Common use of Benefit and Compensation Plans Clause in Contracts

Benefit and Compensation Plans. Stock Option Plans. In 1988, the Company adopted an incentive and non-statutory stock option plan (the "1988 Plan") for which 2,251,834 shares have been reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness of the Company's initial public offering ("IPO"), no further grants have been, or will be, made under the 1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods not to exceed ten years. Exercise prices of incentive stock option grants under both plans must be at least 100% of the fair market value of the stock at the date of grant and for nonstatutory stock options must be at least 85% of the fair market value of the stock at the date of grant. Under both plans, the options generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. The Company has reserved 4,400,000 shares of Common Stock for issuance under the 1995 Plan. Upon the closing of the acquisition of HDS in January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became effective. The Company assumed all outstanding HDS options and issued new options at the closing totaling 800,000 shares. No further grants have been, or will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory stock option plan (the "1999 Plan") for which 400,000 shares have been reserved for issuance. Options granted under the 1997 and 1999 Plans were at fair market value and for periods not to exceed ten years with vesting generally under the same terms as the 1988 and 1995 plans. Director Option Plan. Effective upon the IPO, the Company adopted the 1995 Director Option Plan (the "Director Plan") and reserved 100,000 shares of Common Stock for issuance thereunder. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company pursuant to an automatic, nondiscretionary grant mechanism. 41 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes activities under the Plans: WEIGHTED SHARES AVAILABLE STOCK OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------------- ------------- -------------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Balance at December 31, 1996............... 210 2,482 $ 3.28 Shares authorized.......................... 960 -- -- Options granted............................ (1,008) 1,008 9.04 Options exercised.......................... -- (370) 1.65 Options canceled........................... 308 (354) 7.13 ------ ------ ------ Balance at December 31, 1997............... 470 2,766 5.11 Shares authorized.......................... 1,950 -- -- Options granted............................ (2,128) 2,128 6.24 Options exercised.......................... -- (374) 2.10 Options canceled........................... 240 (274) 7.28 ------ ------ ------ Balance at December 31, 1998............... 532 4,246 5.80 Shares authorized.......................... 1,560 -- --

Benefit and Compensation Plans. Stock Option Plans. In 1988, the Company adopted an incentive and non-statutory stock option plan (the "1988 Plan") for which 2,251,834 shares have been reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness of the Company's initial public offering ("IPO"), no further grants have been, or will be, made under the 1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods not to exceed ten years. Exercise prices of incentive stock option grants under both plans must be at least 100% of the fair market value of the stock at the date of grant and for nonstatutory stock options must be at least 85% of the fair market value of the stock at the date of grant. Under both plans, the options generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. The Company has reserved 4,400,000 3,240,000 shares of Common Stock for issuance under the 1995 Plan. Upon the closing of the acquisition of HDS New Media 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Communication Ltd. ("NMC") in January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became effective. The Company assumed all outstanding HDS NMC options and issued new options at the closing totaling 800,000 shares. No further grants have been, or will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory stock option plan (the "1999 Plan") for which 400,000 shares have been reserved for issuance. Options granted under the 1997 and 1999 Plans Plan were at fair market value and for periods not to exceed ten years with vesting generally under the same terms as the 1988 and 1995 plans. Director Option Plan. Effective upon the IPO, the Company adopted the 1995 Director Option Plan (the "Director Plan") and reserved 100,000 shares of Common Stock for issuance thereunder. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company pursuant to an automatic, nondiscretionary grant mechanism. 41 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes activities under the Plans: WEIGHTED SHARES AVAILABLE STOCK OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------------- ------------- -------------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Balance at December 31, 1996............... 