HARMONIC INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held on June 13, 2007May 15, 2008
TO THE STOCKHOLDERS OF HARMONIC INC.:
NOTICE IS HEREBY GIVENthat the Annual Meeting of Stockholders of Harmonic Inc., a Delaware corporation (the “Company”), will be held on Wednesday, June 13, 2007May 15, 2008 at 8:00 a.m.a.m., Pacific Time, at The Hyatt Regency — Santa Clara Marriott Hotel, 5101 Great America Parkway,2700 Mission College Blvd., Santa Clara, California, 95054, for the following purposes:
1. To elect six directors to serve until the 2008 Annual Stockholders Meeting or until their successors are elected and duly qualified.
2. To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2007.
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| 1. | To elect eight directors to serve until the 2009 Annual Meeting of Stockholders or until their successors are elected and duly qualified. |
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| 2. | To approve amendments to the 1995 Stock Plan (the “1995 Plan”) to (i) increase the number of shares of common stock reserved for issuance by 7,500,000 shares, (ii) approve the material terms of the 1995 Plan and the performance goals thereunder for Internal Revenue Code Section 162(m) purposes, (iii) extend the 1995 Plan’s term to March 1, 2018, and (iv) amend the 1995 Plan’s share counting provisions. |
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| 3. | To approve amendments to the 2002 Director Option Plan ( the “2002 Plan”) to (i) add the ability to grant restricted stock units, (ii) provide more flexibility in setting the amount and mix of automatic awards under the 2002 Plan, (iii) provide the ability to make discretionary grants, (iv) increase the number of shares of common stock reserved for issuance by 100,000 shares, (v) amend the 2002 Plan’s share counting provisions, (vi) extend the 2002 Plan’s term to May 14, 2018, and (vii) rename the 2002 Plan to the “2002 Director Stock Plan.” |
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| 4. | To ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm of the Company for the fiscal year ending December 31, 2008. |
The foregoing items of business are more fully described in the Proxy Statement accompanying this notice.
Only stockholders of record at the close of business on April 16, 2007March 17, 2008 are entitled to notice of and to vote at the meeting and any adjournment thereof.
All stockholders are cordially invited to attend the meeting in person. However, to ensure your representation at the meeting, you are urged to mark, sign, date and return the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose, or vote by telephone or by using the internet as instructed on the proxy card. Any stockholder of record attending the meeting may vote in person even if such stockholder has returned a proxy.
By Order of the Board of Directors,
Robin N. Dickson,
Corporate Secretary
Sunnyvale, California
April 30, 200711, 2008
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to complete, sign and date the enclosed proxy as promptly as possible and return it in the enclosed envelope, or vote by telephone or by using the internet as instructed on the proxy card.
HARMONIC INC.
Sunnyvale, California 94089
PROXY STATEMENT
INFORMATION CONCERNING SOLICITATION AND VOTING
GeneralGENERAL
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 June 13, 2007May 15, 2008 at 8:00 a.m.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 Hyatt Regency — Santa Clara Marriott Hotel, 5101 Great America Parkway,2700 Mission College Blvd., Santa Clara, California, 95054. The telephone number of the Company’s principal offices is(408) 542-2500.542-2500, and the Company’s principal offices are located at 549 Baltic Way, Sunnyvale, California 94089.
These proxy materials and the Company’s Annual Report to Stockholders for the year ended December 31, 2006,2007, including financial statements, were first mailed on or about April 30, 200711, 2008 to all stockholders entitled to vote at the Annual Meeting.
Record DateIMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR STOCKHOLDERS MEETING TO BE HELD ON MAY 15, 2008
We are mailing or otherwise delivering to you the Proxy Statement, proxy card and Voting SecuritiesAnnual Report onForm 10-K for the year ended December 31, 2007. These proxy materials are also available to you on the Internet. The Proxy Statement, proxy card, Annual Report onForm 10-K for the year ended December 31, 2007 and Annual Report are available athttp://www.proxyvoting.com/hlit. You may access your proxy card on the Internet by following the instructions on the proxy card included herewith. Please note that you will not be required to provide any personal information, other than the identification number provided on the proxy card, to execute a proxy.
RECORD DATE AND VOTING SECURITIES
Stockholders of record at the close of business on April 16, 2007March 17, 2008 (the “Record Date”) are entitled to notice of and to vote at the Annual Meeting. At the Record Date, 79,335,25094,097,610 shares of the Company’s common stock, $0.001 par value per share, were issued and outstanding.
Revocability of ProxiesREVOCABILITY 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 telephone or Internet proxy is counted), or by attending the Annual Meeting and voting in person.
Voting and SolicitationVOTING 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, printing and mailing of this Proxy Statement, the proxy card and any other solicitation 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 solicitation material 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-VotesQUORUM; 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 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.
Stockholder Proposal Procedures and DeadlinesSTOCKHOLDER PROPOSAL PROCEDURES AND DEADLINES
Proposals of stockholders of the Company that are intended to be presented by such stockholders at the Company’s 20082009 Annual Meeting 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 no later than January 2,December 12, 2008, which is 120 calendar days prior to the anniversary of the mailing date of this Proxy Statement, 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.
