Committee believed that, with management having achieved targeted operating income levels in 2008, increased revenue weighting would provide an appropriate incentive for greater revenue growth. For 2009, the Compensation Committee approved the following targets for the incentive plan:

 

 

For performance between these levels, bonus payouts would be determined by straight line interpolation. No payments would be made under any component of the 2009 incentive plan if non-GAAP operating income fell below $15 million. We do not publicly disclose operating income targets or revenue targets for the current year because such information is an integral part of our business plan, and as such is highly confidential commercial and business information. In addition, we believe that the disclosure of such targets could be confusing and misleading to investors as the Company does not provide annual revenue or operating income guidance to investors. Disclosing specific targets would provide competitors and other third parties with insights into our planning process and would therefore cause competitive harm. The Compensation Committee believed that the 2009 bonus targets were challenging but achievable based on their review of the Company’s operating plan for 2009, their experience of the Company’s historical performance in a business heavily dependent on the capital spending plans of a limited number of large customers uncertainty related to the performance of Scopus Video Networks in acquisition in March 2009, and their assessment of the very difficult economic environment which prevailed at the beginning of 2009. In fiscal 2009, we failed to meet the threshold established for revenue; we exceeded the threshold for operating income, but without meeting the target.

As a result, the incentive pool was funded at twenty-eight percent (28%) of the total targeted amount. Bonus payments from the 2009 incentive bonus plan were approved by the Compensation Committee and made to executive officer participants in February 2010, as disclosed in the Summary Compensation Table on page 34. All bonus amounts paid to NEOs with respect to 2009 were paid pursuant to the 2009 incentive bonus plan.

 

Equity Compensation Plans

 

The Compensation Committee believes that equity compensation plans are an essential tool to link the long-term interests of stockholders and employees, especially the Chief Executive Officer and executive management, and serve to motivate executives to make decisions that will, in the long run, deliver the best returns to stockholders. Stock options have been historically granted when an employee, including an NEO, joins the Company, and on an annual basis thereafter. These stock options vest over a four year period and are granted at an exercise price equal to the fair market value of the Company’s common stock at the date of grant. The size of an initial stock option grant is based upon the position, responsibilities and expected contribution of the individual, with subsequent grants also taking into account the individual’s performance, potential contributions, and, to a lesser extent, the vesting status of previously granted options. This approach is designed to maximize stockholder value over the long term, as no benefit is realized from the option grant unless the price of the Company’s common stock has increased over a number of years.

 

The Compensation Committee has awarded stock options to most employees, including NEOs, on an annual basis until 2009, when the use of stock options was replaced by restricted stock units for most non-executive employees. In prior years, the total pool of annual grants to be made to all employees, including NEOs, was determined principally by reference to guidelines published by shareholder advisory firms such as RiskMetrics (“RM”) and in part to historic practice. The guidelines generally refer to metrics such as total annual grants as a percentage of shares outstanding and total outstanding options as a percentage of fully diluted shares. Historically, the Compensation Committee has set the total pool of equity awards to result in the Company’s use of options being substantially lower than the guideline amounts. In 2007, the Compensation Committee concluded that Harmonic should increase the equity component of officer compensation in order to protect the Company from the potential loss of executive talent to companies with more generous equity compensation policies. In January 2007, an analysis by Top Five, an executive compensation consulting firm, of equity awards at peer group companies was presented by management to the Compensation Committee. The Compensation Committee considered these data, reviewed it with Meyercord, and in conjunction with other information, including experience with other public company equity compensation programs, the Compensation Committee concluded that it should increase both the total pool of option awards for 2007 and individual awards to each NEO. The Compensation Committee adopted the same policy in determining the total amount and distribution of 2008 and 2009 awards. In February 2009, the Compensation Committee approved the grant of a blend of restricted stock and stock options to NEOs and certain other key employees and made the aggregate value of the awards consistent with the 65th percentile of the peer group companies. In addition, the Compensation Committee desired to recognize the efforts of management, including the NEOs and selected key employees, in their execution of various strategic initiatives in 2009, in particular the integration of Scopus Video Networks following its acquisition in March 2009. Consequently, a special award of RSUs was made to each NEO and selected key employees in February 2010.

