NOTE 14: COMMITMENTS AND CONTINGENCIES

Leases

Future minimum lease payments under non-cancelable operating leases at June 28, 2013, after giving effect to $0.6 million of future sublease income from Aurora, are as follows (in thousands):


Years ending December 31,
2013 (remaining six months)	$	4,919
2014		7,833
2015		7,226
2016		7,353
2017		7,584
Thereafter		20,997

Total	$	55,912

Warranties

The Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of its warranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, and estimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarized below (in thousands):


	Three months ended						Six months ended
	June 28, 2013			June 29, 2012			June 28, 2013			June 29, 2012
Balance at beginning of period	$	3,270		$	5,133		$	4,292		$	5,558
Transfer to Aurora as part of the sale of discontinued operations		—			—			(939	)		—
Accrual for current period warranties		1,948			1,474			3,342			3,093
Warranty costs incurred		(1,990	)		(1,882	)		(3,467	)		(3,926	)

Balance at end of period	$	3,228		$	4,725		$	3,228		$	4,725

Purchase Commitments with Contract Manufacturers and Other Suppliers

The Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of its products. In addition, some components, sub-assemblies and modules are obtained from a sole supplier or limited group of suppliers. During the normal course of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Company enters into agreements with certain contract manufacturers and suppliers that allow them to procure inventory based upon criteria as defined by the Company. The Company had approximately $21.0 million of non-cancelable purchase commitments with contract manufacturers and other suppliers as of June 28, 2013.

Standby Letters of Credit

As of June 28, 2013, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related to performance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was $1.2 million as of June 28, 2013.

Indemnification

Harmonic is obligated to indemnify its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonic also indemnifies some of its suppliers and most of its customers for specified intellectual property matters pursuant to certain contractual arrangements, subject to certain limitations. The scope of these indemnities varies, but, in some instances, includes indemnification for damages and expenses (including reasonable attorneys’ fees). There have been no amounts accrued in respect of these indemnification provisions through June 28, 2013.

Guarantees

The Company has $0.5 million of guarantees in Israel, with the majority related to rent for buildings used by its Israeli subsidiaries, as of June 28, 2013.

Legal proceedings

In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging that Harmonic’s Media Grid product infringes two patents held by Avid. In June 2012, Avid served a subsequent complaint alleging that Harmonic’s Spectrum product infringes one patent held by Avid. The complaints seek injunctive relief and unspecified damages.

In November, 2012, FastVDO served a lawsuit on Harmonic, alleging infringement of a patent allegedly essential to the H.264 standard and that Harmonic encoders, transcoders, software and servers that use H.264 infringe their patent. The complaint seeks injunctive relief and unspecified damages.

At this time, the Company cannot predict the outcome of the above matters.

An unfavorable outcome on the Avid matters or the FastVDO matter referenced above or any other litigation matter could require that Harmonic pay substantial damages, or, in connection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Company from selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of such matters could have a material adverse effect on Harmonic’s business, operating results, financial position and cash flows.

Harmonic’s industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and other intellectual property rights against us or the Company’s customers. Such assertions arise in the normal course of the Company’s operations. The resolution of any such assertions and claims cannot be predicted with certainty.