Harmonic Annual Report 2012

Plain-text annual report

Table of Contents 2012 Annual ReportTable of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 Form 10-K (Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2012 ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File No. 000-25826 HARMONIC INC.(Exact name of Registrant as specified in its charter) Delaware 77-0201147(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)4300 North First StreetSan Jose, CA 95134(408) 542-2500(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)Securities registered pursuant to section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $.001 per share NASDAQ Global MarketSecurities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ¨ No xIndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant wasrequired to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. Yes ¨ No xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xBased on the closing sale price of the Common Stock on the NASDAQ Global Market on June 29, 2012, the aggregate market value of the votingCommon Stock held by non-affiliates of the Registrant was approximately $422,694,000. Shares of Common Stock held by each executive officer anddirector and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates.This determination of affiliate status is not necessarily a conclusive determination for other purposes.The number of shares outstanding of the Registrant’s Common Stock, $.001 par value, was 115,202,002 on February 7, 2013. DOCUMENTS INCORPORATED BY REFERENCEPortions of the Proxy Statement for the Registrant’s 2013 Annual Meeting of Stockholders (which will be filed with the Securities and ExchangeCommission within 120 days of the end of the fiscal year ended December 31, 2012) are incorporated by reference in Part III of this Annual Report onForm 10-K. Table of ContentsHARMONIC INC.FORM 10-KTABLE OF CONTENTS Page PART I ITEM 1 BUSINESS 4 ITEM 1A RISK FACTORS 16 ITEM 1B UNRESOLVED STAFF COMMENTS 39 ITEM 2 PROPERTIES 39 ITEM 3 LEGAL PROCEEDINGS 40 ITEM 4 MINE SAFETY DISCLOSURE 40 PART II ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES 41 ITEM 6 SELECTED FINANCIAL DATA 43 ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 44 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 59 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 60 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 98 ITEM 9A CONTROLS AND PROCEDURES 98 ITEM 9B OTHER INFORMATION 98 PART III ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 99 ITEM 11 EXECUTIVE COMPENSATION 99 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS 99 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 99 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES 99 PART VI ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 100 SIGNATURES 101 EXHIBIT INDEX 102 2Table of ContentsForward Looking StatementsSome of the statements contained in this Annual Report on Form 10-K are forward-looking statements that involve risk and uncertainties. Thestatements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, statementsregarding our expectations, beliefs, intentions or strategies regarding the future. In some cases, you can identify forward-looking statements by terminologysuch as, “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “intends,” “estimates,” “predicts,” “potential,” or “continue” or the negativeof these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding: • developing trends and demands in the markets we address, particularly emerging markets; • opportunities in the markets we address; • new and future products and services; • capital spending of our customers in 2013; • our strategic direction, future business plans and growth strategy; • industry and customer consolidation; • anticipated changes in economic conditions, particularly in certain geographies, and in financial markets; • the expected demand for and benefits of our products and services; • seasonality of revenue and concentration of revenue sources; • anticipated benefits of acquisitions; • potential future acquisitions; • anticipated results of potential or actual litigation; • our competitive environment; • the impact of governmental regulation; • the impact of uncertain economic times and markets; • anticipated revenue and expenses, including the sources of such revenue and expenses; • expected impacts of changes in accounting rules; • use of cash, cash needs and ability to raise capital; and • the condition of our cash investments.These statements are subject to known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materiallyfrom those implied by the forward-looking statements. Important factors that may cause actual results to differ from expectations include those discussed in“Risk Factors” beginning on page 16 in this Annual Report on Form 10-K. All forward-looking statements included in this Annual Report on Form 10-K arebased on information available to us on the date thereof, and we assume no obligation to update any such forward-looking statements. The terms “Harmonic,”the “Company,” “we,” “us,” “its,” and “our”, as used in this Annual Report on Form 10-K, refer to Harmonic Inc. and its subsidiaries and its predecessorsas a combined entity, except where the context requires otherwise. 3Table of ContentsPART I Item 1.BUSINESSOVERVIEWWe design, manufacture and sell versatile and high performance video infrastructure products and system solutions that enable our customers toefficiently create, prepare and deliver a full range of video services to consumer devices, including televisions, personal computers, tablets and mobile phones.Our revenue is derived from selling video processing and production and playout solutions and services to traditional video service providers, content owners,broadcasters and over-the-top, or OTT, video providers and selling network edge and access solutions and services to cable providers. Our products aredeployed by thousands of media companies or video service providers, a growing portion of which are located outside the United States. We derivedapproximately 57% of our revenue from our international customers in 2012.INDUSTRY OVERVIEWDemand for Video ServicesThe delivery of television programming and Internet-based information and communication services to consumers is converging, driven by changes inconsumer lifestyles, advances in technology and by changes in the regulatory and competitive environments. Viewers of video increasingly seek a morepersonalized and dynamic video experience that can be delivered to a variety of devices, ranging from widescreen high-definition and 3D televisions to mobileplatforms, including “smart” phones and tablet computers. In part driven by the growth in video consumption devices, the demand for video content,including through Pay-TV, has also increased, putting pressure on content providers to cost-effectively produce more high-quality content and make itavailable on as many consumer platforms as possible. Today, there are a number of developing trends that impact the broadcasting and television businessand the businesses of our customers who originate and deliver video programming. These trends distinctly impact both service providers and contentproviders in unique ways.Service Provider TrendsService providers face increasing competition for consumers of video content and are moving quickly to provide a more personalized, on-demand videoexperience to consumers. Consumers want to view video content at any time, from any location and on any device. Service providers face intense pressure tosatisfy these demands, and they see a number of trends, including the following, driving their business:On-Demand ServicesThe expanding use of digital video recorders and network-based video on demand, or VOD, services is leading to changes in the way subscribers watchtelevision programming in the home. Subscribers are increasingly utilizing “time-shifting” technology. Further advances in technology are accelerating thesetrends, with cable, satellite and telecommunications (“telcos”) operators announcing initiatives, often in conjunction with network broadcasters, toincreasingly personalize subscribers’ video viewing experience. Those initiatives include the delivery of programming directly to broadband enabled TV sets,tablet computers and other mobile devices, in addition to conventional TV sets.High-Definition TelevisionThe increasing popularity of HDTV, 3D and home theater equipment is putting competitive pressure on broadcasters and Pay-TV providers to offerhigher quality video signals for such high definition services, including initiatives to deliver video in ultra high resolution formats. At the end of 2012, leadingoperators in the U.S. were offering hundreds of national and local HD channels to their subscribers across the country and a similar trend is continuing togrow in international markets. 4Table of ContentsThe Internet and Other Video Distribution MethodsAs a competitive response to alternative video distribution models by Hulu and Netflix, as well as traditional broadcasters making their content availableon-line, traditional service providers are expanding their offering to allow their customers to stream video to a range of personal video devices. These newplatforms with either fixed or mobile broadband connections are rapidly gaining popularity and poised to become a major factor in the future of video. Webelieve that the delivery of video over internet protocol will continue to change traditional video viewing habits and distribution methods and also potentiallyalter the traditional subscription business model of the major Pay-TV service providers.Pay TV in Emerging MarketsWith a rapidly growing middle class across emerging markets, the Pay-TV business is poised for rapid growth over the coming decade. Consumerswho are entering the middle class are now able to afford a monthly video service to gain access to their favorite sports, news and movies. Considering the earlystages of economic development in many of these regions, together with the sheer scale of the population, it is conceivable that the leading video serviceproviders in these regions will grow and could become world leaders, and, as a result, the investments they will make in their infrastructure are likely torapidly trend upward.Branded ContentIn an attempt to differentiate their products in the competitive market, traditional service providers are looking to enhance their offerings by creating anddelivering their own branded content. This transition to branded content is being accomplished either by organic in-house development of new content oracquisition of existing and well established content brands. The historic demarcation point between traditional service providers (distributors) and contentowners (creators) will continue to become blurry over time.Content Provider TrendsAs the number of video consumption platforms increase and service provider competition creates more opportunities to reach consumers, contentproviders are facing increasing demands for more content and in many more formats. The process of producing and preparing content for multi-screendelivery means that content providers must become more efficient to keep up with demand. At the same time, content providers realize that their ownership ofcontent rights gives them market power, with many content providers now looking at launching their own content distribution initiatives to reach consumersdirectly. Several important trends, including the following, are impacting content providers.Demand for High-Quality HD ContentWith service providers adding more HD channels and consumers viewing HD television content on ever-larger screens and home theater environments,the demand for more and higher-quality HD programming continues to escalate. From sports to news to episodic to movies, content providers face increasingpressure to deliver the highest quality HD programming across all types of platforms, driving an accelerating transition from standard definition to HD.Content Format ProliferationAs service providers seek to deliver more video services to more devices and platforms, they are increasingly requiring content providers to supplycontent that is properly formatted for each device. With the number of devices continuing to grow, the lack of consistent video standards means that contentproviders must reformat and package their content in dozens of different formats so that their content is viewable across all of these different devices. 5Table of ContentsFragmentation of Revenue SourcesAs consumers divide their viewing across a wider range of devices, the revenues associated with content correspondingly are divided across all of thedifferent viewing outlets. While total content revenues, either from advertising or subscription fees, may remain stable or even increase, the amount of totalrevenue available to support any particular format or viewing platform may decrease, causing content providers to become more efficient and cost-effective inthe production and packaging of their content.Move to File-Based WorkflowsFrom newsrooms to Hollywood studios, there has been a growing shift from traditional tape-based acquisition and production to a more file-basedworkflow, where video content is captured, compressed, stored and edited as a file residing in a storage system. The move to video file-based productionstreamlines the production process because content can be more readily shared across multiple production applications and various media processing taskscan be performed on stored content in a “faster-than-real-time” manner. These trends are driving content providers to invest in video file infrastructure that willhelp them produce more content, faster and more cost-effectively, with server and storage solutions that will enable them to provide content in the widestpossible range of formats and at the highest possible quality.Content Creation in Emerging MarketsWith a rapidly growing middle class in emerging markets, media companies addressing these markets are aggressively investing in the creation of newcontent with the goal of creating strong brands and a growing loyal customer base. In addition, the sheer size of select emerging economies leads to regionalcontent creation targeted towards localized subject matters and demands, also boosting the overall potential for rapid content creation growth.Direct Access of ConsumersContent owners and media companies across the globe are experimenting with the notion of offering their content directly to the end consumer. Some ofthese efforts are in collaboration with their historic distribution partners (video service providers), such as HBO-GO, while others are in competition with thosepartners.The Market OpportunityPersonalized video services, such as VOD, and the increasing amounts of high resolution content, as well as an expanding amount of over-the-top videoservices, pose challenges to both content producers and service providers. For content producers, the increase in high-quality video consumption across thesenew services requires high-performance, reliable video production, transcoding and playout infrastructure in order to support the increased workload. Existingtape-based operations are inadequate for keeping up with the fast-paced demands for new content, new channels and new formats for video content. File-basedproduction storage, high-throughput media transformation and server-based playout enable content producers to meet these growing demands.For service providers, providing access to all these new forms of content requires more sophisticated video processing capabilities and greater bandwidthto the home in order to deliver maximum choice and flexibility to the subscriber. In addition, the delivery of live television and downloadable content tobroadband connected tablets and other mobile devices creates bandwidth constraints and network management challenges. The demand for more bandwidth-intensive video, voice and data content has strained existing communications networks, especially where video is received and processed, and in the “lastmile” of the communications infrastructure, where homes connect to the local network. The upgrade and extension of existing processing capabilities anddistribution networks, or the construction of completely new environments to facilitate the processing and 6Table of Contentsdelivery of high-speed broadband video, voice and data services, requires substantial expenditures and often the replacement of significant portions of theexisting infrastructure. As a result, service providers are seeking solutions that maximize the efficiency of existing available bandwidth and cost-effectivelymanage and transport digital traffic within networks, while minimizing the need to construct new networks for the distribution of video, voice and datacontent.Competition and DeregulationCompetition for traditional service providers in the cable and satellite markets has intensified as offerings from new entrants, such as telcos and OTTproviders, are beginning to attract customers. This increasingly competitive environment may lead to higher capital spending by some of the marketparticipants, particularly internationally, in an effort to deploy attractive service offerings, to capture and retain high revenue-generating subscribers, and toincrease overall average revenue per user, or ARPU from the existing customer base. While global economic trends were volatile throughout 2012, particularlyin Europe, this competitive dynamic appears to be continuing.Similar competitive factors and the continued liberalization of the regulatory environment in foreign countries have led to the establishment abroad ofnew or expanded businesses providing video services, either in distribution of content, creation of content or both. We believe this trend is likely to increasedue to growing disposable incomes and favorable macro economic trends in some foreign countries.Our Cable MarketTo address increasing competition, reduce loss of customers, increase ARPU and differentiate themselves, cable operators have embarked on severalinitiatives to improve their product offerings: • Continued introduction of bundled digital video, voice and high speed data services. • Expansion of VOD libraries and on-demand service offerings. • Refresh of the user experience with upgraded home set-top box solutions. • Launches of video delivery over IP to broadband enabled consumer devices, such as phones, tablets and TV. • Capacity enhancement of high-speed data services, using DOCSIS 3.0. • Expansion of network capacity to support the growing number of services, including HDTV in foreign markets. • Collaboration with content owners on offering access to on-line content for subscribers of premium content.To support this rapid expansion of service offerings, cable operators are investing in digital video equipment that can receive, process and distributecontent from a variety of sources to a growing number of consumer devices, video storage equipment and servers to ingest, store and intelligently distributeincreasing amounts of content, complemented by edge devices capable of routing, multiplexing and modulating in order to deliver signals to individualsubscribers over a hybrid fiber-coaxial, or HFC, network.Our Satellite MarketOver 100 satellite operators around the world have established digital television services that serve tens of millions of subscribers. These services arecapable of providing tens of thousands of channels, including an increasing number of high definition channels. These linear services will likely continue toexpand as operators offer premium packages targeted towards specific consumer groups, with the goal of gaining loyalty and 7Table of Contentsexpanding ARPU. In parallel, satellite operators have began offering the same linear services and VOD options to their customer base via broadband connectedconsumer devices such as smart phones, tablets and their own set-top boxes. These services are deployed in conjunction with content delivery networks(“CDNs”) and are accessible through partnerships, acquisitions or internal investments. To support much of these new services, satellite operators areconsidering an upgrade to their video infrastructure in order to provide a dual gain of bandwidth efficiency and operational optimization in an increasinglycomplex environment.Internationally, and specifically in emerging markets, satellite operators have continued to enjoy substantial growth in their customer base, drivenmainly by rapid economic development, which has resulted in a significantly growing middle class with disposable income. As this growth continues, it isexpected that these satellite operators will expand their product offerings in an effort to leverage the growing customer base and increase overall revenue.Our Telco MarketOver the past several years, telcos around the world have added video services as a competitive response to cable and satellite operators and as a potentialsource of revenue growth. As their businesses have grown and matured, they have also expanded their offerings in an effort to successfully compete in thevideo arena, including premium quality HD and 3D content, larger on-demand libraries, time-shift television services, bundled packages, multi-screenofferings to smart phones and tablets and branded mobile specific services. The last of these offerings is a key advantage they enjoy today, creating a cleardifferentiator in any-time, anywhere service offerings, as well as a rich library option for consumers looking to view content on the move.Our Terrestrial MarketIn the terrestrial broadcasting market, operators in many countries in Europe, Asia Pacific, Africa and South America are now required by regulation toconvert from analog to digital transmission in order to free up broadcast spectrum. The conversion to digital transmission often provides the opportunity todeliver new channels, HD services, premium content and interactive services. These broadcasters are faced with requirements of converting analog signals todigital signals prior to transmission over the air, as well as to distribute these new signals across a new terrestrial network.Our Broadcast and Media MarketsNetwork broadcasters, programmers and content owners need to transmit live programming of news and sports to their studios, to subsequentlybroadcast their content, and to deliver their content to video service providers for distribution to their subscribers. These broadcasters generally produce theirown news and sports highlight content, along with hundreds of channels of network programming that is played to air under strict reliability requirements.With our acquisition of Omneon in 2010, the broadcast and media market has grown to become our second largest market, representing approximately 32% ofour revenue in 2012.To successfully service consumers’ demands, media companies are expanding their offerings to support both a wide range of live/linear content, and tomake the content available in an on-demand manner. As a result, their transition towards automated file based workflows have accelerated and, accordingly,so have their needs for media servers, video optimized storage and transformation video products. In addition, and in an effort to optimize their operations,distribution networks responsible for moving content to the service providers are being upgraded to handle larger volumes of content in more efficient formatsand with greater flexibility.Other MarketsWe are addressing video processing and content creation opportunities with a variety of new video entrants, some of which distribute video viatraditional television channels or over-the-top and many of which use both methods of distribution. 8Table of ContentsCurrent Industry ConditionsMany of our customers, particularly our international customers in geographies other than Europe, appeared to have increased their capital expendituresin 2011 and 2012, compared to 2009 and 2010, and it is possible that the trends described in the previous sections above may continue to drive capitalinvestments in 2013, particularly in emerging markets. We expect capital spending by many of our international customers to continue at 2012 levels, orincrease, in 2013, and that capital spending by our U.S. customers may remain flat in 2013. Nevertheless, the global economic instability that exists today,particularly in Europe, and the potential worldwide adverse impact of that instability pose a significant risk that such expectation will not be met, as suchinstability may result in a tougher economic environment for our customers to access credit and to broaden their capital investments.PRODUCTSOur products generally fall into three principal categories; video production platforms and playout solutions, video processing solutions and edge andaccess products. We also provide technical support services and professional services to our customers worldwide. Our video production platforms consist ofvideo-optimized storage and content management applications that provide content companies with file-based infrastructure to support video content productionactivities, such as editing, post-production and finishing. Our playout solutions are based on scalable video servers used by content owners and multi-channeloperators for assembly and playout of one or more television channels. Our video processing solutions, which include network management software andapplication software products, provide broadband operators with the ability to acquire a variety of signals from different sources and in different protocols inorder to deliver a variety of real-time and stored content to their subscribers. Many of our customers also use these products to organize, manage and distributecontent in ways that maximize use of the available bandwidth. Our edge products enable cable operators to deliver customized broadcast or narrowcast on-demand and data services to their subscribers. Our access products, which consist mainly of optical transmission products, node platforms and return pathproducts, allow cable operators to deliver video, data and voice services over their distribution networks.Video Production Platforms and Playout SolutionsVideo servers. The Spectrum and MediaDeck video server products are used by broadcasters, content owners and multi-channel network operators tocreate and play-to-air television channels. Our servers support both standard and high definition programming, as well as many different media formats, suchas MPEG-2, MEPG-4, DV and AVC-Intra, using both QuickTime and MXF media wrapper formats. Typically our customers use our servers to recordincoming content from either live feeds or from tapes, encoding that content in real-time into standard media files that are stored in the server’s file system untilthe content is needed for playback as part of a scheduled playlist. Clips stored in the server are decoded in real-time and played to air according to a playoutschedule in a frame-accurate, back-to-back manner to create a seamless television channel.Video-optimized storage. The MediaGrid active storage system is a scale-out, network-attached storage system with a built-in media file system thathas been optimized for typical read and write file operations found in media production workflows. Architected as a clustered storage system with a distributedfile system, MediaGrid provides highly scalable storage capacity and access bandwidth to support demanding media production applications, such as videoediting, content transformation and media library management.Media Applications. Complementing our server and storage platforms, our Media Application Server or MAS, combined with a suite of integratedapplications, including ProXplore, ProBrowse and ProXchange, provides a basic level of integrated media management and workflow control over contentstored across our systems. For more complex media management, our underlying API, called Media Services Framework, allow both customers and otherapplication developers to build advanced media management applications that can automate many media processing and movement tasks, collect and organizecontent metadata, and provide search and review functionality. 9Table of ContentsVideo Processing SolutionsBroadcast encoders. Our Electra and Ion high performance encoders compress video, audio and data channels to low bit rates, while maintaining highvideo quality. Our encoders are available in standard and high definition formats in both MPEG-2, and the newer MPEG-4 AVC/H.264, or MPEG-4, videocompression standards, for both televisions and new multi-screen formats targeted at smart phones, tablets and broadband connected TVs. Our Electra 9000encoder supports all of these formats on the same hardware platform. Most of these encoders are used in real-time linear video applications, but they are alsoemployed in conjunction with our software in encoding of video content and storage for later delivery as VOD and time-shifted services.Contribution and distribution encoders. Our Ellipse encoders provide broadcasters with video compression solutions for on-the-spot news gathering,live sports coverage and other remote events. These products enable our customers to deliver these feeds to their studios for further processing. Broadcastersand other operators, such as teleports, also use these encoders for delivery of their programming to their customers, typically cable, telco and satelliteoperators.Stream processing and statistical multiplexing solutions. Our ProStream platform and other stream processing products offer our customers a varietyof capabilities that enable them to manage and organize digital streams in a format best suited to their particular delivery requirements and subscriberofferings. Our multi-function ProStream 1000 addresses multiplexing, encryption, ad insertion and other advanced processing requirements of MPEG videostreams and can be integrated with our DiviTrackIP statistical multiplexer, which enhances the bandwidth efficiency of our encoders by allowing bandwidthto be dynamically allocated according to the complexity of the video content. DiviTrackIP also enables operators to combine inputs from different physicallocations into a single multiplex.Content preparation and delivery for multi-screen applications. We offer a variety of content preparation, storage and delivery software basedsolutions that enable high-quality broadcast and on-demand video services on any device (TV, PC or mobile). Our ProMedia family of products provide live-based transcoding, packaging and time-shifting, file-based transcoding and workflow management solutions to facilitate content preparation in any format.Our MediaGrid active storage system provides scalable, high performance network-attached storage to store growing libraries of content. Our multi-screensolutions are used for a variety of applications, including live streaming, VOD, catch-up TV, start-over TV, network PVR through HTTP streaming andmulti-bitrate adaptive HTTP streaming.Decoders and descramblers. We provide our ProView integrated receivers-decoders to allow service providers to acquire content delivered via satellite,IP or terrestrial networks for distribution to their subscribers. These products are also used to decode signals backhauled from live news and sporting eventsin contribution applications and, more recently, are used by content owners looking to distribute their content in a controlled manner to a large base of videoservice providers.Management and control software. Our NMX Digital Service Manager gives service providers the ability to control and visually monitor their digitalvideo infrastructure at an aggregate level, rather than as just discrete pieces of hardware, thereby reducing their operational costs. Our NETWatch managementsystem operates in broadband networks to capture measurement data and our software enables the broadband service operator to monitor and control the HFCtransmission network from a master headend or remote locations. Our NMX Digital Service Manager and NETWatch software is designed to be integrated intolarger network management systems through the use of simple network management protocol, or SNMP.Edge and Access ProductsEdge products. Our Narrowcast Services Gateway family, or NSG, is a fully integrated edge gateway that integrates routing, multiplexing, scramblingand modulation into a single package for the delivery of narrowcast services to subscribers over cable networks. An NSG is usually supplied with singleGigabit Ethernet inputs or 10Table of Contentsmultiple Gigabit Ethernet inputs, allowing the cable operator to use bandwidth efficiently by delivering IP signals from the headend to the edge of the networkfor subsequent modulation onto the HFC network. Originally developed for VOD applications, our most recent NSG product, the high-density, multi-functionNSG 9000, may also be used in switched digital video and modular Cable Modem Termination Systems, or M-CMTS, applications, as well as large-scaleVOD deployments.Optical transmitters and amplifiers. Our family of optical transmitters and amplifiers operates at various optical wavelengths and serves both long-haul and local transport applications in the cable distribution network. The PWRLink series provides optical transmission primarily at a headend or hub forlocal distribution to optical nodes and for narrowcasting, which is the transmission of programming to a select set of subscribers. Our METROLink DenseWave Division Multiplexing, or DWDM, system allows operators to expand the capacity of a single strand of fiber and to provide narrowcast services directlyfrom the headend to nodes. We also offer SupraLink, a transmitter that allows deeper deployment of optical nodes in the network and minimizes thesignificant capital and labor expense associated with deploying additional optical fiber.Optical nodes and return path equipment. Our family of PWRBlazer optical nodes supports network architectures that meet the varying demands forbandwidth delivered to a service area. By the addition of modules providing functions such as return path transmission and DWDM, our configurable nodesare easily segmented to handle increasing two-way traffic over a fiber network without major reconstruction or replacement of our customers’ networks. Ourreturn path transmitters support two-way transmission capabilities by sending video, voice and data signals from the optical node back to the headend. Thesetransmitters are available for either analog or digital transport.Technical Support and Professional ServicesWe provide maintenance and support services to most of our customers under service level agreements that are generally renewed on an annual basis. Wealso provide consulting, implementation and integration services to our customers worldwide. We draw upon our expertise in broadcast television,communications networking and compression technology to design, integrate and install complete solutions for our customers, including integration withthird-party products and services. We offer a broad range of services, including program management, technical design and planning, parts inventorymanagement, building and site preparation, integration and equipment installation, end-to-end system testing and comprehensive training.CUSTOMERSWe sell our products to a variety of cable, satellite and telco, and broadcast and media companies. Set forth below is a representative list of oursignificant end user and integrator/distributor customers, based, in part, on revenue during 2012. United States InternationalCablevision Systems Alcatel LucentCenturylink Bell ExpressvuCharter Communications Capella TelecommunicationsComcast Cable Huawei TechnologiesCox Communications Klonex -VCSDirecTV NetoriumEchoStar Holding Rogers CommunicationsTRC Integration Sky Perfect JSAT Corp.Time Warner Cable Virgin MediaTurner Broadcasting Ziggo NVHistorically, a majority of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cabletelevision and direct broadcast satellite system companies. However, in 11Table of Contentsthe last few years, revenue from our ten largest customers has decreased as a percentage of revenue, due to our growing customer base, in part as a result of theacquisition of Scopus in 2009 and Omneon in 2010. Sales to our ten largest customers in 2012, 2011 and 2010 accounted for approximately 33%, 35% and44% of revenue, respectively. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, weexpect to see continuing industry consolidation and customer concentration.During 2012, 2011 and 2010, revenue from Comcast accounted for 12%, 11% and 17% respectively, of our revenue. The loss of Comcast or any othersignificant customer, any material reduction in orders by Comcast or any significant customer, or our failure to qualify our new products with a significantcustomer could materially and adversely affect our operating results, financial condition and cash flows. In addition, we are involved in most quarters in oneor more relatively large individual transactions, including, from time to time, projects in which we act much like a systems integrator. A decrease in thenumber of relatively larger individual transactions in which we are involved in any quarter could adversely affect our operating results for that quarter.SALES AND MARKETINGIn the U.S. we sell our products through our own direct sales force, as well as through independent distributors and integrators. Our direct sales team isorganized geographically and by major customers and markets to support customer requirements. We sell to international customers through our own directsales force, as well as through independent distributors and integrators. Our principal sales offices outside of the U.S. are located in Europe and Asia, and wehave a support center in Switzerland to support our international customers. International distributors are generally responsible for importing our products andproviding certain installation, technical support and other services to customers in their territory. Our direct sales force and distributors are supported by ahighly trained technical staff, which includes application engineers who work closely with operators to develop technical proposals and design systems tooptimize system performance and economic benefits to operators. Technical support provides a customized set of services, as required, for ongoingmaintenance, support-on-demand and training for our customers and distributors, both in our facilities and on-site.Our marketing organization develops strategies for product lines and markets and, in conjunction with our sales force, identifies the evolving technicaland application needs of customers so that our product development resources can be most effectively and efficiently deployed to meet anticipated productrequirements. Our marketing organization is also responsible for setting price levels, demand forecasting and general support of the sales force, particularly atmajor accounts. We have many programs in place to heighten industry awareness of our products, including participation in technical conferences,publication of articles in industry journals and exhibitions at trade shows.MANUFACTURING AND SUPPLIERSWe use third party contract manufacturers extensively to assemble our products and a substantial majority of subassemblies and modules for ourproducts. Our reliance on subcontractors involves several risks, and we may not be able to obtain an adequate supply of components, subassemblies,modules and turnkey systems on a timely basis. In 2003, we entered into an agreement with Plexus Services Corp. to act as our primary contractmanufacturer. Plexus currently provides us with a substantial majority, by dollar amount, of the products we purchase from our contract manufacturers. Thisagreement has automatic annual renewals, unless prior notice is given, and has been automatically renewed until October 2013. We do not generally maintainlong-term agreements with any of our contract manufacturers.Our internal manufacturing operations consist primarily of final assembly and testing of fiber optic systems. These processes are performed by highlytrained personnel, employing technologically advanced electronic equipment and proprietary test programs. The manufacturing of our products andsubassemblies is a complex process, and we cannot be sure that we will not experience production problems or manufacturing delays in the 12Table of Contentsfuture. Because we utilize our own manufacturing facilities for the final assembly and test of our fiber optic systems, and because such manufacturingcapabilities are not readily available from third parties, any interruption in our manufacturing operations could materially and adversely affect our business,operating results, financial position and cash flows.Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or alimited group of suppliers. For example, we are dependent on one company for certain video encoding chips that are incorporated into several of our products.Our reliance on sole or limited suppliers, particularly foreign suppliers, involves several risks, including a potential inability to obtain an adequatesupply of required components, subassemblies or modules and reduced control over pricing, quality and timely delivery of components, subassemblies ormodules for a number of reasons, including as a result of the impact of natural disasters on those suppliers. In particular, certain components have in the pastbeen in short supply and are available only from a small number of suppliers or from sole source suppliers. While we expend considerable efforts to qualifyadditional component sources, consolidation of suppliers in the industry and the small number of viable alternatives have limited the results of these efforts.We do not generally maintain long-term agreements with any of our suppliers.Managing our supplier relationships is particularly difficult during time periods in which we introduce new products or in which demand for ourproducts is increasing, especially if demand increases more quickly than we expect. An inability to obtain adequate and timely deliveries, or any othercircumstance that would require us to seek alternative sources of supply, could affect our ability to ship our products on a timely basis, which could damagerelationships with current and prospective customers and harm our business. We attempt to limit this risk by maintaining inventories of certain components,subassemblies and modules and through our demand order fulfillment system. As a result of this investment in inventories, we have in the past been, and inthe future may be, subject to a risk of excess and obsolete inventories, which could adversely affect our business and operating results.INTELLECTUAL PROPERTYAs of December 31, 2012, we held 59 issued U.S. patents and 22 issued foreign patents and had a number of patent applications pending. Although weattempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as tradesecrets and other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not beinvalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or futurepatent applications will be issued with the claims, or the scope of the claims, sought by us, if at all. For example, in October 2011 and June 2012, AvidTechnologies, Inc. sued us for patent infringement, alleging, in the first action, that our MediaGrid product infringes two patents held by Avid and, in thesecond action, that our Spectrum product infringes one patent held by Avid. We cannot assure you that others will not develop technologies that are similar orsuperior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright and trade secretprotection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.We generally enter into confidentiality or license agreements with our employees, consultants, vendors and customers as needed, and generally limitaccess to, and distribution of, our proprietary information. However, no assurances can be given that these actions will prevent misappropriation of ourtechnology. In addition, if necessary, we are prepared to take legal action, in the future, to enforce our patents and other intellectual property rights, to protectour trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Any suchlitigation could result in substantial costs and diversion of resources, including management time, and could negatively affect our business, operating results,financial position and cash flows. 13Table of ContentsIn order to successfully develop and market our products, we may be required to enter into technology development or licensing agreements with thirdparties. Although many companies are often willing to enter into such technology development or licensing agreements, we cannot assure you that suchagreements can be negotiated on reasonable terms or at all. The failure to enter into technology development or licensing agreements, when necessary, couldlimit our ability to develop and market new products and could harm our business.The markets we address are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent andother intellectual property rights. In particular, leading companies in the telecommunications industry, as well as an increasing number of companies whoseprincipal business is the ownership and exploitation of patents, have extensive patent portfolios. From time to time, third parties, including certain of thesecompanies, have asserted, and may in the future assert, exclusive patent, copyright, trademark and other intellectual property rights against us or ourcustomers. There can be no assurance that we will be able to defend against any claim that we are infringing upon their intellectual property rights, that theterms of any license offered by any person asserting such rights would be acceptable to us or our customers, or that failure to obtain a license or the costsassociated with any license would not materially and adversely affect our business, operating results, financial position and cash flows.BACKLOGWe schedule production of our products and solutions based upon our backlog, open contracts, informal commitments from customers and salesprojections. Our backlog consists of firm purchase orders by customers for delivery within the next twelve months, as well as deferred revenue that is expectedto be recognized within the succeeding twelve months. At December 31, 2012, backlog, including deferred revenue, was $132 million, compared to $125million at December 31, 2011. The increase in backlog at December 31, 2012, from December 31, 2011, was due to an increase in orders received underwhich product shipments had not been made. Delivery schedules on such orders may be deferred or canceled for a number of reasons, including reductions incapital spending by our customers or changes in specific customer requirements. In addition, due to annual capital spending budget cycles at many of ourcustomers, our backlog at December 31, 2012, or any other date, is not necessarily indicative of actual sales for any succeeding period.COMPETITIONThe markets for video infrastructure systems are extremely competitive and have been characterized by rapid technological change and declining averageselling prices. The principal competitive factors in these markets include product performance, reliability, price, breadth of product offerings, networkmanagement capabilities, sales and distribution capabilities, technical support and service, and relationships with network operators. We believe that wecompete favorably in each of these categories. Our competitors in digital video solutions include vertically integrated system suppliers, such as Motorola,Cisco Systems, Ericsson and Thomson Video Networks, and, in certain product lines, a number of smaller companies, including Envivio, RGB Networksand Elemental. In production and playout products, competitors include Harris (now The Gores Group), Grass Valley, Miranda and Avid. In edge devices andfiber optic access products, competitors include Motorola Mobility (acquired by Google in 2012), Cisco Systems, Aurora and Arris.Consolidation in the industry has led to the acquisition of several of our historic competitor companies. For example, Scientific Atlanta, TandbergTelevision, and BigBand Networks and C-Cor were acquired by Cisco Systems, Ericsson and Arris, respectively. Further, Arris recently announced that itwould be acquiring Motorola Home from Google’s Motorola Mobility unit. Consequently, most of our principal competitors are substantially larger and havegreater financial, technical, marketing and other resources than we have. Many of these larger organizations are in a better position to withstand any significantreduction in capital spending by customers in these markets and are often more capable of engaging in price-based competition for sales of products. Theyoften have broader product lines and market focus, and, therefore, will not be as susceptible to downturns in a 14Table of Contentsparticular market. In addition, many of our competitors have been in operation longer than we have and have more long-standing and established relationshipswith domestic and foreign customers. Further, a few of our competitors offer long-term lease financing to customers for products competitive with ours. Wemay not be able to compete successfully in the future and competition may harm our business, operating results, financial position and cash flows.If any of our competitors’ products or technologies were to become the industry standard, our business could be seriously harmed. In addition,companies that have historically not had a large presence in the broadband communications equipment market have expanded their market presence throughmergers and acquisitions. Further, our competitors may bundle their products or incorporate functionality into existing products in a manner that discouragesusers from purchasing our products or which may require us to lower our selling prices, which could adversely affect our revenue and result in lower grossmargins.RESEARCH AND DEVELOPMENTWe have historically devoted a significant amount of our resources to research and development. Research and development expenses in 2012, 2011, and2010 were $106.2 million, $102.7 million and $77.2 million, respectively. Our internal research and development activities are conducted primarily in theUnited States (California, Oregon, New York and New Jersey), Israel and Hong Kong.Our research and development program is primarily focused on developing new products and systems, and adding new features to existing productsand systems. Our development strategy is to identify features, products and systems, in both software and hardware solutions, that are, or are expected to be,needed by our customers. Our current research and development efforts are focused heavily on video processing solutions, including enhanced videocompression and multi-screen solutions. We also devote significant resources to production and playout and distribution solutions. Other research anddevelopment efforts are devoted to edge QAM devices for both video and data, and broadband optical products that enable the transmission of video over fiberoptic networks.Our success in designing, developing, manufacturing and selling new or enhanced products will depend on a variety of factors, including theidentification of market demand for new products, product selection, timely implementation of product design and development, product performance,effective manufacturing and assembly processes and sales and marketing. Because of the complexity inherent in such research and development efforts, wecannot assure you that we will successfully develop new products, or that new products developed by us will achieve market acceptance. Our failure tosuccessfully develop and introduce new products would materially and adversely affect our business, operating results, financial condition and cash flows.EMPLOYEESAs of December 31, 2012, we employed a total of 1,148 people, including 439 in research and development, 223 in sales, 179 in service and support,145 in operations, 57 in marketing (corporate and product), and 105 in a general and administrative capacity. There were 660 employees in the U.S. and 488employees in foreign countries located in South America, the Middle East, Europe, Asia, and Canada. We also employ a number of temporary employees andconsultants on a contract basis. None of our employees are represented by a labor union with respect to his or her employment by Harmonic. We have notexperienced any work stoppages, and we consider our relations with our employees to be good. Our future success will depend, in part, upon our ability toattract and retain qualified personnel. Competition for qualified personnel in the broadband communications industry and in the geographic areas where ourprimary operations are located remains strong, particularly for highly qualified technical personnel, and we cannot assure you that we will be successful inretaining our key employees or that we will be able to attract the key employees or highly qualified technical personnel we may require in the future. 15Table of ContentsABOUT HARMONICHarmonic was initially incorporated in California in June 1988 and reincorporated into Delaware in May 1995.In March 2009, we completed the acquisition of Scopus Video Networks, Ltd. The acquisition of Scopus was intended to strengthen our position ininternational video broadcast and contribution and distribution markets. Scopus provides complementary video processing technology, expanded research anddevelopment capability and additional sales and distribution channels, particularly in emerging markets.In September 2010, we completed the acquisition of Omneon, Inc., a private, venture-backed company specializing in file-based infrastructure for theproduction, preparation and playout of video content typically deployed by broadcasters, satellite operators, content owners and other media companies. Theacquisition of Omneon is complementary to our core business, expanding our customer reach into content providers and extending our product lines into videoservers and video-optimized storage for content production and playout.Our principal executive offices are located at 4300 North First Street, San Jose, California 95134. Our telephone number is (408) 542-2500. Our Internetwebsite is http://www.harmonicinc.com. Other than the information expressly set forth in this Annual Report on Form 10-K, the information contained orreferred to on our web site is not part of this report. Item 1A.RISK FACTORSWe depend on cable, satellite and telco, and broadcast and media industry capital spending for our revenue and any material decrease or delay incapital spending in any of these industries would negatively impact our operating results, financial condition and cash flows.Our revenue has been derived from sales to cable television operators, satellite and telco operators and broadcast and media companies, as well as, morerecently, emerging streaming media providers. We expect that these markets will provide our revenue for the foreseeable future. Demand for our products willdepend on the magnitude and timing of capital spending by customers in each of these markets for the purpose of creating, expanding or upgrading theirsystems.These capital spending patterns are dependent on a variety of factors, including: • impact of general economic conditions, actual and projected; • access to financing; • annual capital spending budget cycles of each of the industries we serve; • impact of industry consolidation; • federal, state, local and foreign government regulation of telecommunications, television broadcasting and streaming media; • overall demand for communication services and consumer acceptance of new video and data services; • competitive pressures, including pricing pressures; and • discretionary end-user customer spending patterns;In the past, specific factors contributing to reduced capital spending have included: • weak or uncertain economic and financial conditions in domestic or international markets; • uncertainty related to development of digital video industry standards; • delays in evaluations of new services, new standards and systems architectures by many operators; 16Table of Contents • emphasis by operators on generating revenue from existing customers, rather than from new customers, through construction, expansion orupgrades; • a reduction in the amount of capital available to finance projects of our customers and potential customers; • proposed and completed business combinations and divestitures by our customers and the length of regulatory review of each; • completion of a new system or significant expansion or upgrade to a system; and • bankruptcies and financial restructuring of major customers.In the past, adverse economic conditions in one or more of the geographies in which we offer our products have adversely affected our customers’ capitalspending in those geographies and, as a result, our business. In 2008, 2009 and the first half of 2010, economic conditions in many of the geographies inwhich we offer our products were very weak, and global economic conditions and financial markets experienced a severe downturn. The downturn stemmedfrom a multitude of factors, including adverse credit conditions, slower economic activity, concerns about inflation and deflation, rapid changes in foreignexchange rates, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions andliquidity concerns. Although there was an increase in global economic activity in the second half of 2010 and the first half of 2011, economic growth appearsto have become sluggish in some geographies since the middle of 2011, and weak in other geographies, particularly in Europe, since the beginning of 2012.Further, economic growth is expected to be sluggish in some geographies, and may continue to be weak in Europe, during 2013.The severity or length of time that economic and financial market conditions may be weak or sluggish, whether certain or all of such adverse factorswill persist, or whether a severe down turn may occur in the U.S., Europe or in other geographies, is unknown. During challenging or uncertain economictimes, and particularly in tight credit markets, many customers may delay or reduce capital expenditures, which often results in lower demand for ourproducts.Further, we have a number of international customers to whom sales are denominated in U.S. dollars. The value of the U.S. dollar fluctuatessignificantly against many foreign currencies, including the Euro and other local currencies of many of our international customers. If the U.S. dollarappreciates relative to the local currencies of our customers, then the prices of our products correspondingly increase for such customers. Such an effect couldadversely impact sales of our products to such customers and result in longer sales cycles, difficulties in collection of accounts receivable, slower adoption ofnew technologies and increased price competition in the affected countries. Also, if the U.S. dollar were to weaken against many foreign currencies, there canbe no assurance that a weaker dollar would lead to growth in capital spending.In addition, industry consolidation has in the past constrained, and may in the future constrain, capital spending by our customers. Further, if ourproduct portfolio and product development plans do not position us well to capture an increased portion of the capital spending of customers in the markets onwhich we focus, our revenue may decline.As a result of these capital spending issues, we may not be able to maintain or increase our revenue in the future, and our operating results, financialcondition and cash flows could be materially and adversely affected.The markets in which we operate are intensely competitive.The markets for our products are extremely competitive and have been characterized by rapid technological change and declining average sales prices inthe past. Pressure on average sales prices was particularly severe during previous economic downturns, including in 2008 and 2009, as equipment supplierscompeted aggressively for customers’ reduced capital spending, and we experienced similar pressure during the economic slowdown in the second half of 2011and in 2012. 17Table of ContentsIn the digital video solutions market, we compete broadly with products from vertically integrated system suppliers, including Motorola, CiscoSystems, Ericsson, and Thomson Video Networks and, in certain product lines, with a number of smaller companies. Our principal competitors for ourproduction and playout products are Harris (now The Gores Group), Grass Valley, Miranda and Avid. Our principal competitors for edge and accessproducts are Cisco Systems, Motorola Mobility (acquired by Google in 2012), Aurora and Arris.Many of our competitors are substantially larger, and have greater financial, technical, marketing and other resources than we have. Many of these largeenterprises are in a better position to withstand any significant reduction in capital spending by customers in our markets. They often have broader productlines and market focus, and may not be as susceptible to downturns in a particular market. These competitors may also be able to bundle their productstogether to meet the needs of a particular customer, and may be capable of delivering more complete solutions than we are able to provide. To the extent largeenterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise, competition would likely intensify.Further, some of our competitors that have greater financial resources have offered, and in the future may offer, their products at lower prices than weoffer for our competing products or on more attractive financing or payment terms, which has in the past caused, and may in the future cause, us to lose salesopportunities and the resulting revenue or to reduce our prices in response to that competition. Reductions in prices for any of our products could materiallyand adversely affect our operating margins and revenue. In addition, many of our competitors have been in operation longer than we have and, therefore, havemore long-standing and established relationships with domestic and foreign customers, making it difficult for us to sell to those customers.If any of our competitors’ products or technologies were to become the industry standard, our business would be seriously harmed. If our competitorsare successful in bringing their products to market earlier than us, or if these products are more technologically capable than ours, our revenue could bematerially and adversely affected. In addition, certain companies that have not had a large presence in the broadband communications equipment market havebegun to expand their presence in this market through mergers and acquisitions. The continued consolidation of our competitors could have a significantnegative impact on our business. Further, our competitors, particularly companies that offer products that are competitive with our digital video systems, maybundle their products or incorporate functionality into existing products in a manner that discourages users from purchasing our products or which mayrequire us to lower our selling prices, resulting in lower revenue and decreased gross margins.If we are unable to compete at the same level as we have in the past, in any of our markets, or are forced to reduce the prices of our products in order tocontinue to be competitive, our operating results, financial condition and cash flows would be materially and adversely affected.We need to develop and introduce new and enhanced products in a timely manner to meet the needs of our customers and to remain competitive.All of the markets we address are characterized by continuing technological advancement, changes in customer requirements and evolving industrystandards. To compete successfully, we must continually design, develop, manufacture and sell new or enhanced products that provide increasingly higherlevels of performance and reliability and meet our customers changing needs. However, we may not be successful in those efforts if, among other things, ourproducts: • are not cost effective; • are not brought to market in a timely manner; • are not in accordance with evolving industry standards; • fail to meet market acceptance or customer requirements; or • are ahead of the needs of their markets. 18Table of ContentsWe are currently developing and marketing products based on established video compression standards, such as MPEG-4 AVC/H.264, which providessignificantly greater compression efficiency, thereby making more bandwidth available to operators. We are also involved in research and development effortswith respect to products utilizing new technologies, such as high efficiency video coding, or “HEVC”. At the same time, we need to devote developmentresources to the existing MPEG-2 standard that many of our customers continue to require. There can be no assurance that these efforts will be successful inthe near future, or at all, or that our competitors will not take significant market share in encoding or transcoding.In order to attempt to meet fast paced, dynamic, evolving standards and customer requirements, we are intensifying our development efforts on productsthat will facilitate and enhance multi-screen applications, on media (“playout”) servers utilizing integrated channel playout, and on converged cable accessplatform (“CCAP”) products that are intended to address customers’ cost reduction efforts through the use of IP technology. Many of these products areintended to integrate existing and new features and functions in response to shifts in customer demands in the relevant market. The success of these significantand costly development efforts will be predicated, in substantial part, on the timing of market adoption of the new standards on which the resulting productsare based. If any of the new standards are not adopted or such adoption is earlier or later than we are predicting, we risk spending research and developmenttime and dollars on products that may never achieve market acceptance or introducing products that miss the customer demand window and thus do notproduce the revenue that a timely introduction would have likely produced.In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensingagreements with third parties. We cannot provide assurances that we will be able to timely enter into any necessary technology development or licensingagreements on reasonable terms, or at all.If we fail to develop and market new and enhanced products, our operating results, financial condition and cash flows could be materially andadversely affected.Conditions and changes in some national and global economic environments may adversely affect our business and financial results.Adverse economic conditions in geographic markets in which we operate may harm our business. As described in the first risk factor in this section,economic conditions in some countries in which we sell products were weak in 2008, 2009, the first half of 2010, the second half of 2011, and 2012. Thatweakness was principally the result of global financial markets having experienced a severe downturn, stemming from a multitude of factors, includingadverse credit conditions, slower economic activity, concerns about inflation and deflation, rapid changes in foreign exchange rates, increased energy costs,decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns. Global or regionaleconomic slowdowns have led many of our affected customers to decrease their expenditures and caused certain of our customers to reduce or delay orders forour products. Many of our international customers have been exposed to tight credit markets and depreciating currencies, further restricting their ability tobuild, expand or upgrade their networks. Some customers have had difficulty in servicing or retiring existing debt, and the financial constraints on certaininternational customers have, in the past, required us to significantly increase our allowance for doubtful accounts. It is possible that adverse economicconditions may return during 2013, on a regional or global basis, and it appears that weak economic conditions that reoccurred in most countries in Europe inthe second half of 2011 and in 2012, principally as a result of the European sovereign debt crisis, may continue in 2013.Beginning in the second quarter of 2011, the possible inability of some developed countries, including Greece, Italy, Ireland, Portugal and Spain, to meettheir debt payment obligations has put substantial strain, both direct and indirect, on economic conditions in those countries, in Europe and in many otherparts of the world, including the U.S. If one or more of the Euro-zone countries were to default on its sovereign debt, the adverse impact on European and othereconomies, including the U.S., could be severe. Further, the lowering of the 19Table of ContentsU.S. government’s credit rating in 2011 had an adverse affect on U.S. and international financial markets. Any further lowering of that credit rating, whetheras a result of the U.S. government failing to timely increase its debt limit or to take steps to reduce its deficit, or the impact of the U.S. government forcedreductions in spending due to sequestration, may have a material and adverse affect on the U.S. economy, and possibly the economies of most, if not all, ofthe other countries in the world. The impact of any of these issues, which appears to have negatively affected Europe in the second half of 2011 and in 2012and may continue to negatively affect Europe during 2013, could have a material adverse effect on our business, operating results, financial condition andcash flows.During challenging economic times, and in tight credit markets, many customers may delay or reduce capital expenditures. This could result inreductions in revenue of our products, longer sales cycles, difficulties in collection of accounts receivable, slower adoption of new technologies and increasedprice competition. If global economic and market conditions, or economic conditions in the U.S., Europe or other key markets, deteriorate, we could experiencea material and adverse effect on our business, results of operations, financial condition and cash flows.Our customer base is concentrated and we are regularly involved in relatively large transactions. The loss of one or more of our key customers, afailure to diversify our customer base, or a decrease in the number of such larger transactions could harm our business.Historically, a majority of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cabletelevision and direct broadcast satellite system companies. Over the last three fiscal years and particularly in 2012, revenue from our ten largest customersdecreased as a percentage of revenue, due to our growing customer base, in part as a result of the acquisitions of Scopus and Omneon. Nevertheless, sales toour ten largest customers in the fiscal years ended December 31, 2012, 2011 and 2010, accounted for approximately 33%, 35% and 44% of revenue,respectively. Although we are attempting to broaden our customer base by penetrating new markets and further expanding internationally, we expect to seecontinuing industry consolidation and customer concentration.In the fiscal years ended December 31, 2012, 2011 and 2010, revenue from Comcast accounted for approximately 12%, 11% and 17%, respectively, ofour revenue. The loss of Comcast or any other significant customer, any material reduction in orders by Comcast or any significant customer, or our failure toqualify our new products with a significant customer could materially and adversely affect, either long term or in a particular quarter, our operating results,financial condition and cash flows. In addition, we are involved in most quarters in one or more relatively large individual transactions, including, from timeto time, projects in which we act much like a systems integrator. A decrease in the number of the relatively larger individual transactions in which we areinvolved in any quarter could adversely affect our operating results for that quarter.As a result of these and other factors, we may be unable to increase our revenues from some or all of the markets we address, or to do so profitably, andany failure to increase revenues and profits from these customers could materially and adversely affect our operating results, financial condition and cashflows.We depend significantly on our international revenue and are subject to the risks associated with international operations, which may negativelyaffect our operating results.Revenue derived from customers outside of the U.S. in the fiscal years ended December 31, 2012, 2011 and 2010, represented approximately 57%,55%, and 50% of our revenue, respectively. The percentage of our revenue attributable to international operations primarily resulted from an increase in salesin the Asia Pacific region, particularly in the second half of 2012, offset by a decrease in sales in Europe, and a decrease in sales in the U.S., primarily to thesatellite market. However, although no assurances can be given with respect to international sales growth in any one or more regions, we expect thatinternational revenue is likely to continue to represent, from year to year, a substantial, if not growing, percentage of our annual revenue for the foreseeablefuture. Furthermore, most of our contract manufacturing occurs overseas. Our international operations, the international operations of our contractmanufacturers, and our efforts to maintain and increase revenue in 20Table of Contentsinternational markets are subject to a number of risks, which are generally greater with respect to emerging market countries, including the impact on ourbusiness and operating results of: • growth and stability of the economy in one or more international regions; • fluctuations in currency exchange rates; • changes in foreign government regulations and telecommunications standards; • import and export license requirements, tariffs, taxes and other trade barriers; • a significant reliance on distributors, resellers and others to sell our products and solutions, particularly in emerging market countries; • availability of credit, particularly in emerging market countries; • difficulty in collecting accounts receivable, especially from smaller customers and resellers, particularly in emerging market countries; • compliance with the U.S. Foreign Corrupt Practices Act, or FCPA, and the similar U.K. law, particularly in emerging market countries; • the burden of complying with a wide variety of foreign laws, treaties and technical standards; • fulfilling “country of origin” requirements for our products for certain customers; • difficulty in staffing and managing foreign operations; • political and economic instability, including risks related to terrorist activity, particularly in emerging market countries; • changes in economic policies by foreign governments; • lack of basic infrastructure, particularly in emerging market countries; and • impact of the recent escalating social and political unrest in the Middle East and resulting regime changes.In the past, certain of our international customers accumulated significant levels of debt and engaged in reorganizations and financial restructurings,including bankruptcy proceedings. Even where these restructurings have been completed, in some cases these customers have not been in a position topurchase new equipment at levels we had seen in the past.While our international revenue and operating expenses have typically been denominated in U.S. dollars, fluctuations in currency exchange rates couldcause our products to become relatively more expensive to customers in a particular country, leading to a reduction in revenue or profitability from sales in thatcountry. A portion of our European business is denominated in Euros, which subjects us to increased foreign currency risk. Gains and losses on theconversion to U.S. dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations maycontribute to fluctuations in our operating results.Furthermore, payment cycles for international customers are typically longer than those for customers in the U.S. Unpredictable payment cycles couldcause us to fail to meet or exceed the expectations of security analysts and investors for any given period.Our operations outside the U.S. also require us to comply with a number of U.S. and international regulations. For example, our operations in countriesoutside the U.S. are subject to the FCPA and similar laws, which prohibit U.S. companies or their agents and employees from providing anything of value toa foreign official for the purposes of influencing any act or decision of these individuals, in their official capacity, to help obtain or retain business, directbusiness to any person or corporate entity, or obtain any unfair advantage. Our activities in countries outside the U.S. create the inherent risk of unauthorizedpayments or offers of payments by one of our employees or agents, including those companies to which we outsource certain of our business 21Table of Contentsoperations, which could be in violation of the FCPA, even though these parties are not always subject to our control. We have internal control policies andprocedures with respect to FCPA compliance, have implemented FCPA training and compliance programs for our employees, and include in our agreementswith distributors and resellers a requirement that those parties comply with the FCPA. However, we cannot provide assurances that our policies, proceduresand programs will prevent violations of the FCPA or similar laws by our employees or agents, particularly in emerging market countries, and as we expandour international operations. Any such violation, even if prohibited by our policies, could result in criminal or civil sanctions against us.The effect of one or more of these international risks could have a material and adverse effect on our business, financial condition, operating results andcash flows.Our future growth depends on market acceptance of several broadband services, on the adoption of new broadband technologies, and on severalother broadband industry trends.Future demand for many of our products will depend significantly on the growing market acceptance of emerging broadband services, including digitalvideo, VOD, HDTV, IPTV, mobile video services (particularly streaming to tablet computers and other mobile devices), and very high-speed data services.The market demand for such emerging services is rapidly growing, with many de facto or proprietary systems in use, which increases the challenge ofdelivering interoperable products intended to address the requirements of such services.The effective delivery of these services will depend, in part, on a variety of new network architectures, standards and devices, such as: • video compression standards, such as high efficiency video coding (“HEVC”); • fiber to the premises, or FTTP, networks designed to facilitate the delivery of video services by telcos; • the greater use of protocols such as IP; • the converged cable access platform (“CCAP”); • the further adoption of bandwidth-optimization techniques, such as switched digital video and DOCSIS 3.0; and • the introduction of new consumer devices, such as advanced set-top boxes, personal video recorders (or PVRs), iPads and other tablet computers,and a variety of smartphone mobile devices.If adoption of these emerging services and/or technologies is not as widespread or as rapid as we expect, or if we are unable to develop new productsbased on these technologies on a timely basis, our operating results, financial condition and cash flows could be materially and adversely affected.Furthermore, other technological, industry and regulatory trends and requirements will affect the growth of our business. These trends and requirementsinclude the following: • convergence, or the need of network operators to deliver a package of video, voice and data services to consumers, including mobile deliveryoptions; • the increasing availability of traditional broadcast video content on the Internet; • adoption of high bandwidth wireless technology, such as 4 G-LTE; • the use of digital video by businesses, governments and educational institutions; • efforts by regulators and governments in the U.S. and abroad to encourage the adoption of broadband and digital technologies; • consumer interest in Ultra HDTV; • the need to develop partnerships with other companies involved in the new broadband services; 22Table of Contents • the extent and nature of regulatory attitudes towards such issues as network neutrality, competition between operators, access by third parties tonetworks of other operators, local franchising requirements for telcos to offer video, and other new services, such as mobile video; and • the outcome of litigation and negotiations between content owners and service providers regarding rights of service providers to store and distributerecorded broadcast content, which outcomes may drive adoption of one technology over another in some cases.If we fail to recognize and respond to these trends, by timely developing products, features and services required by these trends, we are likely to loserevenue opportunities and our operating results, financial condition and cash flows could be materially and adversely affected.We purchase several key components, subassemblies and modules used in the manufacture or integration of our products from sole or limitedsources, and we are increasingly dependent on contract manufacturers and other subcontractors.Many components, subassemblies and modules necessary for the manufacture or integration of our products are obtained from a sole supplier or alimited group of suppliers. For example, we depend on a small public company for certain video encoding chips which are incorporated into several products.Our reliance on sole or limited suppliers, particularly foreign suppliers, and our increasing reliance on contractors for manufacturing and installation,involves several risks, including a potential inability to obtain an adequate supply of required components, subassemblies or modules, reduced control overcosts, quality and timely delivery of components, subassemblies or modules, and timely installation of products. In particular, certain optical componentshave in the past been in short supply and are available only from a small number of suppliers, including sole source suppliers.These risks could be heightened during a substantial economic slowdown, because our suppliers and subcontractors are more likely to experienceadverse changes in their financial condition and operations during such a period. Further, these risks could materially and adversely affect our business if oneof our sole sources, or a sole source of one of our suppliers or contract manufacturers, is adversely affected by a natural disaster. While we expend resources toqualify additional component sources, consolidation of suppliers and the small number of viable alternatives have limited the results of these efforts.Managing our supplier and contractor relationships is particularly difficult during time periods in which we introduce new products and during time periodsin which demand for our products is increasing, especially if demand increases more quickly than we expect.From time to time we assess our relationship with our contract manufacturers, and we do not generally maintain long-term agreements with any of oursuppliers or contract manufacturers. Plexus Services Corp., which manufactures our products at its facilities in Malaysia, acts as our primary contractmanufacturer, and currently provides us with a substantial majority of the products that we purchase from our contract manufacturers. Our agreement withPlexus has automatic annual renewals, unless prior notice is given by either party, and has been automatically renewed