 

Executive officers are also eligible to participate in the Company’s 2002 Employee Stock Purchase Plan (ESPP). The ESPP is available on a broad basis to the Company’s employees. The ESPP allows eligible employees to purchase the Company’s common stock at a price equal to 85% of the lower of the fair market value at the beginning of an Offering Period or the fair market value at the end of the purchase period, six months later, with the purchase amount limited to the lesser of ten percent (10%) of base salary or 3,000 shares per purchase period, or as specified by applicable IRS regulations.

 

Financial Accounting Standards Codification Topic 718, of the Financial Accounting Standards Board (“FASC Topic 718”) requires the Company to record a charge to earnings for equity compensation. However, the Compensation Committee believes that the Company should continue to operate its equity compensation plans in spite of the significant non-cash charges

incurred by the Company as a result of the application of FASC Topic 718. The Compensation Committee continues to monitor the impact of the accounting standard on Harmonic’s earnings, changes in the design and operation of equity compensation plans by other companies, particularly those with whom the Company competes locally for employees, and the attitude of financial analysts and investors towards these significant and potentially volatile non-cash charges. In order to mitigate the impact of this new standard on earnings, the Company has implemented changes to our option grant policy and ESPP structure that lessens the expense against earnings that the Company recognizes on these awards. The Company reduced the term of employee option grants from ten (10) years to seven (7) years for grants made on or after February 27, 2006. In addition, the Board of Directors and stockholders approved an amendment to the Company’s ESPP in 2006 to reduce the “look-back” feature from twenty four (24) months to six (6) months. More recently, the Compensation Committee has continued to review, with the assistance of Meyercord, equity grant practices by peer companies. Having noted a trend towards increasing use of restricted stock awards by many other companies rather than stock options, the Compensation Committee determined in early 2009 that for new equity awards, it would award a preponderance of restricted stock units and limit the use of stock options. In 2009, most employees who received equity awards, other than NEOs, received them in the form of restricted stock units, which practice generally results in lower and more predictable accounting charges. The Compensation Committee continues to believe that broad-based equity plans remain an essential element of a competitive compensation package, as such plans are offered currently by most public and private technology companies in Silicon Valley with whom the Company competes for both executive and non-executive employees. Approximately ninety nine percent (99%) of employees currently hold stock options or restricted stock units, and approximately sixty eight percent (68%) are currently participating in the Company’s ESPP.

 

Equity Compensation Grant Practice

 

The Compensation Committee approves all stock option or restricted stock unit grants, except for certain grants made to non-executive employees in the ordinary course of business, for which it has delegated authority to the CEO within pre-approved parameters pursuant to an Employee Equity Issuance Policy, and the Compensation Committee reviews all grants made pursuant to the Employee Equity Issuance Policy. Initial hire grants of stock options that are within the CEO’s approved range are made on the first Friday following the employee’s start date, and initial hire grants of restricted stock units are made on the second Friday of each month and any other grants made by the CEO pursuant to authority granted by the Compensation Committee are made on Fridays of the week of such grant. Stock options are granted at 100% of the closing price of our stock on the NASDAQ Global Select Market on the date of grant.

 

Initial hire grants that are for executives reporting to the CEO or grants which are above the CEO’s approved range are approved by the Compensation Committee, with the grant date being the day of approval by the Compensation Committee and, if in the form of a stock option, the exercise price being the closing price of the stock on the NASDAQ Global Select Market on that date. The initial grants are effective as of the date of grant, with vesting generally beginning on the date of commencement of employment. Annual grants are usually made in the first half of the year, and in 2009, these grants were made on February 24. This timing enables management and the Compensation Committee to consider performance by both the Company and the individual and balance it against our expectations for the current year.

 

We do not time the granting of stock options or restricted stock units with any favorable or unfavorable news released by the Company. The timing of initial grants is driven by the date of hire of our new employees. The Board of Directors and Compensation Committee meeting schedules, for review and approval of annual grants, are usually established several months in advance for the calendar year. Proximity of any awards to an earnings announcement or other market events is coincidental.