The Securities and Exchange Commission, or SEC, rules also establish a different deadline for submission of stockholder proposals that are not intended to be included in the Company’s Proxy Statement with respect to discretionary voting. The discretionary vote deadline for the year 20082009 Annual Meeting of Stockholders is March 16, 2008,February 25, 2009, 45 calendar days prior to the anniversary of the mailing date of this Proxy Statement. If a stockholder gives notice of such a proposal after the discretionary vote deadline, 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
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Company’s year 20082009 Annual Meeting.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; c) the class and number of shares of the Company owned by the stockholder; d) any material interest
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of the stockholder in such business; and e) any other information that may be required under Regulation 14A of the Securities and Exchange Act of 1934.
Multiple Stockholders Sharing One AddressMULTIPLE STOCKHOLDERS SHARING ONE ADDRESS
In some instances, we may deliver to multiple stockholders sharing a common address only one copy of this proxy statementProxy Statement and its attachments. If requested orally or in writing, we will promptly provide a separate copy of the proxy statementProxy Statement and its attachments to a stockholder sharing an address with another stockholder. Requests should be directed to our Corporate Secretary toat Harmonic Inc., Attention: Corporate Secretary, 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
Prior to the Annual Meeting, the Company had a Board of seven directors. Michel L. Vaillaud, who is currently 75 years old, has decided not to stand for re-election. The Board has adopted a resolution, which will be effective as of the Annual Meeting, that reduces the size of the board of directors to six persons. SixEight directors are to be elected at the Annual Meeting. Each of the directors elected at the Annual Meeting will hold office until the Annual Meeting of Stockholders in 20082009 or until such director’s successor has been duly elected and qualified.
Unless otherwise instructed, the proxy holders identified on the enclosed proxy card will vote the proxies received by them for the Company’s sixeight 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 current 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.
The names of the nominees for director and certain information about each of them are set forth below.
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Name | | Age | | | Principal Occupation |
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Anthony J. Ley | | | 68 | 69 | | Chairman of the Board, former | Chief Executive Officer, Collabrx |
Patrick J. Harshman | | | 43 | | | President and& Chief Executive Officer, Harmonic Inc. |
Patrick J. HarshmanHarold Covert | | | 42 | 61 | | President and | Chief ExecutiveFinancial Officer, HarmonicSilicon Image, Inc. |
Patrick Gallagher | | | 53 | | | Chairman, Macro4 Plc. |
E. Floyd Kvamme | | | 6970 | | | Partner Emeritus, Kleiner Perkins Caufield & Byers |
William F. Reddersen | | | 5960 | | | Retired, former Executive Vice President, BellSouth |
Lewis Solomon | | | 7374 | | | Founder and Chairman of SCC Company |
David R. Van Valkenburg | | | 6465 | | | Chairman, Balfour Associates, Inc. |
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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.
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Anthony J. Leyhas served as Harmonic’swas elected Chairman of the Board sinceof Directors in February 1995 and has been1995. Mr. Ley serves as Chief Executive Officer of Collabrx, a director since 1988. Previouslyprivately-held biotech services company. From November 1988 to May 2006, Mr. Ley served also as Harmonic’s President and Chief Executive Officer of Harmonic from November 1988 until May 4, 2006.Officer. 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, ultimatelymost recently as Vice President, Research and Engineering at Fairchild Semiconductor/Schlumberger in Palo Alto, California. Mr. Ley holds an M.A. in mechanical sciencesMechanical Sciences from the University of Cambridge and an S.M.E.E. from the Massachusetts Institute of Technology. HeTechnology, is also named as an inventor inon 29 patents and is a Fellow of the I.E.E.I.E.T. (U.K.) and a Life Seniorsenior member of the I.E.E.E.
Patrick J. Harshmanjoined Harmonicus in 1993 and was appointed President and Chief Executive Officer and elected as a director onin May 4, 2006. From January 2006 to May 2006, Dr. HarshmanIn December 2005, he was the Company’sappointed Executive Vice President with responsibilityresponsible for researchthe majority of our operational functions, including the unified digital video and development, marketing, operationsbroadband 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, technical services. Hefor more than four years, was President of the Broadband Access Networks Division from January 2001 until December 2005.division. Prior to January 2001, Dr.this, Mr. Harshman was Vice President of Marketing, responsible for Harmonic’s digital videoheld key leadership positions in marketing, international sales, and fiber optic transmission product lines. Dr.research and development. Mr. Harshman receivedearned a Ph.D. in Electrical Engineering from the University of California, Berkeley where his graduate research focused on nonlinear optical phenomena in optical communication systems. He alsoand completed an Executive Management Program at Stanford University.
Harold Coverthas been a director since June 2007. Since October 2007, Mr. Covert has served as Chief Financial Officer of Silicon Image, Inc., a semiconductor company. 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 Thermage, Inc. 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.
