<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1 to Current Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934)
Date of Report May 2, 2000
Commission File No. 0-25826
HARMONIC INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0201147
(State of incorporation) (I.R.S. Employer Identification No.)
549 Baltic Way
Sunnyvale, CA 94089
(408) 542-2500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
--------------
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
May 2, 2000 as set forth in the pages attached hereto.
ITEM 7 - FINANCIAL STATEMENTS AND EXHIBITS
The following financial statements, pro forma financial information and exhibits
are filed as part of this report.
(a) Financial statements of business acquired:
- Report of Independent Public Accountants.
- Consolidated Statements of Net Investment as of December 31, 1998 and
December 31, 1999.
- Consolidated Income Statements for the years ended December 31, 1997,
1998, and 1999.
- Consolidated Statements of Changes in Net Investment for the years
ended December 31, 1997, 1998, and 1999.
- Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.
- Notes to Consolidated Financial Statements for the years ended
December 31, 1997, 1998 and 1999.
(b) Pro forma financial information required:
- Harmonic Inc. Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1999.
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- Harmonic Inc. Unaudited Pro Forma Condensed Combined Statement of
Operations for the three months ended March 31, 2000.
- Harmonic Inc. Unaudited Pro Forma Condensed Combined Balance Sheet as
of March 31, 2000.
(c) Exhibits.
99.1 Press Release dated May 3, 2000, announcing the completion of the
acquisition of the DiviCom business of C-Cube Microsystems Inc.
Previously filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned, hereunto
duly authorized.
Harmonic Inc.
Dated: July 17, 2000 By: /s/ Robin N. Dickson
-----------------------------------------
Name: Robin N. Dickson
Title: Chief Financial Officer
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ITEM 7 (a) - Financial Statements of Business Acquired
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated statements of net investment
of the DiviCom business ("DiviCom" or the "Company"), (an operating unit of
C-Cube Microsystems Inc.), as of December 31, 1998 and December 31, 1999, and
the related consolidated income statements, statements of changes in net
investment and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of DiviCom at December 31, 1998
and December 31, 1999, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
April 28, 2000
[May 3, 2000 as to Note 1]
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DIVICOM BUSINESS (AN OPERATING UNIT OF C-CUBE MICROSYSTEMS INC.)
CONSOLIDATED STATEMENTS OF NET INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 15,044 $ 21,151
Short-term investments .................................................. 24,838 7,954
Accounts receivable, net of allowances: 1998 -- $5,109; 1999 -- $4,238
Billed ................................................................ 17,743 43,719
Unbilled .............................................................. 10,330 18,615
--------- ---------
Total receivables ................................................... 28,073 62,334
--------- ---------
Inventories ............................................................. 7,850 10,369
Deferred income taxes ................................................... 5,736 6,969
Other current assets .................................................... 6,150 4,593
--------- ---------
Total current assets ................................................ 87,691 113,370
Property and equipment -- net ............................................. 10,352 15,938
Purchased technology -- net ............................................... 7,551 4,719
Other assets .............................................................. -- 1,499
--------- ---------
Total ............................................................... $ 105,594 $ 135,526
========= =========
LIABILITIES AND NET INVESTMENT
Current liabilities:
Accounts payable ........................................................ $ 9,305 $ 14,744
Accrued compensation and benefits ....................................... 4,609 5,657
Other accrued liabilities ............................................... 7,248 7,340
Income taxes payable .................................................... 3,933 2,855
Deferred contract revenue ............................................... 4,975 1,921
Current portion of deferred rent ........................................ -- 15
--------- ---------
Total current liabilities ........................................... 30,070 32,532
Long-term deferred rent ................................................... 18 23
Deferred income taxes ..................................................... 481 2,004
--------- ---------
Total liabilities ................................................... 30,569 34,559
Accumulated other comprehensive income (loss) ............................. 103 (190)
Net investment ............................................................ 74,922 101,157
--------- ---------
Total ............................................................... $ 105,594 $ 135,526
========= =========
</TABLE>
See notes to consolidated financial statements.
4
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DIVICOM BUSINESS (AN OPERATING UNIT OF C-CUBE MICROSYSTEMS INC.)
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues ................................ $118,760 $142,715 $185,500
-------- -------- --------
Costs and expenses:
Cost of product revenues ................. 59,965 75,088 93,656
Research and development ................. 17,659 21,449 30,106
Selling, general and administrative ...... 15,423 23,959 32,199
-------- -------- --------
Total costs and expenses .............. 93,047 120,496 155,961
-------- -------- --------
Income from operations ...................... 25,713 22,219 29,539
Other income, net ........................... 826 1,751 1,260
-------- -------- --------
Income before income taxes .................. 26,539 23,970 30,799
Provision for income taxes .................. 9,760 8,390 10,173
-------- -------- --------
Net income .................................. $ 16,779 $ 15,580 $ 20,626
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
5
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DIVICOM BUSINESS (AN OPERATING UNIT OF C-CUBE MICROSYSTEMS INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN NET INVESTMENT
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE NET COMPREHENSIVE
INCOME (LOSS) INVESTMENT INCOME
------------- ---------- -------------
<S> <C> <C> <C>
Balances, January 1, 1997 .......................... $ 14 $ 45,351
Net income ......................................... 16,779 $ 16,779
Accumulated translation adjustments ................ (61) (61)
---------
Comprehensive income ............................... $ 16,718
=========
Transactions with C-Cube Semiconductor:
Tax benefit from employee stock transactions ..... 239
Other ............................................ (1,910)
---------
Total ........................................ (1,671)
--------- ---------
Balances, December 31, 1997 ........................ (47) 60,459
Net income ......................................... 15,580 $ 15,580
Accumulated translation adjustments ................ 90 90
Unrealized gain on investments ..................... 60 60
---------
Comprehensive income ............................... $ 15,730
=========
Transactions with C-Cube Semiconductor:
Tax benefit from employee stock transactions...... 518
Other ............................................ (1,635)
---------
Total ........................................ (1,117)
--------- ---------
Balances, December 31, 1998 ........................ 103 74,922
Net income ......................................... 20,626 $ 20,626
Accumulated translation adjustments ................ (233) (233)
Change in unrealized gain on investments ........... (60) (60)
---------
Comprehensive income ............................... $ 20,333
=========
Transactions with C-Cube Semiconductor:
Tax benefit from employee stock transactions...... 8,160
Other ............................................ (2,551)
---------
Total ........................................ 5,609
--------- ---------
Balances, December 31, 1999 ........................ $ (190) $ 101,157
========= =========
</TABLE>
See notes to consolidated financial statements.
