Harmonic 8K/A Omneon Inc. Index to Consolidated Financial Statements | HLIT 15 Nov 10

Exhibit 99.3

HARMONIC INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined balance sheet as of July 2, 2010 and the unaudited pro forma condensed combined statements of operations for the six months ended July 2, 2010 and for the year ended December 31, 2009 are based on the historical financial statements of Harmonic Inc. (“Harmonic”) and Omneon Inc. (“Omneon”) after giving effect to the acquisition of Omneon (“Acquisition”) and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The acquisition was completed on September 15, 2010.

The unaudited pro forma condensed combined financial statements reflect the conversion of all outstanding shares of Omneon common and preferred stock into (a) an aggregate of 14,150,122 shares of Harmonic common stock and (b) cash payments to Omneon stockholders in the aggregate amount of $153.3 million, which is net of cash acquired. In addition, the unaudited pro forma condensed combined financial statements reflect the conversion of all outstanding Omneon options and restricted stock units for continuing employees into an aggregate of 2,976,507 options and restricted stock units to receive Harmonic common stock.

The Acquisition has been accounted for under the purchase method of accounting in accordance with applicable accounting guidance on business combinations. The total estimated purchase price, calculated as described in Note 1 to these unaudited pro forma condensed combined financial statements, is allocated to the net tangible assets and intangible assets of Omneon acquired in connection with the acquisition, based on their estimated fair values as of the completion of the acquisition, and the excess is allocated to goodwill. Harmonic has made a preliminary allocation of the estimated purchase price to the tangible and intangible assets acquired and liabilities assumed based on various preliminary estimates. The allocation of the estimated purchase price is preliminary pending finalization of various estimates and analyses.

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated results of operations or financial position of Harmonic that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of Harmonic. The unaudited pro forma financial statements do not reflect any operating efficiencies and cost savings that Harmonic may achieve, or any additional expenses that it may incur, with respect to the combined companies. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this Current Report on Form 8-K/A. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, Harmonic’s historical consolidated financial statements included in its Annual Report on Form 10-K for its year ended December 31, 2009, filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2010, and in its Form 10-Q for its quarter ended July 2, 2010, filed with the SEC on August 10, 2010, and Omneon’s historical audited consolidated financial statements for the year ended December 31, 2009, and Omneon’s unaudited historical consolidated financial statements for the six months ended June 30, 2010, which are included as Exhibits 99.1 and 99.2, to this Current Report on Form 8-K/A.

UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET

As of July 2, 2010
(in thousands)


	Historical						Pro Forma					Pro Forma
	Harmonic			Omneon			Adjustments			(1)		Combined
ASSETS
Current assets:
Cash and cash equivalents	$	187,893		$	32,323		$	(193,739	)		A	$	26,477
Investments		90,028			5,999			—					96,027
Accounts receivable		71,363			16,932			—					88,295
Inventories		42,816			6,705			2,473			B		51,994
Deferred income taxes		26,503			3,804			10,845			C		41,152
Prepaid expenses and other current assets		25,234			4,351			—					29,585

Total current assets		443,837			70,114			(180,421	)				333,530

Property and equipment, net		42,962			9,644			4,262			D		56,868
Goodwill		64,603			—			125,994			E		209,773
								30,847			C
								(4,853	)		D
								(4,345	)		F
								(2,473	)		B
Intangible assets, net		20,033			—			109,100			G		129,133
Other assets		23,742			4,357			—					28,099

Total assets	$	595,177		$	84,115		$	78,111				$	757,403


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	28,694		$	5,747		$	—				$	34,441
Income taxes payable		2,583			—			—					2,583
Deferred revenue		40,049			10,235			(3,981	)		F		46,303
Accrued and other current liabilities		30,720			8,267			(340	)		D		38,647

Total current liabilities		102,046			24,249			(4,321	)				121,974

Income taxes payable, long-term		39,884			—			866			C		40,750
Financing liability, long-term		24,323			—			—					24,323
Other non-current liabilities		2,228			3,158			40,826			C		45,597
								(364	)		F
								(251	)		D