210 2,482 $ 3.28 Shares authorized.......................... 960 -- -- Options granted............................ (1,008) 1,008 9.04 Options exercised.......................... -- (370) 1.65 Options canceled........................... 308 (354) 7.13 ------ ------ ------ Balance at December 31, 1997............... 470 2,766 5.11 Shares authorized.......................... 1,950 -- -- Options granted............................ (2,128) 2,128 6.24 Options exercised.......................... -- (374) 2.10 Options canceled........................... 240 (274) 7.28 ------ ------ ------ Balance at December 31, 1998............... 532 4,246 5.80 Shares authorized.......................... 1,560 -- --)

Benefit and Compensation Plans. Stock Option Plans. In 1988, the Company adopted an incentive and non-statutory stock option plan (the "1988 Plan") for which 2,251,834 shares have been reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness of the Company's initial public offering ("IPO"), no further grants have been, or will be, made under the 1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods not to exceed ten years. Exercise prices of incentive stock option grants under both plans must be at least 100% of the fair market value of the stock at the date of grant and for nonstatutory stock options must be at least 85% of the fair market value of the stock at the date of grant. Under both plans, the options generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. The Company has reserved 4,400,000 shares of Common Stock for issuance under the 1995 Plan. Upon the closing of the acquisition of HDS in January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became effective. The Company assumed all outstanding HDS options and issued new options at the closing totaling 800,000 shares. No further grants have been, or will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory stock option plan (the "1999 Plan") for which 400,000 shares have been reserved for issuance. Options granted under the 1997 and 1999 Plans were at fair market value and for periods not to exceed ten years with vesting generally under the same terms as the 1988 and 1995 plans. Director Option Plan. Effective upon the IPO, the Company adopted the 1995 Director Option Plan (the "Director Plan") and reserved 100,000 shares of Common Stock for issuance thereunder. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company pursuant to an automatic, nondiscretionary grant mechanism. 41 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes activities under the Plans: WEIGHTED SHARES AVAILABLE STOCK OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------------- ------------- -------------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Balance at December 31, 1996............... 210 2,482 $ 3.28 Shares authorized.......................... 960 -- -- Options granted............................ (1,008) 1,008 9.04 Options exercised.......................... -- (370) 1.65 Options canceled........................... 308 (354) 7.13 ------ ------ ------ Balance at December 31, 1997............... 470 2,766 5.11 Shares authorized.......................... 1,950 -- -- Options granted............................ (2,128) 2,128 6.24 Options exercised.......................... -- (374) 2.10 Options canceled........................... 240 (274) 7.28 ------ ------ ------ Balance at December 31, 1998............... 532 4,246 5.80 Shares authorized.......................... 1,560 -- ---- Options granted............................ (000) 000 00.00 Options exercised.......................... -- (1,273) 4.80 Options canceled........................... 205 (218) 9.04 ------ ------ ------ Balance at December 31, 1999............... 1,320 3,732 $12.48 ====== ====== ====== The following table summarizes information regarding stock options outstanding at December 31, 1999: STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE ---------------------------------------------------- --------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER OUTSTANDING AT REMAINING EXERCISABLE AT RANGE OF DECEMBER 31, CONTRACTUAL LIFE WEIGHTED-AVERAGE DECEMBER 31, WEIGHTED-AVERAGE EXERCISE PRICES 1999 (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE --------------- -------------- ---------------- ---------------- -------------- ---------------- (IN THOUSANDS, EXCEPT EXERCISE PRICE AND LIFE) $0.15 - 5.00.. 750 4.4 $ 2.10 721 $ 2.01 5.47 - 6.75.. 826 7.5 6.05 309 6.39 6.88 - 8.38.. 757 8.2 7.87 258 7.89 8.44 - 25.50.. 1,161 8.7 17.36 241 10.12 26.44 - 94.94.. 