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DIVICOM BUSINESS (AN OPERATING UNIT OF C-CUBE MICROSYSTEMS INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................................................... $ 16,779 $ 15,580 $ 20,626
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 3,698 3,849 5,767
Amortization of purchased technology ............................ 2,832 2,832 2,832
Deferred income taxes ........................................... 3,922 (4,108) 290
Changes in assets and liabilities:
Receivables .................................................. (2,900) (6,052) (34,261)
Inventories .................................................. (2,441) (345) (2,519)
Other current assets ......................................... 2,590 (2,248) 1,557
Accounts payable ............................................. 122 4,693 5,439
Income taxes payable ......................................... 3,546 1,034 (1,078)
Deferred contract revenue .................................... (2,815) 1,080 (3,054)
Accrued liabilities .......................................... 4,963 1,706 1,160
-------- -------- --------
Net cash provided by (used in) operating activities ................ 30,296 18,021 (3,241)
Cash flows from investing activities:
Sales and maturities of short-term investments ....................... -- 18,000 43,415
Purchases of short-term investments .................................. -- (42,875) (26,991)
Capital expenditures ................................................. (6,893) (5,615) (10,953)
Other assets ......................................................... -- -- (1,499)
-------- -------- --------
Net cash provided by (used in) investing activities .................. (6,893) (30,490) 3,972
Cash flows from financing activities:
Net transactions with C-Cube Semiconductor ........................... (1,671) (1,117) 5,609
-------- -------- --------
Exchange rate impact on cash and equivalents ............................ (61) 90 (233)
-------- -------- --------
Net increase (decrease) in cash and equivalents ......................... 21,671 (13,496) 6,107
Cash and cash equivalents, beginning of period .......................... 6,869 28,540 15,044
-------- -------- --------
Cash and cash equivalents, end of period ................................ $ 28,540 $ 15,044 $ 21,151
======== ======== ========
Supplemental schedule of noncash investing and financing activities:
Unrealized gain on investments ....................................... $ -- $ 60 $ --
Supplemental disclosure of cash flow information --
Cash paid during the period for:
Income taxes ...................................................... $ 353 $ 713 $ 909
</TABLE>
See notes to consolidated financial statements.
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DIVICOM BUSINESS (AN OPERATING UNIT OF C-CUBE MICROSYSTEMS INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
NOTE 1. OVERVIEW AND BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared to present
the consolidated net investment, income and cash flows of the DiviCom business
("DiviCom" or the "Company"), an operating unit of C-Cube Microsystems Inc.,
which was sold to Harmonic Inc. ("Harmonic") on May 3, 2000 pursuant to the
Amended and Restated Agreement and Plan of Merger and Reorganization between
C-Cube Microsystems Inc. and Harmonic dated December 9, 1999 (the "Agreement").
DiviCom designs, manufactures and sells products and systems that enable the
transmission of digital video, audio and data over a variety of networks
including satellite, wireless, fiber and cable.
Accruals for certain C-Cube Microsystems Inc. ("C-Cube") corporate
expenses, including legal, accounting, employee benefits, real estate, insurance
services, information technology services, treasury and other C-Cube corporate
and infrastructure costs have been allocated to DiviCom and to C-Cube's
semiconductor business per the spin-off described below. These allocations have
been determined on bases that C-Cube considered to be a reasonable reflection of
the utilization of services provided for the benefit received by those
businesses. Although DiviCom believes the allocations and charges for such
services to be reasonable, the costs of these services charged to DiviCom are
not necessarily indicative of the costs that would have been incurred had
DiviCom been a stand-alone entity. The Agreement also provides for all unvested
options held by DiviCom employees to be substituted for options in Harmonic.
Pursuant to the aforementioned Agreement, on May 2, 2000 C-Cube's
semiconductor business ("C-Cube Semiconductor" or "Semi") was spun off as a
separate company, and on May 3, 2000 the DiviCom business was acquired by
Harmonic. Harmonic acquired all of the outstanding common stock of C-Cube,
whereby each share of C-Cube common stock outstanding on the record date was
converted into 0.5427 of a Harmonic common share and 1 C-Cube Semiconductor
common share. C-Cube Semiconductor designs and distributes powerful, highly
integrated, standards-based digital video compression and decompression
semiconductors. The legal structure of this transaction was a spin-off of C-Cube
Semiconductor and a merger of C-Cube, which as restructured, consisted of the
DiviCom business. The historical assets, revenues, profits and employees of the
semiconductor business have been greater than those of DiviCom. The corporate
management of C-Cube transferred to C-Cube Semiconductor, and the C-Cube
stockholders received less than 50% of Harmonic in the merger. Therefore, for
accounting purposes the merger is being treated as a sale of DiviCom's net
investment and C-Cube Semiconductor is being treated as the continuing
accounting entity. Accordingly, the consolidated statements of net investment
present the net investment of DiviCom rather than common stock and retained
earnings.
The financial information included herein may not necessarily reflect the
consolidated results of operations, financial position, changes in net
investment and cash flows of DiviCom had the Company been a separate stand-alone
entity during the periods presented.
NOTE 2. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
DiviCom has operated as a subsidiary of C-Cube and has certain foreign
sales subsidiaries. The consolidated financial statements include DiviCom and
its wholly owned subsidiaries after elimination of intercompany accounts and
transactions.
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with a remaining maturity of
three months or less are classified as cash equivalents.
SHORT-TERM INVESTMENTS
Management determines the classification of debt and equity securities at
the time of purchase and reevaluates the classification at each balance sheet
date. Short-term investments are classified as available-
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for-sale when the Company generally has the ability and intent to hold such
securities to maturity, but, in certain circumstances, may potentially dispose
of such securities prior to their maturity to implement management strategies.