Total liabilities		168,481			27,407			36,756					232,644


Stockholders’ equity:
Preferred stock		—			63,961			(63,961	)		H		—
Common stock		98			4			14			A		112
								(4	)		H
Additional paid-in-capital		2,290,463			57,809			98,049			A		2,388,512
								(57,809	)		H
Accumulated deficit		(1,862,769	)		(65,066	)		65,066			H		(1,862,769	)
Accumulated other comprehensive loss		(1,096	)		—			—					(1,096	)

Total stockholders’ equity (deficit)		426,696			56,708			41,355					524,759

Total liabilities and stockholders’ equity	$	595,177		$	84,115		$	78,111				$	757,403


(1)		The letters refer to a description of the adjustments in Note 2, “Pro Forma Adjustments,” of the Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS

For the Six Months Ended July 2, 2010
(in thousands, except per share data)


	Historical						Pro Forma					Pro Forma
	Harmonic			Omneon			Adjustments			(1)		Combined
Product revenue	$	158,695		$	51,614		$	—				$	210,309
Service revenue		21,671			8,729			—					30,400

Net revenue		180,366			60,343		$	—					240,709

Product cost of revenue		87,069			20,169			7,575			I		114,870
								57			J
Service cost of revenue		6,810			5,141			73			J		12,024

Total cost of revenue		93,879			25,310			7,705					126,894


Gross profit		86,487			35,033			(7,705	)				113,815

Operating expenses:
Research and development		33,943			12,455			521			J		46,919
Selling, general and administrative		44,919			21,710			(2,389	)		K		64,319
								79			J
Amortization of intangibles		1,067			—			3,392			I		4,459

Total operating expenses		79,929			34,165			1,603					115,697


Income (loss) from operations		6,558			868			(9,308	)				(1,882	)

Interest income, net		809			287			(345	)		L		751
Other income (expense), net		(497	)		(78	)		—					(575	)


Income (loss) before taxes		6,870			1,077			(9,653	)				(1,706	)

Provision for (benefit from) taxes		(2,894	)		586			340			N		(1,968	)


Net income (loss)	$	9,764		$	491		$	(9,993	)			$	262


Net income (loss) per share, basic	$	0.10										$	0.00

Net income (loss) per share, diluted	$	0.10										$	0.00


Weighted average shares, basic		96,845						14,150					110,995

Weighted average shares, diluted		97,529						14,150					111,679


(1)		The letters refer to a description of the adjustments in Note 2, “Pro Forma Adjustments,” of the Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

The accompanying notes are integral part of these unaudited pro forma condensed combined financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS

For the Year Ended December 31, 2009
(in thousands, except per share data)


	Historical						Pro Forma					Pro Forma
	Harmonic			Omneon			Adjustments			(1)		Combined
Product revenue	$	280,009		$	91,834		$	—				$	371,843
Service revenue		39,557			13,600			—					53,157

Net revenue		319,566			105,434			—					425,000

Product cost of revenue		170,734			36,364			15,150			I		222,374
								126			J

Service cost of revenue		14,472			8,100			153			J		22,725

Total cost of revenue		185,206			44,464			15,429					245,099


Gross profit		134,360			60,970			(15,429	)				179,901

Operating expenses:
Research and development		61,435			25,444			1,060			J		87,939
Selling, general and administrative		81,138			39,257			165			J		120,560
Amortization of intangibles		3,822			—			5,983			I		9,805
Asset impairment charge		—			797			—					797
Loss on sale of Castify SAS		—			505			—					505

Total operating expenses		146,395			66,003			7,208					219,606


Loss from operations		(12,035	)		(5,033	)		(22,637	)				(39,705	)

Interest income, net		3,181			47			(1,810	)		L		1,418
Other income (expense), net		(881	)		(407	)		—					(1,288	)
Benefit of preferred stock warrant liability		—			429			(429	)		M		—