238 9.7 58.41 7 26.44 ----- --- ------ ----- ------ 3,732 7.5 $12.48 1,536 $ 5.26 ===== === ====== ===== ====== The weighted-average fair value of options granted in 1999 was $30.76. The weighted-average fair value of options granted in 1998 and 1997 was $6.79 and $9.14, respectively. Employee Stock Purchase Plan. Effective upon the IPO, the Company adopted the 1995 Employee Stock Purchase Plan (the "Purchase Plan") for which 800,000 shares have been reserved for issuance. The Purchase Plan enables employees to purchase shares at 85% of the fair market value of the Common Stock at the beginning or end of each six month purchase period. The Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. 201,826, 174,476 and 136,542 shares were issued under the Purchase Plan during 1999, 1998 and 1997, respectively. Fair Value Disclosures. The Company accounts for its stock-based compensation plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. If compensation cost for the Company's stock-based compensation plans had been determined based on the fair value method at the grant dates, as 42 HARMONIC INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) prescribed in SFAS 123, the Company's net income (loss) and net income (loss) per share would have been as follows: 1999 1998 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) Net income (loss): As reported......................................... $23,680 $(21,453) $4,929 Pro forma........................................... 17,223 (26,457) 3,209 Basic net income (loss) per share: As reported......................................... $ 0.84 $ (0.92) $ 0.24 Pro forma........................................... 0.61 (1.14) 0.15 Diluted net income (loss) per share: As reported......................................... $ 0.76 $ (0.92) $ 0.21 Pro forma........................................... 0.56 (1.14) 0.14 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN 1999 1998 1997 1999 1998 1997 Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Volatility 90% 65% 55% 90% 65% 55% Risk-free interest rate 4.7% - 6.7% 4.4% - 5.6% 5.6% - 6.7% 4.6% - 6.4% 4.6% - 5.5% 5.1% - 6.3%

Benefit and Compensation Plans. Stock Option Plans. In 1988, the Company adopted an incentive and non-statutory stock option plan (the "1988 Plan") for which 2,251,834 1,125,917 shares have been reserved for issuance. Following adoption of the 1995 Stock Plan (the "1995 Plan") at the effectiveness of the Company's initial public offering ("IPO"), no further grants have been, or will be, made under the 1988 Plan. Options granted under the 1988 Plan and the 1995 Plan are for periods not to exceed ten years. Exercise prices of incentive stock option grants under both plans must be at least 100% of the fair market value of the stock at the date of grant and for nonstatutory stock options must be at least 85% of the fair market value of the stock at the date of grant. Under both plans, the options generally vest 25% at one year from date of grant, and an additional 1/48 per month thereafter. The Company has reserved 4,400,000 1,620,000 shares of Common Stock for issuance under the 1995 Plan. Upon the closing of the acquisition of HDS New Media Communication Ltd. ("NMC") in January 1998, the 1997 Non-Statutory Option Plan (the "1997 Plan") became effective. The Company assumed all outstanding HDS NMC options and issued new options at the closing totaling 800,000 400,000 shares. No further grants have been, or will be, made under the 1997 Plan. In 1999, the company adopted a non-statutory stock option plan (the "1999 Plan") for which 400,000 shares have been reserved for issuance. Options granted under the 1997 and 1999 Plans Plan were at fair market value and for periods not to exceed ten years with vesting generally under the same terms as the 1988 and 1995 plans. Director Option Plan. Effective upon the IPO, the Company adopted the 1995 Director Option Plan (the "Director Plan") and reserved 100,000 50,000 shares of Common Stock for issuance thereunder. The Director Plan provides for the grant of nonstatutory stock options to certain nonemployee directors of the Company pursuant to an automatic, nondiscretionary grant mechanism. 41 HARMONIC INC. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table summarizes activities under the Plans: WEIGHTED SHARES AVAILABLE STOCK OPTIONS AVERAGE FOR GRANT OUTSTANDING EXERCISE PRICE ---------------- ------------- -------------- (IN THOUSANDS, EXCEPT EXERCISE PRICE) Balance at December 31, 1996............... 210 2,482 $ 3.28 Shares authorized.......................... 960 -- -- Options granted............................ (1,008) 1,008 9.04 Options exercised.......................... -- (370) 1.65 Options canceled........................... 308 (354) 7.13 ------ ------ ------ Balance at December 31, 1997............... 470 2,766 5.11 Shares authorized.......................... 1,950 -- -- Options granted............................ (2,128) 2,128 6.24 Options exercised.......................... -- (374) 2.10 Options canceled........................... 240 (274) 7.28 ------ ------ ------ Balance at December 31, 1998............... 532 4,246 5.80 Shares authorized.......................... 1,560 -- --)