Patrick Gallagherhas been a director since October 2007. Mr. Gallagher is currently Chairman of Macro4 Plc, a global software solutions provider listed on the London Stock Exchange and Chairman of Ubiquisys which has developed and supplies femtocells for the global 3G mobile wireless market. Mr. Gallagher is also Vice Chairman of Golden Telecom Inc., a provider of integrated communications services in Russia and the CIS. He 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 2003 until 2006. From 1985 to 2002, Mr. Gallagher held senior management positions at BT Group, including as Group Director of Strategy & Development, President of BT Europe and a member of the BT Executive Committee. Mr. Gallagher holds a B.A. in Economics with honors from Warwick University.
E. Floyd Kvammehas been a director of the Company since 1990. Since 1984, Mr. Kvamme has been a general partnerGeneral Partner and now serves as a partner emeritusPartner Emeritus of Kleiner Perkins Caufield & Byers, a venture capital firm. Mr. Kvamme is also a director of National Semiconductor Corporation and Power Integrations, Inc., as well as twoseveral private companies. Mr. Kvamme holds a B.S.E.E. from the University of California, Berkeley and an M.S.E. from Syracuse University.
William F. Reddersenhas been a director of the Company since July 2002. Now retired, Mr. Reddersen spent 31 years at BellSouth Corp. and AT&T.&T Inc. From 1998 to 2000, Mr. Reddersen was Executive Vice President of Corporate Strategy at BellSouth, and from 1991 to 1998, he was responsible for BellSouth’s broadband strategy and business market operations. Mr. Reddersen is a directorserves on the board of Otelco, a group of independent telephone operators, as well as severalInc. and one private companies. Hecompany. 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.
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Lewis Solomonhas been a director of the Company since January 2002. HeMr. Solomon is FounderChairman and ChairmanCEO of SCC Company, a consulting firm specializing in technology. Mr. Solomon also co-founded and was Chief Executive Officer of 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., Terayon Communication Systems, Inc. and several private companies. Mr. Solomon holds a B.S. in Physics from St. Joseph’s College and a M.S. in Industrial Engineering from Temple University.
David R. Van Valkenburghas been a director of the Company 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 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. Mr. Van Valkenburg serves on the boardboards of Moscow Cablecom Corporation, anddirectors of several private companies. He holds a B.A. degree from Malone College, an M.S. degree from the University of Kansas, and an M.B.A. from Harvard University.
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Board Meetings and Committees
The Board of Directors of the Company held a total of eighteleven meetings during the fiscal year ended December 31, 2006.2007. No incumbent director attended fewer than 75% of the meetings of the Board of Directors or the committees upon which such director served during 2006.the period of his directorship in 2007.
The Board of Directors has determined that Messrs. Covert, Gallagher, Kvamme, Reddersen, Solomon and Van Valkenburg are independent and have no material relationship with the Company. The Board considered that two directors were on boards of directors that are suppliers to the Company and concluded that the nature of these relationships did not compromise the directors’ 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 atwww.harmonicinc.com.www.harmonicinc.com.
The Audit Committee currently consists of Messrs. Kvamme,Covert, Gallagher and Reddersen, and Michel L. Vaillaud, a director not standing for re-election, each of whom is independent underRule 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, 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. Harmonic’s management has primary responsibility for preparing financial statements and the financial reporting process. The Audit Committee held teneight meetings during 2006.2007.
The Company’s Board of Directors has determined that Mr. KvammeCovert 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. Kvamme’sCovert’s experience as general partnerChief Financial Officer of a major venture capital firm since 1984several companies publicly traded on U.S. stock exchanges qualifies him as aan “audit committee financial expert” because he has acquired relevant expertise and experience from the analysis and evaluation of financial statements of both public and private companies.performing his duties as a Chief Financial Officer.
The Compensation and Equity Ownership Committee currently consists of Messrs. Van Valkenburg, Kvamme, and Kvamme, neitherSolomon 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 ownership plans. The Compensation and Equity Ownership Committee held twothree meetings during 2006. 2007.
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Matters within the scope of the Compensation and Equity Ownership Committee were also discussed in executive sessions at each board meeting. 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, Kvamme, and Van Valkenburg, botheach of whom are independent under applicable NASDAQ Stock Market listing standards. The Corporate Governance and Nominating Committee held one meetingtwo meetings in 2006.2007. Matters within the scope of the Corporate Governance and Nominating Committee were also discussed in executive sessions at each board meeting. See “Meetings of Non-Employee Directors.”
The Corporate Governance and Nominating Committee has proposed, and the Board of Directors has approved, the nomination of all sixeight current board members for re-election by annual stockholders at this annual meeting.Annual Meeting. No candidates have been proposed for nomination by stockholders at this meetingAnnual Meeting or at any previous annual meeting.