 

Retirement Benefits

 

The Company does not provide pension benefits or deferred compensation plans to any of its employees, including NEOs, other than a 401(k) deferred compensation plan which is open to all regular, full-time U.S. employees.

The Company made matching contributions to the 401(k) plan of up to $1,000 per annum per participant in 2008 and 2007. Matching contributions were suspended throughout 2009 and to date as a result of the economic recession and its impact on the Company’s financial performance. NEOs were eligible for these matching contributions on the same basis as other plan participants. Details of Company contributions for executives in 2008 and 2007 are included in the “All Other Compensation” column in the Summary Compensation Table on page 34. The Compensation Committee reviews regularly the performance of, and changes to, the 401(k) plan.

 

Change-of-Control Agreements

 

The Company does not have employment agreements with any of its NEOs. However, as a historical practice, it has generally provided change of control severance agreements to its NEOs. These agreements are designed to incentivize continuing service to the Company by NEOs in the event that the Company may be in discussions regarding strategic transactions and to provide short-term benefits in the event that a NEO’s position is eliminated or responsibilities or compensation are reduced following a change of control.

 

As of December 31, 2009, the Company had entered into change of control severance agreements with each of the NEO’s. Under the terms of the respective NEO’s change of control severance agreement, in the event of termination within eighteen months following a change in control of the Company other than for cause (as defined in the relevant change of control severance agreement), Mr. Harshman will receive a lump-sum payment of twice his annual salary plus a bonus payment and benefits, Mr. Dickson will receive a lump-sum payment of one and a half times his annual salary plus a bonus payment and benefits, and the other NEOs will receive a lump-sum payment of one year’s salary plus a bonus payment and benefits. These agreements also provide for out-placement assistance and the full acceleration of unvested stock options and any restricted stock awards held by the respective NEO in the event of such termination, subject to certain limitations.

 

Other Compensation

 

Other elements of executive compensation include life and long-term disability insurance and health benefits. These benefits are available to all regular, full-time U.S. employees of the Company on the same basis and similar benefits are provided to most employees in other countries. All NEOs have access to a supplemental medical plan which provides coverage of additional out-of-pocket medical costs up to an annual limit of $15,000 and one NEO has a monthly car allowance. Management periodically reviews the level of benefits provided to all employees and adjusts those levels as appropriate. Company payments for NEOs pursuant to these other elements of compensation in 2009, 2008 and 2007 are included in the “All Other Compensation” column in the Summary Compensation Table on page 34.

 

Approvals

 

In February 2009, the Compensation Committee approved the 2009 cash compensation for all NEOs. The Company’s CEO was not present during the portion of the meetings during which his compensation was discussed and approved. Equity compensation awards were approved by the Compensation Committee on February 24, 2009.

 

Stock Ownership Guidelines

 

The Company currently has no stock ownership guidelines for its NEOs.

Financial Restatements

 

The Company has never restated its financial statements and does not have an established practice regarding the adjustment of bonus payments if the performance measures on which they were based are restated in a manner that would change the amount of an award.

 

Section 162(m)

 

We have considered the potential future effects of Section 162(m) of the Code on the compensation paid to our NEOs. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for the Chief Executive Officer or any of our next four most highly compensated executive officers, unless such compensation is performance based. For fiscal 2009, no executive officer received compensation subject to Section 162(m) in excess of $1.0 million. We have adopted a policy that, where reasonably practicable, we will seek to qualify the variable compensation paid to our executive officers for an exemption from the deductibility limitations of Section 162(m).

 

Report of the Compensation and Equity Ownership Committee of the Board of Directors on Executive Compensation

 

The Compensation and Equity Ownership Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on the Compensation Committee’s review of and the discussions with management with respect to the Compensation Discussion and Analysis, our committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

The Compensation and Equity Ownership Committee

 

David R. Van Valkenburg

 

E. Floyd Kvamme

 

William Reddersen

 

The information contained above under the captions “Report of the Audit Committee of the Board of Directors” and “Report of the Compensation and Equity Ownership Committee of the Board of Directors on Executive Compensation” shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference to such filing.