until October 2013.Most of the products manufactured by our Israeli operations are outsourced to a single third party manufacturer located in Israel. Our ability to improveproduction efficiency with respect to those products had been limited, until 2012, by the terms of research grants that we received from the Israeli Office of theChief Scientist, or OCS, an arm of the Israeli government. These grants restricted the transfer outside of Israel of intellectual property developed with fundingfrom the OCS, and also limited the manufacturing outside of Israel of products containing such intellectual property. However, in 2012, the Company enteredinto an arrangement with the OCS that permits it to transfer a significant portion of such intellectual property, and manufacture products containing suchportion of intellectual property, outside of Israel.Difficulties in managing relationships with any of our current contract manufacturers, particularly Plexus, that manufacture our products off-shore,could impede our ability to meet our customers’ requirements and 23Table of Contentsadversely affect our operating results. An inability to obtain adequate and timely deliveries, or any other circumstance that would require us to seek alternativesources of supply, could negatively affect our ability to ship our products on a timely basis, which could damage relationships with current and prospectivecustomers and harm our business and materially and adversely affect our revenue and other operating results. We attempt to limit this risk by maintainingsafety stocks of certain components, subassemblies and modules. Increases, from time to time, in demand on our suppliers and subcontractors from otherparties have caused sporadic shortages of certain components and products. In response, we have increased our inventories of certain components andproducts and expedited shipments of our products when necessary, which has increased our costs. As a result of this investment in inventories, we have in thepast been, and in the future may be, subject to risk of excessive or obsolete inventories, which, despite our use of a demand order fulfillment model, couldmaterially and adversely affect our business, operating results, financial position and cash flows. In this regard, our gross margins and operating resultshave, in the past, been adversely affected by significant excess and obsolete inventory charges.Our ability to meet customer demand depends significantly on the availability of components and other materials, as well as the ability of our contractmanufacturers to scale their production, and because we purchase several key components, subassemblies and modules used in the manufacture or integrationof our products from sole or limited sources, the risk of not meeting customer demand is increased. Our ability to meet customer requirements depends in parton our ability to obtain sufficient volumes of these materials in a timely fashion. Increases in demand on our suppliers and subcontractors from othercustomers may cause sporadic shortages of certain components and products. In order to be able to respond to these issues, we have increased our inventoriesof certain components and products, particularly for our customers that order significant dollar amounts of our products, and expedited shipments ofcomponents, subassemblies and modules when necessary, which has increased our costs and could increase our risk of holding obsolete or excessiveinventory. We also employ a demand order fulfillment model which is designed to reduce the effects of increases or decreases in demand for any products.Nevertheless, we may be unable to respond to customer demand that increases more quickly than we expect. If we fail to meet customers’ supply expectations,our revenue would be adversely affected and we may lose business, which could materially and adversely affect our operating results, financial condition andcash flows.Our operating results are likely to fluctuate significantly and, as a result, may fail to meet or exceed the expectations of securities analysts orinvestors, causing our stock price to decline.Our operating results have fluctuated in the past and are likely to continue to fluctuate in the future, on an annual and a quarterly basis, as a result ofseveral factors, many of which are outside of our control. Some of the factors that may cause these fluctuations include: • the level and timing of capital spending of our customers, in the U.S., Europe and in other foreign markets, due in part to access to financing,including credit, for capital spending; • economic and financial conditions specific to each of the cable, satellite and telco, and broadcast and media industries; • changes in market demand for our products or our customers’ services or products; • the timing and amount of orders, especially from our significant customers; • general economic and financial markets conditions, whether global or in certain geographic areas; • the mix of our products sold and the effect it has on gross margins; • the timing of revenue recognition from solution contracts, which may span several quarters; • changes in the number and size of relatively large individual transactions, and projects in which we are involved, from quarter to quarter; • the timing of revenue recognition on sales arrangements; • the timing of acquisitions and the financial impact of such acquisitions; 24Table of Contents • the timing of completion of our customers’ projects; • the length of each customer product upgrade cycle and the volume of purchases during the cycle; • competitive market conditions, including pricing actions by our competitors; • lack of predictability in our revenue cycles; • the level and mix of our international revenue; • new product introductions by our competitors or by us; • changes in domestic and international regulatory environments affecting our business; • market acceptance of our products, particularly our new products; • the evaluation of new services, new standards and system architectures by our customers; • the cost and timely availability to us of components, subassemblies and modules; • the mix of our customer base, by industry and size, and sales channels; • changes in our operating and extraordinary expenses; • impairment of our goodwill and intangibles; • the impact of litigation, such as related litigation expenses and settlement costs; • write-downs of inventory and investments; • whether the research and development tax is renewed for 2014 and beyond; • changes in our effective federal tax rate, including as a result of changes in our valuation allowance against our deferred tax assets, and changes inour effective state tax rates, including as a result of apportionment; • changes in our mix of domestic versus international revenue; • changes to tax rules related to the deferral of foreign earnings and compliance with foreign tax rules; • the impact of applicable accounting guidance on accounting for uncertainty in income taxes that requires us to establish reserves for uncertain taxpositions and accrue potential tax penalties and interest; • the impact of applicable accounting guidance on business combinations that requires us to record charges for certain acquisition related costs andexpenses and generally to expense restructuring costs associated with a business combination subsequent to the acquisition date; and • the timing of our development of custom products and software.The timing of deployment of our products by our customers can be subject to a number of other risks, including the availability of skilled engineeringand technical personnel, the availability of third party equipment and services, our customers’ ability to negotiate and enter into rights agreements with videocontent owners that provide the customers with the right to deliver certain video content, and our customers’ need for local franchise and licensing approvals.We often recognize a substantial portion of our quarterly revenue in the last month of the quarter. We establish our expenditure levels for productdevelopment and other operating expenses based on projected revenue levels for a specified period, and expenses are relatively fixed in the short term.Accordingly, even small variations in the timing of revenue, particularly from relatively large individual transactions, can cause significant fluctuations inoperating results in a particular quarter. 25Table of ContentsAs a result of these factors and other factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securitiesanalysts or investors. In that event, the trading price of our common stock would likely decline.Fluctuations in our future effective tax rates, or the outcome of tax audits, could affect our future operating results, financial condition and cashflows.We are required to periodically review our deferred tax assets and determine whether, based on available evidence, a valuation allowance is necessary.Accordingly, we have performed such evaluation, from time to time, based on historical evidence, trends in profitability, expectations of future taxable incomeand implemented tax planning strategies. We continue to maintain a valuation allowance for certain foreign and California deferred tax assets. In the event, inthe future, we determine an additional valuation allowance is necessary with respect to our U.S. state or foreign deferred tax assets, we would incur a chargeequal to the amount of the valuation allowance, as a discrete item, in the period in which we made such determination and this could have a material andadverse effect on our operating results for such period.The calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize potential liabilitiesfor anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Inthe event we determine that it is appropriate to create a reserve or increase an existing reserve for any such potential liabilities, the amount of the additionalreserve is charged as an expense in the period in which it is determined. If payment of these amounts ultimately proves to be unnecessary, the reversal of theliabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If the estimate of tax liabilitiesproves to be less than the ultimate tax assessment for the applicable period, a further charge to expense in the period such short fall is determined would result.Either such charge to expense could have a material and adverse effect on our results of operations for the applicable period.In addition, recent statements from the Internal Revenue Service have indicated their intent to seek greater disclosure by companies of their reserves foruncertain tax positions.Our 2008, 2009 and 2010 U.S. corporate income tax returns are presently being audited by the Internal Revenue Service. These audits commenced in thesecond quarter of 2011. A subsidiary of the Company is under an audit, which commenced in the first quarter of 2012, by the Israel tax authority for theyears 2007 through 2010. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the U.S. or Israel is for an amount in excess ofthe tax provision we have recorded in the applicable period, our overall tax expense, effective tax rate, operating results and cash flow could be materially andadversely impacted in the period of adjustment.We requested an Advanced Pricing Agreement with the Internal Revenue Service regarding our non-exclusive license of our intellectual property rights toone of our international subsidiaries in 2008 and our sharing of research and development costs with our international subsidiaries. We completed the samenon-exclusive license of Omneon intellectual property in the fourth quarter of 2010, upon the closing of the Omneon acquisition. Recently, we withdrew ourrequest for the Advanced Pricing Agreement with the Internal Revenue Service with respect to our initial non-exclusive license of intellectual property. As notedabove, our U.S. corporate tax returns for both 2008 and 2010 are presently being audited by the Internal Revenue Service. If the Internal Revenue Service, inconnection with such audit or otherwise, were to disagree with our tax treatment of either of such non-exclusive licenses, we may be required to take a charge toexpense related to such disagreement, which could have a material and adverse effect on our operating results in the period in which the charge is taken.We continue to be in the process of expanding our international operations and staffing to better support our expansion into international markets. Thisexpansion involves the implementation of an international structure that includes, among other things, an international support center in Europe, a researchand development cost- 26Table of Contentssharing arrangement, and certain licenses and other contractual arrangements between us and our wholly-owned domestic and foreign subsidiaries. As a resultof these changes, we anticipate that our consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when compared to the U.S. federalstatutory tax rate and, as a consequence, our effective income tax rate is expected to be lower than the U.S. federal statutory rate.Our future effective income tax rates could be adversely affected if tax authorities challenge our international tax structure or if the relative mix of U.S.and international income changes for any reason. Accordingly, there can be no assurance that our income tax rate will be less than the U.S. federal statutoryrate in future periods.We or our customers may face intellectual property infringement claims from third parties.Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. In particular, leading companies in the telecommunications industry have extensive patent portfolios. From time to time, thirdparties have asserted, and may assert in the future, patent, copyright, trademark and other intellectual property rights against us or our customers. Oursuppliers and their customers, including us, may have similar claims asserted against them. A number of third parties, including companies with greaterfinancial and other resources than us, have asserted patent rights to technologies that are important to us.Any intellectual property litigation, regardless of its outcome, could result in substantial expense and significant diversion of the efforts of ourmanagement and technical personnel. An adverse determination in any such proceeding could subject us to significant liabilities and temporary or permanentinjunctions and require us to seek licenses from third parties or pay royalties that may be substantial. Furthermore, necessary licenses may not be available onterms satisfactory to us, or at all. An unfavorable outcome on any such litigation matter could require that we pay substantial damages, could require that wepay ongoing royalty payments, or could prohibit us from selling certain of our products. Any such outcome could have a material and adverse effect on ourbusiness, operating results, financial condition and cash flows.In October 2011, Avid Technology, Inc. filed a complaint in the United States District Court for the District of Delaware, alleging that our Media Gridproduct infringes two patents held by Avid. In June 2012, Avid served a subsequent complaint, alleging that Harmonic’s Spectrum product infringes onepatent held by Avid. The complaints seek injunctive relief and damages. At this time, we cannot predict the outcome of either of these matters. An unfavorableoutcome of either of these matters, or any other intellectual property infringement action, could materially and adversely affect our business, operating results,financial position and cash flows.Our suppliers and customers may have intellectual property claims relating to our products asserted against them. We have agreed to indemnify some ofour suppliers and most of our customers for patent infringement relating to our products. The scope of this indemnity varies, but, in some instances, includesindemnification for damages and expenses (including reasonable attorney’s fees) incurred by the supplier or customer in connection with such claims. If asupplier or a customer seeks to enforce a claim for indemnification against us, we could incur significant costs defending such claim, the underlying claim orboth. An adverse determination in either such proceeding could subject us to significant liabilities and have a material and adverse effect on our operatingresults, cash flows and financial condition.We may be the subject of litigation which, if adversely determined, could harm our business and operating results.In addition to the litigation discussed elsewhere herein, we may be subject to claims arising in the normal course of business. The costs of defending anylitigation, whether in cash expenses or in management time, could harm our business and materially and adversely affect our operating results and cash flows.An unfavorable 27Table of Contentsoutcome on any litigation matter could require that we pay substantial damages, or, in connection with any intellectual property infringement claims, couldrequire that we pay ongoing royalty payments or prohibit us from selling certain of our products. In addition, we may decide to settle any litigation, whichcould cause us to incur significant settlement costs. A settlement or an unfavorable outcome on any litigation matter could have a material and adverse affect onour business, operating results, financial condition and cash flows.As an example, we have received letters from several of our customers, notifying us that the customer intends to exercise its indemnification rights inagreements between the customer and us with respect to a patent infringement claim brought against the customer that may cover products sold to the customerby Harmonic or its acquired companies. Many of these notices arise out of a spate of patent infringement claims, and related litigation, brought by theMultimedia Patent Trust (“MPT”), an affiliate of Alcatel-Lucent, against end-users of products used in the industries we address. Any such litigation by MPTmay be very expensive to defend, and there could be significant financial exposure to each of such customers if MPT is successful in such litigation or inextracting a settlement of such claims. Few of the notices we have received from a customer with respect to its indemnification rights related to the MPTlitigation have demanded that we provide a defense for the customer against such claims or litigation or currently reimburse the customer for its costs of suchdefense. We cannot predict whether the claims by MPT are legitimate or actually cover any of our products, whether the claims are likely to result in asettlement or judgment against a customer defendant (although some such settlements have occurred), or whether we would have liability under ourindemnification obligations for defense or settlement costs or damages paid by any customer defendant. In the event one or more of our other customers makesa written indemnification claim against us with respect to a specific amount of defense or settlement costs or damages it suffers as a result of such MPTclaims or litigation, we may be obligated to pay amounts to such customer(s) that, either individually or in the aggregate, could materially and adversely affectour operating results, financial condition and cash flows.We rely on distributors, value-added resellers and systems integrators for a significant portion of our revenue, and disruptions to, or our failureto develop and manage our relationships with these customers and the processes and procedures that support them could adversely affect ourbusiness.We generate a significant percentage of our revenue through sales to distributors, value-added resellers, or VARs, and systems integrators that assist uswith fulfillment or installation obligations. We expect that these sales will continue to generate a significant percentage of our revenue in the future. Further, ourreliance on VARs and systems integrators that specialize in video delivery solutions, products and services has increased since the completion of ouracquisition of Omneon in 2010. Accordingly, our future success is highly dependent upon establishing and maintaining successful relationships with avariety of channel partners.We generally have no long-term contracts or minimum purchase commitments with any of our distributor, VAR or system integrator customers, and ourcontracts with these parties do not prohibit them from purchasing or offering products or services that compete with ours. Our competitors may provideincentives to any of our distributor, VAR or systems integrator customers to favor their products or, in effect, to prevent or reduce sales of our products. Anyof our distributor, VAR or systems integrator customers may independently choose not to purchase or offer our products. Many of our distributors, VARs andsystem integrators are small, are based in a variety of international locations, and may have relatively unsophisticated processes and limited financialresources to conduct their business. Any significant disruption of our sales to these customers, including as a result of the inability or unwillingness of thesecustomers to continue purchasing our products, or their failure to properly manage their business with respect to the purchase of and payment for ourproducts, could materially and adversely affect our business, operating results, financial condition and cash flows. In addition, our failure to continue toestablish or maintain successful relationships with distributor, VAR and systems integrator customers could likewise materially and adversely affect ourbusiness, operating results, financial condition and cash flows. 28Table of ContentsChanges in telecommunications legislation and regulations could harm our prospects and future revenue.Changes in telecommunications legislation and regulations in the U.S. and other countries could affect the revenue from our products. In particular,regulations dealing with access by competitors to the networks of incumbent operators could slow or stop additional construction or expansion by theseoperators. Increased regulation of our customers’ pricing or service offerings could limit their investments and, consequently, revenue from our products. Theimpact of new or revised legislation or regulations could have a material adverse effect on our business, operating results, financial condition and cash flows.Recently adopted Federal laws will likely impact the demand for product features by our customers. These laws include the Commercial AdvertisementLoudness Mitigation Act and the Twenty-First Century Communications and Video Accessibility Act of 2010, which deals with accessibility for the hearingand visually impaired. While we have added some features to our products in anticipation of these laws, others (driven by the regulatory process related to thelaws) may require feature development on a schedule which may be inflexible and difficult to meet. This could result in our inability to develop other productfeatures necessary for particular transactions at the same time, and thus we could lose some business and the related revenue.The ongoing threat of terrorism, social and political instability and tensions among countries have created uncertainty and may harm ourbusiness.Conditions in the U.S. and global economies improved from mid-2010 to mid-2011, but remain uncertain. The terrorist attacks in the U.S. in 2001,subsequent and continuing attempted and accomplished terrorist attacks in other parts of the world, and the threat of future attacks have created manyeconomic and political uncertainties that have adversely impacted the global economy and, as a result, have adversely affected our business. The long-termeffects of such attacks, the threat of future attacks, the ongoing war on terrorism, recent increased social and political instability and regime changes,particularly in the Middle East, and tensions among countries, including between Iran and Israel and the U.S., on our business and the global economyremain uncertain. Such uncertainty has increased the price of certain commodities, particularly oil, which could have an indirect material and adverse impacton the cost of manufacturing and shipping our products. Moreover, the potential for future terrorist attacks, including hacking attacks on government andcommercial computer systems, increases in such social and political instability and such tensions, particularly if Israel or any other country were to attackany of Iran’s nuclear development facilities, make it difficult to estimate the long-term stability and strength of the U.S. and other economies, particularlythose in certain emerging market countries and certain European countries, and the impact of resulting economic conditions on our business.We face risks associated with having important facilities and resources located in Israel.We maintain facilities in two locations in Israel with a total of 221 employees, or approximately 19% of our worldwide workforce, as of December 31,2012. Our employees in Israel engage in a number of activities, including research and development, the development of, and supply chain management for,one product line, and sales activities.We are directly influenced by the political, economic and military conditions affecting Israel. Any significant conflict involving Israel could have a directeffect on our business or that of our Israeli contract manufacturers, in the form of physical damage or injury, reluctance to travel within, or to or from, Israelby our Israeli and other employees or those of our subcontractors, or the loss of Israeli employees to active military duty. Most of our employees in Israel arecurrently obligated to perform annual reserve duty in the Israel Defense Forces, and approximately 15% of those employees were called for active military dutyin 2012. In the event that more employees are called to active duty, certain of our research and development activities may be adversely affected, includingsignificantly delayed. In addition, the interruption or curtailment of trade between Israel and its trading partners, as a result of terrorist attacks or hostilities,conflicts between Israel and any other Middle Eastern country, or any other cause, could significantly harm our business. Current or future tensions in theMiddle East could materially and adversely affect our business, operating results, financial condition and cash flows. 29Table of ContentsWe have made, and expect to continue to make, acquisitions, and any acquisition could disrupt our operations, cause dilution to our stockholdersand materially and adversely affect our business, operating results, cash flows and financial condition.As part of our business strategy, from time to time we have acquired, and we continue to consider acquiring, businesses, technologies, assets andproduct lines that we believe complement or expand our existing business. In 2010, we completed the acquisition of Omneon, a privately-held company thatprovides broadcast video server and storage systems used for video production and play-to-air workflows. It is possible that we will make additionalacquisitions, from time to time, in the future.We may face challenges as a result of these acquisition activities, because such activities entail numerous risks, including: • the possibility that an acquisition may not close because of, among other things, a failure of a party to satisfy the conditions to closing or anacquisition target entering into an alternative transaction; • unanticipated costs or delays associated with the acquisition; • difficulties in the assimilation and integration of acquired operations, technologies and/or products; • the diversion of management’s attention from the regular operations of the business during the acquisition process; • the challenges of managing a larger and more geographically widespread operation and product portfolio after the closing of the acquisition; • difficulties in integrating acquired companies’ systems, controls, policies and procedures, particularly to comply with the internal control overfinancial reporting requirements of the Sarbanes-Oxley Act of 2002; • adverse effects on new and existing business relationships with suppliers, contract manufacturers and customers; • channel conflicts and disputes between distributors and other partners of ours and the acquired companies; • potential difficulties in completing projects associated with in-process research and development; • risks associated with entering markets in which we may have no or limited prior experience; • the potential loss of key employees of acquired businesses; • difficulties in the assimilation of different corporate cultures and practices; • difficulties in bringing acquired products and businesses into compliance with applicable legal requirements in jurisdictions in which we operateand sell products; • substantial charges for acquisition costs, which are required to be expensed under accounting guidance on business combinations; • substantial charges for the amortization of certain purchased intangible assets, deferred stock compensation or similar items; • substantial impairments to goodwill or intangible assets in the event that an acquisition proves to be less valuable than the price we paid for it; • delays in realizing, or failure to realize, the anticipated benefits of an acquisition or disposal; and • the possibility that any acquisition or disposal may be viewed negatively by our customers or investors or the financial markets. 30Table of ContentsCompetition within our industry for acquisitions of businesses, technologies, assets and product lines has been, and is likely to continue to be, intense.As such, even if we are able to identify an acquisition that we would like to consummate, we may not be able to complete the acquisition on commerciallyreasonable terms or because the target chooses to be acquired by another company. Furthermore, in the event that we are able to identify and consummate anyfuture acquisitions, we may, in each of those acquisitions: • issue equity securities which would dilute current stockholders’ percentage ownership; • incur substantial debt to finance the acquisition or assume substantial debt in the acquisition; • incur significant acquisition-related expenses; • assume substantial liabilities, contingent or otherwise; or • expend significant cash.These financing activities or expenditures could materially and adversely affect our operating results, cash flows and financial condition or the price ofour common stock, or both. Alternatively, due to difficulties in the capital or credit markets, we may be unable to secure capital on reasonable terms, or at all,necessary to complete an acquisition.Moreover, even if we were to obtain benefits from acquisitions in the form of increased revenue and earnings per share, there may be a delay between thetime the expenses associated with an acquisition are incurred and the time we recognize such benefits.As of December 31, 2012, we have approximately $213 million of goodwill recorded on our balance sheet associated with prior acquisitions. In the eventwe determine that our goodwill is impaired, we would be required to write down all or a portion of such goodwill, which could result in a material non-cashcharge to our results of operations in the period in which such write-down occurs.If we are unable to successfully address any of these risks, our business, operating results, financial condition and cash flows could be materially andadversely affected.We may sell one or more of our product lines, from time to time, as a result of our evaluation of our products and markets, and any suchdivestiture could adversely affect our expenses, revenues, results of operation, cash flows and financial position.We periodically evaluate our various product lines and may, as a result, consider the divestiture of one or more of those product lines. Any suchdivestiture could adversely affect our expenses, revenues, results of operations, cash flows and financial position.On February 18, 2013, we entered into an Asset Purchase Agreement with Aurora Networks pursuant to which we agreed to sell our cable access HFCbusiness (the “Business”) for $46 million in cash. Although no assurance can be given as to whether and when this transaction will close, it is presentlyscheduled to close on March 4, 2013, and may be terminated by either party if it does not close by March 29, 2013. In 2012, revenue from this Business wasapproximately $53 million, which represented approximately 10% of our revenue for the year.Divestitures of product lines have inherent risks, including the expense of selling the product line, the possibility that any anticipated sale will notoccur, possible delays in closing any sale, the risk of lower-than-expected proceeds from the sale of the divested business, unexpected costs associated with theseparation of the business to be sold from the seller’s information technology and other operating systems, and potential post-closing claims forindemnification. Expected cost savings, which are offset by revenue losses from divested businesses, may also be difficult to achieve or maximize due to theseller’s fixed cost structure, and a seller may experience varying success in reducing fixed costs or transferring liabilities previously associated with thedivested business. 31Table of ContentsThe sale of the Business, if it closes, would reduce future annual potential revenue, likely in the range of $50 million to $55 million, future annualexpenses, including cost of sales, likely in the range of $45 million to $50 million, and cash flow. With this reduction in revenue and cash flow, the salecould also have an adverse affect on our results of operations and financial position. A failure of the sale to close would have a material effect on our expensesin the quarter in which it is scheduled to close.Broadband communications markets are characterized by rapid technological change.Broadband communications markets are subject to rapid changes, making it difficult to accurately predict the markets’ future growth rates, sizes ortechnological directions. In view of the evolving nature of these markets, it is possible that pay TV service providers, broadcasters, content providers andother video production and delivery companies will decide to adopt alternative architectures, new business models, and/or technologies that are incompatiblewith our current or future products. In addition, successful new entrants into the media markets, both domestic and international, may impact existingindustry business models, resulting in decreased spending by our existing customer base. Finally, decisions by customers to adopt new technologies orproducts are often delayed by extensive evaluation and qualification processes, which can result in delays in revenue from current and new products. If we areunable to design, develop, manufacture and sell products that incorporate, or are compatible with, these new architectures or technologies, our business,operating results, financial condition and cash flows would be materially and adversely affected.Our operating results could be adversely affected by natural disasters affecting the Company or impacting our third-party manufacturers,suppliers, distributors or customers.Our headquarters and the majority of our operations are located in California, which is prone to earthquakes. In the event that any of our businesscenters are adversely affected by an earthquake or by any other natural disaster, we may sustain damage to our operations and properties, which could cause asustained interruption or loss of affected operations, and cause us to suffer significant financial losses.We rely on third-party manufacturers for the production of most of our products. Any significant disruption in the business or operations of suchmanufacturers or of our suppliers could adversely impact our business. Our principal third-party manufacturer and several of our suppliers and distributorshave operations in locations that are subject to natural disasters, such as severe weather, tsunamis, floods and earthquakes, which could disrupt theiroperations and, in turn, our operations.In addition, if there is a major earthquake or other natural disaster in any of the locations in which our significant customers are located, we face therisk that our customers may incur losses or sustained business interruption, or both, which may materially impair their ability to continue their purchase ofproducts from us. Accordingly, a major earthquake or other natural disaster in one of the geographies in which we, or our third-party manufacturers,suppliers or customers, operate could have a material and adverse effect on our business, operating results, cash flows and financial condition.In order to manage our growth, we must be successful in addressing management succession issues and attracting and retaining qualifiedpersonnel.Our future success will depend, to a significant extent, on the ability of our management to operate effectively, both individually and as a group. Wemust successfully manage transition and replacement issues that may result from the departure or retirement of members of our executive management,whether in the context of an acquisition or otherwise. We cannot provide assurances that changes of management personnel in the future would not causedisruption to operations or customer relationships or a decline in our operating results.We are also dependent on our ability to retain and motivate our existing highly qualified personnel, in addition to attracting new highly qualifiedpersonnel. Competition for qualified management, technical and other personnel is often intense, and we may not be successful in attracting and retaining suchpersonnel. Competitors 32Table of Contentsand others have in the past attempted, and are likely in the future to attempt, to recruit our employees. While our employees are required to sign standardagreements concerning confidentiality and ownership of inventions, we generally do not have employment contracts or non-competition agreements with any ofour personnel. The loss of the services of any of our key personnel, the inability to attract or retain highly qualified personnel in the future or delays in hiringsuch personnel, particularly senior management and engineers and other technical personnel, could negatively affect our business and operating results.We may not be able to effectively manage our operations.In recent years, the Company has grown significantly, principally through acquisitions, and expanded our international operations. Upon the closing ofour acquisition of Scopus in 2009, we added 221 employees, most of whom are based in Israel. Upon the closing of the acquisition of Omneon in 2010, weadded 286 employees, most of whom are based in the U.S.As of December 31, 2012, we have 488 employees in our international operations, representing approximately 43% of our worldwide workforce. Ourability to manage our business effectively in the future, including with respect to any future growth, the integration of recent and any future acquisitions, andthe breadth of our international operations, will require us to train, motivate and manage our employees successfully, to attract and integrate new employeesinto our overall operations, to retain key employees and to continue to improve our operational, financial and management systems. There can be noassurances that we will be successful in any of those regards, and our failure to effectively manage our operations could have a material and adverse effect onour business, operating results, cash flows and financial condition.Our failure to adequately protect our proprietary rights and data may adversely affect us.At December 31, 2012, we held 59 issued U.S. patents and 22 issued foreign patents, and have a number of patent applications pending. Although weattempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as tradesecrets and other measures, we can give no assurances that any patent, trademark, copyright or other intellectual property rights owned by us will not beinvalidated, circumvented or challenged, that such intellectual property rights will provide competitive advantages to us, or that any of our pending or futurepatent applications will be issued with the scope of the claims sought by us, if at all. We can give no assurances that others will not develop technologies thatare similar or superior to our technologies, duplicate our technologies or design around the patents that we own. In addition, effective patent, copyright andtrade secret protection may be unavailable or limited in certain foreign countries in which we do business or may do business in the future.We believe that patents and patent applications are not currently significant to our business, and we do not rely on our patent portfolio to give us acompetitive advantage over others in our industry. We believe that the future success of our business will depend on our ability to translate the technologicalexpertise and innovation of our personnel into new and enhanced products. We generally enter into confidentiality or license agreements with our employees,consultants, and vendors and our customers, as needed, and generally limit access to, and distribution of, our proprietary information. Nevertheless, wecannot provide assurances that the steps taken by us will prevent misappropriation of our technology. In addition, we have taken in the past, and may take inthe future, legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of theproprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion ofmanagement time and other resources, and could materially and adversely affect our business, operating results, financial condition and cash flows.Recently reported hacking attacks on government and commercial computer systems, particularly attacks sponsored by foreign governments orenterprises, raise the risks that such an attack may compromise, in a material respect, one or more of our computer systems and permit hackers access to ourproprietary information and data. If such an attack does, in fact, allow access to or theft of our proprietary information or data, our business, operatingresults, financial condition and cash flows could be materially and adversely affected. 