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Identification and Evaluation of 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. TheFor example, the Corporate Governance and Nominating Committee, has in the past, hired a consulting firm to assist it in identifying and screening potential candidates for election to the Board of Directors, in particular, to replacefind candidates for the position formerlypositions now held by Michel L. Vaillaud.Messrs. Covert and Gallagher. 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 Board of Directors and committee service, personal character and integrity, and sound business judgment. 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
The Corporate Governance and Nominating Committee will consider proposals from stockholders for Board of Directors nominees at the 20082009 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, CA 94089, Attention: Corporate Secretary for inclusion in the Company’s proxy statementProxy Statement or consideration at the next annual meeting of stockholders. For stockholder nominations of persons for election to the Board of Directors of the Company at the 20082009 Annual Stockholder Meeting, timely written notice of such nomination must be delivered to the Corporate Secretary of the Company one hundred twenty days (120 days) prior to the anniversary of the mailing of this proxy statementProxy Statement (i.e., January 2,December 12, 2008), which 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 such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the Company which are beneficially owned by such person, (D) a description of all arrangements and 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
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be made by the stockholder and (E) any other information relating to such person 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 such person’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, the information set forth in “Stockholder Proposal Procedures and Deadlines” for a stockholder notice of business to be brought before an annual meeting. 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.
Meetings of Non-Employee Directors
At each board meeting, the non-employee directors meet in executive session without any management directors or employees present. The Chairman of the Corporate Governance and Nominating Committee, Mr. Solomon, has
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the responsibility of presiding over periodic executive sessions of the Board of Directors in which management directors and other members of management do not participate. Last year, the non-employee directors discussed corporate strategy, management and Board succession planning, and board policies, processes and practices in executive session.
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 $20,000, plus $2,000 per board meeting attended and $1,000 per board committee meeting attended. Fees of $1,000 and $500, respectively, are paid for telephonic Board of Directors and committee meetings. In addition, the Chair of the Audit Committee receives an annual retainer of $7,500 and the Chairs of the Compensation and Equity Ownership Committee and the Corporate Governance and Nominating Committee each are paid a retainer of $4,000 per annum (but only one retainer will be paid if held by the same person). Maximum total cash compensation per director is capped at $35,000 per annum, excluding committee remuneration.remuneration to directors for service on committees.
Equity Compensation. The 2002 Director Option Plan currently provides for grants of options to be made in two ways:
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| 1. | Each non-employee director is automatically granted an option to purchase 30,000 shares of Harmonic’s common stock on the date on which such person first becomes a non-employee director, whether through election by our stockholders or by our Board of Directors to fill a vacancy, provided, however, that an employee director who ceases to be an employee director but who remains a director will not receive an option upon such occurrence; and |
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| 2. | Each non-employee director is automatically granted an option to purchase 10,000 shares on the date of our annual stockholders meeting each year if on such dates he or she shall have served on our Board of Directors for at least the preceding six (6) months. |
Director and Former Chief Executive Officer
In connection with Mr. Ley’s retirement from his position as President and Chief Executive Officer in May 2006, the Compensation Committee approved the terms of an agreement designed to reflect Mr. Ley’s 18 years of service to
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Harmonic as CEO, the Company’s need to have his services available in the future on a consulting basis, and the Company’s lack of retirement benefits. The Company and Mr. Ley entered into a Transition Agreement providing that:
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| − | Assuming his continued election to be a member of the Company’s Board of Directors, Mr. Ley would serve as Chairman until the Company’s 2007 annual meeting of stockholders or such other time as is determined by the Board of Directors; |
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| − | On July 1, 2006 (the “Transition Date”), Mr. Ley would become a consultant to, and would cease to be an employee of, the Company; and |
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| − | Mr. Ley would provide consulting services to the Company from July 1, 2006 until June 30, 2008. |
The Transition Agreement also provided that Mr. Ley would be entitled to receive, (a) his then-current base salary at an annual rate of $500,000 per year until June 30, 2006, (b) payment under the Company’s 2006 Bonus Plan (the “Plan”) based upon the achievement of the targets in the Plan at the time that payments were made to the Company’s other executive officers, pro-rated to reflect Mr. Ley’s employment through June 30, 2006, and (c) health benefits for the lesser of i) 36 months or ii) such time as Mr. Ley ceased to be a consultant.
On the Transition Date, Mr. Ley became a consultant to the Company, and became entitled to receive, among other things, compensation at a rate of $225,000 per annum, and was granted an option to purchase 30,000acquire 100,000 shares of the Company’s common stock (the “Option”), vesting ratably each month over 12 months.
Mr. Ley is also entitled to expenses not to exceed $25,000 per annum as long as he remained a consultant and certain health benefits. The Transition Agreement also contained non-compete and non-solicitation undertakings and a release of claims by Mr. Ley.
Proposed Changes to Director Equity Compensation
If Proposal Three is approved by our stockholders, the Board will have the flexibility under our re-named 2002 Director Stock Plan to set the terms and conditions of initial and annual equity grants to our non-employee directors. This includes the ability to grant stock options, restricted stock units or a combination thereof. Moreover, the Board will have the ability to make discretionary grants of stock options or restricted stock units to our non-employee directors. However, in no event may a stock option with more than a seven-year term be granted. Also, any stock options granted under the Plan must have an exercise price equal to at least 100% of the underlying shares on the date on which such person first becomes a non-employee director, whether through election by our stockholders or by our Board of Directors to fill a vacancy, provided, however, that an employee director who ceases to be an employee director but who remains a director will not receive an option upon such occurrence; andgrant date.
