Benefit Plans

6 Months Ended

Jul. 01, 2011

Benefit Plans [Abstract]

BENEFIT PLANS

NOTE 10: BENEFIT PLANS

Stock Based Incentive Plans. The Company has three active stock based incentive plans; the 1995 Stock Plan (the “Stock Plan”), the 2002 Director Stock Plan (the “Director Plan”), and the Employee Stock Purchase Plan (the “ESPP”). As of July 1, 2011, (a) an aggregate of 19,134,221 shares of common stock are reserved for issuance under the Stock Plan, 7,998,875 of which remained available for grant, 7,171,074 of which were subject to outstanding stock option grants and 3,964,272 of which were restricted stock units (“RSUs”) subject to vesting, (b) an aggregate of 619,162 shares of common stock are reserved for issuance under the Director Plan, 163,317 of which remained available for grant, 380,000 of which were subject to outstanding stock option grants and 75,845 of which were RSUs subject to vesting, and (c) an aggregate of 2,829,786 shares of common stock are reserved for issuance under the ESPP. In addition, the Company has various inactive stock based incentive plans, such as the assumed Omneon plans described below. As of July 1, 2011, an aggregate of 2,169,412 shares of common stock are reserved for issuance under the inactive plans, all of which were subject to outstanding stock option grants.

Stock Plan. Under the Stock Plan, both stock options and RSUs may be granted to employees and consultants of Harmonic. Stock options have a maximum term of seven years and generally vest 25% at one year from date of grant and an additional 1/48 per month thereafter. Stock options are granted with exercise prices equal to the fair market value of the common stock at the date of grant. Restricted stock units (“RSUs”) have no exercise price and generally vest over four years, with 25% vesting at one year from date of grant or the vesting commencement date chosen for the award and either an additional 1/16 per quarter or 1/8 semiannually thereafter. In May 2010, Harmonic stockholders approved amendments to the Stock Plan that (a) increased the maximum number of shares of common stock authorized for issuance by an additional 10,600,000 shares, (b) decreased the maximum term of stock options to seven years, and (c) changed the share counting provisions to provide that each award with an exercise price below 100% of the fair market value on the grant date (or no exercise price) would decrease the Stock Plan reserve 1.5 shares for every unit or share granted and any forfeitures of these awards due to their not vesting would increase the Stock Plan reserve by 1.5 shares for every unit or share forfeited. Previously, RSUs granted reduced the number of shares reserved for grant under the Stock Plan by two shares for every unit granted. In the six months ended July 1, 2011, 1,570,300 RSUs, with an aggregate grant date fair value of $14.9 million, were granted to employees. In the six months ended July 2, 2010, 1,501,100 RSUs, with an aggregate grant date fair value of $9.5 million, were granted to employees. Certain stock option and RSU awards provide for accelerated vesting if there is a change in control and a subsequent involuntary termination of the award holder.

Upon acquisition of Omneon in September 2010, the Company assumed substantially all unvested stock options and RSUs outstanding, as of the date of closing, under Omneon’s 1998 Stock Option Plan and 2008 Equity Incentive Plan, resulting in the assumption of stock options to purchase approximately 1,522,000 shares of Harmonic common stock and the assumption of RSUs for 1,455,000 shares of Harmonic common stock. The exchange of stock-based compensation awards was treated as a modification under current accounting guidance. The calculation of the fair value of the exchanged awards immediately before and after the modification did not result in any significant incremental fair value. The fair value of Harmonic’s stock options and RSUs issued to Omneon employees was $17.3 million, which was determined using the Black-Scholes option pricing model, of which $2.1 million represents purchase consideration and $15.2 million will be recorded as compensation expense over the weighted average service period of 2.5 years from the September 15, 2010 closing date.