Securities available-for-sale are reported at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity. All
available-for-sale securities are classified as current assets.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Cost is computed using standard costs which approximate actual cost on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over estimated useful lives of three years. Leasehold
improvements are amortized over the shorter of their estimated useful lives,
generally three years, or the lease term.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Revenue from systems contracts is recognized based on performance of
specific tasks with approval and acceptance by the customer. Completion of these
tasks are natural milestones used in measuring the progress to completion of the
project. Such tasks include design, assembly and configuration of equipment and
system performance tests at factory and at customer sites. Losses, if any, are
recorded when determinable. Unbilled receivables result from completion of tasks
as described above in advance of billing schedules. Deferred revenues arise from
billing schedules in advance of completion of tasks. It is anticipated that all
unbilled receivables from such contracts will be collected within one year.
RESEARCH AND DEVELOPMENT
Research and development expenses include costs and expenses associated
with the development of the Company's design methodology and the design and
development of new products, and are expensed as incurred.
INCOME TAXES
Income tax amounts result from application of Statement of Financial
Accounting Standards ("SFAS") No. 109 as though DiviCom had operated as a
separate company. Therefore, income taxes provide for recognition of deferred
tax liabilities and assets for the expected future tax consequences of temporary
differences between the historical financial statement carrying amounts and the
historical tax bases of assets and liabilities on a separate company basis. The
deferred tax balances reflect the effects of such temporary differences related
to the historical assets and liabilities of DiviCom. Income tax payable is
estimated as if the Company filed tax returns on a stand-alone basis. The
Company will file a consolidated tax return with C-Cube through the date of the
merger.
Upon consummation of the Agreement referred to in Note 1, the Company and
C-Cube will enter into an intercompany tax sharing agreement. Due to differences
between filing on a consolidated basis versus individual basis, amounts on the
actual tax returns could vary from the amounts in these financial statements.
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ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets, liabilities, revenues and
expenses as of the dates and for the periods presented. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash equivalents and short-term investments.
Cash equivalents and short-term investments are stated at fair value based on
quoted market prices. The estimated fair value of financial instruments at
December 31, 1998 and 1999 was not materially different from the values
presented in the consolidated balance sheets.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, accounts receivable and financial instruments used in hedging
transactions. By policy, the Company places its investments only with financial
institutions meeting its credit guidelines. Almost all of the Company's accounts
receivable are derived from sales to companies in the cable and satellite
communications markets. The Company performs ongoing credit evaluations of its
customers' financial condition and manages its exposure to losses from bad debts
by limiting the amount of credit extended whenever deemed necessary and
generally does not require collateral.
The Company entered into an accounts receivable sales program with a
financial institution in December 1999 in which the Company sold a $7.2 million
undivided interest in the Company's trade accounts receivable. The program
qualifies for sale treatment under SFAS No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." The sales
were recorded at the estimated fair values of the receivables sold, reflecting
discounts for the time value of money based on U.S. commercial paper rates and
estimated loss provisions.
The Company is subject to credit risks related to sales made into Asia,
where economic instability, which resulted in several countries sharply
devaluing their currencies in 1998, may reduce the cash flows and the access to
credit of some of the Company's major customers.
FOREIGN CURRENCY TRANSLATION
The functional currency of certain of the Company's subsidiaries in foreign
countries are in the local currencies of these respective countries.
Accordingly, all assets and liabilities of these subsidiaries are translated at
the current exchange rate at the end of the period and revenues and costs at
average exchange rates in effect during the period. Gains and losses from
foreign currency translation are recorded as a separate component of net
investment.
FORWARD EXCHANGE CONTRACTS
In the normal course of business, the Company has exposure to foreign
currency fluctuations arising from foreign currency purchases and intercompany
sales, among other things. The Company enters into forward exchange contracts to
neutralize the impact of foreign currency fluctuations on assets and
liabilities. All foreign exchange contracts are designated as and effected as
hedges. Gains and losses on forward exchange contracts are deferred and
recognized in income when the related transactions being hedged are recognized.
The costs of entering into such contracts are not material to the Company's
financial results. The fair value of exchange contracts is determined by
obtaining quoted market prices of comparable contracts at the balance sheet
date, adjusted by interpolation where necessary for maturity differences.
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Prior to 1998, the Company held no foreign exchange contracts. At December
31, 1998, the Company had $4.2 million of outstanding foreign exchange contracts
to sell British pounds, for which the estimated fair value was not significantly
different. Unrealized gains (losses) on forward exchange contracts at December
31, 1998 were not material. At December 31, 1999, the Company had $1.5 million
of outstanding foreign exchange contracts to sell British pounds and $0.2
million of outstanding foreign exchange contracts to sell French francs, for
which the estimated fair value of these contracts were not materially different
from the net carrying values. These contracts mature through January 2000.
Unrealized gains (losses) on these contracts at December 31, 1999 were not
material. The Company's risk in these contracts is the cost of replacing, at
current market rates, these contracts in the event of default by the other
party. These contracts are executed with credit worthy financial institutions
and are denominated in the currency of major industrial nations.
INTANGIBLES
The Company amortizes purchased technology over five years. The Company
evaluates the recoverability of intangibles and other long-lived assets on a
regular basis based on estimated future undiscounted cash flows.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees."
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use." SOP 98-1 requires the capitalization of
certain expenditures for software that is purchased or internally developed,
once certain criteria are met. As required, the Company adopted SOP 98-1 in
fiscal year 1999. At December 31, 1999, the Company had capitalized
approximately $1.6 million of costs. Capitalized costs represent external direct
costs as well as direct payroll related costs incurred during the application
development and integration stages of the project in accordance with the
provisions of SOP 98-1. All costs incurred during the preliminary assessment of
the project were expensed as incurred. When the software is placed into service,
such capitalized costs will be amortized over the estimated useful life of the
asset of three years.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities," which requires costs of start-up activities and
organization costs to be expensed as incurred. As required under SOP 98-5, the
Company will expense the start-up costs associated with the merger and spin-off
as they are incurred in 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Adoption of this statement is not expected to materially impact the Company's
consolidated financial position, results of operations or cash flows. The
Company is required to adopt this statement in the first quarter of fiscal year
2001.