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2. Each non-employee director is automatically granted an option to purchase 10,000 shares on the date of our annual stockholders meeting each year if on such dates he or she shall have served on our Board of Directors for at least the preceding six (6) months.
20062007 Compensation of Directors
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| | | Fees Earned
| | Option
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| | | | | | | | | | | | | | or Paid in
| | Awards
| | All Other
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Name | | Fees Earned or Paid in Cash ($) | | Option Awards ($)(4)(5) | | Total ($) | | | Cash ($) | | ($)(3)(4)(5)(6) | | Compensation | | Total ($) | |
Anthony J. Ley(1) | | | — | | | | — | | | | — | | | | 339,200 | | | | 621,548 | | | | 3,998 | | | | 964,746 | |
Patrick J. Harshman(2) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Harold Covert | | | | 23,750 | | | | 23,380 | | | | — | | | | 47,130 | |
Patrick Gallagher | | | | 9,000 | | | | 14,100 | | | | — | | | | 23,100 | |
E. Floyd Kvamme | | | 47,500 | | | | 23,526 | | | | 71,026 | | | | 44,750 | | | | 35,786 | | | | — | | | | 80,536 | |
William F. Reddersen | | | 38,500 | | | | 23,526 | | | | 62,026 | | | | 42,000 | | | | 35,786 | | | | — | | | | 77,786 | |
Lewis Solomon | | | 37,000 | | | | 23,526 | | | | 60,526 | | | | 41,500 | | | | 35,786 | | | | — | | | | 77,286 | |
Michel L. Vaillaud(3) | | | 38,500 | | | | 23,526 | | | | 62,026 | | |
Michel L. Vaillaud(7) | | | | 19,000 | | | | 11,923 | | | | — | | | | 30,923 | |
David R. Van Valkenburg | | | 38,500 | | | | 23,526 | | | | 62,026 | | | | 44,000 | | | | 35,786 | | | | — | | | | 79,786 | |
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1. | | Compensation earned in 2006 byIn 2007, pursuant to the Transition Agreement, Mr. Ley earned $225,000 in consulting fees, was paid $114,200 in pro-rated bonus pursuant to the 2006 Bonus Plan, and was reimbursed for his service as CEO and subsequently as a consultant, is shown in the Summary Compensation Table on page 17. Mr. Ley received no compensation for his service as a director.health insurance costs of $3,998. |
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2. | | Compensation earned in 20062007 by Dr.Mr. Harshman for his service as CEO is shown in the Summary Compensation table. Dr.Mr. Harshman receivedreceives no compensation for his service as a director. |
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3. | | Mr. Vaillaud is not standing for re-election in 2007. |
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4. | | The amounts in this column represent amounts recognized for financial statement reporting purposes in 20062007 in accordance with SFAS 123(R) and do not reflect actual amounts paid to or received by any director. These amounts are the accounting cost of options granted in 20052006 and 2006.2007. See Note 12 to our Consolidated Financial Statements contained in our Annual Report onForm 10-K for a discussion of the assumptions made in our valuation of equity awards. |
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5.4. | | Automatic option grants under our 2002 Director Plan were made on June 28, 200613, 2007 to each of the following directors: E. Floyd Kvamme, William F. Reddersen, Lewis Solomon, Michel L. Vaillaud and David Van Valkenburg. Each grant was for 10,000 shares at an exercise price of $3.97$8.17 with vesting over one year. |
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5. | | Automatic option grants under our 2002 Director Plan were made on June 25, 2007 and September 28, 2007 to Messrs. Covert and Gallagher, respectively. Each grant was for 30,000 shares at exercise prices of $8.48 and $10.61, respectively with vesting over three years. |
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6. | | The following table provides the number of shares of Common Stock subject to outstanding options held at December 31, 2006.2007. |
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7. | | Mr. Vaillaud retired in June 2007. |
Outstanding Equity Awards at December 31, 20062007
| | | | |
Name | | Number of Shares | |
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Anthony J. Ley(1)Ley | | | 950,000800,000 | |
Patrick J. Harshman(2)Harshman | | | 521,000703,000 | |
Harold Covert | | | 30,000 | |
Patrick Gallagher | | | 30,000 | |
E. Floyd Kvamme | | | 70,00080,000 | |
William F. Reddersen | | | 70,00080,000 | |
Lewis Solomon | | | 74,000 | |
Michel L. Vaillaud | | | 90,00084,000 | |
David R. Van Valkenburg | | | 74,00084,000 | |
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1. | | All options awarded to Mr. Ley were for services as CEO or consultant. Mr. Ley did not receive option grants for service as a director. |
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2. | | All options awarded to Dr.Mr. Harshman were for services as an employee. Dr.Mr. Harshman did not receive option grants for service as a director. |
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, CA, 94089.
Attendance of the Board of Directors at Annual Meetings
All members of the Board of Directors attended the 20062007 Annual Meeting.Meeting of Stockholders. The Board of Directors has a policy encouraging Board of Directors members to attend annual stockholder meetings and anticipates that certain board members will be present at the June 13, 2007May 15, 2008 annual shareholder meeting.