Director Plan. In May 2002, Harmonic’s stockholders approved the Director Plan. Under the Director Plan, both non-statutory stock options and RSUs may be granted to certain non-employee directors of Harmonic. In May 2010, Harmonic stockholders approved amendments to the Director Plan, (a) increasing the maximum number of shares of common stock authorized for issuance by an additional 400,000 shares, and (b) changing the share counting provisions to provide that each award of RSUs would decrease the Director Plan reserve 1.5 shares for every unit granted and any forfeitures of unvested RSUs would increase the Director Plan reserve by 1.5 shares for every unit forfeited. Previously, RSUs granted reduced the number of shares reserved for grant under the Director Plan by two shares for every unit granted. RSUs have no exercise price and vest either after one year from the grant date or on the vesting date chosen for such award. Stock options are granted at the fair market value of the common stock on the date of grant and have a maximum term of seven years. Initial option grants generally vest monthly over three years, and subsequent grants generally vest monthly over one year. In the six months ended July 1, 2011, 75,845 RSUs, with an aggregate grant date fair value of $0.7 million, were granted to non-employee directors. In the six months ended July 2, 2010, 87,367 RSUs, with an aggregate grant date fair value of $0.5 million, were granted to non-employee directors.

A summary of share-based award activity under the Stock Plan and Director Plan during the six months ended July 1, 2011 is as follows:

	Shares
	Available for
	Grant
	(In thousands)
Balance at December 31, 2010		10,449
Options granted		(833	)
Restricted stock units granted		(2,469	)
Options cancelled		384
Restricted stock units cancelled		591
Options expired		40
Balance at July 1, 2011		8,162

The following table summarizes RSU activity under the Stock Plan and Director Plan during the six months ended July 1, 2011:

				Weighted
	RSU’s			Average Fair		Aggregate Fair
	Outstanding			Value Per Share		Value(1)
	(In thousands, except per share data)
Balance at December 31, 2010		4,507		$	6.43
Restricted stock units granted		1,646			9.50
Restricted stock units vested		(922	)		6.31	$	8,250
Restricted stock units cancelled		(718	)		6.80
Balance at July 1, 2011		4,513			7.51

(1) Represents the fair value of Harmonic common stock on the date that each of the restricted stock units vested. On the grant date, the fair value for these awards was $5.8 million.

The following table summarizes stock option activity under the Stock Plan and Director Plan during the six months ended July 1, 2011:

				Average
	Stock Options			Exercise Price
	Outstanding			Per Option
	(In thousands, except per option data)
Balance at December 31, 2010		11,020		$	6.90
Options granted		833			9.63
Options exercised		(1,714	)		6.33
Options cancelled		(507	)		7.55
Options expired		(384	)		9.11
Balance at July 1, 2011		9,248			7.12
Options vested and exercisable at July 1, 2011		6,492
Options vested and expected-to-vest at July 1, 2011		9,122

The weighted-average fair value of options granted for the six months ended July 1, 2011 and July 2, 2010 was $4.55 and $3.09, respectively.

The following table summarizes information regarding stock options outstanding at July 1, 2011:

	Stock Options Outstanding						Stock Options Exercisable
			Weighted
			Average		Weighted				Weighted
	Number		Remaining		Average		Number		Average
	Outstanding at		Contractual Life		Exercise Price		Exercisable at		Exercise Price
	July 1, 2011		(In Years)		Per Option		July 1, 2011		Per Option
			(In thousands, except per option data)
Range of Exercise Prices
$0.19 - 5.14		1,467		5.9	$	2.77		866	$	3.12
5.18 - 5.87		1,483		3.6		5.76		1,097		5.79
5.88 - 8.12		1,036		4.8		6.65		509		6.72
8.17 - 8.17		1,895		3.7		8.17		1,523		8.17
8.20 - 8.65		1,332		2.7		8.25		1,313		8.25
8.69 - 9.69		1,398		5.0		9.39		555		9.04
9.74 - 16.73		637		1.2		10.63		629		10.63
		9,248		4.0	$	7.12		6,492	$	7.31

The weighted-average remaining contractual life for all exercisable stock options at July 1, 2011 was 3.2 years. The weighted-average remaining contractual life of all vested and expected-to-vest stock options at July 1, 2011 was 4.0 years. The weighted-average remaining contractual life of all vested and expected-to-vest RSUs at July 1, 2011 was 1.4 years.