2009 Compensation of Named Executive Officers

 

SUMMARY COMPENSATION TABLE

 

The following Summary Compensation Table (“SCT”) sets forth summary information concerning the compensation earned by our NEOs, including Patrick J. Harshman as President and Chief Executive Officer, Robin N. Dickson as the Chief Financial Officer and the three most highly compensated executive officers of the Company during the fiscal years ended December 31, 2009, 2008 and 2007 for services to our Company in all capacities:

 

 

 

GRANT OF PLAN-BASED AWARDS

 

The following table summarizes certain information regarding non-equity and equity plan-based awards granted by Harmonic to the NEOs in 2009:

 

 

 

 

OUTSTANDING EQUITY AWARDS AS OF DECEMBER 31, 2009

 

The following table summarizes stock options outstanding as of December 31, 2009 for each of the NEOs:

 

 

 

 

OPTIONS EXERCISED DURING 2009

 

The following table summarizes the options exercised during the year ended December 31, 2009 and the value realized upon exercise:

 

PENSION BENEFITS AND NONQUALIFIED DEFERRED COMPENSATION

 

There are no pension or retirement benefit plans for any of the NEOs, other than a 401(k) deferred compensation plan which is available to all regular, full-time U.S. employees of the Company. The Company made matching contributions to the 401(k) plan of up to $1,000 per annum per participant in 2008 and 2007. Matching contributions were suspended at the beginning of 2009. Details of Company contributions for NEOs in 2007 and 2008 are included in the “All Other Compensation” column in the Summary Compensation Table on page 34.

 

CHANGE-OF-CONTROL AGREEMENTS

 

The Company does not have employment agreements with any of its NEOs. As of December 31, 2009, the Company had entered into change of control severance agreements with each of the NEO’s. Based on a hypothetical termination date of December 31, 2009, the respective amounts paid to the NEOs in the event of a change of control would have been:

 

 

 

 

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

 

No member of the Compensation and Equity Ownership Committee or executive officer of the Company has a relationship that would constitute an interlocking relationship with executive officers or directors of another entity.

EQUITY PLAN INFORMATION

 

 

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company’s common stock as of the Record Date by (i) each beneficial owner of more than 5% of the Company’s common stock; (ii) each director and each nominee to the Company’s Board of Directors; (iii) each NEO; and (iv) all of the Company’s current directors and executive officers as a group. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable. The addresses for each of the directors, nominees for director and named executive officers of the Company is c/o Harmonic Inc., 549 Baltic Way, Sunnyvale, CA 94089.

 

 

 

 

 

 

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires the Company’s executive officers and directors and persons who own more than ten percent of a registered class of the Company’s equity securities to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC and the NASDAQ Global Select Market. Executive officers, directors and greater than ten percent stockholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it or written representations from certain reporting persons, the Company believes that, with respect to 2009, all filing requirements applicable to its officers, directors and ten percent stockholders were complied with.

 

It is Harmonic’s policy that all employees, officers and directors must avoid any activity that is or has the appearance of conflicting with the interests of the Company. This policy is included in the Company’s Code of Business Conduct and Ethics, which is posted on our website. All related party transactions must be reviewed and approved by the Company’s Audit Committee.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Except for the compensation agreements and other arrangements that are described under “Executive Compensation and Additional Information” and “Change of Control,” there was not during fiscal year 2009, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $120,000 and in which any director, executive officer, 5% stockholder or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

The Company’s Audit Committee has the responsibility to review proposed related party transactions for potential conflicts of interest and approving all such transactions in advance.

 

The Company knows of no other matters to be submitted for stockholder action at the 2010 Annual Meeting. If any other matters properly come before the Annual Meeting or any adjournments or postponements thereof, it is the intention of the persons named in the enclosed form of proxy to vote the shares they represent as the Board of Directors may recommend.

 

Dated: April 9, 2010

 

 

Robin N. Dickson

 

Corporate Secretary

Exhibit #1

 

HARMONIC INC.

 

1995 STOCK PLAN

(AS AMENDED AND RESTATED EFFECTIVE UPON, AND SUBJECT TO, STOCKHOLDER APPROVAL AT THE 2010 ANNUAL MEETING OF STOCKHOLDERS)