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Vote Required and Recommendation
The sixeight 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. A broker non-vote will be counted for purposes of determining the presence or absence of a quorum, but, under Delaware law and assuming that a quorum is obtained, a broker non-vote will not affect the outcome of the vote relating to election of directors.
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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 Company’s 1995 Stock Plan (the “1995 Plan”) which will:
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| − | increase the number of shares of common stock reserved for issuance by 7,500,000 shares, |
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| − | approve the material terms of the 1995 Plan and the performance goals thereunder for Internal Revenue Code Section 162(m) purposes, |
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| − | extend the 1995 Plan’s term to March 1, 2018, and |
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| − | amend the 1995 Plan’s share counting provisions. |
Proposed Amendments
As of March 17, 2008, options to purchase an aggregate of 6,442,498 shares of the Company’s common stock were outstanding under the 1995 Plan, with a weighted average exercise price of $9.05 per share, and 2,654,014 shares have been issued upon exercise of stock options granted under the 1995 Plan. In 2004, shareholders approved the use of up to 1,800,000 forfeitures in the 1995 Plan from the 1999 Non-Statutory Option Plan. As of March 17, 2008, only 388,617 shares were available for future grant under the 1995 Plan plus 1,497,982 from 1999 Plan forfeitures and 302,018 potential from additional forfeitures from the 1999 Plan (excluding the 7,500,000 shares subject to approval at the Annual Meeting). The Company intends to make annual option awards to current employees during its open trading window period in May 2008 and the planned grant of these awards would not be possible unless this amendment is approved by shareholders. Prior to the planned awards in May 2008, options to purchase a total of 8,836,688 shares were outstanding under our stock option plans as follows:
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C-Cube Microsystems 1994 Stock Option Plan (the “1994 Plan”) | | | 322,735 | |
C-Cube Microsystems SSOP Stock Option Plan (the “SSOP Plan”) | | | 9,651 | |
1995 Stock Plan | | | 6,442,498 | |
1999 Non-Statutory Stock Plan (the “1999 Plan”) | | | 2,061,804 | |
The 1994 Plan and the SSOP Plan were 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.
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
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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 stock options to both new and existing employees.
In April 2008, our Board of Directors approved amending the 1995 Plan to increase the number of shares reserved for issuance thereunder by 7,500,000 shares to a total of 15,800,000 shares, subject to stockholder approval.
The proposed change in the 1995 Plan share counting provisions provides 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 two 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 two shares for every unit or share forfeited.
Our Board of Directors also approved, subject to obtaining stockholder approval, extending the term of the 1995 Plan to March 1, 2018. Our Board of Directors also approved seeking stockholder approval of the material terms of the 1995 Plan, including the performance goals in the 1995 Plan, for purposes of preserving corporate tax deductions under Internal Revenue Code Section 162(m).
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 Harmonic. As of March 17, 2008, there were approximately 669 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.
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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
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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 or 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 (ten years in the case of options granted prior to February 27, 2006). 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 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
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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 Harmonic’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 Harmonic’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 a 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 Harmonic’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.
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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 withRule 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. If Proposal Two is approved then the 1995 Plan will extend to March 1, 2018.
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
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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 $1,000,000 if the conditions of Section 162(m) are met with respect to awards. These conditions include stockholder approval of the 1995 Plan and performance goals under the 1995 Plan, setting individual annual limits on each type of award, and certain other requirements. The 1995 Plan has been designed to permit the committee to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m), thereby permitting us to continue to receive a federal income tax deduction in connection with such awards.
Stock Issuances
The Company is unable to predict the amount of benefits that will be received by or allocated to any particular participant under the 1995 Plan. The table that follows shows as to each of the Company’s executive officers named in the Summary Compensation Table of the Executive Compensation and Additional Information section of this Proxy Statement and the various indicated groups, the options granted to purchase common stock under the 1995 Plan and other employee option plans during 2007 together with the weighted average purchase price paid per share.
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| | Option Plan Benefits | |
| | | | | Weighted Average
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| | Securities Underlying
| | | Exercise Price Per Share
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Name | | Awards Granted Shares | | | ($/sh) | |
Patrick J. Harshman | | | 200,000 | | | $ | 8.20 | |
Robin N. Dickson | | | 70,000 | | | | 8.20 | |
Nimrod Ben-Natan | | | 70,000 | | | | 8.20 | |
Charles Bonasera | | | 45,000 | | | | 8.20 | |
Neven Haltmayer | | | 70,000 | | | | 8.20 | |
All executive officers as a group (5 persons) | | | 455,000 | | | | 8.20 | |
All employees, including current officers who are not executive officers, as a group (633 persons) | | | 1,959,000 | | | | 8.67 | |
For the full text of the 1995 Plan, please see Exhibit 1.
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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 (I) INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UNDER THE 1995 PLAN BY 7,500,000 SHARES (II) APPROVE THE MATERIAL TERMS OF THE 1995 PLAN AND THE PERFORMANCE GOALS THEREUNDER FOR INTERNAL REVENUE CODE SECTION 162(M) PURPOSES, (III) EXTEND THE 1995 PLAN’S TERM TO MARCH 1, 2018, AND (IV) AMEND THE 1995 PLAN’S SHARE COUNTING PROVISIONS.
