Acquisitions

12 Months Ended

Dec. 31, 2011

Acquisitions [Abstract]

ACQUISITIONS

NOTE 3: ACQUISITIONS

Omneon

On September 15, 2010, Harmonic completed the acquisition of 100% of the equity interests of Omneon, Inc., a private, venture-backed company organized under the laws of Delaware and headquartered in Sunnyvale, California. Omneon was engaged in the development and support of a range of video servers, active storage systems and related software applications that media companies use to simultaneously ingest, process, store, manage and deliver digital media in a wide range of formats. The acquisition of Omneon was intended to strengthen Harmonic’s competitive position in the digital 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 digital storage and playout solutions which complement Harmonic’s existing video processing products. In addition, the acquisition provided an assembled workforce and the implicit value of future cost savings as a result of combining entities, and was expected to provide Harmonic with future, but then unidentified, new products and technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Omneon’s net tangible and intangible assets acquired, resulting in goodwill of approximately $147.8 million that was recorded in connection with this acquisition.

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 of cash 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 Harmonic common stock at the time of close, and (iii) approximately $2.1 million representing the fair value attributed to shares of Omneon equity awards which Harmonic assumed for which services had already been rendered as of the close of the acquisition. The cash portion of the purchase price was paid from existing cash balances. The Company also incurred a total of $5.9 million of transaction expenses, which were expensed as selling, general and administrative expenses in the year ended December 31, 2010.

Omneon equity awards assumed included substantially all unvested stock options and restricted stock units outstanding as of the date of closing from Omneon’s 1998 Stock Option Plan and 2008 Equity Incentive Plan, resulting in the assumption of stock options to purchase approximately 1,522,000 shares of Harmonic common stock and the assumption of restricted stock units for 1,455,000 shares of Harmonic common stock. The exchange of stock-based compensation awards was treated as a modification under current accounting guidance. The calculation of the fair value of the exchanged awards immediately before and after the modification did not result in any significant incremental fair value. The fair value of Harmonic’s stock options and restricted 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 represents purchase consideration and $15.2 million will be recorded as compensation expense over the weighted average service period of 2.5 years.

Harmonic accounted for its acquisition of Omneon using the acquisition method of accounting for business combinations. Omneon’s tangible and identifiable intangible assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the closing date of the acquisition. The excess purchase price over the value of the net assets acquired was recorded as goodwill. The 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 (a)		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

^(a)  The gross contractual receivable is $17,760.

Existing technology. Existing technology represents products that have reached technological feasibility. Omneon’s products include Spectrum and MediaDeck video servers, MediaGrid active storage systems and media management software applications which were initially designed for, and have been deployed mostly by, broadcasters that use Omneon’s products for the production and transmission of television content. The Company will amortize the existing 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 will amortize 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. The Company 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 technological feasibility as of the closing date, including new versions and incremental improvements to its 3G MediaPort product, which was expected to be used in the Spectrum product line once completed. Acquired in-process technology is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts. The in-process projects were completed in the 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 maintenance and 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. The Company 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 the backlog 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 assets acquired. Goodwill represents the highly skilled and valuable assembled workforce, the ability to generate new products and services as a combined company and expected synergistic benefits of the transaction. In accordance with applicable accounting standards, goodwill is not amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. The goodwill resulting from this acquisition is not deductible for federal tax purposes.

The results of operations of Omneon are included in Harmonic’s Consolidated Statements of Operations from September 15, 2010, the date of acquisition. For the period from September 15, 2010 to December 31, 2010, Omneon products contributed revenues of $36.5 million and a net operating profit of $1.1 million.

Scopus

On March 12, 2009, Harmonic completed the acquisition of 100% of the equity interests of Scopus Video Networks Ltd., or Scopus, a publicly traded company based in Israel. Scopus was engaged in the development and support of digital video networking products that allow network operators to transmit, process, and manage digital video content. The acquisition of Scopus is intended to strengthen Harmonic’s technology and market leadership, particularly in the broadcast contribution and distribution markets. The acquisition extended Harmonic’s diversification strategy, providing it with an expanded international sales force and global customer base, particularly in video broadcast, contribution and distribution markets, as well as complementary video processing technology and expanded research and development capability. In addition, the acquisition provided an assembled workforce and the implicit value of future cost savings as a result of combining entities, and was expected to provide Harmonic with future, but then unidentified, new products and technologies. These opportunities were significant factors to the establishment of the purchase price, which exceeded the fair value of Scopus’ net tangible and intangible assets acquired, resulting in goodwill of approximately $22.8 million that was recorded in connection with this acquisition.

The purchase price, net of $23.3 million of cash acquired, was $63.1 million, which was paid from existing cash balances. The Company also incurred a total of $3.4 million of transaction expenses, which were expensed as selling, general and administrative expenses in the year ended December 31, 2009.

