EX-99.3 5 a09-17518_1ex99d3.htm EX-99.3

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma condensed combined financial statements of Acme Packet, Inc. (the Company) and Covergence Inc. (Covergence) have been prepared to give effect to the acquisition of Covergence by the Company pursuant to the merger of CIAP Merger Corp., an indirect subsidiary of the Company, with and into Covergence, on April 30, 2009. The unaudited pro forma condensed combined balance sheets as of March 31, 2009, and the unaudited pro forma condensed combined statements of income for the three months ended March 31, 2009 and the twelve months ended December 31, 2008, are presented herein to reflect the acquisition of Covergence. The unaudited pro forma condensed combined balance sheet combines the unaudited condensed balance sheet of the Company as of March 31, 2009 and the unaudited condensed balance sheet of Covergence as of March 31, 2009 and gives effect to the acquisition as if it had been completed on March 31, 2009, including any adjustments to fair value required, in accordance with Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations which was adopted by the Company on January 1, 2009. The unaudited pro forma condensed combined statements of income for the three months ended March 31, 2009 and the twelve months ended December 31, 2008 combines the historical results of the Company and the historical results of Covergence and gives effect to the acquisition as if it had occurred on January 1, 2008. The unaudited pro forma condensed combined financial statements presented are based on the assumptions and adjustments described in the accompanying notes. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not purport to represent what the financial position or results of operations would actually have been if the acquisition occurred as of the dates indicated or what such financial position or results will be for any future periods. The unaudited pro forma condensed combined financial statements are based upon the respective historical and pro forma consolidated financial information of the Company and Covergence, and should be read in conjunction with:

 

·                           the accompanying notes to the unaudited pro forma condensed combined financial statements;

 

·                           the separate historical audited consolidated financial statements of the Company as of and for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008;

 

·                           the separate historical unaudited condensed consolidated financial statements of the Company as of and for the three months ended March 31, 2009 included in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2009;

 

·                           the separate historical audited consolidated financial statements of Covergence as of and for the year ended December 31, 2008, included in Exhibit 99.1 of this Current Report on Form 8-K/A; and

 

·                           the separate unaudited historical condensed consolidated financial statements of Covergence as of and for the three months ended March 31, 2009, included in Exhibit 99.2 of this Current Report on Form 8-K/A.

 

The unaudited pro forma condensed combined financial statements and are not necessarily indicative of the operating results or financial position that would have occurred if the merger had been completed at the dates indicated. While some reclassifications of prior periods have been included in the unaudited pro forma condensed combined financial statements, it may be necessary to further reclassify Covergence’s financial statements to conform to those classifications that are determined by the combined company to be most appropriate.

 

The unaudited pro forma condensed combined financial statements were prepared using the purchase method of accounting, whereby the Company is treated as the acquiring entity. Accordingly, consideration paid by the Company to complete the acquisition of Covergence was allocated to Covergence’s assets and liabilities based upon their estimated fair values as of the date of completion of the acquisition. The pro forma purchase price adjustments are preliminary, subject to further adjustments as additional information becomes available and as additional analyses are performed and have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information presented below.

 

The Company expects to incur additional costs associated with integrating the businesses of the Company and Covergence. The unaudited pro forma condensed combined financial statements do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities.

 

Based on the Company’s preliminary review of Covergence’s summary of significant accounting policies disclosed in Covergence’s financial statements, the nature and amount of any adjustments to the historical financial statements of Covergence to conform Covergence’s accounting policies to those of the Company’s are not expected to be significant. Further review of Covergence’s accounting policies and financial statements may result in required revisions to Covergence’s policies and classifications to conform to the Company’s.

 



 

Unaudited Pro Forma Condensed Combined Statement of Income

For the Three Months Ended March 31, 2009

 (in thousands, except share and per share data)

 

 

 

Acme Packet
Historical
March 31, 2009

 

Covergence
Historical
March 31, 2009

 

Pro Forma
Adjustments (1)

 

 

 

Pro Forma
Combined

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

23,051

 

$

5,708

 

$

 

 

 

$

28,759

 

Maintenance, support and service

 

7,936

 

603

 

 

 

 

8,539

 

Total revenue

 

30,987

 

6,311

 

 

 

 

37,298

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Product

 

5,232

 

770

 

 

 

 

6,002

 

Maintenance, support and service

 

923

 

204

 

 

 

 

1,127

 

Total cost of revenue

 

6,155

 

974

 

 

 

 

7,129

 

Gross profit

 

24,832

 

5,337

 

 

 

 

30,169

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

11,336

 

1,500

 

 

 

 

12,836

 

Research and development

 

6,164

 

1,458

 

 

 

 

7,622

 

General and administrative

 

3,133

 

423

 

302

 

(F)

 

3,858

 

Total operating expenses

 

20,633

 

3,381

 

302

 

 

 

24,316

 

Income from operations

 

4,199

 

1,956

 

(302

)

 

 

5,853

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

115

 

20

 

 

 

 

135

 

Other expense

 

(49

)

(13

)

 

 

 

(62

)

Total other income, net

 

66

 

7

 

 

 

 

73

 

Income before provision for income taxes

 

4,265

 

1,963

 

(302

)

 

 

5,926

 

Provision for income taxes

 

1,507

 

 

567

 

(D)

 

2,074

 

Net income

 

$

2,758

 

$

1,963

 

$

(869

)

 

 

$

3,852

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.05

 

 

 

 

 

 

 

$

0.07

 

Diluted

 

$

0.05

 

 

 

 

 

 

 

$

0.06

 

Weighted average number of common shares used in the calculation of net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

54,744,550

 

 

 

2,874,383

 

(E)

 

57,618,933

 

Diluted

 

58,403,618

 

 

 

2,874,383

 

(E)

 

61,278,001

 

 


(1)      See Note 4 and applicable subsection.