CONTINGENCIES
From time to time, DiviCom is involved in litigation or legal claims which
arise in the ordinary course of business. There are no such matters pending that
DiviCom expects to be material in relation to its business or financial
condition.
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PRIOR PERIOD RECLASSIFICATIONS
Certain reclassifications have been made to prior period balances in order
to conform to current period presentation. Such reclassifications had no effect
on net investment or net income in any period.
NOTE 3. SHORT-TERM INVESTMENTS
Short-term investments include the following available-for-sale securities
as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING MARKET
COST GAINS LOSSES VALUE
--------- ----------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998:
Commercial paper .................... $ 4,918 $ -- $ -- $ 4,918
Municipal bonds ..................... 19,860 60 -- 19,920
------- ------- ------- -------
Total short-term investments .... $24,778 $ 60 $ -- $24,838
======= ======= ======= =======
1999:
Commercial paper .................... $ 7,954 $ -- $ -- $ 7,954
======= ======= ======= =======
</TABLE>
The Company's holdings of commercial paper mature within one year. The
Company realized no gains or losses on the sale of investments in the years
ended December 31, 1997, 1998 or 1999.
NOTE 4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods ......... $ 3,187 $ 7,083
Work-in-process ........ 2,517 1,917
Raw materials .......... 2,146 1,369
-------- --------
Total ........ $ 7,850 $ 10,369
======== ========
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment -- principally computers ..... $ 15,017 $ 25,979
Furniture and fixtures ............................... 1,069 1,231
Leasehold improvements ............................... 1,629 1,887
-------- --------
Total ...................................... 17,715 29,097
Accumulated depreciation and amortization ............ (7,363) (13,159)
-------- --------
Property and equipment -- net ........................ $ 10,352 $ 15,938
======== ========
</TABLE>
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NOTE 6. LEASE COMMITMENTS
The Company rents office and research facilities under operating lease
agreements which expire through April 2005.
Future minimum operating lease commitments for years ending December 31 are
as follows:
<TABLE>
<CAPTION>
OPERATING
---------
(IN THOUSANDS)
<S> <C>
2000.............................. $2,121
2001.............................. 1,616
2002.............................. 1,036
2003.............................. 1,017
2004.............................. 279
Thereafter........................ 248
------
Total minimum lease payments...... $6,317
======
</TABLE>
Rent expense for operating leases was approximately $553,000, $1,613,000
and $2,254,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
NOTE 7. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTION PLANS
C-Cube's stock option plans (the "Plans") authorize the issuance of
31,639,838 shares of C-Cube $.001 par value common stock for the grant of
incentive or nonstatutory stock options and the direct award or sale of shares
to employees, directors, contractors and consultants. Under the Plans, options
are generally granted at fair value at the date of grant. Such options become
exercisable over periods of one to five years and expire up to 10 years from the
grant date. Under the existing terms of the stock option plans, all C-Cube
options held by DiviCom employees will be substituted for options of Harmonic
upon consummation of the Agreement referred to in Note 1.
Option activity for DiviCom employees under the Plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding, January 1, 1997 (239,873 exercisable at a
weighted average price of $10.04) ......................... 1,752,188 $ 34.39
Granted (weighted average fair value of $13.12) .............. 3,262,662 21.50
Exercised .................................................... (57,617) (11.93)
Canceled ..................................................... (2,296,495) (33.60)
----------
Outstanding, December 31, 1997 (437,284 exercisable at a
weighted average price of $15.56) ......................... 2,660,738 19.74
Granted (weighted average fair value of $11.97) .............. 1,516,160 18.83
Exercised .................................................... (202,257) (15.81)
Canceled ..................................................... (348,710) (20.16)
----------
Outstanding, December 31, 1998 (785,390
exercisable at a weighted average price of $18.87) ........... 3,625,931 19.54
Granted (weighted average fair value of $15.85) .............. 1,373,266 24.36
Exercised .................................................... (870,562) (19.40)
Canceled ..................................................... (683,524) (20.00)
----------
Outstanding, December 31, 1999 ............................... 3,445,111 $ 21.40
==========
</TABLE>
13
<PAGE> 14
Additional information regarding options outstanding for DiviCom employees
as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.22 - $ 0.22 319 3.53 $ 0.22 319 $ 0.22
0.36 - 14.81 104,525 7.68 12.69 39,363 9.29
14.88 - 19.56 1,636,526 8.71 18.44 263,508 18.33
19.63 - 19.94 842,907 6.95 19.93 314,189 19.93
20.00 - 35.44 741,376 9.00 27.38 57,763 25.21
37.00 - 50.50 119,458 9.74 42.94 2,666 39.83
--------- ---------
$ 0.22 - $50.50 3,445,111 8.34 $21.40 677,808 $19.21
========= =========
</TABLE>
At December 31, 1999, C-Cube exceeded the total number of shares available
for grant by 481,295 shares. C-Cube's 1994 Stock Option Plan has an automatic
refresh on January 1, 2000, equal to 4% of shares outstanding, which has
replenished this negative balance.
EMPLOYEE STOCK PURCHASE PLAN
C-Cube has an employee stock purchase plan, under which eligible employees
may authorize payroll deductions of up to 10% of their compensation (as defined
in the plan) to purchase C-Cube $.001 par value common stock at a price equal to
85% of the lower of the fair market values as of the beginning of the offering
period or end of the purchase period. Stock issued to DiviCom employees under
the plan was 34,000, 50,000 and 108,000 shares in the years ended December 31,
1997, 1998 and 1999, at weighted average prices of $29.98, $18.45 and $17.52,
respectively. The weighted average fair value of the 1997, 1998 and 1999 awards
was $9.46, $7.32, and $7.96, respectively. At December 31, 1999, 855,000 shares
of common stock were available for issuance under this plan. A liability of
$831,000 representing amounts collected from DiviCom employees, but not used to
purchase shares is included in accounts payable at December 31, 1999.