PROPOSAL THREE
AMENDMENTS TO THE 2002 DIRECTOR OPTION PLAN
The Company’s stockholders are being asked to approve amendments to our 2002 Director Option Plan (the “2002 Plan”) to:
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| − | add the ability to grant restricted stock units; |
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| − | provide more flexibility in setting the amount and mix of automatic awards under the 2002 Plan; |
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| − | provide the ability to make discretionary grants; |
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| − | increase the number of shares of common stock reserved for issuance by 100,000 shares; |
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| − | amend the 2002 Plan’s share counting provisions; |
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| − | extend the 2002 Plan’s term to May 14, 2018; and |
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| − | rename the 2002 Plan to the “2002 Director Stock Plan.” |
The 2002 Plan was initially adopted by our Board of Directors on March 2002 and was approved by our stockholders in May 2002. As of March 17, 2008, 250,834 shares remain available to become subject to options and sold under the Plan. The 2002 Plan is currently scheduled to expire in 2012.
Proposed Amendments
Due to changes in the financial accounting rules relating to equity compensation, full-value awards such as restricted stock units are increasingly part of the equity compensation package for non-employee directors in the technology industry. Moreover, the Company wishes to provide the Board of Directors with flexibility in structuring ongoing equity awards so that the Company can adapt rapidly and effectively to changes in the marketplace. Accordingly, our Board of Directors has approved, subject to obtaining stockholder approval, 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. For the same reasons, the Board of Directors also approved an amendment permitting discretionary grants under the 2002 Plan.
The proposed change in the 2002 Plan share counting provisions provides that each award of restricted stock units will debit the 2002 Plan reserve two shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of two shares for every unit forfeited.
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We are also seeking stockholder approval to extend the term of the 2002 Plan to May 14, 2018, to rename the 2002 Plan the “2002 Director Stock Plan” and to increase the number of shares issuable under the 2002 Plan by 100,000 shares.
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 2008 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 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 six (6) are non-employee directors. Mr. Harshman, our current President and Chief Executive Officer, is not eligible to receive awards under the 2002 Plan. While Mr. Ley, our former President and Chief Executive Officer, is eligible to receive awards under the 2002 Plan, the Board of Directors does not currently intend to provide Mr. Ley with either discretionary or annual automatic grants under the 2002 Plan during the term of his Transition Agreement.
Shares Subject to the Plan
The maximum aggregate number of shares which may be optioned and sold under the 2002 Plan is 700,000 shares. If this proposal is approved by our stockholders, an additional 100,000 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
Each award of restricted stock units will debit the 2002 Plan reserve two shares for every unit granted. Conversely, any forfeitures of unvested restricted stock units will result in a credit to the 2002 Plan reserve of two 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.
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Administration
The 2002 Plan provides for grants of awards to be made in three ways:
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| 1. | Automatic Initial Grant.Except as otherwise determined by our Board of Directors, each non-employee director is automatically granted a stock option or restricted stock units (or combination of options and restricted stock units) on the date upon which he or she first becomes a non-employee director, whether through election by our stockholders or appointment by our Board of Directors to fill a vacancy. An employee director who ceases to be an employee director but who remains a director will not receive this initial award. |
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| 2. | Automatic Annual Grant.Except as otherwise determined by our Board of Directors, each non-employee director is automatically granted a stock option or restricted stock unit (or combination of options and restricted stock units) on the date of our annual stockholders meeting each year if on such dates he or she shall have served on our Board of Directors for at least the preceding six (6) months. |
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| 3. | Discretionary Grants.The Board of Directors may make discretionary grants of stock options or restricted stock units (or a combination of options and restricted stock units) to any non-employee director. |
Terms of Awards
Each award of 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:
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| 1. | Option Term.The term of options may not exceed seven (7) years. |
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| 2. | Exercise Price.The exercise price per share may not be less than 100% of the fair market value per share of our common stock on the grant date. |
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| 3. | Termination of Continuous Status as Director.If a non-employee director’s status as a director terminates, all of their vested options expire upon the earlier of the options’ original maximum term or three (3) years following such termination of employment. |
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| 4. | Nontransferability of Options.Options granted under the 2002 Plan are not transferable other than by will or the laws of descent and distribution, and may be exercised, during the non-employee director’s lifetime, only by the non-employee director. |
Terms of 2008 Awards
If this Proposal Three is approved by our stockholders, then on May 15, 2008, our incumbent non-employee directors, with the exception of Mr. Ley, our former President and Chief Executive Officer, will receive equity awards on such date. The amounts of these awards have not yet been determined.
Adjustments upon Changes in Capitalization, Dissolution, Merger orChange-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 aChange-in-Control of our Company, such options will remain
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exercisable in accordance with the 2002 Plan. In the event of aChange-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 Internal Revenue Code (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 option shares granted under the 2002 Plan in 2007 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 options under the 2002 Plan.