Aggregate intrinsic value of options exercisable at July 1, 2011 was $6.0 million. The aggregate intrinsic value of stock options vested and expected-to-vest, net of estimated forfeitures, was $10.1 million at July 1, 2011. Aggregate intrinsic value represents the difference between our closing price on the last trading day of the fiscal period, which was $7.46 as of July 1, 2011, and the exercise price multiplied by the number of options outstanding and exercisable. The intrinsic value of exercised stock options is calculated based on the difference between the exercise price and the market value of the common stock at the time of exercise. The aggregate intrinsic value of exercised stock options during the six months ended July 1, 2011 was $4.9 million.

ESPP. In May 2002, Harmonic’s stockholders approved the ESPP. In June 2011, Harmonic’s stockholders approved an amendment to the ESPP which increased by 2.0 million shares the maximum number of shares authorized under the ESPP. The ESPP enables employees to purchase shares at 85% of the fair market value of the common stock at the beginning or end of each six month offering period, whichever is lower. Offering periods generally begin on the first trading day on or after January 1 and July 1 of each year. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During the six months ended July 1, 2011 and July 2, 2010, the number of shares of stock issued under the ESPP was 945,287 and 864,800, at weighted average prices of $5.54 and $4.90, respectively. The weighted-average fair value of each right to purchase shares of common stock granted under the ESPP during the six months ended July 1, 2011 and July 2, 2010 was $2.02 and $1.91, respectively.

Retirement/Savings Plan. Harmonic has a retirement/savings plan that qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allows participants to contribute up to 20% of total compensation, subject to applicable Internal Revenue Service limitations. Harmonic can make discretionary contributions to the plan of 25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. The employer contribution has been suspended since the first quarter of 2009.

Stock-based Compensation

The following table summarizes stock-based compensation costs in our Condensed Consolidated Statements of Operations for the three and six months ended July 1, 2011 and July 2, 2010:

	Three months ended						Six months ended
	July 1, 2011			July 2, 2010			July 1, 2011		July 2, 2010
				(In thousands)
Employee stock-based compensation in:
Cost of revenue	$	762		$	527		$	1,509	$	1,006
Research and development expense		1,771			1,158			3,607		2,266
Selling, general and administrative expense		2,559			1,734			5,978		3,391
Total employee stock-based compensation in operating expense		4,330			2,892			9,585		5,657
Total employee stock-based compensation		5,092			3,419			11,094		6,663
Amount capitalized in inventory		(14	)		(5	)		—		25
Total stock-based compensation	$	5,078		$	3,414		$	11,094	$	6,688

As of July 1, 2011, total unamortized stock-based compensation cost related to unvested stock options and RSUs was $41.1 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average amortization period of 2.6 years.

The fair value of each option grant is estimated on the date of grant, using the Black-Scholes single option pricing model with the following weighted average assumptions:

	Employee Stock Options
	Three months ended						Six months ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010
Expected life (in years)		4.75			4.75			4.75			4.75
Volatility		52	%		55	%		54	%		56	%
Risk-free interest rate		2.5	%		2.2	%		2.1	%		2.4	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

	Employee Stock Purchase Plan Awards
	Three months ended						Six months ended
	July 1, 2011			July 2, 2010			July 1, 2011			July 2, 2010
Expected life (in years)		0.50			0.50			0.50			0.50
Volatility		43	%		50	%		43	%		50	%
Risk-free interest rate		0.3	%		0.4	%		0.3	%		0.4	%
Dividend yield		0.0	%		0.0	%		0.0	%		0.0	%

The expected life for stock options and ESPP awards represents the weighted-average period that the stock options or ESPP awards are expected to remain outstanding. Our computation of expected life for stock options was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

We use the historical volatility over the expected term of the options and the ESPP offering period to estimate the expected volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our stock options and ESPP awards. The dividend yield assumption is based on our history and expectation of dividend payouts.