401(k) PLAN
C-Cube Microsystems, Inc. has a 401(k) tax-deferred savings plan under
which participants may contribute up to 20% of their compensation, subject to
certain Internal Revenue Service limitations. The Company is not required to
contribute and has not contributed to the plan to date. DiviCom employees will
be permitted to transfer their vested balances to Harmonic or an IRA upon
consummation of the Agreement referred to in Note 1.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 2, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees"
and its related interpretations. Accordingly, no compensation expense has been
recognized in the financial statements for employee stock arrangements which are
granted with exercise prices equal to the fair market value at grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's
14
<PAGE> 15
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 5.50 years in 1997, 5.60
years in 1998 and 5.80 years in 1999; stock volatility, 63% in 1997, 68% in 1998
and 68% in 1999; risk free interest rates, 6.1% in 1997, 5.2% in 1998 and 5.5%
in 1999; and no dividends during the expected term. The Company's calculations
are based on a single option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 1997, 1998, and 1999 awards
had been amortized to expense over the vesting period of the awards, pro forma
net income would have been $9.9 million in 1997, $8.7 million in 1998 and $13.0
million in 1999.
NOTE 8. COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires an enterprise to report, by major
components and as a single total, the change in net investments during the
period from nonowner sources. SFAS 130 requires unrealized gains or losses on
investments and foreign currency translation adjustments, which prior to
adoption were reported separately in net investment, to be included in other
comprehensive income; however, the adoption of this Statement had no impact on
net income or net investment. The Company has presented its comprehensive income
in the Consolidated Statement of Changes in Net Investment. Prior year amounts
have been reclassified to conform to the requirements of SFAS 130.
The following are the components of accumulated other comprehensive income
(loss):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Unrealized holding gains arising during period ...... $ 60 $ --
Accumulated translation adjustments ................. 43 (190)
----- -----
Total ........................................... $ 103 $(190)
===== =====
</TABLE>
NOTE 9. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal ............ $ 5,326 $ 12,707 $ 9,482
State .............. 723 (198) 401
Foreign ............ (211) (11) --
-------- -------- --------
Total ......... 5,838 12,498 9,883
-------- -------- --------
Deferred:
Federal ............ 2,539 (3,172) 196
State .............. 1,335 (1,078) 94
Foreign ............ 48 142 --
-------- -------- --------
Total ......... 3,922 (4,108) 290
-------- -------- --------
Total ................. $ 9,760 $ 8,390 $ 10,173
======== ======== ========
</TABLE>
The tax benefit associated with dispositions from stock in employee stock
plans reduced taxes currently payable by $239,000, $518,000 and $8,160,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
15
<PAGE> 16
Income tax rates differ from the rates computed by applying the federal
statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Tax expense computed at federal
statutory rate ............................ 35.0% 35.0% 35.0%
State income taxes, net of federal effect ..... 3.1 1.8 1.6
Tax credits ................................... (1.7) (1.7) (3.2)
Foreign sales corporation ..................... (2.0) (2.2) (1.7)
Other ......................................... 3.2 2.1 1.3
------ ------ ------
Income tax rate ..................... 37.6% 35.0% 33.0%
====== ====== ======
</TABLE>
The components of the net deferred tax asset as of December 31, 1998 and
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals and reserves recognized in
different periods .................... $ 6,765 $ 6,686
Deferred revenue ........................ 1,992 785
-------- --------
Total ............................ 8,757 7,471
-------- --------
Deferred tax liabilities:
Purchased technology .................... (3,021) (1,923)
Depreciation / other intangibles ........ (481) (583)
-------- --------
Total ............................ (3,502) (2,506)
-------- --------
Net deferred tax assets .................... $ 5,255 $ 4,965
======== ========
</TABLE>
NOTE 10. RELATED PARTY INFORMATION
Beginning in 1998, C-Cube corporate expenses, including legal, accounting,
employee benefits, real estate, insurance services, information technology
services, treasury and other C-Cube corporate and infrastructure costs have been
allocated as expenses to DiviCom and Semi. The expense allocations have been
determined on bases that C-Cube and those businesses considered to be a
reasonable reflection of the utilization of services provided or the benefit
received. The allocation methods include relative sales, headcount, square
footage, transaction processing costs, adjusted operating expenses and others.
Although DiviCom believes the allocations and charges for such services to be
reasonable, the costs of these services charged to DiviCom are not necessarily
indicative of the costs that would have been incurred had DiviCom been a
stand-alone entity. Allocated costs are settled through intercompany accounts
with Semi. Prior to 1998, the costs for most of the services and operations
listed above were incurred separately and directly by DiviCom and Semi, and thus
allocations from C-Cube were only made for shared executive management and
accounting services.
Allocated costs included in the accompanying consolidated income statements
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Costs of revenues ........................ $ -- $ 4,112 $ 5,623
Research and development ................. -- 3,531 5,304
Selling, general and administrative ...... 571 3,942 7,439
------- ------- -------
$ 571 $11,585 $18,366
======= ======= =======
</TABLE>
16
<PAGE> 17
NOTE 11. SEGMENT INFORMATION, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
DiviCom operates in one reportable segment under SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information," which is the
development and integration of products and systems that enable the transmission
of digital video, audio and data over satellite, broadcast, cable and wireless
networks. These products and services allow its customers to create "end-to-end"
digital video systems. Substantially all of DiviCom's long-lived assets are
located within North America.
Revenues are broken out geographically by the ship-to location of the
customer. Revenues by geographical location are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
U.S .................. $ 85,954 $ 78,082 $111,924
Canada ............... 7,149 16,793 11,596
Spain ................ 8,757 1,792 1,260
United Kingdom ....... 90 15,931 18,377
Other Europe ......... 6,064 8,132 16,364
Philippines .......... -- 8,686 7,627
China ................ 503 118 4,715
Japan ................ 2,024 4,128 4,077
Other Asia ........... 3,381 2,531 2,003
Rest of World ........ 4,838 6,522 7,557
-------- -------- --------
Total ........... $118,760 $142,715 $185,500
======== ======== ========
</TABLE>
During the year ended December 31, 1997, three customers accounted for 26%,
14% and 12% of the Company's revenues. During the year ended December 31, 1998,
one customer accounted for 12% of the Company's revenues. During the year ended
December 31, 1999, one customer accounted for 20% of the Company's revenues.