Loss before taxes		(9,735	)		(4,964	)		(24,876	)				(39,575	)

Provision for (benefit from) income taxes		14,404			(1,304	)		(724	)		N		12,376


Net loss	$	(24,139	)	$	(3,660	)	$	(24,152	)			$	(51,951	)


Net loss per share, basic and diluted	$	(0.25	)									$	(0.47	)


Weighted average shares, basic and diluted		95,833						14,150					109,983


(1)		The letters refer to a description of the adjustments in Note 2, “Pro Forma Adjustments,” of the Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

HARMONIC, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1: Basis of Pro Forma Presentation

The unaudited pro forma condensed combined balance sheet as of July 2, 2010 and the unaudited pro forma condensed combined statements of operations for the six months ended July 2, 2010 and for the year ended December 31, 2009 are based on historical financial statements of Harmonic and Omneon after giving effect to the Acquisition, and the assumptions and adjustments described in the notes herein. Omneon’s fiscal year ends on December 31, and its historical results have been conformed to Harmonic’s interim reporting period, which is the six months ended July 2, 2010, by adding Omneon’s results for the six months ended June 30, 2010. Omneon’s results for the year ended December 31, 2009 have been added to Harmonic’s results for the year ended December 31, 2009. Harmonic’s historical balance sheet as of July 2, 2010 has been combined with Omneon’s balance sheet as of June 30, 2010 to present the unaudited condensed combined balance sheet as of July 2, 2010.

The unaudited pro forma condensed combined balance sheet as of July 2, 2010 is presented as if the Acquisition occurred on July 2, 2010.

The unaudited pro forma condensed combined statements of operations of Harmonic and Omneon for the six months ended July 2, 2010 and for the year ended December 31, 2009 are presented as if the Acquisition had taken place on January 1, 2009.

The pro forma adjustments are based upon available information and certain assumptions that Harmonic believes are reasonable under the circumstances. A final determination of fair values relating to the Acquisition may differ materially from the preliminary estimates and will include management’s final valuation of the fair value of assets acquired and liabilities assumed. This final valuation will be based on the actual net assets of Omneon that exist as of the date of the completion of the Acquisition.

The unaudited pro forma condensed combined financial statements have been prepared by management for illustrative purposes only and are not necessarily indicative of the consolidated results of operations or financial position of Harmonic that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial position of Harmonic. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and cost savings that we may achieve, or any additional expenses that we may incur, with respect to the combined companies. The pro forma adjustments are based on the preliminary information available at the time of the preparation of this Current Report on Form 8-K/A. The unaudited pro forma condensed combined financial statements, including the notes thereto, are qualified in their entirety by reference to, and should be read in conjunction with, Harmonic’s historical consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 1, 2010, and in the Quarterly Report on Form 10-Q for the quarter ended July 2, 2010, filed with the SEC on August 10, 2010, and Omneon’s historical consolidated financial statements for the year ended December 31, 2009, and Omneon’s unaudited historical consolidated financial statements for the six months ended June 30, 2010, which are included as Exhibits 99.1 and 99.2, to this Current Report on Form 8-K/A.

For the purposes of the pro forma financial information, the following table presents the components of the purchase consideration.


	(In thousands)
Cash consideration	$	193,739
Fair value of common stock to be issued		95,938
Fair value of stock options and restricted stock units to be assumed		2,125

Total	$	291,802

The purchase price reflects the issuance of 14,150,122 shares of Harmonic’s common stock to Omneon stockholders. The fair value of Harmonic’s shares issued is based Harmonic’s closing price per share as reported on the Nasdaq Global Select Market at the closing of the Acquisition.

The fair value of Harmonic’s stock options and restricted stock units to be issued as replacement awards to Omneon employees have been valued at $17.3 million using the Black-Scholes options pricing model of which $15.2 million represents unearned stock-based compensation, which will be recorded as compensation expense as services are provided, and $2.1 million has been recorded as additional purchase consideration.