Harmonic accounted for its acquisition of Scopus using the acquisition method of accounting for business combinations. Scopus’ tangible and identifiable intangible assets acquired and liabilities assumed were recorded based upon their estimated fair values as of the closing date of the acquisition. The excess purchase price over the value of the net assets acquired was recorded as goodwill. The following table summarizes the purchase accounting and the net tangible assets acquired as of the date of acquisition (in thousands):

Total purchase consideration	$	86,369
Less the fair value of net assets acquired:
Net tangible assets acquired		38,422
Intangible assets acquired:
Existing technology		10,100
Customer contracts		4,000
Patents and core technology		3,500
In-process technology		2,400
Trade names / trademarks		2,100
Order backlog		2,000
Maintenance agreements		1,000
		25,100
Goodwill	$	22,847

Details of the net assets acquired are as follows:

Cash and cash equivalents	$	23,316
Short-term investments		1,899
Accounts receivable, net (a)		6,308
Inventories		15,899
Property and equipment, net		4,280
Other tangible assets		2,312
Accounts payable		(2,963	)
Deferred revenue		(336	)
Other accrued liabilities		(12,293	)
	$	38,422

^(a) The gross contractual receivable is $6,977.

Existing technology. Existing technology represents products that have reached technological feasibility. Scopus’ primary products included integrated receivers/decoders, intelligent video gateways, and encoders. In addition, Scopus marketed multiplexers, network management systems, and other ancillary technology to its customers. The Company will amortize the existing technology intangible asset over an average estimated life of five years.

Customer Contracts. Customer contracts represent the value placed on Scopus’ distribution channels and customer relationships. The Company will amortize the customer contracts intangible asset over an estimated life of four to five years.

Patents and core technology. Patents and core technology represent a series of processes and trade secrets that are used in Scopus’ products. The Company 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 Scopus research and development projects that had not reached technological feasibility as of the closing date. Acquired in-process technology is recorded at fair value as an indefinite-lived intangible asset at the acquisition date until the completion or abandonment of the associated research and development efforts. Three of the in-process projects were completed in the fourth quarter of 2009 and the remaining three projects were completed in the first quarter of 2010. The completed technology is being amortized over its estimated useful lives of three to six years.

Trade names / trademarks. Trade names and trademarks represent the value placed on Scopus’ brand and recognition in the market place. The Company will amortize the trade names/trademarks intangible asset over an average estimated life of five years.

Backlog. Backlog relates to firm customer orders that are scheduled for delivery subsequent to the acquisition date. The Company amortized the backlog intangible asset over its estimated life of six months.

Maintenance agreements. Maintenance agreements relate to revenue generated by Scopus from fees that users pay when they subscribe to maintenance and support contracts. The Company will amortize the maintenance agreements intangible asset over an average estimated life of four years.

Goodwill. Goodwill is calculated as the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets acquired. Goodwill represents the value associated with Scopus’ assembled workforce, the implicit value of future cost savings as a result of combining entities, and future unidentified new products and technologies. In accordance with applicable accounting standards, goodwill is not amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. The goodwill resulting from this acquisition is not deductible for federal tax purposes.

The results of operations of Omneon are included in Harmonic’s Consolidated Statements of Operations from March 12, 2009, the date of acquisition. Subsequent to the acquisition, the Company recorded expenses of $8.2 million in the year ended December 31, 2009, primarily for excess and obsolete inventories related to product discontinuances and severance costs. For the period from March 12, 2009 to December 31, 2009, Scopus’ products contributed revenues of $19.3 million and a net operating loss of $22.5 million.

Pro Forma Financial Information

The unaudited pro forma financial information presented below for the year ended December 31, 2009 summarizes the combined results of operations as if the Scopus and Omneon acquisitions had been completed on January 1, 2009. The unaudited pro forma financial information for the year ended December 31, 2009 combines the results for Harmonic for the year ended December 31, 2009, the historical results of Omneon for the year ended December 31, 2009 and the historical results of Scopus through March 12, 2009, the date of acquisition.

The unaudited pro forma financial information presented below for the year ended December 31, 2010 summarizes the combined results of operations as if the Omneon acquisition had been completed on January 1, 2010. The unaudited pro forma financial information for the year ended December 31, 2010 combines the results for Harmonic for the year ended December 31, 2010 and the historical results of Omneon through September 15, 2010, the date of acquisition.

The pro forma financial information is presented for informational purposes only and does not purport to be indicative of what would have occurred had the merger actually been completed on such dates or of results which may occur in the future.

	Year Ended December 31,
	2010			2009
Net revenues	$	506,904		$	428,885
Net loss	$	(17,619	)	$	(37,253	)
Net loss per share – basic and diluted	$	(0.16	)	$	(0.34	)