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| | 2002 Director Option Plan(1) | |
| | | | | Number of
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| | | | | Option Shares
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Name | | Dollar Value(2) | | | Granted | |
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Anthony J. Ley | | $ | — | | | | — | |
Harold Covert | | | 60,000 | | | | 30,000 | |
Patrick Gallagher | | | 0 | | | | 30,000 | |
E. Floyd Kvamme | | | 23,100 | | | | 10,000 | |
William F. Reddersen | | | 23,100 | | | | 10,000 | |
Lewis Solomon | | | 23,100 | | | | 10,000 | |
David R. Van Valkenburg | | | 23,100 | | | | 10,000 | |
Non-Executive Officer Director Group (7 persons) | | $ | 152,400 | | | | 100,000 | |
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1. | | Future benefits under the 2002 Plan are not determinable because the value of options and restricted stock units depends on the market price of our common stock on the date of grant. |
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2. | | Indicates the difference between the exercise price at which shares were granted under the 2002 Plan and $10.48, the closing price of our common stock on December 31, 2007. |
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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 OF (I) ADD THE ABILITY TO GRANT RESTRICTED STOCK UNITS, (II) PROVIDE MORE FLEXIBILITY IN SETTING THE AMOUNT AND MIX OF AUTOMATIC AWARDS UNDER THE 2002 PLAN, (III) PROVIDE THE ABILITY TO MAKE DISCRETIONARY GRANTS, (IV) INCREASE THE NUMBER OF SHARES OF COMMON STOCK RESERVED FOR ISSUANCE BY 100,000 SHARES, (V) AMEND THE 2002 PLAN’S SHARE COUNTING PROVISIONS, (VI) EXTEND THE 2002 PLAN’S TERM TO MAY 14, 2018, AND (VII) RENAME THE PLAN TO THE “2002 DIRECTOR STOCK PLAN.”
PROPOSAL FOUR
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, 2007.2008. 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, 2007.2008.
Independent Registered Public Accounting Firm
Aggregate fees for professional services rendered for the Company by PricewaterhouseCoopers LLP for the years ended December 31, 20062007 and 20052006 were:
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| | 2006 | | 2005 | | |
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Name | | | 2007 | | 2006 | |
| | (In thousands) | |
Audit | | $ | 1,868 | | | $ | 1,966 | | | $ | 2,481 | | | $ | 1,868 | |
Audit Related | | | 34 | | | | 477 | | |
Audit-Related | | | | 126 | | | | 34 | |
Tax Fees | | | 190 | | | | 129 | | | | 58 | | | | 190 | |
All Other | | | 2 | | | | 5 | | | | — | | | | 2 | |
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Total | | $ | 2,094 | | | $ | 2,577 | | | $ | 2,665 | | | $ | 2,094 | |
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Audit Fees
The audit fees for the years ended December 31, 20062007 and 20052006 were for professional services rendered for the audits of the consolidated financial statements of the Company and statutory and subsidiary audits, issuance of comfort letters, consents, and assistance with the review of documents, including registration statements, filed with the SEC.
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Audit RelatedAudit-Related Fees
The audit related fees for the years ended December 31, 20062007 and 20052006 were for the audit of an acquired company, due diligence assignments and consultations concerning financial accounting and reporting standards.
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The Company’s annual incentive bonus plan reflects the Compensation Committee’s belief that a meaningful component of executive compensation should be contingent on the performance of the Company. Because the Company, had been unprofitable in 2005, the Compensation Committee took the position thatthereby introducing a returnsignificant element of “pay for performance” and appropriate incentives to profitability was the most important financial objective in 2006. Consequently,produce superior results. In 2006, the Company’s incentive bonus plan for key employees was weighted 70% toward themore heavily towards attainment of a Companyan operating income target (defined(excluding certain non-cash and non-recurring charges and credits) in order to exclude certain items)incentivize management to return the Company to profitability from the operating loss incurred in 2005. Operating income was weighted at 70% and revenue at 30% toward. Following the attainmentCompany’s return to profitability in 2006, the Committee moved the weighting of athe 2007 incentive bonus plan measures to 60% operating income and 40% revenue goal, with ain order to provide greater incentive for revenue growth as well as the continuation of profitability. A target bonus was established for each participant by reference to the peer group data. The plan allowed for an adjustment of 10% of any bonus payable based upon the individual performance of each NEO.data, and such targets were reviewed with Meyercord. In addition, the 2007 incentive bonus plan 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 plan were limited to 20% of operating income, as defined.defined in the 2007 incentive bonus plan. The Compensation Committee believed that the 2007 bonus targets were challenging but achievable based on their review of the Company’s operating plan for 2007 and 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. In fiscal 2006,2007, we partially metexceeded our goals established for both revenue and operating income. As a result, the incentive pool was funded at 57%117% of the total targeted amount. Bonus payments from the 20062007 plan were approved by the Compensation Committee and made to executive officer participants in February 2007,2008, as disclosed in the Summary Compensation Table on page 17.30. All bonus amounts paid to NEOs with respect to 2007 were paid pursuant to the 2007 incentive bonus plan.
The following table summarizes the options exercised during the year ended December 31, 20062007 and the value realized upon exercise:
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