The following represents the preliminary allocation of the purchase price to the acquired assets and assumed liabilities based on Omneon’s balance sheet as of June 30, 2010 and is for illustrative purposes only.


		(In thousands)
Net tangible assets		$	37,532
Intangible assets:
Existing technology	50,800
In-process technology	9,000
Patents/core technology	9,800
Customer contracts	29,200
Maintenance agreements	5,500
Trademarks/trade names	4,000
Order backlog	800		109,100

Goodwill			145,170

Total purchase price		$	291,802

Goodwill of approximately $145.2 million represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Omneon is 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, cable channels and other major owners of content. The acquisition is 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, the implicit value of future cost savings as a result of combining entities, and is expected to provide Harmonic with future unidentified new products and technologies.

Amortization of intangibles has been provided using the following estimated useful lives: existing technology — four years; patents/core technology — four years; customer contracts — six years; maintenance agreements — six years; trademarks/trade names — four years and order backlog — less than one year. The following represents the estimated amortization of intangibles for the periods presented as if the Acquisition occurred on July 2, 2010:


Fiscal Year	(In Thousands)
Remainder 2010	$	11,767
2011		21,933
2012		21,933
2013		21,933
2014		13,859
2015		5,783
2016		2,892

Total	$	100,100

Note 2: Pro Forma Adjustments

The pro forma adjustments included in the unaudited pro forma condensed combined financial statements are as follows:

	A.		to record cash portion of purchase consideration, the issuance of 14,150,122 shares of Harmonic common stock and the fair value attributable to the portion of assumed Omneon equity awards for which services had already been rendered as of the closing of the acquisition;

	B.		to adjust inventory to fair value. The company will record the amortization of this adjustment within the first year and, as such, has excluded this charge from the unaudited pro forma condensed consolidated statements of operations;

	C.		to record deferred tax impact related to Omneon purchase accounting;

	D.		to adjust fixed assets and associated capital lease liabilities to fair value;

	E.		to record goodwill;

	F.		to record the reduction in Omneon’s reported deferred revenue at June 30, 2010 based on our preliminary estimate of the fair value of Harmonic’s legal performance obligations under Omneon’s existing contracts;

	G.		to record the fair value of Omneon’s identifiable intangible assets.

	H.		to eliminate Omneon’s historical equity;

	I.		to amortize Omneon’s intangible assets using the straight-line method based on the estimated useful lives assigned. The amortization associated with intangible assets assigned a useful life of less than one year has been excluded;

	J.		to record depreciation associated with the fair value adjustment of Omneon’s fixed assets as noted in item (D) above;

	K.		to eliminate acquisition related costs incurred by Harmonic;

to record a reduction in amount of interest income earned on the net cash decrease of $153.3 million used to fund the cash portion of the purchase consideration, calculated as follows:


						Decrease in Six		Decrease in
			Estimated Annual			Months Interest		Annual Interest
(in thousands, except interest rate)	Amount		Interest Rate			Income		Income
Cash payment to Omneon stockholders	$	153,254		0.4% - 1.8	%	$	345	$	1,810

	M.		to eliminate the benefit from a preferred stock warrant liability historically recorded by Omneon. The pro forma adjustment represents the elimination of this amount as if the acquisition had been completed as of January 1, 2009;

	N.		to record tax adjustments at the combined Federal and state rate of 40% to the unaudited pro forma condensed combined statements of operations.

Note 3: Pro Forma Net Income (Loss) Per Share

The pro forma combined basic and diluted net income (loss) per share are based on the number of Harmonic shares of common stock used in computing basic and diluted net income (loss) per share, as well as the 14,150,122 shares of Harmonic common stock issued to Omneon stockholders. Dilutive potential common shares are included only if they have a dilutive effect on earnings per share. No adjustment has been made for the assumed Omneon equity awards in the computation of pro forma combined diluted net income (loss) per share since their effect would be anti-dilutive or not material.

Harmonic (HLIT) 8-K/AOmneon Inc. Index to Consolidated Financial Statements