33Table of ContentsOur products include third-party technology and intellectual property, and our inability to acquire new technologies or use third-party technologyin the future could harm our business.In order to successfully develop and market certain of our planned products, we may be required to enter into technology development or licensingagreements with third parties. Although companies with technology useful to us are often willing to enter into technology development or licensing agreementswith respect to such technology, we cannot provide assurances that such agreements may be negotiated on commercially reasonable terms, or at all. The failureto enter into such technology development or licensing agreements, when necessary or desirable, could limit our ability to develop and market new productsand could materially and adversely affect our business.We incorporate certain third-party technologies, including software programs, into our products, and, as noted, intend to utilize additional third-partytechnologies in the future. In addition, the technologies that we license may not operate properly or as specified, and we may not be able to secure alternatives ina timely manner, either of which could harm our business. We could face delays in product releases until alternative technology can be identified, licensed ordeveloped, and integrated into our products, if we are able to do so at all. These delays, or a failure to secure or develop adequate technology, could materiallyand adversely affect our business, operating results, financial condition and cash flows.We cannot assure you that our stock repurchase program will actually result in repurchases of our common stock or enhance long-termstockholder value, and repurchases, if any, could affect our stock price and increase its volatility and will diminish our cash reserves.On January 28, 2013, our Board of Directors approved a $75 million increase to our existing $25 million stock repurchase program. On February 19,2013, the Board approved a further approximately $35 million increase to the program, contingent upon the closing of a sale of the Company’s cable accessHFC business. The Board has authorized aggregate repurchases under the program of $135 million, $22.6 million of which had been utilized for repurchasesas of December 31, 2012. Under the program, we are authorized to repurchase shares of common stock in open market transactions or pursuant to anytrading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The timing and actual number of shares repurchased, if any, willdepend on a variety of factors, including the price and availability of our shares, trading volume and general market conditions. The program may besuspended or discontinued at any time without prior notice. Repurchases pursuant to our stock repurchase program could affect our stock price and increaseits volatility. The existence of a stock repurchase program could also cause our stock price to be higher than it would be in the absence of such a program andcould potentially reduce the market liquidity for our stock. Additionally, repurchases under our stock repurchase program will diminish our cash reserves,which could impact our ability to pursue possible future strategic opportunities and acquisitions and could result in lower overall returns on our cashbalances. There can be no assurance that any stock repurchases will, in fact, occur, or, if they occur, that they will enhance stockholder value because themarket price of our common stock may decline below the levels at which we repurchased shares of stock. Although our stock repurchase program is intendedto enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness.We are subject to import and export controls that could subject us to liability or impair our ability to compete in international markets.Our products are subject to U.S. export controls, and may be exported outside the U.S. only with the required level of export license or through an exportlicense exception, in most cases because we incorporate encryption technology into our products. In addition, various countries regulate the import of certaintechnology and have enacted laws that could limit our ability to distribute our products, or could limit our customers’ ability to implement our products, inthose countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in internationalmarkets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent theexport or import of our products to certain countries altogether. Any change in export or import 34Table of Contentsregulations or related legislation, shift in approach to the enforcement or scope of existing regulations, or change in the countries, persons or technologiestargeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potentialcustomers internationally.In addition, we may be subject to customs duties that could have a significant adverse impact on our operating results or, if we are able to pass on therelated costs in any particular situation, would increase the cost of the related product to our customers. As a result, the future imposition of significantincreases in the level of customs duties or the creation of import quotas on our products in Europe or in other jurisdictions, or any of the limitations oninternational sales described above, could have a material adverse effect on our business, operating results, financial condition and cash flows. Further, someof our customers in Europe have been, or are being, audited by local governmental authorities regarding the tariff classifications used for importation of ourproducts. Import duties and tariffs vary by country and a different tariff classification for any of our products may result in higher duties or tariffs, whichcould have an adverse impact on our operating results and potentially increase the cost of the related products to our customers.We may need additional capital in the future and may not be able to secure adequate funds on terms acceptable to us.We have been engaged in the design, manufacture and sale of a variety of video products and system solutions since inception, which has required, andwill continue to require, significant research and development expenditures.We believe that our existing cash and short-term investments of approximately $201 million, at December 31, 2012, even as reduced through therepurchase of our common stock under the program discussed on page 34 above, will satisfy our cash requirements for at least the next twelve months.However, we may need to raise additional funds if our expectations are incorrect, to take advantage of presently unanticipated strategic opportunities, to satisfyour other cash requirements from time to time, or to strengthen our financial position. Our ability to raise funds may be adversely affected by a number offactors, including factors beyond our control, such as weakness in the economic conditions in markets in which we sell our products and continueduncertainty in financial, capital and credit markets. There can be no assurance that equity or debt financing will be available to us on reasonable terms, if atall, when and if it is needed.In addition, we regularly review potential acquisitions that would complement our existing product offerings, enhance our technical capabilities, orexpand our marketing and sales presence. Any future transaction of this nature could require potentially significant amounts of capital to finance theacquisition and related expenses, as well as to integrate operations following the acquisition, and could require us to issue our stock and dilute existingstockholders.We may raise additional financing through public or private equity offerings, debt financings, or corporate partnership or licensing arrangements. To theextent we raise additional capital by issuing equity securities or convertible debt, our stockholders may experience dilution. To the extent that we raiseadditional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or products, or grantlicenses on terms that are not favorable to us. To the extent we raise capital through debt financing arrangements, we may be required to pledge assets or enterinto covenants that could restrict our operations or our ability to incur further indebtedness and the interest on such debt may adversely affect our operatingresults.If adequate capital is not available, or is not available on reasonable terms, when needed, we may not be able to take advantage of acquisition or othermarket opportunities, to timely develop new products, or to otherwise respond to competitive pressures. 35Table of ContentsNegative conditions in the global credit and financial markets may impair the liquidity or the value of a portion of our investment portfolio.Negative conditions in the global credit and financial markets have had an adverse impact on the liquidity of certain of our investments in the past. Inthe event we need or desire to access funds from the short-term investments that we hold, it is possible that we may not be able to do so due to marketconditions. If a buyer is found, but is unwilling to purchase the investments at par or our cost, we may incur a loss. Further, rating downgrades of thesecurity issuer or the third parties insuring such investments may require us to adjust the carrying value of these investments through an impairment charge.Our inability to sell all or some of our short-term investments at par or our cost, or rating downgrades of issuers or insurers of these securities, couldmaterially and adversely affect our operating results, financial condition and cash flows.In addition, we invest our cash, cash equivalents and short-term investments in a variety of investment vehicles, in a number of countries, with, and inthe custody of, financial institutions with high credit ratings. While our investment policy and strategy attempt to manage interest rate risk, limit credit risk,and ensure we only invest in what we view as very high-quality securities, the outlook for our investment holdings is dependent on general economicconditions, interest rate trends and volatility in the financial marketplace, both internationally and in the U.S., which can all affect, directly and indirectly,the income that we receive, the value of our investments and our ability to sell those investments.We believe that our investment securities are carried at fair value. However, over time the economic and market environment in which we conductbusiness may provide us with additional insight regarding the fair value of certain securities in our portfolio that could change our judgment regardingimpairment of those securities. This could result in unrealized or realized losses in our securities, relating to other than temporary declines, being chargedagainst income. Given current market conditions, particularly in Europe, there is continuing risk that declines in fair value of our portfolio securities mayoccur and impairments may be charged to income in future periods.If demand for our products increases more quickly than we expect, we may be unable to meet our customers’ requirements.If demand for our products increases, the difficulty of accurately forecasting our customers’ requirements and meeting these requirements will increase.Forecasting to meet customers’ needs and effectively managing our supply chain is particularly difficult in connection with newer products. Our ability tomeet customer demand depends significantly on the availability of components and other materials, as well as the ability of our contract manufacturers toscale their production. Furthermore, we purchase several key components, subassemblies and modules used in the manufacture or integration of our productsfrom sole or limited sources. Our ability to meet customer requirements depends in part on our ability to obtain sufficient volumes of these materials in atimely fashion. Increases in demand on our suppliers and subcontractors from other customers may cause sporadic shortages of certain components andproducts. In order to be able to respond to these issues, we have increased our inventories of certain components and products, particularly for our customersthat order significant dollar amounts of our products, and expedited shipments of our products when necessary, which has increased our costs and couldincrease our risk of holding obsolete or excessive inventory. We also employ a demand order fulfillment model which is designed to reduce the effects ofincreases or decreases in demand for any products. Nevertheless, we may be unable to respond to customer demand that increases more quickly than weexpect. If we fail to meet customers’ supply expectations, our revenue would be adversely affected and we may lose business, which could materially andadversely affect our operating results, financial condition and cash flows.We are subject to various laws and regulations related to the environment and potential climate change that could impose substantial costs uponus and may adversely affect our business, operating results, cash flows and financial condition.Our operations are regulated under various federal, state, local and international laws relating to the environment and potential climate change, includingthose governing the management, disposal and labeling of 36Table of Contentshazardous substances and wastes and the cleanup of contaminated sites. We could incur costs and fines, third-party property damage or personal injuryclaims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Theultimate costs to us under these laws and the timing of these costs are difficult to predict.We also face increasing complexity in our product design as we adjust to new and future requirements relating to the presence of certain substances inelectronic products and making producers of those products financially responsible for the collection, treatment, recycling, and disposal of certain products.For example, the European Parliament and the Council of the European Union have enacted the Waste Electrical and Electronic Equipment (WEEE) directive,which regulates the collection, recovery and recycling of waste from electrical and electronic products, and the Restriction on the Use of Certain HazardousSubstances in Electrical and Electronic Equipment (RoHS) directive, which bans the use of certain hazardous materials, including lead, mercury, cadmium,hexavalent chromium, polybrominated biphenyls (PBBs) and polybrominated diphenyl ethers (PBDEs) that exceed certain specified levels. Legislation similarto RoHS and WEEE has been or may be enacted in other jurisdictions, including in the U.S., Japan and China. Our failure to comply with these laws couldresult in our being directly or indirectly liable for costs, fines or penalties and third-party claims, and could jeopardize our ability to conduct business in suchregions and countries.We also expect that our operations will be affected by other new environmental laws and regulations on an ongoing basis. Although we cannot predict theultimate impact of any such new laws and regulations, they will likely result in additional costs, and could require that we redesign or change how wemanufacture our products, any of which could have a material and adverse effect on our operating results, financial condition and cash flows.Some anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair atakeover attempt.We have provisions in our certificate of incorporation and bylaws that could have the effect of rendering more difficult or discouraging an acquisitiondeemed undesirable by our Board of Directors. These include provisions: • authorizing blank check preferred stock, which could be issued with voting, liquidation, dividend and other rights superior to our commonstock; • limiting the liability of, and providing indemnification to, our directors and officers; • limiting the ability of our stockholders to call, and bring business before, special meetings; • requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidatesfor election to our Board of Directors; • controlling the procedures for conduct and scheduling of Board of Directors and stockholder meetings; and • providing the Board of Directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduledspecial meetings.These provisions, alone or together, could delay hostile takeovers, changes in control of the Company or changes in our management.As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, whichprevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval ofthe holders of substantially all of our outstanding common stock. 37Table of ContentsAny provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit theopportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing topay for our common stock.Our common stock price may be extremely volatile, and the value of an investment in our stock may decline.Our common stock price has been highly volatile. We expect that this volatility will continue in the future due to factors such as: • general market and economic conditions; • actual or anticipated variations in operating results; • announcements of technological innovations, new products or new services by us or by our competitors or customers; • changes in financial estimates or recommendations by stock market analysts regarding us or our competitors; • announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; • announcements by our customers regarding end user market conditions and the status of existing and future infrastructure network deployments; • additions or departures of key personnel; and • future equity or debt offerings or our announcements of these offerings.In addition, in recent years, the stock market in general, and the NASDAQ Stock Market and the securities of technology companies in particular,have experienced extreme price and volume fluctuations. These fluctuations have often been unrelated or disproportionate to the operating performance ofindividual companies. These broad market fluctuations have in the past, and may in the future, materially and adversely affect our stock price, regardless ofour operating results. In these circumstances, investors may be unable to sell their shares of our common stock at or above their purchase price over the shortterm, or at all.Our stock price may decline if additional shares are sold in the market or if analysts drop coverage of or downgrade our stock.Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these salescould occur, may cause the market price of our common stock to decline. In addition, we will be required to issue substantial amounts of additional sharesupon exercise of stock options, including under our Employee Stock Purchase Agreement, or grants of restricted stock units. Increased sales of our commonstock in the market after exercise of outstanding stock options or grants of restricted stock units could exert downward pressure on our stock price. Thesesales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.The trading market for our common stock relies in part on the availability of research and reports that third-party industry or securities analystspublish about us. If one or more of the analysts who do cover us downgrade our stock, our stock price may decline. If one or more of these analysts ceasecoverage of us, we could lose visibility in the market, which in turn could cause the liquidity of our stock and our stock price to decline.We are exposed to additional costs and risks associated with complying with increasing regulation of corporate governance and disclosurestandards.We have spent, and expect to continue to spend, a substantial amount of management time and costly external resources to comply with changes in laws,regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, SEC regulations, the NASDAQStock Market 38Table of Contentsrules and applicable provisions of the Dodd-Frank Act of 2010. In particular, Section 404 of the Sarbanes-Oxley Act requires management’s annual review andevaluation of our internal control over financial reporting and attestation of the effectiveness of our internal control over financial reporting by our independentregistered public accounting firm in connection with the filing of our Form 10-K for each fiscal year. We have documented and tested our internal controlsystems and procedures and have made improvements in order for us to comply with the requirements of Section 404. This process has required us to hireadditional personnel and outside advisory services and has resulted in significant additional expenses.While our management’s assessment of our internal control over financial reporting resulted in our conclusion that, as of December 31, 2012, ourinternal control over financial reporting was effective, and our independent registered public accounting firm has attested that our internal control over financialreporting was effective in all material respects as of December 31, 2012, we cannot predict the outcome of our testing and that of our independent registeredpublic accounting firm in future periods. If we conclude in future periods that our internal control over financial reporting is not effective or if our independentregistered public accounting firm is unable to provide an unqualified attestation as of future year-ends, we may incur substantial additional costs in an effortto correct such problems and investors may lose confidence in our financial statements, and the price of our stock will likely decrease in the short term, untilwe correct such problems, and perhaps in the long term, as well.In addition, we are subject to new requirements under the Dodd-Frank Act of 2010 that will require us to diligence, disclose, and report whether or notour products contain conflict minerals. The implementation of these new requirements could adversely affect the sourcing, availability, and pricing of thematerials used in the manufacture of semiconductor devices or other components used in our products. In addition, we will incur additional costs to complywith the disclosure requirements, including costs related to conducting diligence procedures to determine the sources of conflict minerals that may be used ornecessary to the production of our products and, if applicable, potential changes to products, processes or sources of supply as a consequence of suchverification activities. It is also possible that we may face reputational harm if we determine that certain of our products contain minerals not determined to beconflict free and/or we are unable to alter our products, processes or sources of supply to avoid such materials.Available InformationHarmonic makes available free of charge, on the Harmonic web site, the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K (via link to the SEC website), and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of theExchange Act as soon as reasonably practicable after Harmonic files such material with, or furnishes such material to, the Securities and ExchangeCommission. The address of the Harmonic web site is http://www.harmonicinc.com. Except as expressly set forth in this Form 10-K, the contents of our website are not incorporated into, or otherwise to be regarded as part of, this report. Item 1B.UNRESOLVED STAFF COMMENTSNone. Item 2.PROPERTIESAll of our facilities are leased, including our principal operations and corporate headquarters in San Jose, California. We also have research anddevelopment centers in Oregon, New York and New Jersey, several sales offices in the U.S., sales and support centers in Europe and Asia, and research anddevelopment centers in Israel and Hong Kong. Our leases, which expire at various dates through September 2021, are for an aggregate of approximately446,000 square feet of space. The San Jose lease has a term of ten years and is for approximately 188,000 square feet of space. The San Jose facility housesour manufacturing, research and development and 39Table of Contentscorporate headquarters functions. We believe that the facilities that we currently occupy are adequate for our current needs and that suitable additional spacewill be available, as needed, to accommodate the presently foreseeable expansion of our operations.Of our leased facilities, an aggregate of approximately 76,000 square feet is in the Omneon Sunnyvale office and the Scopus New Jersey office and is inexcess of our space requirements. We no longer occupy these facilities and the estimated loss, net of potential estimated sublease income, for this square footagehas been included in the excess facilities charges recorded in the year ended December 31, 2010. The Scopus New Jersey lease terminated in May 2011 and theOmneon Sunnyvale lease terminates in June 2013. Item 3.LEGAL PROCEEDINGSIn October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging thatHarmonic’s Media Grid product infringes two patents held by Avid. In June 2012, Avid served a subsequent complaint alleging that Harmonic’s Spectrumproduct infringes one patent held by Avid. The complaints seek injunctive relief and damages.On November 14, 2012, FastVDO served a lawsuit on Harmonic, alleging infringement of a patent allegedly essential to the H.264 standard and thatHarmonic encoders, transcoders, software and servers that use H.264 infringe their patent.At this time, the Company cannot predict the outcome of the above matters. An unfavorable outcome of these matters could materially and adverselyaffect the Company’s business, operating results, financial position and cash flows.In April 2010, Arris Corporation filed a complaint in the United States District Court in Atlanta, alleging that the Company’s Streamliner 3000 productinfringes four patents held by Arris. The complaint sought injunctive relief and damages. In connection with this matter, the Company recorded a $1.3 millionliability in the fourth quarter of 2010, based on a tentative agreement of Arris and Harmonic with respect to the settlement of the action. In April 2011, thismatter was settled on essentially the same terms as the tentative agreement and the action was dismissed.In March 2010, Interkey ELC Ltd, or Interkey, filed a lawsuit in Israel, alleging breach of contract against Harmonic and Scopus Video Networks Ltd.(now Harmonic Video Networks Ltd. or “HVN”), which was acquired by Harmonic in March 2009. The plaintiffs were seeking damages in the amount of6,300,000 ILS (approximately $1.7 million). On June 26, 2012, the action was dismissed by the Israeli Central District Court.An unfavorable outcome on the matters referenced above or any other litigation matter could require that Harmonic pay substantial damages, or, inconnection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Companyfrom selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matterscould 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 otherintellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and otherintellectual property rights against us or the Company’s customers. Such assertions arise in the normal course of the Company’s operations. The resolution ofany such assertions and claims cannot be predicted with certainty. Item 4.MINE SAFETY DISCLOSURENot applicable 40Table of ContentsPART II Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESMarket Information of our Common StockOur common stock is traded on the NASDAQ Global Market under the symbol HLIT, and has been listed on NASDAQ since our initial publicoffering on May 22, 1995. The following table sets forth, for the periods indicated, the high and low sales price per share of our common stock as reportedon the Nasdaq Global Market: 2012 2011 Sales Price Sales Price Quarter ended High Low High Low First quarter $6.81 $4.82 $10.05 $7.78 Second quarter 5.54 4.00 10.00 6.64 Third quarter 4.99 3.76 7.45 4.19 Fourth quarter 5.10 3.96 5.85 3.85 HoldersAs of February 7, 2013, there were approximately 534 holders of record of our common stock.Dividend PolicyWe have never declared or paid any dividends on our capital stock. At this time, we expect to retain future earnings, if any, for use in the operation andexpansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Our line of credit includes covenants prohibiting thepayment of cash dividends.Repurchases of Equity Securities by the IssuerOn April 24, 2012, our Board of Directors approved a stock repurchase program that provides for the repurchase of up to $25 million of theCompany’s outstanding common stock during the term of the program, which expires 18 months from Board approval. Under the program, the Companymay purchase shares of common stock through open market transactions at prices deemed appropriate by management, subject to certain pre-determinedprice/volume guidelines set, from time to time, by the Board. The timing and amount of repurchase transactions under this program depend on a variety offactors, including price, corporate and regulatory requirements, strategic priorities and other market conditions. The purchases are funded from availableworking capital. The stock repurchase program may be suspended or discontinued at any time.During fiscal 2012, we repurchased and retired approximately 5.1 million shares of our common stock at an average price of $4.43 per share for anaggregate purchase price of $22.6 million. The remaining authorized amount for stock repurchases under this program was approximately $2.4 million as ofDecember 31, 2012. On January 28, 2013, the Company’s Board approved a $75 million increase in the stock repurchase program. On February 6, 2013,the Board approved a modification to the program that permits the Company to repurchase its common stock pursuant to a plan that meets the requirements ofRule 10b5-1 under the Securities Exchange Act of 1934. The program is presently scheduled to expire in July, 2014. On February 19, 2013, the Boardapproved a further approximately $35 million increase to the program, contingent upon the closing of a sale of the Company’s cable access HFC business. SeeNote 20, “Subsequent Events” of our Consolidated Financial Statements. The Board has authorized aggregate repurchases under the program of $135 million,$22.6 million of which had been utilized for purchases as of December 31, 2012. 41Table of ContentsThe following table is a summary of our stock repurchases during the quarter ended December 31, 2012 (in thousands, except per share data): Period Total Number ofSharesRepurchased asPart of theProgram Average PricePaid perShare Approximate DollarValue of Shares thatMay Yet bePurchased Underthe Program September 29 — October 26, 2012 — — $10,613 October 27 — November 23, 2012 1,050 $4.24 $6,163 November 24 — December 31, 2012 813 $4.67 $2,361 1,863 $4.43 STOCK PERFORMANCE GRAPHSet forth below is a line graph comparing the annual percentage change in the cumulative return to the stockholders of the Company’s common stockwith the cumulative return of the NASDAQ Telecommunications Index and of the Standard & Poor’s (S&P) 500 Index for the period commencingDecember 31, 2007 and ending on December 31, 2012. The graph assumes that $100 was invested in each of the Company’s common stock, the S&P 500and the NASDAQ Telecommunications Index on December 31, 2007, and assumes the reinvestment of dividends, if any. The comparisons shown in thegraph below are based upon historical data. Harmonic cautions that the stock price performance shown in the graph below is not indicative of, nor intended toforecast, the potential future performance of the Company’s common stock. 12/07 12/08 12/09 12/10 12/11 12/12 Harmonic Inc. 100.00 53.53 60.40 81.77 48.09 48.38 S&P 500 100.00 63.00 79.67 91.67 93.61 108.59 NASDAQ Telecom 100.00 57.58 72.97 86.05 90.30 89.62 The information contained in this Stock Performance Graph section shall not be deemed to be “soliciting material”, “filed” or incorporated byreference in previous or future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extentthat Harmonic specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934. 42Table of ContentsItem 6.SELECTED FINANCIAL DATAThe data set forth below are qualified in their entirety by reference to, and should be read in conjunction with, “Management’s Discussion and Analysisof Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included elsewhere in this Annual Report onForm 10-K. The consolidated statement of operations data for the years ended December 31, 2009 and 2008, and the consolidated balance sheet data as ofDecember 31, 2010, 2009, and 2008, are derived from audited consolidated financial statements that are not included in this report. Historical results are notnecessarily indicative of future results. Year ended December 31, 2012 2011 2010 2009 2008 (In thousands, except per share amounts) Condensed Consolidated Statements of Operations Data Net revenues $530,464 $549,332 $423,344 $319,566 $364,963 Gross profit 236,555 254,514 195,401 134,360 177,533 Income (loss) from operations (9,307) 11,773 5,142 (12,035) 39,305 Net income (loss) $(10,937) $8,779 $(4,335) $(24,139) $63,992 Net income (loss) per share — basic $(0.09) $0.08 $(0.04) $(0.25) $0.68 Net income (loss) per share — diluted $(0.09) $0.08 $(0.04) $(0.25) $0.67 As of December 31, 2012 2011 2010 2009 2008 (In thousands) Condensed Consolidated Balance Sheet Data Cash, cash equivalents and short-term investments $201,176 $161,837 $120,371 $271,070 $327,163 Working capital $293,978 $279,060 $217,898 $325,185 $375,131 Total assets $717,531 $734,166 $720,386 $572,034 $564,363 Long-term financing liability $— $— $— $6,908 $— Stockholders’ equity $553,413 $564,316 $520,203 $407,473 $414,317 The following factors affect the comparability of the information reflected in the selected financial data tables provided above: • On September 15, 2010, we acquired Omneon, Inc. for a purchase price of $251.3 million, net of cash acquired. The 2010 income fromoperations and net loss included a charge of $5.9 million for acquisition costs related to the Omneon acquisition. See Note 3 “OmneonAcquisition” of the Company’s Consolidated Financial Statements for additional information. • In addition, the 2010 income from operations and net loss included $3.0 million of excess facilities charges, primarily related to the closure of theOmneon Sunnyvale office, and $1.6 million for severance expenses. • On December 31, 2009, we had on our balance sheet the capitalized fair value of our San Jose headquarters building, which was underconstruction, of $6.9 million, with a corresponding credit to financing liability. Upon completion of the building in September 2010, and inconnection with the sale-leaseback of the building, we removed from our books the carrying value of the building and the financing liability. • On March 12, 2009, we acquired Scopus Video Networks for a purchase price of $63.1 million, net of cash acquired. The 2009 loss fromoperations and net loss included a charge of $3.4 million for acquisition costs related to the Scopus acquisition. 43Table of Contents • The 2009 loss from operations and net loss included $8.3 million of restructuring charges related to the Scopus acquisition. These chargesincluded $6.3 million in cost of revenue, primarily related to provisions for excess and obsolete inventories of $5.8 million and $0.5 million forseverance and other expenses. Charges of $2.0 million, consisting primarily of severance costs, were recorded in operating expenses related to theacquisition. • The 2008 income from operations and net income included a charge of $5.0 million for the settlement of a patent infringement claim, arestructuring charge of $1.8 million on a reduction in estimated sublease income for Sunnyvale, California and UK buildings, and animpairment charge of $0.8 million on a short-term investment. We also recognized a benefit from income taxes of $18.0 million, resulting from theuse of net operating loss carryforwards and the release of the substantial majority of our income tax valuation allowance. • Income (loss) from operations for 2012, 2011, 2010, 2009 and 2008 included amortization of intangible assets of $29.2 million, $30.4 million,$17.4 million, $11.9 million and $6.1 million, respectively. • Income (loss) from operations for 2012, 2011, 2010, 2009 and 2008 included stock-based compensation expense of $18.9 million, $20.9million, $15.5 million, $10.6 million and $7.8 million, respectively. Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEWWe design, manufacture and sell versatile and high performance video infrastructure products and system solutions. We enable our customers toefficiently create, prepare and deliver a full range of video services to consumer devices, including televisions, personal computers, tablets and mobile phones.Our products generally fall into three principal categories; video production platforms and playout solutions, video processing solutions and edge and accesssolutions. We also provide technical support services and professional services to our customers worldwide.The principal markets we serve are cable television, direct broadcast satellite system companies, telecommunications companies, or “telcos”,broadcasters and media companies, as well as, more recently, the emerging streaming media providers, that create video programming or offer video-basedinfrastructure. Historically, a majority of our revenue has been derived from relatively few customers, due in part to the consolidation of the ownership of cabletelevision and direct broadcast satellite system companies. Sales to our ten largest customers in 2012, 2011 and 2010 accounted for approximately 33%, 35%and 44%, respectively, of our revenue. Revenue from our ten largest customers has decreased as a percentage of revenue, due to our growing customer base, inpart, as a result of acquisitions we have made. Although we are attempting to broaden our customer base by penetrating new markets and further expandinginternationally, we expect to see continuing industry consolidation and customer concentration. During 2012, 2011 and 2010, revenue from Comcastaccounted for 12%, 11% and 17%, respectively, of our revenue. The loss of Comcast or any other significant customer, any material reduction in orders byComcast or any significant customer, or our failure to qualify our new products with a significant customer could materially and adversely affect ouroperating results, financial condition and cash flows.We recognized revenue of $530 million in 2012, as compared to $549 million in 2011. Our international revenue represents a growing part of ourbusiness. In 2012, international revenue represented 57% of our total revenue, as compared to 55% in 2011. In recognition of our growing internationalbusiness opportunities, we have expanded our international operations and staffing to better support our expansion into international markets. We expect thatinternational sales will continue to account for a significant portion of our net revenue for the foreseeable future and that, due to sales to emerging markets inparticular, our international revenue may increase as a percentage of our total net revenue from year to year. 44Table of ContentsHistorically, our revenue has been dependent upon capital spending in the cable, satellite, telco and broadcast industries. More recently, we also havederived revenue from media companies, including streaming media providers. Industry consolidation has in the past constrained, and may in the futureconstrain, capital spending by our customers. If our product portfolio and product development plans do not position us well to capture an increased portionof the capital spending of customers in the markets on which we focus, our revenue may decline. As we attempt to further diversify our customer base in thesemarkets, we may need to continue to build alliances with other equipment manufacturers and content providers, adapt our products for new applications, takeorders at prices resulting in lower margins, and build internal expertise to handle the particular contractual and technical demands of the media market, whichcould result in higher operating costs. Implementation issues with our products or those of other vendors have caused, and may continue to cause, delays inproject completion for our customers and delay our recognition of revenue.The impact of economic conditions on certain of our customers and changes in our customers’ deployment plans have adversely affected our businessin the past. In 2010, economic conditions in many of the countries in which we sell products were very weak, and global economic conditions and financialmarkets experienced a severe downturn. The downturn stemmed from a multitude of factors, including adverse credit conditions, slower economic activity,concerns about inflation and deflation, rapid changes in foreign exchange rates, increased energy costs, decreased consumer confidence, reduced corporateprofits and capital spending, adverse business conditions and liquidity concerns. Although there was an increase in global economic activity in the secondhalf of 2010 and the first half of 2011, economic growth appears to have become sluggish in some geographies since the middle of 2011, and weak in othergeographies, particularly in Europe, since the beginning of 2012. If an economic downturn were to occur in the future, customers may delay or reduce capitalexpenditures, which often results in lower demand for our products.As part of our business strategy, (1) from time to time we have acquired, and continue to consider acquiring, businesses, technologies, assets andproduct lines that we believe complement or may expand our existing business, and (2) from time to time we consider divesting a product line that we believemay no longer complement or expand our existing business. In September 2010, we completed the acquisition of Omneon, Inc., a company specializing in file-based infrastructure for the production, preparation and playout of video content typically deployed by broadcasters, satellite operators, content owners andother media companies. Omneon’s business is complementary to Harmonic’s core business, and expands our customer reach into content providers andextends our product lines into video servers and video-optimized storage for content production and playout. In connection with the acquisition, our operatingresults for 2010 included related acquisition costs and restructuring expenses. Further, the financial results of Omneon, including the amortization of acquiredintangible assets, is included in our results of operations as of the acquisition date, and has had a significant impact on our revenues, cost of revenues, andoperating expenses since the date of acquisition. On February 18, 2013, we entered into an agreement to sell our cable access HFC business. See Note 20,“Subsequent Events” of our Consolidated Financial Statements.CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATESThe preparation of financial statements and related disclosures requires Harmonic to make judgments, assumptions and estimates that affect thereported amounts of assets and liabilities, the disclosure of contingencies and the reported amounts of revenue and expenses in the financial statements andaccompanying notes. Material differences may result in the amount and timing of revenue and expenses if different judgments or different estimates were made.See Note 2 of Notes to Consolidated Financial Statements for details of Harmonic’s accounting policies. Critical accounting policies, judgments and estimatesthat we believe have the most significant impact on Harmonic’s financial statements are set forth below: • Revenue recognition; • Valuation of inventories; • Impairment of goodwill or long-lived assets; 45Table of Contents • Assessment of the probability of the outcome of current litigation; • Accounting for income taxes; and • Stock-based compensation.REVENUE RECOGNITIONHarmonic’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and the sale of end-to-end solutions, encompassing design, manufacture, test, integration and installation of products. Harmonic recognizes revenue when persuasive evidence of anarrangement exists, delivery has occurred or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured.We generally use contracts and customer purchase orders to determine the existence of an arrangement. Shipping documents and customer acceptance,when applicable, are used to verify delivery. We assess whether the sales price is fixed or determinable based on the payment terms associated with thetransaction and whether the price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer, asdetermined by credit checks and analysis, as well as the customer’s payment history.Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accountingperiod. Because of the concentrated nature of our customer base, different judgments or estimates made for any one large contract or customer could result inmaterial differences in the amount and timing of revenue recognized in any particular period.We have multiple-element revenue arrangements that include hardware and software essential to the hardware product’s functionality. For transactionsoriginating or materially modified beginning January 1, 2011, we apply new accounting guidance on a prospective basis, which requires that we allocaterevenue to all deliverables based on their relative selling prices. We determine the relative selling prices by first considering vendor-specific objective evidence offair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. When we are unable to establish selling price using VSOEor TPE, we use our best estimate of selling price (“BESP”) in our allocation of arrangement consideration. The objective of BESP is to determine the price atwhich we would transact a sale if the product or service were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on astand-alone basis or for new or highly customized offerings. The Company’s process for determining BESP involves management’s judgment, and considersmultiple factors that may vary over time, depending upon the unique facts and circumstances related to each deliverable. If the facts and circumstancesunderlying the factors considered change or should future facts and circumstances lead the Company to consider additional factors, the Company’s BESPmay also change.Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the industry-specific softwarerevenue recognition guidance. Further, the Company also applied the industry-specific software revenue recognition guidance to its multiple elementarrangements for transactions originating prior to January 1, 2011. In accordance with the software revenue recognition guidance, the Company applies theresidual method to recognize revenue for the delivered elements in stand-alone software transactions. Under the residual method, the amount of revenueallocated to delivered elements equals the total arrangement consideration, less the aggregate fair value of any undelivered elements, typically maintenance,provided that VSOE of fair value exists for all undelivered elements. We establish fair value by reference to the price the customer is required to pay when anitem is sold separately, using contractually stated, substantive renewal rates, when applicable, or the price of recently completed stand alone sales transactions.Accordingly, the determination as to whether appropriate objective and reliable evidence of fair value exists can impact the timing of revenue recognition for anarrangement. 46Table of ContentsSolution sales for the design, manufacture, test, integration and installation of products are accounted for in accordance with applicable guidance onaccounting for performance of construction/production contracts, using the percentage-of-completion method of accounting when various requirements for theuse of this accounting guidance exist. Under the percentage-of-completion method, our revenue recognized reflects the portion of the anticipated contract revenuethat has been earned, equal to the ratio of actual labor hours expended to total estimated labor hours to complete the project. Costs are recognized proportionallyto the labor hours incurred. Management believes that, for each such project, labor hours expended in proportion to total estimated hours at completionrepresents the most reliable and meaningful measure for determining a project’s progress toward completion. This requires us to estimate, at the outset of eachproject, a detailed project plan and associated labor hour estimates for that project. For contracts that include customized services for which labor costs are notreasonably estimable, the Company uses the completed contract method of accounting. Under the completed contract method, 100% of the contract’s revenueand cost is recognized upon the completion of all services under the contract. If the estimated costs to complete a project exceed the total contract amount,indicating a loss, the entire anticipated loss is recognized. Our application of percentage-of-completion accounting is subject to our estimates of labor hours tocomplete each project. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results, financialposition or cash flows for a particular period could be adversely affected.Revenue on shipments to distributors, resellers and systems integrators is generally recognized on delivery. Allowances are provided for estimated returnsand discounts. Such allowances are adjusted periodically to reflect actual and anticipated experience. Distributors and systems integrators purchase ourproducts for specific capital equipment projects of the end-user and do not hold inventory. They perform functions that include importation, delivery to theend-customer, installation or integration, and post-sales service and support. Our agreements with these distributors and systems integrators have terms whichare generally consistent with the standard terms and conditions for the sale of our equipment to end users and do not provide for product rotation or pricingallowances, as are typically found in agreements with stocking distributors. We have long-term relationships with most of these distributors and systemsintegrators and substantial experience with similar sales of similar products. We do have instances of accepting product returns from distributors and systemintegrators. However, such returns typically occur in instances where the system integrator has designed a product into a project for the end user, but theintegrator requests permission to return the component as it does not meet the specific project’s functional requirements. Such returns are made solely at thediscretion of the Company, as our agreements with distributors and system integrators do not provide for return rights. We have extensive experiencemonitoring product returns from our distributors, and, accordingly, we have concluded that the amount of future returns can be reasonably estimated inaccordance with applicable accounting guidance. If the actual future returns were to deviate from the historical data on which the reserve had been established,our revenue could be adversely affected.VALUATION OF INVENTORIESHarmonic states inventories at the lower of cost, using the weighted average method, or market. We write down the cost of excess or obsolete inventory tonet realizable value based on future demand forecasts and historical consumption. If there were to be a sudden and significant decrease in demand for ourproducts, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could berequired to record additional charges for excess and obsolete inventory and our gross margin could be adversely affected. Inventory management is of criticalimportance in order to balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence becauseof rapidly changing technology and customer requirements. During the years ended December 31, 2012, 2011 and 2010, we recorded excess and obsoleteinventory charges of $3.4 million, $3.9 million and $4.2 million, respectively. 47Table of ContentsIMPAIRMENT OF GOODWILL OR LONG-LIVED ASSETSThe Company tests for impairment of goodwill on an annual basis in the fourth quarter of its fiscal year at the Company level, which is the solereporting unit, and at any other time at which events occur or circumstances indicate that the carrying amount of goodwill may exceed its estimated fair value.When assessing the goodwill for impairment, the Company considers its market capitalization adjusted for a control premium and, if necessary, theCompany’s discounted cash flow model, which involves significant assumptions and estimates, including the Company’s future financial performance, theCompany’s weighted average cost of capital and the Company’s interpretation of currently enacted tax laws. Circumstances that could indicate impairmentand require the Company to perform an impairment test include: a significant decline in the financial results of the Company’s operations; the Company’smarket capitalization relative to net book value; unanticipated changes in competition and the Company’s market share; significant changes in the Company’sstrategic plans; or adverse actions by regulators. We make every effort to estimate future financial performance as accurately as possible with the informationavailable at the time the estimate is developed. However, any change in the assumptions and estimates may affect the estimated fair value of goodwill and couldresult in an impairment charge in a future period. Identifiable intangible and other long-lived assets are also tested for impairment on the basis of undiscountedcash flows from the asset group when events or changes in circumstances indicate that their carrying amounts may not be recoverable. For example, changesin industry and market conditions or the strategic realignment of our resources could result in an impairment of identified intangibles, goodwill or long-livedassets.Based on the annual impairment test performed as of December 31, 2012, management determined that the Company’s estimated fair value exceeded thecarrying value of its net assets by approximately 21% and that goodwill was not impaired.We did not record any impairment charges related to our goodwill or long-lived assets during the years ended December 31, 2012, 2011 or 2010.However, there can be no assurance that future impairment tests will not result in a charge to earnings.At December 31, 2012, our carrying values for goodwill and intangible assets totaled $212.5 million and $58.4 million, respectively.ASSESSMENT OF THE PROBABILITY OF THE OUTCOME OF CURRENT LITIGATIONOur industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. In particular, leading companies in the telco industry have extensive patent portfolios. From time to time, third parties haveasserted, and may assert in the future, patent, copyright, trademark and other intellectual property rights against us or our customers. We record accruals forloss contingencies when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated.In October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging thatHarmonic’s Media Grid product infringes two patents held by Avid. In June 2012, Avid served a subsequent complaint alleging that Harmonic’s Spectrumproduct infringes one patent held by Avid. The complaints seek injunctive relief and damages.On November 14, 2012, FastVDO served a lawsuit on Harmonic, alleging infringement of a patent allegedly essential to the H.264 standard and thatHarmonic encoders, transcoders, software and servers that use H.264 infringe their patent.At this time, the Company cannot predict the outcome of the above matters. 48Table of ContentsIn March 2010, Interkey ELC Ltd, or Interkey, filed a lawsuit in Israel, alleging breach of contract against Harmonic and Scopus Video Networks Ltd.(now Harmonic Video Networks Ltd. or “HVN”), which was acquired by Harmonic in March 2009. The plaintiffs were seeking damages in the amount of6,300,000 ILS (approximately $1.7 million). On June 26, 2012, the action was dismissed by the Israeli Central District Court.An unfavorable outcome on the matters referenced above or any other litigation matter could require that Harmonic pay substantial damages, or, inconnection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Companyfrom selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matterscould have a material adverse effect on Harmonic’s business, operating results, financial position and cash flows.ACCOUNTING FOR INCOME TAXESIn preparing our financial statements, we estimate our income taxes for each of the jurisdictions in which we operate. This involves estimating our actualcurrent tax exposures and assessing temporary differences resulting from differing treatment of items, such as reserves and accruals, for tax and accountingpurposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxableincome for purposes of assessing our ability to realize any future benefit from our deferred tax assets. In the event that actual results differ from these estimatesor we adjust these estimates in future periods, our operating results and financial position could be materially affected.We are subject to examination of our income tax returns by various tax authorities on a periodic basis. We regularly assess the likelihood of adverseoutcomes resulting from such examinations to determine the adequacy of our provision for income taxes. We apply the provisions of the applicable accountingguidance regarding accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to the recognition andderecognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits us to recognize a tax benefit measured atthe largest amount of such tax benefit that, in our judgment, is more than fifty percent likely to be realized upon settlement. It further requires that a change injudgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change. Our income tax returnsfor 2008, 2009 and 2010 are currently under examination by the U.S. Internal Revenue Service. In addition, the statute of limitations on our 2008 U.S.corporate income tax return has been extended to 2013. A subsidiary of the Company is under an audit, which commenced in the first quarter of 2012, by theIsrael tax authority for the years 2007 through 2010. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the U.S. or Israel is foran amount in excess of the tax provision we have recorded in the applicable period, our overall tax expense, effective tax rate, operating results and cash flowscould be materially and adversely impacted in the period of adjustment.We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position isaudited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, webelieve that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest and penalties, in light ofchanging facts and circumstances. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. Ifpayment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when wedetermine the liabilities are no longer necessary. Any changes in estimate, or settlement of any particular position, could have a material impact on ouroperating results, financial condition and cash flows. 49Table of ContentsSTOCK-BASED COMPENSATIONHarmonic measures and recognizes compensation expense for all stock-based compensation awards made to employees and directors, including stockoptions, restricted stock units and share purchase rights related to our Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair value of thoseawards. The grant date fair value of restricted stock units is based on the fair value of our common stock on the date of grant. The grant date fair value of ourstock options and share purchase rights is estimated using the Black-Scholes option pricing model.The determination of fair value of stock options and share purchase rights on the date of grant, using an option-pricing model, is affected by our stockprice, as well as assumptions regarding a number of highly complex and subjective variables. These variables include our expected stock price volatility overthe term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rates, and expected dividends. We estimated theexpected life of the awards based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation tothe contractual life of the options and purchase rights. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expectedterm of the awards. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, ourexpected dividend yield is zero.Stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest and thereforehas been reduced for estimated forfeitures. The stock-based compensation guidance requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.If factors change and we employ different assumptions to determine the fair value of our stock-based compensation awards granted in future periods, thecompensation expense that we record under it may differ significantly from what we have recorded in the current period.See Note 13 and Note 14 of our Consolidated Financial Statements for additional information. 50Table of ContentsRESULTS OF OPERATIONSNet RevenueNet Revenue — ConsolidatedHarmonic’s consolidated net revenue, by product line, for each of the three years ended December 31, 2012, 2011 and 2010, are presented in the tablebelow. Also presented is the related dollar and percentage change in consolidated net revenue, by product line, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Revenues by type: Video processing products $219,440 $236,624 $202,898 Production and playout products 90,247 98,842 32,579 Edge and access products 138,653 141,880 135,306 Service and support 82,124 71,986 52,561 Net revenues $530,464 $549,332 $423,344 Increase (decrease): Video processing products $(17,184) $33,726 $40,244 Production and playout (8,595) 66,263 32,579 Edge and access products (3,227) 6,574 17,951 Service and support 10,138 19,425 13,004 Total increase (decrease) $(18,868) $125,988 $103,778 Percent change: Video processing products (7.3)% 16.6% 24.7% Production and playout (8.7)% 203.4% — % Edge and access products (2.3)% 4.9% 15.3% Service and support 14.1% 37.0% 32.9% Total percent change (3.4)% 29.8% 32.5% The decrease in net revenue in 2012, compared to 2011, was primarily due to a reduction in demand for video processing and production and playoutproducts and, to a lesser extent, edge and access products, primarily in the U.S. and Europe, offset, in part, by an increase in service and support revenue.Our revenues from Europe in 2012 were impacted significantly by the weak economic environment in Europe caused principally by the sovereign debt crisisin many European countries. Service and support revenues are derived primarily from maintenance contracts, as well as professional and integration servicesand training. The 14.1% increase in services revenues for 2012, compared to 2011, was primarily the result of increased maintenance revenues, driven bynew maintenance contracts, and the completion of several large, multi-year projects.The increase in net revenue in 2011, compared to 2010, was due, in large part, to the revenue contribution resulting from the acquisition of Omneon,which was completed in September 2010. Omneon’s product revenue is included in the production and playout product line above. In addition, our revenueincreased due to strong demand for our video processing products, particularly in international markets where Pay TV is growing rapidly. The addition ofOmneon product revenue and the growth in video processing product revenue also contributed to the growth in service and support activity related to theassociated products, resulting in service and support revenue growth of 37% in 2011, when compared to 2010. 51Table of ContentsNet Revenue — GeographicHarmonic’s domestic and international net revenue, for each of the three years ended December 31, 2012, 2011 and 2010, are presented in the tablebelow. Also presented are the related dollar and percentage change in domestic and international net revenue, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Net revenues: United States $230,336 $244,897 $209,583 International 300,128 304,435 213,761 Total $530,464 $549,332 $423,344 Increase (decrease): United States $(14,561) $35,314 $47,560 International (4,307) 90,674 56,218 Total increase (decrease) $(18,868) $125,988 $103,778 Percent change: United States (5.9)% 16.8% 29.4% International (1.4)% 42.4% 35.7% Total percent change (3.4)% 29.8% 32.5% The decrease in U.S. net revenue in 2012, compared to 2011, was principally due to decreased demand for our video processing products and, to amuch lesser extent, our production and playout products. International net revenue in 2012 decreased, compared to 2011, primarily due to decreased demandin Europe across all product lines, offset by increased demand in Asia Pacific, largely for our production and playout products. We expect that internationalsales will continue to account for a significant percentage of our net revenue for the foreseeable future.The increase in U.S. net revenue in 2011, compared to 2010, was principally due to the addition of Omneon product revenue and, to a lesser extent,increased video processing revenue and service and support revenue. International net revenue in 2011 increased, compared to 2010, primarily due to sales ofOmneon production and playout products, given that a substantial majority of production and playout net revenues were international, and, to a lesser extent,increased demand from customers in emerging markets.Gross ProfitHarmonic’s gross profit and gross profit as a percentage of net revenue, for each of the three years ended December 31, 2012, 2011, and 2010, arepresented in the table below. Also presented is the related dollar and percentage change in gross profit, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Gross profit $236,555 $254,514 $195,401 As a percentage of net revenues 44.6% 46.3% 46.2% Increase (decrease) $(17,959) $59,113 $61,041 Percent change (7.1)% 30.3% 45.4% Gross profit as a percentage of revenue decreased in 2012, compared to 2011. The decrease in gross margin was primarily due to a change in productmix, the continuing competitive pricing environment, and, to a lesser extent, the decrease in net revenue. In 2012 and 2011, approximately $20.5 million and$21.5 million of expense related to amortization of intangibles was included in cost of revenue. 52Table of ContentsGross profit as a percentage of revenue remained relatively flat in 2011, compared to 2010. The increase in gross margin was principally due to theincrease in sales of production and playout products, which typically carry a higher gross margin than our average gross margin, offset in part by higheramortization of intangibles. In 2011, $21.5 of amortization of intangibles was included in cost of sales, compared to $12.5 million in 2010. The higheramortization of intangible expense in 2011 was due to the amortization of intangibles arising from the Omneon acquisition, which was completed in September2010.Research and DevelopmentHarmonic’s research and development expense and the expense as a percentage of net revenue, for each of the three years ended December 31, 2012,2011, and 2010, are presented in the table below. Also presented is the related dollar and percentage change in research and development expense, as comparedwith the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Research and development $106,219 $102,732 $77,197 As a percentage of net revenues 20.0% 18.7% 18.2% Increase (decrease) $3,487 $25,535 $15,762 Percent change 3.4% 33.1% 25.7% The increase in research and development expense in 2012, compared to 2011, was primarily the result of increased employee related compensationexpense of $1.1 million, and increased outside engineering services and prototype materials costs of $2.1 million, related to new product developmentinitiatives. We expect research and development expense in 2013 to remain relatively flat, compared to 2012.The increase in research and development expense in 2011, compared to 2010, was primarily the result of increased personnel related expense of $15.0million, increased outside engineering services of $3.5 million, increased facilities related expenses of $3.0 million and increased stock-based compensationexpense of $1.9 million. The increased personnel related expense, outside engineering services and stock-based compensation expense were primarily due toincreased engineering headcount and activities resulting from the Omneon acquisition, as well as additional hiring of employees engaged in engineeringactivities. The increased facilities related expenses were primarily due to additional depreciation of building improvements and lab equipment costs incurred inorder to consolidate the Omneon employees within our San Jose headquarters building.Selling, General and AdministrativeHarmonic’s selling, general and administrative expense and the expense as a percentage of net revenue, for each of the three years ended December 31,2012, 2011, and 2010, are presented in the table below. Also presented is the related dollar and percentage change in selling, general and administrativeexpense, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Selling, general and administrative $130,938 $131,091 $108,150 As a percentage of net revenues 24.7% 23.9% 25.5% Increase (decrease) $(153) $22,941 $27,012 Percent change (0.1)% 21.2% 33.3% Selling, general and administrative expenses in 2012, compared to 2011, remained relatively flat. Increased depreciation expense of $1.1 million andincreased professional fees of $0.5 million were offset by decreased third party commission expense of $0.7 million, decreased travel expense of $0.6 millionand decreased bad debt 53Table of Contentsexpenses of $0.2 million. The increase in depreciation expense was primarily due to additional demonstration equipment and software applications formarketing use. The decrease in third party commission expense was largely due to decreased net revenue in 2012, and the decrease in travel expense waslargely due to travel cost containment efforts.The increase in selling, general and administrative expense in 2011, compared to 2010, was primarily a result of increased compensation expense of$14.7 million, increased stock-based compensation expense of $2.6 million, increased program marketing and third party commission expense of $5.1million, increased travel expense of $3.4 million, increased amortization of intangibles of $4.0 million, and increased consulting and professional serviceexpense of $2.0 million. These increases were partially offset by the absence of $5.7 million of acquisition related costs incurred in 2010 in connection withthe acquisition of Omneon and a decrease of $2.5 million of excess facilities charges primarily related to the closure of the Omneon Sunnyvale office in 2010.The increased compensation expense, stock-based compensation expense and travel expense in 2011 were primarily due to increased headcount resulting fromthe Omneon acquisition and higher commission expense resulting from increased net revenue in 2011. The increase in consulting and professional serviceexpense was related to higher temporary headcount and additional consulting resources being used in general and administrative activities.Amortization of IntangiblesHarmonic’s amortization of intangibles expense charged to operating expenses and the amortization of intangibles expense as a percentage of net revenue,for each of the three years ended December 31, 2012, 2011, and 2010, are presented in the table below. Also presented is the related dollar and percentagechange in amortization of intangibles expense, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Amortization of intangibles $8,705 $8,918 $4,912 As a percentage of net revenues 1.6% 1.6% 1.2% Increase (decrease) $(213) $4,006 $1,090 Percent change (2.4)% 81.6% 28.5% The decrease in the amortization of intangibles expense in 2012, compared to 2011, was the result of the completion of the amortization of trademarksacquired as part of a prior business acquisition. The increase in the amortization of intangibles expense in 2011, compared to 2010, was primarily due to theamortization of intangible assets obtained in connection with the acquisition of Omneon during the third quarter of 2010.Interest Income, NetHarmonic’s interest income and expense, net as a percentage of net revenue, for each of the three years ended December 31, 2012, 2011, and 2010, arepresented in the table below. Also presented is the related dollar and percentage change in interest income, net, as compared with the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Interest income, net $515 $374 $1,082 As a percentage of net revenues 0.1% 0.1% 0.3% Increase (decrease) $141 $(708) $(2,099) Percent change 37.7% (65.4)% (66.0)% 54Table of ContentsThe increase in interest income, net in 2012, compared to 2011, was primarily due to higher average cash and short-term investments balances during2012.The decrease in interest income, net in 2011, compared to 2010, was primarily due to lower average cash and short-term investments balances during2011, principally resulting from cash used in the Omneon acquisition in September 2010, offset by increases in cash from operations, and lower interest ratesearned on the balances.Other Expense, NetOther expense, net is primarily comprised of foreign exchange gains and losses on cash, accounts receivable and intercompany balances denominated incurrencies other than the U.S. dollar. To mitigate the volatility related to fluctuations in the foreign exchange rates, we may enter into various foreign currencycontracts. The (gain) loss on foreign currency is driven by the fluctuations in the foreign currency exchanges rates, primarily the euro, British pound andJapanese yen. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Other expense, net $(293) $(514) $(785) As a percentage of net revenues (0.1)% (0.1)% (0.2)% (Increase) decrease $221 $271 $96 Percent change (43.0)% (34.5)% (10.9) Income TaxesHarmonic’s provision for income taxes and provision for income taxes as a percentage of net revenue, for each of the three years ended December 31,2012, 2011, and 2010, are presented in the table below. Also presented is the related dollar and percentage change in provision for income taxes, as comparedwith the prior year. Year ended December 31, 2012 2011 2010 (In thousands, except percentages) Provision for income taxes $1,852 $2,854 $9,774 As a percentage of net revenues 0.3% 0.5% 2.3% Increase (decrease) $(1,002) $(6,920) $(4,630) Percent change (35.1)% (70.8)% (32.1)% For the year ended December 31, 2012, our effective tax rate on our pre-tax loss was -20.4%, compared to an effective tax rate on our pre-tax income for2011 of 24.5% . The difference between the underlying effective tax rate for the year ended December 31, 2012 and the federal statutory rate of 35% isprimarily attributable to lower rates on foreign earnings, offset in part by unbenefitted losses of certain foreign entities, an increase in the valuation allowancefor California R&D credits, non-deductible amortization expense, and the impact of non-deductible stock-based compensation. On January 2, 2013, theFederal R&D credit was extended for two years, retroactively from January 1, 2012, through December 31, 2013. The Company has estimated the tax benefitof the R&D credit for 2012 to be approximately $2.5 million and it will be recorded in the first quarter of 2013.For the year ended December 31, 2011, our effective tax rate on our pre-tax income was 24.5%, compared to an effective tax rate on our pre-tax income of179.7% for 2010. The difference between the underlying effective tax rate for the year ended December 31, 2011 and the federal statutory rate of 35% isprimarily attributable to lower rates on foreign earnings, a current year research credit, and a decrease in our liability for uncertain tax positions due to theexpiration of the statute of limitations for certain items, offset in part by unbenefitted losses of certain foreign entities and the impact of non-deductible stock-based compensation. Further, California tax legislation, enacted in February 2009, provides for the election of a single sales 55Table of Contentsapportionment formula beginning in 2011. The Company elected the single sales apportionment method in 2011. The use of this apportionment methodreduces the amount of California taxable income, which reduced our overall state rate in 2011 and 2012.Liquidity and Capital ResourcesAs of December 31, 2012, our cash and cash equivalents totaled $96.7 million, and our short-term investments totaled $104.5 million. At that date, asubstantial majority of the Company’s cash, cash equivalents and short-term investments were held in accounts in the United States. The Company believesthat these funds are sufficient to meet the requirements of our U.S. operations for the next twelve months, including any stock repurchases.In the event we need or desire to access funds from the short-term investments that we hold, it is possible that we may not be able to do so due to adversemarket conditions. Our inability to sell all or some of our short-term investments at par or our cost, or rating downgrades of issuers of these securities, couldadversely affect our results of operations or financial condition. Nevertheless, we believe that our existing liquidity sources will satisfy our presentlycontemplated cash requirements for at least the next twelve months. However, if our expectations are incorrect, we may need to raise additional funds to fundour operations, to take advantage of unanticipated opportunities or to strengthen our financial position.We have a bank line of credit facility with Silicon Valley Bank, which provides for borrowings of up to $10.0 million and matures on August 23, 2013.As of December 31, 2012, there were no amounts outstanding under the line of credit facility and there were no borrowings during the year endedDecember 31, 2012. Future borrowings pursuant to the line would bear interest at the bank’s prime rate (3.25% at December 31, 2012) or at LIBOR for thedesired borrowing period (an annualized rate of 0.21% for a one month borrowing period at December 31, 2012) plus 1.75%, or 1.96%. Borrowings are notcollateralized. This facility contains a financial covenant that requires us to maintain a ratio of unrestricted cash, accounts receivable and short terminvestments to current liabilities (less deferred revenue) of at least 1.75 to 1.00. As of December 31, 2012, the Company’s ratio under that covenant was 4.11to 1. In the event of noncompliance by us with the covenants under the facility, including the financial covenant referenced above, Silicon Valley Bank wouldbe entitled to exercise its remedies under the facility, including declaring all obligations immediately due and payable.We regularly consider potential acquisitions that would complement our existing product offerings, enhance our technical capabilities or expand ourmarketing and sales presence. Any future transaction of this nature could require potentially significant amounts of capital or could require us to issue ourstock and dilute existing stockholders. If adequate funds are not available, or are not available on acceptable terms, we may not be able to take advantage ofmarket opportunities, to develop new products or to otherwise respond to competitive pressures.In addition, our ability to raise funds may be adversely affected by a number of factors relating to Harmonic, as well as factors beyond our control,including any global or European economic slowdown, market uncertainty surrounding necessary increases in the U.S. debt limit and its future debtobligations, the impact of increases in oil prices, and conditions in financial markets and the industries we serve. There can be no assurance that anyfinancing will be available on terms acceptable to us, if at all. Year ended December 31, 2012 2011 2010 (In thousands) Net cash provided by operating activities $70,813 $45,177 $17,566 Net cash used in investing activities (47,549) (65,331) (96,355) Net cash (used in) provided by financing activities (17,699) 14,656 22,963 Effect of exchange rate changes on cash and cash equivalents 122 (52) (118) Net increase (decrease) in cash and cash equivalents $5,687 $(5,550) $(55,944) 56Table of ContentsOperating ActivitiesCash provided by operations was $70.8 million in 2012, resulting from a net loss of $10.9 million, adjusted for $66.2 million in non-cash charges,and a $15.5 million increase in cash associated with the net change in operating assets and liabilities. The non-cash charges included deferred income taxes,amortization of intangible assets, stock-based compensation, depreciation, and provisions for excess and obsolete inventories and doubtful accounts. The netchange in operating assets and liabilities included increases in prepaid expenses, as well as decreases in accounts payable and accrued liabilities, which wereoffset by decreases in accounts receivable and inventories, as well as increases in deferred revenue and income taxes payable. The decrease in accountsreceivable was primarily due to improvement in our collection process, and the decrease in inventory was primarily due to improvement in our supply chainprocess. The decrease in accounts payable was primarily due to the timing of purchases and payments in the last quarter of 2012. The increase in income taxpayable was primarily due to lower estimated tax payments made in 2012, compared to 2011.Cash provided by operations was $45.2 million in 2011, resulting from net income of $8.8 million, adjusted for $71.5 million in non-cash charges,and $35.1 million for use of cash associated with the net change in operating assets and liabilities. The non-cash charges included deferred income taxes,amortization of intangible assets, stock-based compensation and depreciation. The net change in operating assets and liabilities included increases in accountsreceivable and inventories, as well as decreases in deferred revenue, prepaid expenses, accounts payable and income taxes payable. The increase in inventorywas due to higher service and production inventories to support higher revenue levels. The decrease in income taxes payable was due to estimated tax paymentsmade in 2011. The decrease in deferred revenue was primarily due to the timing of periodic service and support billings for annual contracts and therecognition of product revenue for a large contract that had previously been deferred.Cash provided by operating activities was $17.6 million in 2010, resulting from a net loss of $4.3 million, adjusted for $49.7 million in non-cashcharges, and $27.8 million for use of cash associated with the net change in operating assets and liabilities. The non-cash charges included deferred incometaxes, amortization of intangible assets, stock-based compensation and depreciation. The net change in operating assets and liabilities included increases inaccounts receivable, inventories and prepaid expenses, as well as decreases in accounts payable and accrued excess facilities cost, which was partially offsetby an increase in deferred revenue, income taxes payable and accrued and other liabilities. The increase in accrued and other liabilities was mostly attributableto higher incentive compensation accruals in 2010, as compared to 2009, as a result of the increase in revenue in 2010.We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in ouroperating results, shipment linearity, accounts receivable collections performance, inventory and supply chain management, and the timing and amount ofcompensation and other payments. We usually pay our annual incentive compensation to employees in the first quarter.Investing ActivitiesNet cash used in investing activities was $47.5 million in 2012, primarily resulting from the purchase of short-term investments of $133.8 million andcapital expenditures of $12.6 million, offset by proceeds from the sale and maturity of investments of $98.8 million.Net cash used in investing activities was $65.3 million in 2011, primarily resulting from the purchase of short-term investments of $107.5 million andcapital expenditures of $17.3 million, offset by proceeds from the sale and maturity of investments of $59.7 million.Net cash used in investing activities was $96.4 million in 2010, resulting from the purchase of Omneon in September 2010 for $153.3 million andcapital expenditures of $35.6 million, primarily related to leasehold improvements to our new corporate headquarters, partially offset by proceeds from thesale and maturity of investments of $92.8 million. 