At December 31, 1998, one customer accounted for 19% of accounts
receivable. At December 31, 1999, two customers accounted for 19% and 16% of
accounts receivable.
NOTE 12. PURCHASE COMMITMENT
In the third quarter of 1999, the Company began integration of an Oracle
ERP system. Costs incurred to date are included in property, plant and equipment
for which depreciation will begin when the software is functional. At December
31, 1999, the remaining external purchase commitment related to this project was
approximately $1,000,000.
17
<PAGE> 18
ITEM 7 (b) - PRO FORMA FINANCIAL INFORMATION
On May 3, 2000, Harmonic completed its merger with C-Cube Microsystems Inc.
("C-Cube") pursuant to the terms of an Agreement and Plan of Merger and
Reorganization (the "Merger Agreement") dated October 27, 1999. Under the terms
of the Merger Agreement, C-Cube spun off its semiconductor business as a
separate publicly traded company prior to the closing. C-Cube then merged into
Harmonic and Harmonic therefore acquired C-Cube's DiviCom business. The merger
was structured as a tax-free exchange of stock and will be accounted for under
the purchase method of accounting.
The unaudited pro forma condensed combined financial statements reflect the
conversion of C-Cube common stock into 0.5427 shares of Harmonic common stock.
The purchase price, including unvested C-Cube stock options and merger-related
costs was approximately $1.8 billion. The portion of the purchase price
attributable to stock issued reflects issuance of 26.4 million shares of
Harmonic common stock at an average market price per share of Harmonic common
stock of $62.00. The average market price per share was based on the average
closing price for a period three days before and after the October 27, 1999
announcement of the merger.
The following unaudited pro forma condensed combined financial statements give
effect to the acquisition of DiviCom. The unaudited pro forma balance sheet is
based on the individual balance sheets of Harmonic Inc. and the DiviCom business
included herein or incorporated herein by reference and has been prepared to
reflect the acquisition of DiviCom by Harmonic Inc. as of March 31, 2000. The
unaudited pro forma statement of operations is based on the individual
statements of operations of Harmonic Inc. and the DiviCom business included
herein or incorporated herein by reference and combines the results of
operations of Harmonic Inc. and the DiviCom business (acquired by Harmonic Inc.
as of May 2, 2000) for the year ended December 31, 1999 and for the quarter
ended March 31, 2000 as if the acquisition occurred on January 1, 1999. The pro
forma information does not purport to be indicative of the results that would
have occurred had the merger actually been in effect for these periods, or of
results which may occur in the future. The unaudited pro forma condensed
combined financial statements should be read in conjunction with the historical
consolidated financial statements of Harmonic Inc. and the DiviCom business
including the notes thereto, included herein or incorporated herein by
reference.
18
<PAGE> 19
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------------
PRO FORMA
ADJUSTMENTS PROFORMA
HARMONIC DIVICOM (NOTE 2) COMBINED
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 184,075 $ 185,500 -- $ 369,575
Cost of sales 103,470 93,656 $ 17,200 (d) 214,326
--------- --------- --------- ---------
Gross profit 80,605 91,844 (17,200) 155,249
--------- --------- --------- ---------
Operating expenses:
Research and development 17,281 30,106 -- 47,387
Selling, general and administrative 34,003 32,199 -- 66,202
Amortization of intangibles 304 -- 330,400 (d) 330,704
--------- --------- --------- ---------
Total operating expenses 51,588 62,305 330,400 (444,293)
--------- --------- --------- ---------
Income (loss) from operations 29,017 29,539 (347,600) (289,044)
Interest and other income, net 2,556 1,260 -- 3,816
--------- --------- --------- ---------
Income (loss) before income taxes 31,573 30,799 (347,600) (285,228)
Provision for income taxes 7,893 10,173 (19,400) (e) (1,334)
--------- --------- --------- ---------
Net income (loss) $ 23,680 $ 20,626 $(328,200) $(283,894)
========= ========= ========= =========
Net income (loss) per share
Basic $ 0.84 $ (5.19)
========= =========
Diluted $ 0.76 $ (5.19)
========= =========
Weighted average shares
Basic 28,290 54,690
========= =========
Diluted 30,967 54,690
========= =========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined financial statements.
19
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------
PRO FORMA
ADJUSTMENTS PROFORMA
HARMONIC DIVICOM (NOTE 2) COMBINED
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 62,863 $ 39,402 -- $ 102,265
Cost of sales 33,067 20,914 $ 4,300 (d) 58,281
--------- --------- --------- ---------
Gross profit 29,796 18,488 (4,300) 43,984
--------- --------- --------- ---------
Operating expenses:
Research and development 6,018 8,558 -- 14,576
Selling, general and administrative 9,779 7,744 -- 17,523
Merger costs -- 911 (911) (i) 0
Amortization of intangibles 76 -- 82,600 (d) 82,676
--------- --------- --------- ---------
Total operating expenses 15,873 17,213 81,689 114,775
--------- --------- --------- ---------
Income (loss) from operations 13,923 1,275 (85,989) (70,791)
Interest and other income, net 1,121 131 -- 1,252
--------- --------- --------- ---------
Income (loss) before income taxes 15,044 1,406 (85,989) (69,539)
Provision for income taxes 5,717 464 (4,850) (e) 1,331
--------- --------- --------- ---------
Net income (loss) $ 9,327 $ 942 $ (81,139) $ (70,870)
========= ========= ========= =========
Net income (loss) per share
Basic $ 0.30 $ (1.24)
========= =========
Diluted $ 0.28 $ (1.24)
========= =========
Weighted average shares
Basic 30,716 57,116
========= =========
Diluted 33,391 57,116
========= =========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined financial statements.
20
<PAGE> 21
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------------------------
PRO FORMA
ADJUSTMENTS PROFORMA
HARMONIC DIVICOM (NOTE 2) COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,936 $ 20,527 $ 286,990 (f) $ 318,453
Short-term investments 72,439 -- -- 72,439
Accounts receivable, net 38,638 77,246 (10,800) (h) 105,084
Note receivable -- -- 117,980 (f) 117,980
Inventories 42,868 13,182 4,500 (h) 60,550
Deferred income taxes 5,478 6,048 11,526
Prepaid expenses and other assets 4,109 7,423 (2,832) (g) 8,700
----------- ----------- ----------- -----------
Total current assets 174,468 124,426 395,838 694,732
----------- ----------- ----------- -----------
Property and equipment, net 18,710 16,243 -- 34,953
Intangibles and other assets 985 2,678 1,738,000 (d) 1,740,458
(1,205) (g)
----------- ----------- ----------- -----------
$ 194,163 $ 143,347 $ 2,132,633 $ 2,470,143
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,619 $ 17,512 -- $ 36,131
Income taxes payable 6,094 2,385 $ 323,570 (f) 332,049
Accrued compensation 5,543 5,623 31,780 (f) 42,946
Other accrued liabilities 7,239 8,210 9,600 (a) 49,769
11,700 (f)
(1,580) (f)
14,600 (h)
Deferred income taxes -- -- 19,400 (e) 19,400
----------- ----------- ----------- -----------
Total current liabilities 37,495 33,730 409,070 480,295
----------- ----------- ----------- -----------
Other long term liabilities 584 67 -- 651
Deferred income taxes -- 2,513 77,600 (e) 80,113
Stockholders' equity:
Common stock and additional paid-in capital 150,412 -- 1,792,000 (a) 1,942,412
Retained earnings (accumulated deficit) 5,535 -- (39,000) (b) (33,465)
Net investment -- 107,037 (107,037) (c) 0
Currency translation 137 -- -- 137
----------- ----------- ----------- -----------
Total stockholders' equity 156,084 107,037 1,645,963 1,909,084
----------- ----------- ----------- -----------
$ 194,163 $ 143,347 $ 2,132,633 $ 2,470,143
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the unaudited pro forma
condensed combined financial statements.
21
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
On a combined basis, there were no transactions between Harmonic and the
DiviCom business during the periods presented.
The historical cost of sales of the DiviCom business includes amortization
of intangibles related to purchased technology arising from C-Cube Microsystems'
acquisition of the DiviCom business in 1996. Amortization was $2,832,000 and
$707,937 for 1999 and the three months ended March 31, 2000, respectively. See
Note 2(g) for pro forma adjustment.
The pro forma combined provision for income taxes may not represent the
amounts that would have resulted had Harmonic and the DiviCom business filed
consolidated income tax returns during the periods presented.
NOTE 2. PRO FORMA ADJUSTMENTS
The pro forma information including the allocation of the purchase price is
based on management's estimates and valuation of the intangible assets acquired.
The pro forma financial statements have not been adjusted to reflect any cost
savings or operating synergies that may be realized as a result of the merger.
The purchase price of $1.8 billion includes $1.6 billion of stock to be
issued, $155 million in Harmonic stock option costs and expenses of the
transaction of $9.6 million. The stock to be issued reflects issuance of 26.4
million shares of Harmonic common stock and an average market price per share of
Harmonic common stock of $62.00. The average market price per share was based on
the average closing price for a period three days before and after the October
27, 1999 announcement of the merger.
Following is a table of the total purchase price, purchase price allocation
and annual amortization of the intangible assets acquired (in thousands):
<TABLE>
<S> <C>
Purchase price:
Value of securities issued $1,636,800
Assumption of options of the DiviCom business 155,200
Direct transaction costs and expenses 9,600
----------
Total purchase price $1,801,600
==========
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
ANNUAL
AMORTIZATION
------------
<S> <C> <C>
Purchase price allocation:
Net Assets of DiviCom Business $ 142,500 --
Fair Value Adjustments:
Accounts Receivable (10,800) --
Inventory 4,500 --
Accrued Liabilities (14,600) --
----------- -----------
Total fair value of tangible net assets acquired 121,600 --
Intangible assets acquired:
Customer base 113,000 $ 22,600
Developed technology 78,000 15,600
Trademark and tradename 14,000 2,800
Assembled workforce 23,000 4,600
Supply agreement 8,000 1,600
----------- -----------
Total intangibles (excluding goodwill) 236,000 47,200
In-process research and development 39,000 --
Goodwill 1,502,000 300,400
Deferred tax liabilities (97,000) --
----------- -----------
Total purchase price allocation $ 1,801,600 $ 347,600
=========== ===========
</TABLE>
The tangible net assets acquired represent the historical net assets of the
DiviCom business as of March 31, 2000 of $107 million adjusted to eliminate
intangibles of $4.0 million arising from C-Cube's acquisition of the DiviCom
business in 1996 and to record additional cash of $39.5 million received as a
result of the merger. As required under purchase accounting, the assets and
liabilities of DiviCom have been adjusted to fair value.
A customer base represents established relationships with businesses that
repeatedly order from a company. The income approach was used to estimate the
value of the DiviCom business' customer base by determining the present value of
future cash flows generated by existing customers. Key assumptions used in the
calculation included an attrition rate of 20%, discount rate of 20% and
estimates of revenue growth, cost of sales, operating expenses and tax rate
provided by management of the DiviCom business.
In estimating the value of the trademark and tradename, the relief from
royalty method was employed. The relief from royalty method is based on the
assumption that in lieu of ownership, a firm would be willing to pay a royalty
in order to exploit the related benefits of the assets. Therefore, a portion of
the company's earnings, equal to the after-tax royalty that would have been paid
for the use of the trademark and tradename, can be attributed to the company's
possession of the trademark and tradename. The trademark and tradename are each
being amortized on a straight-line basis over its estimated useful life of five
years.
The value of the assembled workforce was derived by estimating the costs to
replace the existing employees, including recruiting, hiring and training costs
for each category of employee. The value of the assembled workforce is being
amortized on a straight-line basis over its estimated useful life of five years.
Harmonic and C-Cube Microsystems entered into a Supply, License and
Development Agreement (Supply Agreement) concurrent with the merger agreement.