57Table of ContentsFinancing ActivitiesNet cash used in financing activities was $17.7 million in 2012, primarily resulting from $22.6 million of payments for the repurchase of commonstock in connection with our stock repurchase program announced in April 2012, offset in part by $4.8 million of net proceeds from the issuance of commonstock related to our equity incentive plans.Net cash provided by financing activities was $14.7 million in 2011, primarily resulting from $12.7 million of net proceeds from the issuance ofcommon stock related to our equity incentive plans and $2.0 million of excess tax benefits from stock-based compensation.Net cash provided by financing activities was $23.0 million in 2010, primarily resulting from $18.8 million in proceeds relating to lessor financing ofbuilding improvements for our new corporate headquarters and $3.9 million of net proceeds from the issuance of common stock related to our equity incentiveplans.OFF-BALANCE SHEET ARRANGEMENTSNone as of December 31, 2012.CONTRACTUAL OBLIGATIONS AND COMMITMENTSFuture payments under contractual obligations, and other commercial commitments, as of December 31, 2012, were as follows: Payments Due by Period TotalAmountsCommitted 1 Year orLess 2 -3 Years 4 -5 Years Over 5 Years (In thousands) Operating leases (1) $59,276 $10,692 $14,594 $14,193 $19,797 Purchase commitments $27,579 26,542 1,037 — — Total contractual obligations $86,855 $37,234 $15,631 $14,193 $19,797 Other commercial commitments: Standby letters of credit $207 $— $207 $— $— Indemnification obligations (2) — — — — — Total commercial commitments $207 $— $207 $— $— 1.As of December 31, 2012, $0.9 million of these future lease payments were accrued for as part of accrued excess facility costs. See Note 10“Restructuring and Excess Facilities” of our Consolidated Financial Statements.2.Harmonic indemnifies its officers and the members of its Board of Directors pursuant to its bylaws and contractual indemnity agreements. Harmonicalso indemnifies some of its suppliers and most of its customers for specified intellectual property matters and some of its other vendors, such asbuilding contractors, pursuant to certain parameters and restrictions. The scope of these indemnities varies, but, in some instances, includesindemnification for defense costs, damages and other expenses (including reasonable attorneys’ fees).Due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits at December 31, 2012, we are unableto make reasonably reliable estimates of the period of cash settlement with the respective taxing authority. Therefore, approximately $49.3 million ofunrecognized tax benefits classified as “Income taxes payable, long-term” in the accompanying Consolidated Balance Sheet as of December 31, 2012, havebeen excluded from the contractual obligations table above. See Note 15 “Income Taxes” of our Consolidated Financial Statements for a discussion on incometaxes. 58Table of ContentsNEW ACCOUNTING PRONOUNCEMENTSSee Note 2 of the accompanying Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respectiveexpected dates of adoption and effects on results of operations and financial condition. Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Market risk represents the risk of loss that may impact the operating results, financial position, or liquidity of Harmonic due to adverse changes inmarket prices and rates. Harmonic is exposed to market risk because of changes in interest rates, foreign currency exchange rates, as measured against theU.S. dollar and currencies of Harmonic’s subsidiaries, and changes in the value of financial instruments held by Harmonic.FOREIGN CURRENCY EXCHANGE RISKHarmonic has a number of international subsidiaries, each of whose sales are generally denominated in U.S. dollars. In addition, Harmonic has variousinternational branch offices that provide sales support and systems integration services. Sales denominated in foreign currencies were approximately 9%, 10%and 6% of net revenue in 2012, 2011 and 2010, respectively. Harmonic enters into foreign currency forward exchange contracts (“forward exchangecontracts”) to manage exposure related to foreign accounts receivable and reduce the effects of fluctuating exchange rates on expenses denominated in foreigncurrencies. Harmonic does not enter into derivative financial instruments for trading purposes. The table below presents the impact on the foreign exchangegain (loss) of a hypothetical 10% appreciation and a 10% depreciation of the USD against the forward exchange contracts as of December 31, 2012: Currency - forward contracts Position USD Value ofNet ForeignExchangeContracts Foreign ExchangeGain (Loss) From10% Appreciationof USD Foreign ExchangeGain (Loss) From10% Depreciationof USD (In thousands) EUR Sell $5,585 $559 $(559) GBP Sell 2,155 216 (216) JPY Sell 3,317 332 (332) ILS Buy 3,174 (317) 317 INTEREST RATE AND CREDIT RISKExposure to market risk for changes in interest rates relates primarily to Harmonic’s investment portfolio of marketable debt securities of variousissuers, types and maturities and to Harmonic’s borrowings under its bank line of credit facility. Harmonic does not use derivative instruments in itsinvestment portfolio, and its investment portfolio only includes highly liquid instruments. These investments are classified as available for sale and arecarried at estimated fair value, with material unrealized gains and losses reported in “accumulated other comprehensive income (loss)”. As of December 31,2012, gross unrealized gains were nominal. If the credit market deteriorates, we may incur realized losses, which could adversely affect our financial conditionor results of operations. There is risk that losses could be incurred if Harmonic were to sell any of its securities prior to stated maturity. As of December 31,2012, our cash, cash equivalents and short-term investments balance was $201.2 million. In a declining interest rate environment, as short term investmentsmature, reinvestment occurs at less favorable market rates. Given the short term nature of certain investments, declining interest rates would negatively impactinvestment income. Based on our estimates, a 10% change in interest rates would have increased or decreased the fair value of our investments by less than$0.1 million as of December 31, 2012. 59Table of ContentsItem 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAIndex to Consolidated Financial Statements Page Management’s report on internal control over financial reporting 60 Report of Independent Registered Public Accounting Firm 61 Consolidated Balance Sheets 62 Consolidated Statements of Operations 63 Consolidated Statements of Comprehensive Income (Loss) 64 Consolidated Statements of Stockholders’ Equity 65 Consolidated Statements of Cash Flows 66 Notes to Consolidated Financial Statements 67 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTINGOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) andRule 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internalcontrol over financial reporting includes those policies and procedures that:1. pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors; and3. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that couldhave a material effect on the financial statements.The effectiveness of any system of internal control over financial reporting, including ours, is subject to inherent limitations, including the exercise ofjudgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely.Accordingly, any system of internal control over financial reporting, including ours, no matter how well designed and operated, can only provide reasonable,not absolute, assurances. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. Our management assessed the effectiveness ofHarmonic’s internal control over financial reporting as of December 31, 2012. In making this assessment, our management used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on our assessment usingthose criteria, our management has concluded that, as of December 31, 2012, Harmonic’s internal control over financial reporting was effective. 60Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Board of Directors and Stockholders of Harmonic Inc.:In our opinion, the accompanying Consolidated Balance Sheets and the related Consolidated Statements of Operations, Consolidated Statements ofComprehensive Income (Loss), Consolidated Statements of Stockholders’ Equity, and Consolidated Statements of Cash Flows listed in the accompanyingindex present fairly, in all material respects, the financial position of Harmonic Inc. and its subsidiaries at December 31, 2012 and December 31, 2011, andthe results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principlesgenerally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effectiveinternal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Reporton Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements and on theCompany’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all materialrespects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessingthe risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Ouraudits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basisfor our opinions.As discussed in Note 2 to the consolidated financial statements, the Company adopted new accounting rules for revenue recognition in 2011.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. /S/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLPSan Jose, CaliforniaMarch 1, 2013 61Table of ContentsHARMONIC INC.CONSOLIDATED BALANCE SHEETS December 31, 2012 2011 (In thousands, except par value amounts) ASSETS Current assets: Cash and cash equivalents $96,670 $90,983 Short-term investments 104,506 70,854 Accounts receivable 85,920 109,886 Inventories 64,270 70,649 Deferred income taxes 21,870 28,032 Prepaid expenses and other current assets 23,636 21,474 Total current assets 396,872 391,878 Property and equipment, net 38,122 40,469 Goodwill 212,518 212,417 Intangibles, net 58,447 87,651 Other assets 11,572 1,751 Total assets $717,531 $734,166 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $25,447 $30,537 Income taxes payable 1,797 2,290 Deferred revenues 33,235 33,095 Accrued liabilities 42,415 46,896 Total current liabilities 102,894 112,818 Income taxes payable, long-term 49,309 47,307 Deferred income taxes, long-term — 655 Other non-current liabilities 11,915 9,070 Total liabilities 164,118 169,850 Commitments and contingencies (Notes 18 and 19) Stockholders’ equity: Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding — — Common stock, $0.001 par value, 150,000 shares authorized; 114,193 and 116,257 shares issuedand outstanding at December 31, 2012 and 2011 114 116 Capital in excess of par value 2,432,790 2,433,164 Accumulated deficit (1,879,026) (1,868,089) Accumulated other comprehensive loss (465) (875) Total stockholders’ equity 553,413 564,316 Total liabilities and stockholders’ equity $717,531 $734,166 The accompanying notes are an integral part of these consolidated financial statements. 62Table of ContentsHARMONIC INC.CONSOLIDATED STATEMENTS OF OPERATIONS Year ended December 31, 2012 2011 2010 (In thousands, except per share amounts) Product revenues $448,340 $477,346 $370,783 Service revenues 82,124 71,986 52,561 Total net revenues 530,464 549,332 423,344 Product cost of revenues 250,800 256,230 201,057 Service cost of revenues 43,109 38,588 26,886 Total cost of revenues 293,909 294,818 227,943 Gross profit 236,555 254,514 195,401 Operating expenses: Research and development 106,219 102,732 77,197 Selling, general and administrative 130,938 131,091 108,150 Amortization of intangibles 8,705 8,918 4,912 Total operating expenses 245,862 242,741 190,259 Income (loss) from operations (9,307) 11,773 5,142 Interest income, net 515 374 1,082 Other expense, net (293) (514) (785) Income (loss) before income taxes (9,085) 11,633 5,439 Provision for income taxes 1,852 2,854 9,774 Net income (loss) $(10,937) $8,779 $(4,335) Net income (loss) per share: Basic $(0.09) $0.08 $(0.04) Diluted $(0.09) $0.08 $(0.04) Weighted average shares: Basic 116,457 115,175 101,487 Diluted 116,457 116,427 101,487 The accompanying notes are an integral part of these consolidated financial statements. 63Table of ContentsHARMONIC INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Year ended December 31, 2012 2011 2010 (In thousands) Net income (loss) $(10,937) $8,779 $(4,335) Other comprehensive income (loss), net of tax: Changes in cumulative translation adjustments, net of tax 395 (173) (390) Translation adjustments reclassified into earnings upon sale or liquidation of subsidiaries, net of tax — — 89 Foreign currency translation adjustments, net of tax 395 (173) (301) Changes in unrealized gain (loss) on investment arising during the period, net of tax 15 10 (140) Gain (loss) on investments reclassified into earnings upon sale of investments, net of tax — — (236) Gain (loss) on investments, net of tax 15 10 (376) Other comprehensive income (loss) net of tax 410 (163) (677) Comprehensive income (loss) $(10,527) $8,616 $(5,012) The accompanying notes are an integral part of these consolidated financial statements. 64Table of ContentsHARMONIC INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome (Loss) TotalStockholders’Equity Shares Amount (In thousands) Balance at December 31, 2009 96,110 $96 $2,279,945 $(1,872,533) $(35) $407,473 Net loss (4,335) (4,335) Unrealized loss on investments, net of tax (376) (376) Translation adjustments (301) (301) Stock-based compensation 15,549 15,549 Issuance of Common Stock for acquisition of Omneon 14,150 14 98,049 98,063 Issuance of Common Stock under option, stock award andpurchase plans 2,100 2 3,857 3,859 Excess tax benefits from stock-based compensation 271 271 Balance at December 31, 2010 112,360 112 2,397,671 (1,876,868) (712) 520,203 Net income 8,779 8,779 Unrealized gain on investments, net of tax 10 10 Translation adjustments (173) (173) Issuance of Common Stock under option, stock award andpurchase plans 3,897 4 12,697 12,701 Stock-based compensation 20,841 20,841 Excess tax benefits from stock-based compensation 1,955 1,955 Balance at December 31, 2011 116,257 116 2,433,164 (1,868,089) (875) 564,316 Net loss (10,937) (10,937) Unrealized gain on investments, net of tax 15 15 Translation adjustments 395 395 Issuance of Common Stock under option, stock award andpurchase plans 3,045 3 4,533 4,536 Repurchase of Common Stock (5,109) (5) (22,634) (22,639) Stock-based compensation 18,926 18,926 Reduction in excess tax benefits from stock-basedcompensation (1,199) (1,199) Balance at December 31, 2012 114,193 $114 $2,432,790 (1,879,026) $(465) $553,413 The accompanying notes are an integral part of these consolidated financial statements. 65Table of ContentsHARMONIC INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, 2012 2011 2010 (In thousands) Cash flows from operating activities: Net income (loss) $(10,937) $8,779 $(4,335) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of intangibles 29,204 30,420 17,425 Depreciation 15,195 13,867 9,990 Stock-based compensation 18,926 20,913 15,539 Net (gain) loss on disposal of fixed assets (36) 671 162 Deferred income taxes (4,969) (361) (1,461) Provision for doubtful accounts and sales returns 3,602 3,235 2,589 Provision for excess and obsolete inventories 3,377 3,936 4,153 Excess tax benefits from stock-based compensation (121) (1,955) (271) Other non-cash adjustments, net 1,006 801 1,529 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable 20,368 (11,477) (22,333) Inventories 3,003 (16,588) (16,132) Prepaid expenses and other assets (2,684) 7,924 (5,445) Accounts payable (5,201) 4,750 (3,080) Deferred revenue 1,334 (13,470) 5,086 Income taxes payable 1,535 (6,843) 11,017 Accrued excess facility costs (1,724) (327) (2,412) Accrued and other liabilities (1,065) 902 5,545 Net cash provided by operating activities 70,813 45,177 17,566 Cash flows from investing activities: Purchases of investments (133,778) (107,544) (51,457) Proceeds from maturities of investments 57,484 28,733 80,961 Proceeds from sales of investments 41,354 30,999 63,269 Acquisition of property and equipment (12,609) (17,269) (35,624) Acquisition of Omneon, net of cash received — — (153,254) Other acquisitions — (250) (250) Net cash used in investing activities (47,549) (65,331) (96,355) Cash flows from financing activities: Proceeds from lease financing liability — — 18,833 Proceeds from issuance of common stock, net 4,819 12,701 3,859 Repurchase of common stock (22,639) — — Excess tax benefits from stock-based compensation 121 1,955 271 Net cash provided by (used in) financing activities (17,699) 14,656 22,963 Effect of exchange rate changes on cash and cash equivalents 122 (52) (118) Net increase (decrease) in cash and cash equivalents 5,687 (5,550) (55,944) Cash and cash equivalents at beginning of period 90,983 96,533 152,477 Cash and cash equivalents at end of period $96,670 $90,983 $96,533 Supplemental disclosures of cash flow information: Income tax payments, net $5,051 $7,597 $1,427 Non-cash investing and financing activities: Issuance of restricted common stock for Omneon acquisition — — 95,938 Fair value of vested portion of stock options and restricted stock units assumed in connection with theOmneon acquisition — — 2,125 The accompanying notes are an integral part of these consolidated financial statements. 66Table of ContentsHARMONIC INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNOTE 1: DESCRIPTION OF BUSINESSHarmonic Inc. (“Harmonic” or the “Company”) designs, manufactures and sells versatile and high performance video infrastructure products andsystem solutions that enable its customers to efficiently create, prepare and deliver broadcast and on-demand video services to televisions, personal computers,tablets and mobile devices. Historically, the majority of the Company’s sales have been derived from sales of video processing solutions and network edge andaccess systems to cable television operators and from sales of video processing solutions to direct-to-home satellite operators. More recently, the Company isproviding its video processing solutions to telecommunications companies, or telcos, broadcasters and other media companies that create video programmingor offer video services. In September 2010, Harmonic acquired Omneon, Inc. (“Omneon”), a private, venture-backed company specializing in file-basedinfrastructure for the production, preparation and playout of video content typically deployed by broadcasters, satellite operators, content owners and othermedia companies. The acquisition of Omneon is complementary to Harmonic’s core business, expanding Harmonic’s customer reach into content providersand extending its product lines into video servers and video-optimized storage for content production and playout.NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBasis of PresentationThe accompanying consolidated financial statements of Harmonic include the accounts of the Company and its subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation. The Company’s fiscal quarters are based on 13-week periods, except for thefourth quarter which ends on December 31.Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differfrom those estimates.ReclassificationsFrom time to time the Company reclassifies certain period balances to conform to the current year presentation. These reclassifications have no materialimpact on previously reported total assets, total liabilities, stockholders’ equity, results of operations or cash flows.Foreign CurrencyThe functional currency of the Company’s Israeli, Cayman and Swiss operations is the U.S. dollar. All other foreign subsidiaries use the respectivelocal currency as the functional currency. When the local currency is the functional currency, gains and losses from translation of these foreign currencyfinancial statements into U.S. dollars are recorded as a separate component of other comprehensive loss in stockholders’ equity.For subsidiaries where the functional currency is the U.S. dollar, monetary assets and liabilities denominated in currencies other than the U.S. dollar areremeasured into U.S. dollars using exchange rates prevailing on the balance sheet date. The remeasurement gains and losses are included in other expense, netin the Company’s Consolidated Statements of Operations. The Company recorded remeasurement losses of $0.7 million, $0.7 million, and $1.0 million forthe years ended December 31, 2012, 2011 and 2010, respectively. 67Table of ContentsFair Value of Financial InstrumentsThe carrying value of Harmonic’s financial instruments, including cash equivalents, short-term investments, accounts receivable, accounts payableand accrued liabilities, approximate fair value due to their short maturities.Cash and Cash EquivalentsCash and cash equivalents include all cash and highly liquid investments with maturities of three months or less at the date of purchase. The carryingamount of cash and cash equivalents approximates fair value because of the short maturity of those instruments.Short-Term InvestmentsHarmonic’s short-term investments are stated at fair value and are principally comprised of U.S. federal government bonds, state, municipal and localgovernment agencies bonds, corporate bonds, commercial paper and certificates of deposit. The Company classifies its investments as available-for-sale inaccordance with applicable accounting guidance on accounting for certain investments in debt and equity securities and states its investments at fair value,with unrealized gains and losses reported in accumulated other comprehensive income (loss). The specific identification method is used to determine the cost ofsecurities disposed of, with realized gains and losses reflected in other expense, net in the Company’s Consolidated Statements of Operations. Investments areanticipated to be used for current operations and are, therefore, classified as current assets even though maturities may extend beyond one year. The Companymonitors its investment portfolio for impairment on a periodic basis. In the event a decline in value is determined to be other than temporary, an impairmentcharge is recorded. The Company considers current market conditions, as well as the likelihood that it would need to sell its investments prior to a recovery ofpar value, when determining if a loss is other than temporary.Concentrations of Credit Risk/Major Customers/Supplier ConcentrationFinancial instruments which subject Harmonic to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments andaccounts receivable. Cash, cash equivalents and short-term investments are invested in short-term, highly liquid, investment-grade obligations of commercialor governmental issuers, in accordance with Harmonic’s investment policy. The investment policy limits the amount of credit exposure to any one financialinstitution, commercial or governmental issuer. Harmonic’s accounts receivable are derived from sales to cable, satellite, telco, broadcaster and other mediacompanies. Harmonic generally does not require collateral from its customers, and performs ongoing credit evaluations of its customers and provides forexpected losses. Harmonic maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. No customers had abalance greater than 10% of the Company’s net accounts receivable balance as of December 31, 2012 and 2011. In the years ended December 31, 2012, 2011and 2010, sales to Comcast accounted for 12%, 11% and 17%, respectively, of net revenue.Certain of the components and subassemblies included in the Company’s products are obtained from a single source or a limited group of suppliers.Although the Company seeks to reduce dependence on those sole source and limited source suppliers, the partial or complete loss of certain of these sourcescould have at least a temporary adverse effect on the Company’s results of operations and damage customer relationships.Revenue RecognitionHarmonic’s principal sources of revenue are from the sale of hardware, software, hardware and software maintenance contracts, and end-to-endsolutions, encompassing design, manufacture, test, integration and installation of products. Harmonic recognizes revenue when persuasive evidence of anarrangement exists, delivery has occurred or services have been provided, the sale price is fixed or determinable, and collectability is reasonably assured. 68Table of ContentsRevenue from the sale of hardware and software products is recognized when risk of loss and title have transferred. For most of the Company’s productsales, these criteria are met at the time the product is shipped or delivery has occurred. Revenue from distributors and system integrators is recognized ondelivery of the related products, provided all other revenue recognition criteria have been met. The Company’s agreements with these distributors and systemintegrators have terms which are generally consistent with the standard terms and conditions for the sale of the Company’s equipment to end users, and do notprovide for product rotation or pricing allowances, as are typically found in agreements with stocking distributors. The Company accrues for sales returnsand other allowances based on its historical experience.Deferred revenue includes billings in excess of revenue recognized, net of deferred cost of revenue, and invoiced amounts remain deferred until applicablerevenue recognition criteria are met.Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of revenue in the Company’s ConsolidatedStatements of Operations. Costs associated with services are generally recognized as incurred.The Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of thehardware in accordance with applicable revenue recognition accounting guidance. For the sale of stand-alone software products, bundled with hardware notessential to the functionality of the hardware, the Company recognizes revenue in accordance with industry specific software accounting guidance. Revenueassociated with service and maintenance agreements is recognized on a straight-line basis over the period in which the services are performed, generally oneyear. The Company recognizes revenue associated with solution sales using the percentage of completion method. Further details of these accounting policiesare described below.Multiple Element Arrangements. The Company has revenue arrangements that include hardware and software essential to the hardware product’sfunctionality. For transactions originating or materially modified, beginning January 1, 2011, the Company has applied the accounting guidance that requiresthe Company to allocate revenue to all deliverables based on their relative selling prices. For transactions originating prior to January 1, 2011, the Companyapplied software revenue recognition accounting guidance, as described in the “Software” section below. The Company determines the relative selling prices byfirst considering vendor-specific objective evidence of fair value (“VSOE”), if it exists; otherwise third-party evidence (“TPE”) of the selling price is used. Ifneither VSOE nor TPE exists for a deliverable, the Company uses a best estimate of the selling price (“BESP”) for that deliverable.Harmonic has established VSOE for certain elements of its arrangements based on either historical stand-alone sales to third parties or stated renewalrates for maintenance. The Company has VSOE of fair value for maintenance, training and certain professional services.TPE is determined based on competitor prices for similar deliverables when sold separately. The Company is typically not able to determine TPE forcompetitors’ products or services. Generally, the Company’s go-to-market strategy differs from that of its competitors’ and the Company’s offerings contain asignificant level of differentiation, such that the comparable pricing of products with similar functionality cannot be obtained. Furthermore, the Company isunable to reliably determine what competitor similar products’ selling prices are on a stand-alone basis.When the Company is unable to establish fair value of non-software deliverables using VSOE or TPE, the Company uses BESP in its allocation ofarrangement consideration. The objective of using BESP is to determine the price at which the Company would transact a sale if the product or service weresold on a stand-alone basis. The Company determines BESP for a product or service by considering multiple factors, including, but not limited to, pricingpractices, market conditions, competitive landscape, internal costs, geographies and gross margin. The determination of BESP is made through consultationwith Company’s management, taking into consideration the Company’s go-to-market strategy. 69Table of ContentsSoftware. Sales of stand-alone software that are not considered essential to the functionality of the hardware continue to be subject to the industry-specific software revenue recognition guidance. Further, the Company also applied the industry-specific software revenue recognition guidance to its multipleelement arrangements for transactions originating prior to January 1, 2011.In accordance with the software revenue recognition guidance, the Company applies the residual method to recognize revenue for the delivered elements instand-alone software transactions. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration,less the aggregate fair value of any undelivered elements, typically maintenance, provided that VSOE of fair value exists for all undelivered elements. VSOE offair value is based on the price charged when the element is sold separately or, in the case of maintenance, substantive renewal rates for maintenance.Solution Sales. Solution sales for the design, manufacture, test, integration and installation of products, including equipment acquired from thirdparties to be integrated with Harmonic’s products, that are customized to meet the customer’s specifications are accounted for in accordance with applicableguidance on accounting for performance of construction/production contracts. Accordingly, for each arrangement that the Company enters into that includesboth products and services, the Company performs a detailed evaluation to determine whether the arrangement should be accounted for under guidance forconstruction/production contracts or, alternatively, for arrangements that do not involve significant production, modification or customization, under otherapplicable accounting guidance. The Company has a long-standing history of entering into contractual arrangements to deliver the solution sales described.At the outset of each arrangement accounted for as a single arrangement, the Company develops a detailed project plan and associated labor hourestimates for each project. The Company believes that, based on its historical experience, it has the ability to make labor cost estimates that are sufficientlydependable to justify the use of the percentage-of-completion method of accounting and, accordingly, utilizes percentage-of-completion accounting for mostarrangements that are determined to be single arrangements. Under the percentage-of-completion method, revenue recognized reflects the portion of theanticipated contract revenue that has been earned, equal to the ratio of actual labor hours expended to total estimated labor hours to complete the project. Costsare recognized proportionally to the labor hours incurred. For contracts that include customized services for which labor costs are not reasonably estimable, theCompany uses the completed contract method of accounting. Under the completed contract method, 100% of the contract’s revenue and cost is recognized uponthe completion of all services under the contract. If the estimated costs to complete a project exceed the total contract amount, indicating a loss, the entireanticipated loss is recognized.InventoriesInventories are stated at the lower of cost, using the weighted average method, or market. Harmonic establishes provisions for excess and obsoleteinventories to reduce such inventories to their estimated net realizable value after evaluation of historical sales, future demand and market conditions, expectedproduct lifecycles and current inventory levels. Such provisions are charged to cost of revenue in the Company’s Consolidated Statements of Operations.Capitalized Software Development CostsCosts related to research and development are generally charged to expense as incurred. Capitalization of material software development costs beginswhen a product’s technological feasibility has been established. To date, the time period between achieving technological feasibility, which the Company hasdefined as the establishment of a working model, which typically occurs when beta testing commences, and the general availability of such software has beenshort, and, as such, software development costs qualifying for capitalization have been insignificant. 70Table of ContentsThe Company incurs costs associated with developing software for internal use and for which no plan exists to market the software externally. TheCompany capitalizes the costs as part of property and equipment and recognizes the associated depreciation over a useful life of generally three years. In theyears ended December 31, 2012, 2011 and 2010, the Company capitalized $0.8 million, $1.1 million and $1.0 million, respectively, in internal use softwaredevelopment costs.Property and EquipmentProperty and equipment are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives ofthe assets. Estimated useful lives are five years for furniture and fixtures and up to four years for machinery and equipment. Depreciation and amortization forleasehold improvements are computed using the shorter of the remaining useful lives of the assets, up to ten years, or the lease term of the respective assets.Depreciation and amortization expense related to property and equipment for the years ended December 31, 2012, 2011 and 2010 was $15.2 million,$13.9 million and $10.0 million, respectively.GoodwillGoodwill represents the difference between the purchase price and the estimated fair value of the identifiable assets acquired and liabilities assumed. TheCompany tests for impairment of goodwill on an annual basis in the fourth quarter of each of its fiscal years at the Company level, which is the sole reportingunit, and at any other time at which events occur or circumstances indicate that the carrying amount of goodwill may exceed its fair value. When assessing thegoodwill for impairment, the Company considers its market capitalization adjusted for a control premium and, if necessary, the Company’s discounted cashflow model, which involves significant assumptions and estimates, including the Company’s future financial performance, the Company’s weighted averagecost of capital and the Company’s interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require the Company toperform an impairment test include: a significant decline in the financial results of the Company’s operations; the Company’s market capitalization relative tonet book value; unanticipated changes in competition and the Company’s market share; significant changes in the Company’s strategic plans; or adverseactions by regulators.There was no impairment of goodwill resulting from the Company’s annual impairment testing in the fourth quarter of 2012. See Note 4, “Goodwill andIdentified Intangible Assets” for additional information.Long-lived AssetsLong-lived assets represent property and equipment and purchased intangible assets. Purchased intangible assets from business combinations and assetacquisitions include customer contracts, trademarks and tradenames, and maintenance agreements and related relationships, the amortization of which ischarged to general and administrative expenses, and core technology and developed technology, the amortization of which is charged to cost of revenue. TheCompany evaluates the recoverability of intangible assets and other long-lived assets when indicators of impairment are present. When impairment indicatorsare present, the Company evaluates the recoverability of intangible assets and other long-lived assets on the basis of undiscounted cash flows from each assetgroup. If impairment is indicated, provisions for impairment are determined based on fair value, principally using discounted cash flows. This evaluationinvolves significant assumptions and estimates, including the Company’s future financial performance, the Company’s weighted average cost of capital andthe Company’s interpretation of currently enacted tax laws. Circumstances that could indicate impairment and require the Company to perform an impairmenttest include: a significant decline in the cash flows of such asset or asset group; unanticipated changes in competition and the Company’s market share;significant changes in the Company’s strategic plans; or exiting an activity resulting from a restructuring of operations. See Note 4, “Goodwill and IdentifiedIntangible Assets” for additional information. 71Table of ContentsRestructuring Costs and Accruals for Excess FacilitiesThe Company applies applicable accounting guidance on accounting for costs associated with restructuring activities, including exit or disposalactivities, which requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value when theliability is incurred. Harmonic’s restructuring activities have primarily been related to excess facilities. The Company determines the excess facilities accrualbased on expected cash payments, under the applicable facility lease, reduced by any estimated sublease rental income for such facility. See Note 10,“Restructuring and Excess Facilities” for additional information.WarrantyThe Company accrues for estimated warranty costs at the time of revenue recognition and records such accrued liabilities as part of cost of revenue.Management periodically reviews its warranty liability and adjusts the accrued liability based on the terms of warranties provided to customers, historical andanticipated warranty claims experience, and estimates of the timing and cost of warranty claims.Advertising ExpensesThe Company expenses all advertising costs as incurred. Advertising expense was $0.5 million, $0.8 million and $0.4 million for the years endedDecember 31, 2012, 2011 and 2010, respectively.Stock-based Compensation ExpenseHarmonic measures and recognizes compensation expense for all stock-based compensation awards made to employees and directors, including stockoptions, restricted stock units and awards related to our Employee Stock Purchase Plan (“ESPP”), based upon the grant-date fair value of those awards.Stock-based compensation expense recognized for the years ended December 31, 2012, 2011 and 2010 was $18.9 million, $20.9 million and$15.5 million, respectively.Applicable accounting guidance requires companies to estimate the fair value of stock-based compensation awards on the date of grant. The value of theportion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s Consolidated Statements ofOperations.The fair value of stock options is estimated at grant date using the Black-Scholes option pricing model. The Company’s determination of fair value ofstock options on the date of grant, using an option pricing model, is affected by the Company’s stock price, as well as the assumptions regarding a number ofhighly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the term of theawards and projected employee stock option exercise behaviors. The fair value of each restricted stock unit grant is based on the underlying value of theCompany’s common stock on the date of grant.Accounting for Derivatives and Hedging ActivitiesThe Company accounts for derivative financial instruments and hedging contracts in accordance with the applicable accounting guidance, whichrequires that all derivatives be recognized at fair value in the balance sheet and that the corresponding gains or losses be reported either in the ConsolidatedStatement of Operations or as a component of comprehensive income (loss), depending on the type of hedging arrangement utilized by the Company.Forward Exchange Contracts Not Designated as Hedging InstrumentsPeriodically, the Company enters into foreign currency forward exchange contracts (“forward exchange contracts”) to manage exposure related tomonetary assets and liabilities denominated in foreign currencies. The 72Table of ContentsCompany does not enter into derivative financial instruments for trading purposes. The Company does not designate these forward exchange contracts ashedging instruments, and these contracts do not qualify for hedge accounting treatment.At December 31, 2012, the Company had a forward exchange contract to buy Israeli shekels (ILS) with a notional value of $3.2 million, and forwardexchange contracts to sell euros, British pounds, and Japanese yen with notional values of $5.6 million, $2.2 million, and $3.3 million, respectively. Theseforeign exchange contracts mature in the first quarter of 2013. At December 31, 2011, the Company had forward exchange contracts to sell Israeli shekels(ILS) with a notional value of $4.3 million, euros with a notional value of $6.9 million and British pounds with a notional value of $5.7 million. Theseforeign exchange contracts matured in the first quarter of 2012.The Company’s forward exchange contracts generally have maturities of between one and three months. The fair value of these contracts has historicallynot been significant at the end of each reporting period. Typically, realized gains and losses on these forward exchange contracts, which arise as a result ofclosing out the contracts, are substantially offset by remeasurement or realized losses and gains on the underlying balances denominated in non-functionalcurrencies. Gains and losses on forward exchange contracts and from remeasurement and realized gains and losses of the underlying asset balances,denominated in non-functional currencies, are recognized in the Consolidated Statements of Operations in other expense, net.Income TaxesIn preparing the Company’s financial statements, the Company estimates the income taxes for each of the jurisdictions in which the Company operates.This involves estimating the Company’s actual current tax exposures and assessing temporary and permanent differences resulting from differing treatment ofitems, such as reserves and accruals, for tax and accounting purposes.The Company’s income tax policy is to record the estimated future tax effects of temporary differences between the tax bases of assets and liabilities andamounts reported in the Company’s accompanying Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. The Companyfollows the guidelines set forth in the applicable accounting guidance regarding the recoverability of any tax assets recorded on the Consolidated Balance Sheetand provides any necessary allowances as required. Determining necessary allowances requires the Company to make assessments about the timing of futureevents, including the probability of expected future taxable income and available tax planning opportunities.The Company is subject to examination of its income tax returns by various tax authorities on a periodic basis. The Company regularly assesses thelikelihood of adverse outcomes resulting from such examinations to determine the adequacy of its provision for income taxes. The Company has applied theprovisions of the accounting guidance on accounting for uncertainty in income taxes, which requires application of a more-likely-than-not threshold to therecognition and de-recognition of uncertain tax positions. If the recognition threshold is met, the applicable accounting guidance permits the Company torecognize a tax benefit measured at the largest amount of tax benefit that, in the Company’s judgment, is more than 50 percent likely to be realized uponsettlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in theperiod of such change.The Company files annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain taxposition is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain taxposition, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves and penalties, as well asthe related interest, in light of changing facts and circumstances. Changes in the Company’s assessment of its uncertain tax positions or settlement of anyparticular position could materially and adversely impact the Company’s income tax rate, operating results, financial position and cash flows. 