23
<PAGE> 24
This separate agreement covers the supply, licensing and development of two
encoder chips for Harmonic by the spun-off semiconductor business. The value of
the Supply Agreement was derived by using the income approach and is being
amortized on a straight line basis over its estimated useful life of five years.
A portion of the purchase price has been allocated to developed technology
and in-process research and development (IPRD). Developed technology and IPRD
were identified and valued through extensive interviews, analysis of data
provided by the DiviCom business concerning development projects, their stage of
development, the time and resources needed to complete them, if applicable,
their expected income generating ability and associated risks. The income
approach, which includes an analysis of the cash flows, and risks associated
with achieving such cash flows, was the primary technique utilized in valuing
the developed technology and IPRD.
Where development projects had reached technological feasibility, they were
classified as developed technology and the value assigned to developed
technology was capitalized. The developed technology is being amortized on a
straight-line basis over its estimated useful life of five years.
Where the development projects had not reached technological feasibility
and had no future alternative uses, they were classified as IPRD, which will be
expensed upon the consummation of the merger. The value was determined by
estimating the expected cash flows from the projects once commercially viable,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value as defined below.
- Net cash flows. The net cash flows from the identified projects are based
on estimates of revenue, cost of sales, research and development costs,
selling, general and administrative costs and income taxes from those
projects. These estimates are based on the assumptions mentioned below.
The research and development costs included in the model reflect costs to
sustain projects, but exclude costs to bring in-process projects to
technological feasibility.
The estimated revenue is based on projections of the DiviCom business for
each in-process project. These projections are based on its estimates of
market size and growth, expected trends in technology and the nature and
expected timing of new product introductions by the DiviCom business and
its competitors.
Projected gross margins and operating expenses approximate the DiviCom
business' recent historical levels.
- Discount rate. Discounting the net cash flows back to their present value
is based on the industry weighted average cost of capital ("WACC"). The
industry WACC is approximately 17%. The discount rate used in discounting
the net cash flows from IPR&D is 25%, an 800 basis point increase from
the industry WACC. This discount rate is higher than the industry WACC
due to inherent uncertainties surrounding the successful development of
the IPR&D, market acceptance of the technology, the useful life of such
technology and the uncertainty of technological advances which could
potentially impact the estimates described above.
- Percentage of completion. The percentage of completion for each project
was determined using costs incurred to date on each project as compared
to the remaining research and development to be completed to bring each
project to technological feasibility. The percentage of completion varied
by individual project ranging from 10% to 80%.
If the projects discussed above are not successfully developed, the sales
and profitability of the combined company may be adversely affected in future
periods.
Based on the finalization of the valuation, and purchase price allocation,
finalization of the integration plans and other factors, the pro forma
adjustments
24
<PAGE> 25
may change from those presented in these pro forma combined financial
statements. A change in the value assigned to long-term tangible and intangible
assets and liabilities could result in a reallocation of the purchase price and
a change in the pro forma adjustments. The statement of operations effect of
these changes will depend on the nature and amount of the assets or liabilities
adjusted.
(a) Adjustments reflect the components of the purchase price -- $1.6
billion in Harmonic common stock, $155 million in Harmonic common
stock options and $9.6 million in estimated transaction expenses
incurred by Harmonic. The Harmonic common stock was issued in
exchange for outstanding shares of C-Cube Microsystems common stock.
Harmonic common stock options, with a weighted average exercise
price of $38.71, were issued in exchange for unvested C-Cube
Microsystems options.
(b) Adjustment includes $39 million for purchased in-process research
and development. This amount will be expensed and charged to
operations during the second quarter ended June 30, 2000. This
amount has been reflected as a reduction to retained earnings and
has not been included in the pro forma condensed combined statement
of operations due to its non-recurring nature.
(c) Adjustment reflects elimination of the DiviCom business' net
investment.
(d) Adjustments include the recording of $1,738 million in intangible
assets which are comprised of $236 million of non-goodwill
intangibles (see table in Note 2) and $1,502 million in goodwill.
The estimated useful life of non-goodwill intangible assets and
goodwill is five years. The annual amortization charge to income
approximates $348 million based on a five-year average useful life.
(e) Adjustment reflects the recording of deferred tax liabilities
associated with the step up to fair value of non-goodwill intangible
assets recorded as part of this transaction. These liabilities were
recorded using statutory tax rates of 41%. The deferred tax
liability will be recognized in the statement of operations as the
underlying assets giving rise to the deferred taxes are amortized.
(f) Adjustment reflects the transfer of cash and the recording of a note
receivable for the estimated tax liabilities and transaction
expenses incurred by C-Cube plus additional cash as contemplated in
the merger agreement. The tax liabilities represent taxes resulting
from the spin-off ($324 million based on a $1,052 million valuation
of the semiconductor business on May 3, 2000) as well as payroll
taxes related to employees' stock option exercises. The transaction
expenses of C-Cube have not been reflected in the unaudited pro
forma condensed combined statements of operations due to its
non-recurring nature. As of July 17, 2000, $116.0 million has been
collected on the note receivable.
(g) Adjustment reflects elimination of intangibles of $4.0 million
arising from C-Cube's acquisition of the DiviCom business in 1996.
(h) Adjustment to reflect the fair value of assets and liabilities,
including accrual for estimated foreign tax liabilities, and to
conform the accounting for long term contracts. The application of
the percentage of completion method of recognizing revenues and
earnings for contracts has been conformed to the method applied by
Harmonic.
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<PAGE> 26
(i) Adjustment reflects elimination of the DiviCom business' merger
costs which are non-recurring.
NOTE 3. PRO FORMA EARNINGS PER COMMON SHARE
Basic and diluted pro forma earnings per common share is calculated based
on the issuance of 26.4 million shares of Harmonic common stock in the merger.
Options and warrants outstanding during 1999 and the three months ended March
31, 2000 were not included in the computation of diluted EPS because inclusion
of such options and warrants would have been antidilutive.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
99.1 Press Release dated May 3, 2000, announcing the completion of the
acquisition of the DiviCom business of C-Cube Microsystems Inc.
Previously filed.
</TABLE>
26