73Table of ContentsComprehensive Income (Loss)Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes cumulativetranslation adjustments and unrealized gains and losses on available-for-sale securities.Recent Accounting PronouncementsIn May 2011, the Financial Accounting Standards Board (“FASB”) issued additional guidance on fair value disclosures. This guidance contains certainupdates to the measurement guidance, as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of theinformation required for Level 3 measurements, including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) thesensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. TheCompany adopted these reporting requirements in the first quarter of 2012. Adoption of these new reporting requirements did not have any impact on theCompany because the Company does not hold any assets or liabilities for which fair value is based on Level 3 measurements.In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance requires an entity to present the total ofcomprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement ofcomprehensive income or in two separate but consecutive statements. This guidance eliminates the option to present the components of other comprehensiveincome as part of the statement of equity. The Company adopted this standard in the first quarter of fiscal 2012. While this guidance changes the presentationof comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accountingguidance; therefore, adoption did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.In September 2011, the FASB approved an accounting standard update intended to simplify how an entity tests goodwill for impairment. Theamendment allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step annual goodwill impairment test. Anentity is required to perform step one only if the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is lessthan its carrying amount. Adoption of this accounting standard update did not have an impact on the Company’s financial position, results of operations orcash flows.In December 2011, the FASB issued guidance enhancing disclosure requirements about the nature of an entity’s right to offset. The new guidancerequires the disclosure of the gross amounts subject to rights of set-off, amounts offset in accordance with the accounting standards followed, and the relatednet exposure. The new guidance is effective for both interim and annual reporting periods beginning January 1, 2013. To the extent applicable, the applicationof this guidance in 2013 will result in financial statement disclosure changes only.In July 2012, the FASB issued Accounting Standard Update 2012-2, “Intangibles—Goodwill and Other”, which allows an entity to first assessqualitative factors to determine whether it is more likely than not that an indefinite-lived asset is impaired for determining whether it is necessary to perform thequantitative impairment test. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.Application of this new guidance is not expected to have any impact on the Company because it does not hold any indefinite-lived assets.NOTE 3: OMNEON ACQUISITIONOn September 15, 2010, Harmonic completed the acquisition of 100% of the equity interests of Omneon, Inc., a private, venture-backed companyorganized under the laws of Delaware and headquartered in Sunnyvale, California. Omneon was engaged in the development and support of a range of videoservers, active storage systems and related software applications that media companies use to simultaneously ingest, process, store, 74Table of Contentsmanage and deliver digital media in a wide range of formats. The acquisition of Omneon was intended to strengthen Harmonic’s competitive position in thedigital media market and to broaden the Company’s relationships with customers who produce and distribute digital video content, such as broadcasters,content networks and other major owners of content. The acquisition was also intended to broaden Harmonic’s technology and product lines with digitalstorage and playout solutions which complement Harmonic’s existing video processing products. In addition, the acquisition provided an assembledworkforce and the implicit value of future cost savings as a result of combining entities, and was expected to provide Harmonic with future, but thenunidentified, new products and technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fairvalue of Omneon’s net tangible and intangible assets acquired, resulting in goodwill of approximately $147.8 million that was recorded in connection with thisacquisition.The purchase price, net of $40.5 million of cash acquired, was $251.3 million, which consisted of (i) approximately $153.3 million in cash, net ofcash acquired, (ii) 14.2 million shares of Harmonic common stock with a total fair value of approximately $95.9 million, based on the price of Harmoniccommon stock at the time of close, and (iii) approximately $2.1 million, representing the fair value attributed to shares of Omneon equity awards whichHarmonic assumed for which services had already been rendered as of the close of the acquisition. The cash portion of the purchase price was paid fromexisting cash balances. The Company also incurred a total of $5.9 million of transaction expenses, which were expensed as selling, general and administrativeexpenses in the year ended December 31, 2010.To secure post-closing indemnification obligations of the holders of Omneon capital stock, the Company deposited into escrow an aggregate ofapproximately $21.0 million in cash and 1,926,920 shares of the Company’s common stock that would otherwise have been issued to those holders. In thefirst quarter of 2012, the Company submitted an indemnification claim for reimbursement from escrow and received reimbursement of $0.8 million,representing $0.5 million of cash and 40,372 shares of common stock valued at $0.3 million. The return of shares was reflected as a reduction in commonstock and additional paid-in-capital. The reimbursement was for previously expensed legal and tax costs incurred by the Company following the date ofacquisition. The indemnification period ended on March 15, 2012, and the cash and shares remaining in escrow were distributed to the holders of Omneoncapital stock.Omneon equity awards assumed included substantially all unvested stock options and restricted stock units outstanding as of the date of closing fromOmneon’s 1998 Stock Option Plan and 2008 Equity Incentive Plan, resulting in the assumption of stock options to purchase approximately1,522,000 shares of Harmonic common stock and the assumption of restricted stock units for 1,455,000 shares of Harmonic common stock. The exchangeof stock-based compensation awards was treated as a modification under current accounting guidance. The calculation of the fair value of the exchangedawards immediately before and after the modification did not result in any significant incremental fair value. The fair value of Harmonic’s stock options andrestricted stock units issued to Omneon employees was $17.3 million, which was determined using the Black-Scholes option pricing model, of which$2.1 million represented purchase consideration and $15.2 million was recorded as compensation expense over the weighted average service period of2.5 years.Harmonic accounted for its acquisition of Omneon using the acquisition method of accounting for business combinations. Omneon’s tangible andidentifiable intangible assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the closing date of the acquisition. Theexcess purchase price over the value of the net assets acquired was recorded as goodwill. 75Table of ContentsThe following table summarizes the purchase accounting and the net tangible assets acquired as of the date of acquisition (in thousands): Total purchase consideration $291,802 Less the fair value of net assets acquired: Net tangible asset acquired 34,952 Intangible assets acquired: Existing technology 50,800 Customer contracts 29,200 Patents and core technology 9,800 In-process technology 9,000 Maintenance agreements 5,500 Trade names / trademarks 4,000 Order backlog 800 109,100 Goodwill $147,750 Details of the net assets acquired are as follows: Cash and cash equivalents $40,485 Accounts receivable, net 17,055 Inventories 11,010 Property and equipment, net 12,093 Deferred income tax assets 18,021 Other tangible assets 3,294 Accounts payable (6,829) Deferred revenue (6,399) Deferred income tax liabilities (42,575) Other accrued liabilities (11,203) $34,952 The gross contractual receivable is $17,760.Existing technology. Existing technology represents products that have reached technological feasibility. Omneon’s products include Spectrum andMediaDeck video servers, MediaGrid active storage systems and media management software applications, which were initially designed for, and have beendeployed mostly by, broadcasters that use Omneon’s products for the production and transmission of television content. The Company will amortize theexisting technology intangible asset over an average estimated life of four years.Customer Contracts. Customer contracts represent the value placed on Omneon’s distribution channels and customer relationships. The Company willamortize the customer contract intangible asset over an average estimated life of six years.Patents and core technology. Patents and core technology represent a series of processes and trade secrets that are used in Omneon’s products. TheCompany will amortize the patents and core technology intangible asset over an average estimated life of four years.In-process technology. In-process technology represents incomplete Omneon research and development projects that had not reached technologicalfeasibility as of the closing date, including new versions and incremental improvements to its 3G MediaPort product, which was expected to be used in theSpectrum product line once completed. Acquired in-process technology is recorded at fair value as an indefinite-lived intangible 76(a)(a)Table of Contentsasset at the acquisition date until the completion or abandonment of the associated research and development efforts. The in-process projects were completed inthe first quarter of 2011. The completed technology is estimated to have a useful life of four years.Maintenance agreements. Maintenance agreements relate to revenue generated by Omneon from fees that users pay when they subscribe to maintenanceand support contracts. The Company will amortize the maintenance agreements intangible asset over an average estimated life of six years.Trade names / trademarks. Trade names and trademarks represent the value placed on Omneon’s brand and recognition in the market place. TheCompany will amortize the trade names/trademarks intangible asset over an average estimated life of four years.Backlog. Backlog relates to firm customer orders that are scheduled for delivery subsequent to the acquisition date. The Company amortized thebacklog intangible asset over its estimated life of three and one half months.Goodwill. Goodwill is calculated as the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assetsacquired. Goodwill represents the highly skilled and valuable assembled workforce, the ability to generate new products and services as a combined companyand expected synergistic benefits of the transaction. In accordance with applicable accounting standards, goodwill is not amortized, but instead will be testedfor impairment at least annually or more frequently if certain indicators are present. The goodwill resulting from this acquisition is not deductible for federaltax purposes.The results of operations of Omneon are included in Harmonic’s Consolidated Statements of Operations from September 15, 2010, the date ofacquisition. For the period from September 15, 2010 to December 31, 2010, Omneon products contributed revenues of $36.5 million and a net operatingprofit of $1.1 million.Pro Forma Financial InformationThe unaudited pro forma financial information presented below for the year ended December 31, 2010 summarizes the combined results of operations asif the Omneon acquisition had been completed on January 1, 2010. The unaudited pro forma financial information for the year ended December 31, 2010combines the results for Harmonic for the year ended December 31, 2010 and the historical results of Omneon through September 15, 2010, the date ofacquisition.The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurredhad the merger actually been completed on such dates or of results which may occur in the future. Year endedDecember 31, 2010 (In thousands, exceptper share amounts) Net revenues $506,904 Net loss (17,619) Net loss per share – basic (0.16) Net loss per share – diluted (0.16) 77Table of ContentsNOTE 4: GOODWILL AND IDENTIFIED INTANGIBLE ASSETSThe following is a summary of identified intangible assets (in thousands): December 31, 2012 December 31, 2011 GrossCarryingAmount AccumulatedAmortization NetCarryingAmount GrossCarryingAmount AccumulatedAmortization NetCarryingAmount Identifiable intangibles: Developed core technology $136,145 $(102,449) $33,696 $136,145 $(81,951) $54,194 Customer relationships/contracts 67,098 (48,150) 18,948 67,098 (42,142) 24,956 Trademarks and tradenames 11,361 (9,145) 2,216 11,361 (7,700) 3,661 Maintenance agreements and related relationships 7,100 (3,513) 3,587 7,100 (2,260) 4,840 Total identifiable intangibles $221,704 $(163,257) $58,447 $221,704 $(134,053) $87,651 The changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows (in thousands): December 31, 2012 2011 Balance at beginning of period $212,417 $211,878 Adjustment to deferred tax liability associated with the acquisition of Omneon — (527) Adjustment to fixed assets associated with the acquisition of Omneon — 298 Adjustment to income tax payable associated with the acquisition of Omneon — 771 Foreign currency translation adjustment 101 (3) Total changes in goodwill $212,518 $212,417 Based on the annual impairment test performed as of December 31, 2012, management determined that the Company’s estimated fair value exceeded thecarrying value of its net assets by approximately 21% and that goodwill was not impaired as of December 31, 2012. In addition, the Company has notrecorded any impairment charges related to goodwill for any prior periods.For the years ended December 31, 2012, 2011 and 2010, the Company recorded a total of $29.2 million, $30.4 million and $17.4 million, respectively,of amortization expense for identified intangibles of which $20.5 million, $21.5 million and $12.5 million, respectively, was included in cost of revenue. Theestimated future amortization expense of purchased intangible assets with definite lives is as follows (in thousands): Cost ofRevenue OperatingExpenses Total Year ended December 31, 2013 $19,232 $8,096 $27,328 2014 13,745 6,775 20,520 2105 719 5,783 6,502 2016 — 4,097 4,097 2017 — — — Total future amortization expense $33,696 $24,751 $58,447 78Table of ContentsNOTE 5: SHORT-TERM INVESTMENTSThe following table summarizes the Company’s short-term investments (in thousands): AmortizedCost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFair Value As of December 31, 2012 Certificates of deposit $1,603 $ — $— $1,603 State, municipal and local government agencies bonds 59,009 45 (4) 59,050 Corporate bonds 31,568 4 (10) 31,562 Commercial paper 10,287 1 — 10,288 U.S. federal government bonds 2,003 — — 2,003 Total short-term investments $104,470 $50 $(14) $104,506 As of December 31, 2011 State, municipal and local government agencies bonds $38,785 $46 $(6) $38,825 Corporate bonds 18,613 6 (15) 18,604 Commercial paper 4,195 — — 4,195 U.S. federal government bonds 9,226 4 — 9,230 Total short-term investments $70,819 $56 $(21) $70,854 The following table summarizes the maturities of the Company’s short-term investments (in thousands): December 31, 2012 2011 Less than one year $76,779 $43,470 Due in 1 - 2 years 27,727 27,384 Total short-term investments $104,506 $70,854 In the event the Company needs or desires to access funds from the short-term investments that it holds, it is possible that the Company may not be ableto do so due to market conditions. If a buyer is found, but is unwilling to purchase the investments at par or the Company’s cost, it may incur a loss. Further,rating downgrades of the security issuer or the third parties insuring such investments may require the Company to adjust the carrying value of theseinvestments through an impairment charge. The Company’s inability to sell all or some of the Company’s short-term investments at par or the Company’scost, or rating downgrades of issuers or insurers of these securities, could adversely affect the Company’s results of operations or financial condition.For the years ended December 31, 2012, 2011 and 2010, realized gains and realized losses from the sale of investments were not material.Impairment of InvestmentsThe Company monitors its investment portfolio for impairment on a periodic basis. In the event that the carrying value of an investment exceeds its fairvalue and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment isestablished. A decline of fair value below amortized costs of debt securities is considered other-than temporary if the Company has the intent to sell the securityor it is more likely than not that the Company will be required to sell the security before recovery of the entire amortized cost basis. At the present time, theCompany does not intend to sell its investments that have unrealized losses in accumulated other comprehensive loss. In addition, the Company does notbelieve that it is more likely than not that it will be required to sell its investments that have unrealized losses in accumulated other comprehensive loss beforethe Company recovers the principal amounts invested. The Company believes that the unrealized losses are temporary and do not require an other-than-temporary impairment, based on its evaluation of available evidence as of December 31, 2012. 79Table of ContentsAs of December 31, 2012, there were no individual available-for-sale securities in a material unrealized loss position and the amount of unrealized losseson the total investment balance was insignificant.NOTE 6: FAIR VALUE MEASUREMENTSThe applicable accounting guidance establishes a framework for measuring fair value and requires disclosure about the fair value measurements ofassets and liabilities. This guidance requires the Company to classify and disclose assets and liabilities measured at fair value on a recurring basis, as well asfair value measurements of assets and liabilities measured on a nonrecurring basis in periods subsequent to initial measurement, in a three-tier fair valuehierarchy as described below.The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The guidancedescribes three levels of inputs that may be used to measure fair value: • Level 1 — Observable inputs that reflect quoted prices for identical assets or liabilities in active markets. • Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that arenot active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets orliabilities. The Company primarily uses broker quotes for valuation of its short-term investments. The forward exchange contracts are classifiedas Level 2 because they are valued using quoted market prices and other observable data for similar instruments in an active market. • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.The Company uses the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevantinformation generated by market transactions involving identical or comparable assets or liabilities. During the years ended December 31, 2012 and 2011,there were no nonrecurring fair value measurements of assets and liabilities subsequent to initial recognition. 80Table of ContentsThe following table sets forth the fair value of the Company’s financial assets and liabilities measured at fair value based on the three-tier fair valuehierarchy (in thousands): Level 1 Level 2 Level 3 Total As of December 31, 2012 Cash equivalents Money market funds $54,923 $— $ — $54,923 Corporate bonds with maturity less than 90 days — 3,614 — 3,614 U.S. federal government bonds with maturity less than 90 days 3,005 — — 3,005 Short-term investments Certificates of deposit — 1,603 — 1,603 State, municipal and local government agencies bonds — 59,050 — 59,050 Corporate bonds — 31,562 — 31,562 Commercial paper — 10,288 — 10,288 U.S. federal government bonds 2,003 — — 2,003 Prepaids and other current assets Foreign exchange forward contracts — 344 — 344 Total assets measured and recorded at fair value $59,931 $106,461 $— $166,392 Accrued Liabilities Foreign exchange forward contracts $— $143 $— $143 Total liabilities measured and recorded at fair value $— $143 $— $143 Level 1 Level 2 Level 3 Total As of December 31, 2011 Cash equivalents Money market funds $62,131 $— $ — $62,131 Short-term investments State, municipal and local government agencies bonds — 38,825 — 38,825 Corporate bonds — 18,604 — 18,604 Commercial paper — 4,195 — 4,195 U.S. federal government bonds 9,230 — — 9,230 Prepaids and other current assets Foreign exchange forward contracts — 373 — 373 Total assets measured and recorded at fair value $71,361 $61,997 $— $133,358 Accrued liabilities Foreign exchange forward contracts $— $159 $— $159 Total liabilities measured and recorded at fair value $— $159 $— $159 NOTE 7: ACCOUNTS RECEIVABLEAccounts receivable, net of allowances, consisted of the following (in thousands): December 31, 2012 2011 Accounts receivable $95,515 $118,138 Less: allowance for doubtful accounts, returns and discounts (9,595) (8,252) $85,920 $109,886 81Table of ContentsTrade accounts receivable are recorded at invoiced amounts and do not bear interest. Harmonic generally does not require collateral and performs ongoingcredit evaluations of its customers and provides for expected losses. Harmonic maintains an allowance for doubtful accounts based upon the expectedcollectability of its accounts receivable. The expectation of collectability is based on the Company’s review of credit profiles of customers, contractual termsand conditions, current economic trends and historical payment experience.The following is a summary of activity in allowances for doubtful accounts, returns and discounts for the three years ended December 31, 2012, 2011and 2010 (in thousands): Balance atBeginning ofPeriod Charges toRevenue Charges(Credits) toExpense Additions to(Deductionsfrom) Reserves Balance at Endof Period Year ended December 31, 2012 $8,252 $3,141 $461 $(2,259) $9,595 2011 $5,897 $2,620 $615 $(880) $8,252 2010 $5,163 $1,533 $1,056 $(1,855) $5,897 NOTE 8: CERTAIN BALANCE SHEET COMPONENTSThe following tables provide details of selected balance sheet components (in thousands): December 31, 2012 2011 Inventories: Raw materials $10,731 $14,099 Work-in-process 4,347 4,250 Finished goods 49,192 52,300 $64,270 $70,649 Property and equipment: Furniture and fixtures $7,856 $6,706 Machinery and equipment 108,262 97,916 Leasehold improvements 7,612 7,079 123,730 111,701 Less: accumulated depreciation and amortization (85,608) (71,232) $38,122 $40,469 Accrued liabilities: Accrued compensation $10,890 $10,915 Accrued incentive compensation 7,403 7,917 Accrued warranty 4,292 5,558 Other 19,830 22,506 $42,415 $46,896 NOTE 9: FINANCING LIABILITY FOR CONSTRUCTION IN PROGRESSThe lease for the buildings at the Company’s Sunnyvale location ended in September 2010. In December 2009, the Company entered into a lease for abuilding in San Jose, California, which was intended to become the Company’s new headquarters. In January 2010, the Company began a build-out of thisfacility and during the construction incurred approximately $18.9 million in structural leasehold improvements. Under the terms of the lease, the landlordreimbursed $18.8 million of the construction costs. Because certain improvements constructed by the Company were considered structural in nature and theCompany was responsible for any cost overruns, the Company was considered to be the owner of the construction project for accounting purposes underapplicable accounting guidance on the effect of lessee involvement in asset construction. 82Table of ContentsAs a result, in December 2009 the Company capitalized the fair value of the building of $6.9 million with a corresponding credit to financing liability.The fair value was determined as of December 31, 2009, using a combination of the revenue comparison approach and the income capitalization approach.During the year ended December 31, 2010, the liability increased by $18.9 million due to additional structural leasehold improvements, by $0.2 million dueto land lease expense and by $0.2 million due to capitalized interest expense.Construction was completed in September 2010, at which time the Company relocated to the new building. Upon completion of construction inSeptember 2010, the Company assessed and concluded that it qualified for sale-leaseback accounting under applicable accounting guidance since theCompany has no form of continuing involvement other than the leaseback. In connection with the sale-leaseback of the building, the Company removed fromits books the carrying value of the building, the structural leasehold improvements and the financing liability.NOTE 10: RESTRUCTURING AND EXCESS FACILITIESThe Company has recorded restructuring and excess facilities charges, beginning in 2001 and throughout subsequent years, as a result of changingconditions in the use of its facilities in the United States and the United Kingdom. The initial charges that had been recorded to selling, general andadministrative expense and the related liabilities have been adjusted periodically for changes in sublease income estimates.In 2008, the Company recorded charges in selling, general and administrative expenses for excess facilities of $1.2 million based on a revised estimate ofexpected sublease income from a Sunnyvale building and $0.2 million based on a revised estimate of expected sublease income from two buildings in theUnited Kingdom. The Sunnyvale lease terminated in September 2010 and the United Kingdom lease terminated in October 2010.In 2009, the Company recorded a total of $8.3 million of restructuring charges related to the Scopus acquisition. These charges included $6.3 million incost of revenue, related to provisions for excess and obsolete inventories of $5.8 million and $0.5 million for severance and other expenses. Charges of $2.0million were recorded in operating expenses related to the Scopus acquisition, consisting primarily of severance costs. Substantially all of the severance waspaid during the year ended December 31, 2009.In the fourth quarter of 2010, the Company recorded an excess facilities charge of $3.0 million in selling, general and administrative expenses related tothe closure of the Omneon headquarters in Sunnyvale, California. The charge was based on future rent payments, net of expected sublease income, to be madethrough the end of the lease term in June 2013. In the first quarter of 2011, the Company recorded an additional expense of $0.5 million in selling, general andadministrative expenses related to changes in expected sublease income for this property. Harmonic reassesses this liability quarterly and adjusts as necessary,based on changes in the timing and amounts of expected sublease rental income.The following table summarizes the activity in the restructuring accrual during the years ended December 31, 2012, 2011 and 2010 (in thousands): ExcessFacilities CampusConsolidation UK Closure ScopusFacilities Total Balance at December 31, 2009 $3,117 $1,715 $276 $224 $5,332 Provisions (recoveries) 3,061 (2) (71) 3 2,991 Cash payments, net of sublease income (3,316) (1,713) (205) (169) (5,403) Balance at December 31, 2010 2,862 — — 58 2,920 Provisions 517 — — — 517 Cash payments, net of sublease income (786) — — (58) (844) Balance at December 31, 2011 2,593 — — — 2,593 Provisions 94 — — — 94 Cash payments, net of sublease income (1,818) — — — (1,818) Balance at December 31, 2012 $869 $— $— $— $869 83Table of ContentsNOTE 11: CREDIT FACILITIESHarmonic has a bank line of credit facility with Silicon Valley Bank, which provides for borrowings of up to $10.0 million and matures on August 23,2013. As of December 31, 2012, other than standby letters of credit and guarantees (Note 18), there were no amounts outstanding under the line of creditfacility, and there were no borrowings during the year ended December 31, 2012. This facility, which became effective in August 2011 and was amended inAugust 2012, contains a financial covenant that requires Harmonic to maintain a ratio of unrestricted cash, accounts receivable and short term investments tocurrent liabilities (less deferred revenue) of at least 1.75 to 1.00. As of December 31, 2012, the Company’s ratio under that covenant was 4.11 to 1. In the eventof noncompliance by Harmonic with the covenants under the facility, including the financial covenant referenced above, Silicon Valley Bank would be entitledto exercise its remedies under the facility, including declaring all obligations immediately due and payable. At December 31, 2012, Harmonic was incompliance with the covenants under the line of credit facility. Borrowings pursuant to the line would bear interest at the bank’s prime rate (3.25% atDecember 31, 2012) or at LIBOR for the desired borrowing period (an annualized rate of 0.21% for a one month borrowing period at December 31, 2012) plus1.75%, or 1.96%. Borrowings are not collateralized.NOTE 12: STOCKHOLDERS’ EQUITYPreferred StockHarmonic has 5,000,000 authorized shares of preferred stock. In July 2002, the Company classified 100,000 of these shares as Series A ParticipatingPreferred Stock in connection with the Board’s same day approval and adoption of a stockholder rights plan. This plan had a term of ten years and it expiredin July 2012.Common Stock IssuancesDuring the year ended December 31, 2010, the Company issued 14,150,122 shares of common stock as part of the consideration for the purchase of allof the outstanding shares of Omneon. The shares had a fair market value of $95.9 million at the time of issuance. To secure post-closing indemnificationobligations of the holders of Omneon capital stock, the Company deposited into escrow an aggregate of approximately $21.0 million in cash and 1,926,920shares of the Company’s common stock that would otherwise have been issued to those holders. In the first quarter of 2012, the Company submitted anindemnification claim for reimbursement from escrow and received reimbursement of $0.8 million, representing $0.5 million of cash and 40,372 shares ofcommon stock valued at $0.3 million. The return of shares was reflected as a reduction in common stock and additional paid-in-capital. The reimbursementwas for previously expensed legal and tax costs incurred by the Company following the date of acquisition. The indemnification period ended on March 15,2012, and the cash and shares remaining in escrow were distributed to the holders of Omneon capital stock.Common Stock RepurchasesOn April 24, 2012, the Company’s Board of Directors (the “Board”) approved a stock repurchase program that provides for the repurchase of up to$25 million of the Company’s outstanding common stock during the term of the program, which expires 18 months from Board approval. Under theprogram, the Company may purchase shares of common stock through open market transactions at prices deemed appropriate by management, subject tocertain pre-determined price/volume guidelines set, from time to time, by the Board. The timing and amount of repurchase transactions under the programdepend on a variety of factors, including price, corporate and regulatory requirements, strategic priorities and other market conditions. The purchases arefunded from available working capital. The program may be suspended or discontinued at any time.During 2012, under the program, the Company repurchased and retired approximately 5.1 million shares of common stock at an average price of $4.43per share, for an aggregate purchase price of approximately $22.6 million, leaving approximately $2.4 million available for purchases under the program as ofDecember 31, 2012. The Company charges the excess of cost over par value for the repurchase of its common stock to additional paid-in capital. 84Table of ContentsOn January 28, 2013, the Company’s Board approved a $75 million increase in its stock repurchase program. On February 6, 2013, the Boardapproved a modification to the program that permits the Company to repurchase its common stock pursuant to a plan that meets the requirements of Rule10b5-1 under the Securities Exchange Act of 1934. The program is presently scheduled to expire in July, 2014. On February 19, 2013, the Board approved afurther approximately $35 million increase to the program, contingent upon the closing of a sale of the Company’s cable access HFC business. See Note 20“Subsequent Events”. The Board has authorized aggregate repurchases under the program of $135 million, $22.6 million of which had been utilized forrepurchases as of December 31, 2012.Accumulated Other Comprehensive LossThe components of accumulated other comprehensive loss were as follows (in thousands): December 31, 2012 2011 Foreign currency translation adjustments $(502) $(897) Unrealized gain on investments 37 22 Accumulated Other Comprehensive Loss $(465) $(875) NOTE 13: EMPLOYEE BENEFIT PLANSStock Option Plans1995 Stock Plan. The 1995 Stock Plan provides for the grant of incentive stock options, non-statutory stock options and restricted stock units(“RSUs”). Incentive stock options may be granted only to employees. All other awards may be granted to employees and consultants. Under the terms of the1995 Stock Plan, incentive stock options may be granted at prices not less than 100% of the fair value of the Company’s common stock on the date of grantand non-statutory stock options may be granted at prices not less than 85% of the fair value of the Company’s common stock on the date of grant. RSUs haveno exercise price. Both options and RSUs vest over a period of time as determined by the Board, generally three to four years, and expire seven years from dateof grant. Options granted prior to February 2006 expire ten years from the date of grant. Grants of RSUs and any non-statutory stock options issued at pricesless than the fair market value on the date of grant decrease the plan reserve 1.5 shares for every unit or share granted and any forfeitures of these awards dueto their not vesting would increase the plan reserve by 1.5 shares for every unit or share forfeited. As of December 31, 2012, an aggregate of 21,108,836shares of common stock were reserved for issuance under the 1995 Stock Plan, of which 9,804,018 shares remained available for grant.2002 Director Plan. The 2002 Director Plan provides for the grant of non-statutory stock options and RSUs to non-employee directors of the Company.Under the terms of the 2002 Director Plan, non-statutory stock options may be granted at prices not less than 100% of the fair value of the Company’scommon stock on the date of grant. RSUs have no exercise price. Both options and RSUs vest over a period of time as determined by the Board, generallythree years for the initial grant and one year for subsequent grants to a non-employee director, and expire seven years from date of grant. Grants of RSUsdecrease the plan reserve 1.5 shares for every unit granted and any forfeitures of these awards due to their not vesting would increase the plan reserve by1.5 shares for every unit forfeited. As of December 31, 2012, an aggregate of 872,513 shares of common stock were reserved for issuance under the 2002Director Plan, of which 350,912 shares remained available for grant.Employee Stock Purchase Plan. The 2002 Employee Stock Purchase Plan (“ESPP”) provides for the issuance of share purchase rights to employees ofthe Company. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. The ESPP enablesemployees to purchase shares at 85% of the fair market value of the Common Stock at the beginning or end of the offering period, whichever is lower. Offeringperiods generally begin on the first trading day on or after January 1 and 85Table of ContentsJuly 1 of each year. Employees may participate through payroll deductions of 1% to 10% of their earnings. As of December 31, 2012, 1,230,891 shares ofcommon stock were reserved for issuance under the ESPP. Under the ESPP, 1,598,895, 945,287 and 864,800 shares were issued during fiscal 2012, 2011and 2010, respectively, representing $6.4 million, $5.2 million, and $4.2 million in contributions. As of December 31, 2012, a total of 8,269,109 shareshad been issued under this plan.Assumed Omneon Stock Options. In connection with the Company’s acquisition of Omneon, the Company assumed substantially all stock optionsand RSUs outstanding under Omneon’s 1998 Stock Option Plan and 2008 Equity Incentive Plan. Options assumed were converted into options to purchase1,522,000 shares of the Company’s common stock. RSUs assumed were converted into RSUs for the issuance of 1,455,000 shares of the Company’scommon stock. The assumed options and RSUs retained all applicable terms and vesting periods. In general, the assumed options vest over a four-year periodfrom the original date of grant and expire 10 years from the original grant date. The assumed RSUs generally vest over a four year period from the original dateof grant. As of December 31, 2012, a total of 702,512 shares of common stock were reserved for issuance under the Omneon Plans.Other Stock Option Plans. In addition, the Company has various inactive stock-based incentive plans. As of December 31, 2012, an aggregate of306,882 shares of common stock are reserved for issuance under the inactive plans, representing the aggregate number of shares subject to outstanding stockoptions and RSUs. No further awards may be granted under any of these plans.Stock Options and Restricted Stock UnitsThe following table summarizes the Company’s stock option and restricted stock unit activity during the year ended December 31, 2012 (in thousands,except per share amounts): Stock OptionsOutstanding Restricted Stock UnitsOutstanding SharesAvailablefor Grant NumberofShares WeightedAverageExercisePrice NumberofUnits WeightedAverageGrant DateFair Value Balance at December 31, 2011 7,835 9,303 $7.12 3,713 $7.52 Authorized 5,463 — — — — Granted (5,145) 1,292 5.60 2,569 5.70 Options exercised — (317) 2.80 — — Shares released — — — (1,663) 7.37 Forfeited or cancelled 2,002 (1,378) 8.57 (681) 6.50 Balance at December 31, 2012 10,155 8,900 $6.83 3,938 $6.44 The following table summarizes information about stock options outstanding as of December 31, 2012 (in thousands, except per share amounts andterm): NumberofShares WeightedAverageExercisePrice WeightedAverageRemainingContractualTerm (Years) AggregateIntrinsic Value Vested and expected to vest 8,759 $6.84 3.2 $2,473 Exercisable 6,823 7.03 2.4 1,879 The intrinsic value of options vested and expected to vest and exercisable as of December 31, 2012 is calculated based on the difference between theexercise price and the fair value of the Company’s common stock as of December 31, 2012. The intrinsic value of options exercised during the years endedDecember 31, 2012, 2011 and 2010, was $0.8 million, $5.2 million and $1.0 million, respectively, and is calculated based on the difference between theexercise price and the fair value of the Company’s common stock as of the exercise date. 86Table of ContentsThe following table summarizes information about restricted stock units outstanding as of December 31, 2012 (in thousands, except per share amountsand term): Number ofSharesUnderlyingRestrictedStock Units WeightedAverageRemainingVesting Period(Years) AggregateFairValue Vested and expected to vest 3,661 1.1 $18,563 The fair value of restricted stock units vested and expected to vest as of December 31, 2012 is calculated based on the fair value of the Company’scommon stock as of December 31, 2012.401-K PlanHarmonic has a retirement/savings plan which qualifies as a thrift plan under Section 401(k) of the Internal Revenue Code. This plan allowsparticipants to contribute up to the applicable Internal Revenue Code limitations under the plan. Harmonic can make discretionary contributions to the plan of25% of the first 4% contributed by eligible participants, up to a maximum contribution per participant of $1,000 per year. Employer contributions weresuspended from 2009 through 2012, but have been renewed, on the same basis, for 2013.NOTE 14: STOCK-BASED COMPENSATIONStock-based compensation expense consists primarily of expenses for stock options and restricted stock units granted to employees and shares issuedunder the ESPP. The following table summarizes stock-based compensation expense (in thousands): Year ended December 31, 2012 2011 2010 Employee stock-based compensation in: Cost of revenue $2,996 $3,075 $2,197 Research and development expense 6,405 6,926 5,013 Selling, general and administrative expense 9,525 10,912 8,329 Total employee stock-based compensation recognized in income (loss) 18,926 20,913 15,539 Amount capitalized in inventory — — 10 Total stock-based compensation $18,926 $20,913 $15,549 Stock OptionsThe Company estimated the fair value of all employee stock options using a Black-Scholes valuation model with the following weighted averageassumptions: Employee Stock Options 2012 2011 2010 Expected term (in years) 4.70 4.75 4.75 Volatility 56% 55% 56% Risk-free interest rate 0.9% 1.8% 2.4% Dividend yield 0.0% 0.0% 0.0% The expected term represents the weighted-average period that the stock options are expected to remain outstanding. Our computation of expected termwas determined based on historical experience of similar awards, 87Table of Contentsgiving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The Company usesits historical volatility for a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Companyuses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. TheCompany has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expecteddividend yield of zero in the valuation model.The Company is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation expense only for thoseawards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, whichare generally the vesting periods.The weighted-average fair value per share of options granted for the years ended December 31, 2012, 2011 and 2010 was $2.64, $4.20 and $3.09,respectively. The fair value of all stock options vested during the years ended December 31, 2012, 2011 and 2010 was $4.7 million, $7.1 million and $6.4million, respectively.The total realized tax benefit attributable to stock options exercised during the years ended December 31, 2012, 2011 and 2010, in jurisdictions wherethis expense is deductible for tax purposes, was $0.1 million, $2.0 million and $0.3 million, respectively.Restricted Stock UnitsThe estimated fair value of restricted stock units is based on the market price of the Company’s common stock on the grant date. The fair value of allrestricted stock units issued during the years ended December 31, 2012, 2011 and 2010 was $12.3 million $10.5 million and $6.9 million, respectively.Employee Stock Purchase PlanThe value of the stock purchase right under the ESPP consists of (1) the 15% discount on the purchase of the stock, (2) 85% of the fair value of thecall option, and (3) 15% of the fair value of the put option. The call option and put option were valued using the Black-Scholes option pricing model with thefollowing assumptions: Employee Stock Purchase Plan 2012 2011 2010 Expected term (in years) 0.50 0.50 0.50 Volatility 49% 45% 46% Risk-free interest rate 0.2% 0.2% 0.4% Dividend yield 0.0% 0.0% 0.0% The expected term represents the period of time from the beginning of the offering period to the purchase date. The Company uses its historical volatilityfor a period equivalent to the expected term of the options to estimate the expected volatility. The risk-free interest rate that the Company uses in the Black-Scholes option valuation model is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term. The Company has neverdeclared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and, therefore, used an expected dividend yield of zeroin the valuation model.The weighted-average fair value per share of stock purchase rights granted for the years ended December 31, 2012, 2011 and 2010 was $1.33, $2.15and $1.70, respectively. 88Table of ContentsUnrecognized Stock-Based CompensationAs of December 31, 2012, total unamortized stock-based compensation cost related to unvested stock options and restricted stock units was$25.1 million. This amount will be recognized as expense using the straight-line attribution method over the remaining weighted-average amortization period of2.4 years.NOTE 15: INCOME TAXESIncome (loss) before income tax provision consists of the following (in thousands): Year ended December 31, 2012 2011 2010 United States $(19,319) $(4,925) $66,036 International 10,234 16,558 (60,597) Income (loss) before provision for income taxes $(9,085) $11,633 $5,439 The provision for income taxes consists of the following (in thousands): Year ended December 31, 2012 2011 2010 Current: Federal $3,994 $3,184 $7,940 State 433 755 1,820 International 1,193 1,222 755 Deferred: Federal (2,053) (3,618) 2,267 State (1,362) (392) (1,768) International (353) 1,703 (1,240) Total provision for income taxes $1,852 $2,854 $9,774 The differences between the provision for income taxes computed at the U.S. federal statutory rate and the Company’s actual provision for income taxesare as follows (in thousands): Year ended December 31, 2012 2011 2010 Provision for income taxes at U.S. Federal statutory rate $(3,180) $4,071 $1,904 State taxes (604) 1,053 (469) Differential in rates on foreign earnings (5,181) (9,924) (1,842) Losses for which no benefit is taken 7,279 9,185 6,880 Change in valuation allowance (1,104) — (450) Change in liabilities for uncertain tax positions 1,708 (1,540) 1,261 Non-deductible stock-based compensation 1,996 1,882 1,940 Research credits — (2,138) (1,404) Non-deductible acquisition related expenses — — 1,289 Non-deductible meals and entertainment 232 237 165 Adjustments related to tax positions taken during prior years 619 (255) — Foreign income inclusion 317 — 403 Adjustment related to property and equipment — — 182 Tax-exempt investment income (248) (71) (180) Other 18 354 95 Total provision for income taxes $1,852 $2,854 $9,774 89Table of ContentsThe tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows (in thousands): December 31, 2012 2011 2010 Deferred tax assets: Reserves and accruals $31,999 $31,208 $33,741 Net operating loss carryovers 27,522 24,852 27,431 Research and development credit carryovers 13,704 13,500 12,136 Deferred stock-based compensation 7,684 6,643 6,063 Other tax credits 2,207 2,764 2,813 Total deferred tax assets 83,116 78,967 82,184 Valuation allowance (34,347) (28,354) (26,557) Net deferred tax assets 48,769 50,613 55,627 Deferred tax liabilities: Depreciation and amortization (5,485) (5,434) (3,320) Intangibles (11,656) (17,668) (26,172) Other (483) (135) (1,066) Net deferred tax liabilities $(17,624) $(23,237) $(30,558) The following table summarizes the activity related to the Company’s valuation allowance (in thousands): Year ended December 31, 2012 2011 2010 Balance at beginning of period $28,354 $26,557 $18,025 Additions 5,993 1,797 8,532 Deductions — — — Balance at end of period $34,347 $28,354 $26,557 Pursuant to applicable accounting guidance on accounting for income taxes, the Company is required to periodically review the Company’s deferred taxassets and determine whether, based on available evidence, a valuation allowance is necessary. The Company evaluates the need for a valuation allowancebased on the weight of positive and negative evidence, including expectations of future taxable income. As of December 31, 2012, the Company had avaluation allowance of $34.3 million, which primarily relates to foreign net operating losses and a portion of its California tax credits.As of December 31, 2012, the Company had $87.2 million of state net operating loss carryforwards available to reduce future taxable income that willbegin to expire in 2014 for state tax purposes. As of December 31, 2012 the Company had foreign net operating loss carryforwards of $101.6 million that donot expire. As of December 31, 2012, the portion of state net operating loss carryforwards which relate to stock option deductions is approximately$8.8 million. The Company is tracking the portion of the Company’s deferred tax assets attributable to stock option benefits in a separate memo accountpursuant to applicable accounting guidance. Therefore, these amounts are not included in the Company’s gross or net deferred tax assets. Pursuant toapplicable accounting guidance, the stock option benefits will only be recorded to equity when they reduce cash taxes payable.As of December 31, 2012, the Company had federal and state tax credit carryovers of approximately $1.0 million and $26.6 million available to offsetfuture taxable income. The federal credits expire beginning in 2031, while the state credits will not expire. As of December 31, 2012, the Company had federalAMT credit carryover of approximately $2.2 million, which will not expire. 90Table of ContentsUtilization of the Company’s net operating loss and tax credits may be subject to substantial annual limitation due to the ownership change limitationsprovided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and taxcredits before utilization.The following table summarizes the activity related to the Company’s gross unrecognized tax benefits (in millions): Year ended December 31, 2012 2011 2010 Balance at beginning of period $52.5 $48.4 $47.0 Increases in balances related to tax positions taken during current year 0.6 6.6 7.8 Expiration of the statute of limitations for the assessment of taxes (0.9) (2.1) (5.3) Decreases in balances related to tax positions taken during prior years (0.1) (0.4) (1.1) Balance at end of period $52.1 $52.5 $48.4 The total amount of unrecognized tax benefits that would impact the effective tax rate is approximately $52.1 million at December 31, 2012. TheCompany accrued interest of $2.7 million related to these unrecognized tax benefits during 2012. As of December 31, 2012, the Company had recordedliabilities for potential penalties and interest of $0.3 million and $6.8 million, respectively. In 2012, the Company reversed $1.0 million of liability primarilydue to the expiration of the related statutes of limitations. During the years ended December 31, 2011 and 2010, the Company accrued potential interest of$2.0 million and $1.9 million, respectively, and reversed previously recorded income tax liability of $2.5 million and $2.3 million, respectively, due to theexpiration of the related statutes of limitations. The Company anticipates a decrease of $1.6 million in unrecognized tax benefits due to expiration of the relatedstatutes of limitations within the next 12 months.The Company anticipates the unrecognized tax benefits may increase during 2013 for items that arise in the ordinary course of business. Such amountswill be reflected as an increase in the amount of unrecognized tax benefits and an increase to the current period tax expense. These increases will be consideredin the determination of the Company’s annual effective tax rate. The amount of the unrecognized tax benefit classified as a long-term tax payable, if recognized,would reduce the annual income provision.The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations during which such tax returns maybe audited and adjusted by the relevant tax authorities. The 2008 through 2012 tax years generally remain subject to examination by federal and most state taxauthorities. In significant foreign jurisdictions, the 2006 through 2012 tax years generally remain subject to examination by their respective tax authorities. TheCompany is under audit by the US Internal Revenue Service for the 2008, 2009 and 2010 tax years. In addition, the statute of limitations on our 2008 and2009 U.S. corporate income tax return has been extended to 2013. A subsidiary of the Company is under an audit, which commenced in the first quarter of2012, by the Israel tax authority for the years 2007 through 2010. If, upon the conclusion of these audits, the ultimate determination of taxes owed in the U.S.or Israel is for an amount in excess of the tax provision we have recorded in the applicable period, our overall tax expense, effective tax rate, operating resultsand cash flow could be materially and adversely impacted in the period of adjustment.As of December 31, 2012, U.S. income taxes were not provided on approximately $34.6 million of cumulative undistributed earnings for certain non-U.S. subsidiaries. Determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these non-U.S. subsidiaries that are essentially permanent in duration is not practicable. The Company has not provided U.S. income taxes 91Table of Contentsand foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of December 31, 2012, because the Company intends to permanentlyreinvest such earnings outside the U.S. If these foreign earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreignincome taxes previously paid on these earnings.The Company benefits from a tax ruling concluded in Switzerland. This ruling provides for a lower rate of taxation on certain classes of income andrequires various thresholds of investment and employment in Switzerland. This ruling resulted in a tax savings of $1.1 million, $0.7 million and $0.9million in 2012, 2011 and 2010, respectively, increasing diluted earnings per share by approximately $0.009, $0.006 and $0.009 in 2012, 2011 and 2010,respectively. Our agreement with Switzerland is in effect through the end of 2013 and, subject to the Company meeting investment and employmentrequirements within Switzerland, is renewable for an additional five years.NOTE 16: NET INCOME (LOSS) PER SHAREBasic net income (loss) per share is computed by dividing the net income (loss) attributable to common stockholders for the applicable period by theweighted average number of common shares outstanding during the period. In the years ended December 31, 2012, 2011 and 2010, there were 14,136,804,14,770,995 and 18,774,438, respectively, of potentially dilutive shares, consisting of options, restricted stock units and employee stock purchase planawards, excluded from the net income (loss) per share computations because their effect was antidilutive.The following table presents the calculation of basic and diluted net income per share (in thousands, except per share amounts): December 31, 2012 2011 2010 Net income (loss) (numerator) $(10,937) $8,779 $(4,335) Shares calculation (denominator): Weighted average shares outstanding — basic 116,457 115,175 101,487 Effect of Dilutive Securities: Potential common stock relating to stock options, restricted stock unitsand ESPP — 1,252 — Weighted averages shares outstanding — diluted 116,457 116,427 101,487 Net income (loss) per share — basic $(0.09) $0.08 $(0.04) Net income (loss) per share — diluted $(0.09) $0.08 $(0.04) The diluted net loss per share is the same as basic net loss per share for the years ended December 31, 2012 and 2010 because potential common sharesare only considered when their effect would be dilutive.NOTE 17: SEGMENT INFORMATIONThe Company operates its business in one reportable segment, which is the design, manufacture and sale of video infrastructure solutions, spanningcontent production to multi-screen video delivery. Harmonic’s products enable customers to create, prepare and deliver video services over broadcast, cable,Internet, mobile, satellite and networks. Operating segments are defined as components of an enterprise that engage in business activities for which separatefinancial information is available and evaluated by the chief operating decision maker in deciding how to allocate resources and assessing performance. Thechief operating decision maker is the Company’s Chief Executive Officer. 92Table of ContentsThe Company’s revenue by product type is summarized as follows (in thousands): Year ended December 31, 2012 2011 2010 Video processing products $219,440 $236,624 $202,898 Production and playout products 90,247 98,842 32,579 Edge and access products 138,653 141,880 135,306 Service and support 82,124 71,986 52,561 Total revenues $530,464 $549,332 $423,344 Our revenue by geographic region, based on the location at which each sale originates, and our property and equipment, net by geographic region, issummarized as follows (in thousands): Year ended December 31, 2012 2011 2010 Net revenues: United States $230,336 $244,897 $209,583 International 300,128 304,435 213,761 Total $530,464 $549,332 $423,344 As of December 31, 2012 2011 Property and equipment, net: United States $30,477 $32,925 International 7,645 7,544 Total $38,122 $40,469 NOTE 18: COMMITMENTS AND CONTINGENCIESLeasesHarmonic leases its facilities under noncancelable operating leases which expire at various dates through September 2021. In addition, Harmonic leasesvehicles in several foreign countries under noncancelable operating leases, the last of which expires in 2015. Total rent expense related to these operating leaseswas $7.5 million, $7.5 million and $7.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Future minimum lease paymentsunder noncancelable operating leases at December 31, 2012, are as follows (in thousands): Operating Leases Year ending December 31, 2013 $10,692 2014 7,553 2015 7,041 2016 7,036 2017 7,157 Thereafter 19,797 Total minimum payments $59,276 As of December 31, 2012, $0.9 million of these future lease payments were accrued as part of accrued excess facility costs. See Note 10 “Restructuringand Excess Facilities.” 93Table of ContentsWarrantiesThe Company accrues for estimated warranty costs at the time of product shipment. Management periodically reviews the estimated fair value of itswarranty liability and records adjustments based on the terms of warranties provided to customers, historical and anticipated warranty claims experience, andestimates of the timing and cost of warranty claims. Activity for the Company’s warranty accrual, which is included in accrued liabilities, is summarizedbelow (in thousands): Year ended December 31, 2012 2011 2010 Balance at beginning of period $5,558 $4,811 $4,186 Acquired warranty obligation from Omneon acquisition — — 949 Accrual for current period warranties 5,798 8,245 4,898 Warranty costs incurred (7,064) (7,498) (5,222) Balance at end of period $4,292 $5,558 $4,811 Standby Letters of CreditAs of December 31, 2012, the Company’s financial guarantees consisted of standby letters of credit outstanding, which were principally related toperformance bonds and state requirements imposed on employers. The maximum amount of potential future payments under these arrangements was$0.2 million.IndemnificationHarmonic is obligated to indemnify its officers and the members of its Board pursuant to its bylaws and contractual indemnity agreements. Harmonicalso 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 (includingreasonable attorneys’ fees). There have been no amounts accrued in respect of the indemnification provisions through December 31, 2012.GuaranteesThe Company has $0.5 million of guarantees in Israel, with the majority related to rent, as of December 31, 2012.RoyaltiesHarmonic has licensed certain technologies from various companies. It incorporates these technologies into its own products and is required to payroyalties for such use, usually based on shipment of the related products. In addition, Harmonic has obtained research and development grants under variousIsraeli government programs that require the payment of royalties on sales of certain products resulting from such research. During the years endedDecember 31, 2012, 2011 and 2010 royalty expenses were $3.0 million, $2.4 million and $3.3 million, respectively.Purchase Commitments with Contract Manufacturers and VendorsThe Company relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for a substantial majority of itsproducts. In addition, some components, sub-assemblies and modules are obtained from a sole supplier or limited group of suppliers. During the normalcourse of business, in order to reduce manufacturing lead times and ensure adequate component supply, the Company enters into agreements with certaincontract manufacturers and suppliers that allow them to procure inventory and services based upon criteria as defined by the Company. The Company had$27.6 million of non-cancelable purchase commitments as of December 31, 2012. 94Table of ContentsNOTE 19: LEGAL PROCEEDINGSIn October 2011, Avid Technology, Inc. (“Avid”) filed a complaint in the United States District Court for the District of Delaware alleging thatHarmonic’s Media Grid product infringes two patents held by Avid. In June 2012, Avid served a subsequent complaint alleging that Harmonic’s Spectrumproduct infringes one patent held by Avid. The complaints seek injunctive relief and damages.On November 14, 2012, FastVDO served a lawsuit on Harmonic, alleging infringement of a patent allegedly essential to the H.264 standard and thatHarmonic encoders, transcoders, software and servers that use H.264 infringe their patent.At this time, the Company cannot predict the outcome of the above matters.In April 2010, Arris Corporation filed a complaint in the United States District Court in Atlanta, alleging that the Company’s Streamliner 3000 productinfringes four patents held by Arris. The complaint sought injunctive relief and damages. In connection with this matter, the Company recorded a $1.3 millionliability in the fourth quarter of 2010, based on a tentative agreement of Arris and Harmonic with respect to the settlement of the action. In April 2011, thismatter was settled on essentially the same terms as the tentative agreement and the action was dismissed.In March 2010, Interkey ELC Ltd, or Interkey, filed a lawsuit in Israel, alleging breach of contract against Harmonic and Scopus Video Networks Ltd.(now Harmonic Video Networks Ltd. or “HVN”), which was acquired by Harmonic in March 2009. The plaintiffs were seeking damages in the amount of6,300,000 ILS (approximately $1.7 million). On June 26, 2012, the action was dismissed by the Israeli Central District Court.An unfavorable outcome on the matters referenced above or any other litigation matter could require that Harmonic pay substantial damages, or, inconnection with any intellectual property infringement claims, could require that the Company pay ongoing royalty payments or could prevent the Companyfrom selling certain of its products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matterscould 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 otherintellectual property rights. From time to time, third parties have asserted, and may in the future assert, exclusive patent, copyright, trademark and otherintellectual property rights against Harmonic or its customers. Such assertions arise in the normal course of the Company’s operations. The resolution of anysuch assertions and claims cannot be predicted with certainty. 95Table of ContentsNOTE 20: SUBSEQUENT EVENTSOn February 18, 2013, the Company entered into an Asset Purchase Agreement with Aurora Networks pursuant to which the Company agreed to sell itscable access HFC business (the “Business”) for $46 million in cash. Although no assurance can be given as to whether and when this transaction will close,it is presently scheduled to close on March 4, 2013, and may be terminated by either party if it does not close by March 29, 2013. If this sale closes, theBusiness’s results of operations prior to the closing date will be recorded as part of discontinued operations in the Consolidated Statements of Operations in theCompany’s Form 10-Q for the quarter ending March 29, 2013. The estimated carrying value of the Business’s net assets as of December 31, 2012 is asfollows: December 31, 2012 (in thousands) Inventories $11,162 Prepaid expenses and other current assets 89 Current assets $11,251 Property and equipment, net $1,123 Goodwill 14,864 Long-term assets 15,987 Deferred Revenues $3,333 Accrued liabilities 916 Current liabilities $4,249 96Table of ContentsSELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)The following table sets forth our unaudited quarterly Consolidated Statement of Operations data for each of the eight quarters ended December 31,2012. In management’s opinion, the data has been prepared on the same basis as the audited Consolidated Financial Statements included in this report, andreflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. Fiscal 2012 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share amounts) Quarterly Data: Net revenues $127,721 $132,634 $136,682 $133,427 Gross profit 53,662 57,578 59,904 65,411 Income (loss) from operations (8,657) (2,395) (949) 2,694 Net income (loss) $(7,528) $17 $(8,230) $4,804 Net income (loss) per share — basic $(0.06) $0.00 $(0.07) $0.04 Net income (loss) per share — diluted $(0.06) $0.00 $(0.07) $0.04 Fiscal 2011 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter (In thousands, except per share amounts) Quarterly Data: Net revenues $132,835 $133,996 $138,871 $143,630 Gross profit 61,855 61,828 63,961 66,870 Income (loss) from operations (87) 1,393 3,840 6,627 Net income $516 $390 $3,546 $4,327 Net income per share — basic $0.00 $0.00 $0.03 $0.04 Net income per share — diluted $0.00 $0.00 $0.03 $0.04 97Table of ContentsItem 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone. Item 9A.CONTROLS AND PROCEDURESEVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure thatinformation required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating ourdisclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls andprocedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief FinancialOfficer have concluded that our disclosure controls and procedures were effective.MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.Our management’s report on our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and therelated attestation report of our independent registered public accounting firm are included on pages 60 and 61, respectively, of this Annual Report on Form 10-K, and are incorporated herein by reference.CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.There was no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2012 that has materiallyaffected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B.OTHER INFORMATIONNone. 98Table of ContentsPART IIICertain information required by Part III is omitted from this Annual Report on Form 10-K pursuant to Instruction G to Exchange Act Form 10-K, andthe Registrant will file its definitive Proxy Statement for its 2013 Annual Meeting of Stockholders, pursuant to Regulation 14A of the Securities Exchange Actof 1934, as amended (the “2013 Proxy Statement”), not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, andcertain information included in the 2013 Proxy Statement is incorporated herein by reference. Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEInformation concerning our directors required by this item will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.Information concerning our executive officers required by this item will be set forth in the 2013 Proxy Statement and is incorporated herein by reference.Information relating to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be set forth in the 2013 Proxy Statement and isincorporated herein by reference.Information concerning our audit committee and our audit committee financial expert will be set forth in our 2013 Proxy Statement and is incorporatedherein by reference.Harmonic has adopted a Code of Business Conduct and Ethics for Senior Operational and Financial Leadership (the “Code”), which applies to itsChief Executive Officer, its Chief Financial Officer, its Corporate Controller and other senior operational and financial management. The Code is available onthe Company’s website at www.harmonicinc.com.Harmonic intends to satisfy the disclosure requirement under Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethicsby posting such information on our website, at the address specified above, and, to the extent required by the listing standards of the NASDAQ Global SelectMarket, by filing a Current Report on Form 8-K with the Securities and Exchange Commission disclosing such information. Item 11.EXECUTIVE COMPENSATIONThe information required by this item will be set forth in the 2013 Proxy Statement and is incorporated herein by reference. Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSInformation related to security ownership of certain beneficial owners and security ownership of management and related stockholder matters will be setforth in the 2013 Proxy Statement and is incorporated herein by reference. Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item will be set forth in the 2013 Proxy Statement and is incorporated herein by reference. Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item will be set forth in the 2013 Proxy Statement and is incorporated herein by reference. 99Table of ContentsPART IV Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES1. Financial Statements. See Index to Consolidated Financial Statements in Item 8 on page 60 of this Annual Report on Form 10-K.2. Financial Statement Schedules. Financial statement schedules have been omitted because the information is not required to be set forth herein, is notapplicable or is included in the financial statements or notes thereto.3. Exhibits. The documents listed in the Exhibit Index of this Annual Report on Form 10-K are filed herewith or are incorporated by reference in thisAnnual Report on Form 10-K, in each case as indicated therein. 100Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant, Harmonic Inc., a Delaware corporation, hasduly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State ofCalifornia, on March 1, 2013. HARMONIC INC.By: /s/ PATRICK J. HARSHMAN Patrick J. Harshman President and Chief Executive OfficerPursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons onbehalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date/s/ PATRICK J. HARSHMAN(Patrick J. Harshman) President & Chief Executive Officer (Principal Executive Officer) March 1, 2013/s/ CAROLYN V. AVER(Carolyn V. Aver) Chief Financial Officer(Principal Financial and Accounting Officer) March 1, 2013/s/ LEWIS SOLOMON(Lewis Solomon) Chairman March 1, 2013/s/ HAROLD L. COVERT(Harold L. Covert) Director March 1, 2013/s/ PATRICK GALLAGHER(Patrick Gallagher) Director March 1, 2013/s/ E. FLOYD KVAMME(E. Floyd Kvamme) Director March 1, 2013/s/ WILLIAM REDDERSEN(William Reddersen) Director March 1, 2013/s/ SUSAN G. SWENSON(Susan G. Swenson ) Director March 1, 2013/s/ MITZI REAUGH(Mitzi Reaugh) Director March 1, 2013 101Table of ContentsEXHIBIT INDEXThe following Exhibits to this report are filed herewith or, as shown below, are incorporated herein by reference. ExhibitNumber 3.1(iii) Certificate of Incorporation of Harmonic Inc., as amended 3.2(xxiv) Amended and Restated Bylaws of Harmonic Inc. 4.1(i) Form of Common Stock Certificate 4.3 (iv) Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Harmonic Inc.10.1(i)* Form of Indemnification Agreement10.2(xvi)* 1995 Stock Plan, as amended on June 27, 201210.3(i)* 1995 Director Option Plan and form of Director Option Agreement10.5(v)* 1999 Non-statutory Stock Option Plan10.6(ii) Lease Agreement for 603-611 Baltic Way, Sunnyvale, California10.7(ii) Lease Agreement for 1322 Crossman Avenue, Sunnyvale, California10.8(ii) Lease Agreement for 646 Caribbean Drive, Sunnyvale, California10.9(ii) Lease Agreement for 632 Caribbean Drive, Sunnyvale, California10.10(ii) First Amendment to the Lease Agreement for 549 Baltic Way, Sunnyvale, California10.11(xvi)* 2002 Board Stock Plan, as amended on June 27, 201210.12(xxiii)* 2002 Employee Stock Purchase Plan and Form of Subscription Agreement, as amended on June 22, 201110.15(vi)* Change of Control Severance Agreement between Harmonic Inc. and Patrick Harshman, effective May 30, 200610.21(vii)* Change of Control Severance Agreement between Harmonic Inc. and Charles Bonasera, effective April 24, 200710.22(vii)* Change of Control Severance Agreement between Harmonic Inc. and Neven Haltmayer, effective April 19, 200710.27(xi) Agreement and Plan of Merger among Harmonic Inc., Sunrise Acquisition Ltd., and Scopus Video Networks Ltd., datedDecember 22, 200810.28(xii)* Harmonic Inc. 2002 Director Stock Plan Restricted Stock Unit Agreement10.29(xii) Professional Service Agreement between Harmonic Inc. and Plexus Services Corp., dated September 22, 200310.30(xii) Amendment, dated January 6, 2006, to the Professional Services Agreement for Manufacturing between Harmonic Inc. andPlexus Services Corp., dated September 22, 200310.31(xii) Addendum 1, dated November 26, 2007, to the Professional Services Agreement between Harmonic Inc. and Plexus ServicesCorp., dated September 22, 200310.32(viii)* Change of Control Severance Agreement between Harmonic Inc. and Nimrod Ben-Natan, effective April 11, 2008 102Table of ContentsExhibitNumber 10.34(xiv)* Harmonic Inc. 1995 Stock Plan Restricted Stock Unit Agreement10.36(xv) Lease Agreement between Harmonic Inc. and CRP North First Street, L.L.C. dated December 15, 200910.38(xvii)* Change of Control Agreement between Harmonic Inc. and Carolyn V. Aver, effective June 1, 201010.40(xix) Agreement and Plan of Reorganization among Harmonic Inc., Orinda Acquisition Corporation, Orinda Acquisition, LLC,Omneon, Inc. and Shareholder Representative Services, LLC, as Representative, dated May 6, 201010.41(xx)* Omneon Video Networks, Inc. 1998 Stock Option Plan (as amended through February 27, 2007)10.42(xx)* Omneon, Inc. 2008 Equity Incentive Plan10.43(xxi) Lease Agreement between Omneon, Inc. and Headlands Realty Corporation, dated February 22, 200810.48(xxii) Loan Agreement, dated August 26, 2011, between Harmonic Inc and Silicon Valley Bank10.49(xxv) Amendment No.1 to Loan Agreement between Harmonic Inc. and Silicon Valley Bank21.1 Subsidiaries of Harmonic Inc.23.1 Consent of Independent Registered Public Accounting Firm31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 200232.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002101 The following materials from Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted inExtensible Business Reporting Language (XBRL): Consolidated Balance Sheets at December 31, 2012 and December 31, 2011;(ii) Consolidated Statements of Operations for the Years Ended December 31, 2012, December 31, 2011 and December 31,2010; (iii) Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2012, December 31,2011 and December 31, 2010 (iv) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2012,December 31, 2011 and December 31, 2010, (v) Consolidated Statements of Cash Flows for the Years Ended December 31,2012, December 31, 2011 and December 31, 2010; and (vi) Notes to Consolidated Financial Statements. *Indicates a management contract or compensatory plan or arrangement relating to executive officers or directors of the Company. (i)Previously filed as an Exhibit to the Company’s Registration Statement on Form S-1 No. 33-90752. (iii)Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. (iv)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated July 25, 2002. 103Table of Contents(v)Previously filed as an Exhibit to the Company’s Current Report on Form S-8 dated June 5, 2003. (vi)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated May 31, 2006. (vii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated April 25, 2007. (viii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated April 16, 2008. (xi)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 24, 2008. (xii)Previously filed as an Exhibit to the Company’s Current Annual Report on Form 10-K for the year ended December 31, 2008. (xiv)Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2009. (xv)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated December 18, 2009. (xvi)Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8, dated July 30, 2012. (xvii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated June 3, 2010. (xix)Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q dated August 10, 2010. (xx)Previously filed as an Exhibit to the Company’s Registration Statement on Form S-8 dated September 21, 2010. (xxi)Previously filed as an Exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. (xxii)Previously filed as an Exhibit to the Company’s Current Report on Form 8-K dated September 30, 2011. (xxiii)Previously filed as an Exhibit to the Company’s Definitive Proxy Statement on Schedule 14A dated May 2, 2011. (xxiv)Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q dated August 8, 2012. (xxv)Previously filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q dated November 7, 2012. 104Exhibit 21.1HARMONIC INC. AND SUBSIDIARIESSUBSIDIARIES OF THE REGISTRANT Name State or Other Jurisdictionof Incorporation Percent of Voting SecuritiesOwned by HarmonicHarmonic (Asia Pacific) Limited. Hong Kong 100%Harmonic Delaware, L.L.C. U.S.A. 100%Harmonic Europe S.A.S. France 100%Harmonic Germany GmbH Germany 100%Harmonic Global Limited Cayman Islands 100%Harmonic Japan GK Japan 100%Harmonic India Private Limited India 100%Harmonic International A.G. Switzerland 100%Harmonic International Inc. U.S.A. 100%Harmonic International Limited Bermuda 100%Harmonic Lightwaves (Israel) Ltd. Israel 100%Harmonic Norway A.S. Norway 100%Harmonic Poland Sp. Zo. o Poland 100%Harmonic Singapore P.T.E. Ltd. Singapore 100%Harmonic Spain SL Spain 100%Harmonic Technologies (HK) Limited Hong Kong 100%Harmonic (UK) Limited United Kingdom 100%Harmonic Video Networks Ltd. Israel 100%Harmonic Video Systems Ltd. Israel 100%Horizon Acquisition Ltd. Israel 100%Omneon Singapore Pte. Ltd. Singapore 100%Omneon Asia Pacific, Limited Hong Kong 100%Harmonic Brazil LTDA Brazil 100%Harmonic S.R.I. Argentina 100%Harmonic Mexico International Mexico 100%Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.333-182931, 333-176211, 333-159877, 333-105873,333-91464, 333-84720, 333-59248, 333-43160, 333-86649, 333-65051, 333-44265, 333-136425, 333-116467, 333-38025, 333-140935, 333-154715, 333-19777-99, 333-167197 and 333-169505) of Harmonic Inc. of our report dated March 1, 2013, relating to the financial statements and the effectiveness ofinternal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLCPricewaterhouseCoopers LLCSan Jose, CaliforniaMarch 1, 2013Exhibit 31.1HARMONIC INC.CERTIFICATIONI, Patrick J. Harshman, certify that: 1.I have reviewed this Annual Report on Form 10-K of Harmonic Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 1, 2013 By: /s/ Patrick J. Harshman Patrick J. Harshman President and Chief Executive Officer (Principal Executive Officer)Exhibit 31.2HARMONIC INC.CERTIFICATIONI, Carolyn V. Aver, certify that: 1.I have reviewed this Annual Report on Form 10-K of Harmonic Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: March 1, 2013 By: /s/ Carolyn V. Aver Carolyn V. Aver Chief Financial Officer (Principal Financial Officer)Exhibit 32.1HARMONIC INC.CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002As of the date hereof, I, Patrick J. Harshman, President and Chief Executive Officer of Harmonic Inc. (the “Company”), certify, pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of the Company on Form 10-K for the fiscal yearended December 31, 2012, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of the Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit accompanying suchReport and shall not be deemed filed pursuant to the Securities Exchange Act of 1934, as amended.Date: March 1, 2013 /s/ Patrick J. HarshmanPatrick J. HarshmanPresident and Chief Executive Officer(Principal Executive Officer)Exhibit 32.2HARMONIC INC.CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002As of the date hereof, I, Carolyn V. Aver, Chief Financial Officer of Harmonic Inc. (the “Company”), certify, pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the annual report of the Company on Form 10-K for the fiscal year ended December 31,2012, as filed with the Securities and Exchange Commission (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofthe Company. This written statement is being furnished to the Securities and Exchange Commission as an exhibit accompanying such Report and shall not bedeemed filed pursuant to the Securities Exchange Act of 1934, as amended.Date: March 1, 2013 /s/ Carolyn V. AverCarolyn V. AverChief Financial Officer(Principal Financial Officer)

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