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

2



 

Unaudited Pro Forma Condensed Combined Statement of Income

For the Twelve Months Ended December 31, 2008

(in thousands, except share and per share data)

 

 

 

Acme Packet
Historical
December 31, 2008

 

Covergence
Historical
December 31, 2008

 

Pro Forma
Adjustments (1)

 

 

 

Pro Forma
Combined

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Product

 

$

91,277

 

$

6,321

 

$

 

 

 

$

97,598

 

Maintenance, support and service

 

25,081

 

1,553

 

 

 

 

26,634

 

Total revenue

 

116,358

 

7,874

 

 

 

 

124,232

 

Cost of revenue:

 

 

 

 

 

 

 

 

 

 

 

Product

 

19,234

 

1,217

 

 

 

 

20,451

 

Maintenance, support and service

 

4,710

 

940

 

 

 

 

5,650

 

Total cost of revenue

 

23,944

 

2,157

 

 

 

 

26,101

 

Gross profit

 

92,414

 

5,717

 

 

 

 

98,131

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

44,044

 

8,688

 

 

 

 

52,732

 

Research and development

 

22,235

 

7,163

 

 

 

 

29,398

 

General and administrative

 

11,927

 

1,477

 

1,207

 

(F)

 

14,611

 

Total operating expenses

 

78,206

 

17,328

 

1,207

 

 

 

96,741

 

Income from operations

 

14,208

 

(11,611

)

(1,207

)

 

 

1,390

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

3,225

 

172

 

 

 

 

3,397

 

Other expense

 

(246

)

(8

)

 

 

 

(254

)

Total other income, net

 

2,979

 

164

 

 

 

 

3,143

 

Income (loss) before provision for income taxes

 

17,187

 

(11,447

)

(1,207

)

 

 

4,533

 

Provision for (benefit from) income taxes

 

5,615

 

 

(4,119

)

(D)

 

1,496

 

Net income (loss)

 

$

11,572

 

$

(11,447

)

$

2,912

 

 

 

$

3,037

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.20

 

 

 

 

 

 

 

$

0.05

 

Diluted

 

$

0.18

 

 

 

 

 

 

 

$

0.05

 

Weighted average number of common shares used in the calculation of net income per share:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

58,463,410

 

 

 

2,874,383

 

(E)

 

61,337,793

 

Diluted

 

62,920,268

 

 

 

2,874,383

 

(E)

 

65,794,651

 

 


(1)      See Note 4 and applicable subsection.

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

3



 

Unaudited Pro Forma Condensed Combined Balance Sheet

As of March 31, 2009

(in thousands, except share and per share data)

 

 

 

As of March 31, 2009

 

 

 

Acme Packet
Historical

 

Covergence
Historical

 

Pro Forma
Adjustments (1)

 

 

 

Pro Forma
Combined

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

135,907

 

$

7,828

 

$

(20

)

(C)

 

$

143,715

 

Accounts receivable, net of allowance

 

22,879

 

1,676

 

 

 

 

24,555

 

Inventory

 

7,553

 

519

 

387

 

(A)

 

8,089

 

 

 

 

 

 

 

(370

)

(I)

 

 

 

Deferred tax asset

 

1,262

 

 

368

 

(H)

 

1,630

 

Other current assets

 

2,535

 

122

 

 

 

 

2,657

 

Total current assets

 

170,136

 

10,145

 

365

 

 

 

180,646

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

5,667

 

900

 

 

 

 

6,567

 

Intangible assets

 

 

 

11,285

 

(F)

 

11,285

 

Goodwill

 

 

 

 

 

 

 

Restricted cash

 

333

 

 

 

 

 

333

 

Deferred tax asset

 

6,540

 

 

7,004

 

(H)

 

13,544

 

Other assets

 

111

 

44

 

 

 

 

155

 

Total assets

 

$

182,787

 

$

11,089

 

$

18,654

 

 

 

$

212,530

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS’ EQUITY
(DEFICIT)

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,114

 

$

451

 

$

 

 

 

$

3,565

 

Accrued expenses and other current liabilities

 

7,273

 

1,072

 

578

 

(C)

 

8,923

 

Deferred revenue, current portion

 

17,957

 

2,685

 

(2,165

)

(A)

 

18,477

 

Deferred tax liability

 

 

 

4,764

 

(G)

 

4,764

 

Refundable purchase price related to 49,831 unvested shares of common stock

 

 

9

 

(9

)

(B)

 

 

Total current liabilities

 

28,344

 

4,217

 

3,168

 

 

 

35,729

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred rent

 

48

 

 

 

 

 

48

 

Deferred revenue, net of current portion

 

2,243

 

275

 

(165

)

(A)

 

2,353

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

46,100

 

(46,100

)

(B)

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

 

 

 

 

 

Undesignated preferred stock

 

 

 

 

 

 

 

Common stock

 

62

 

 

3

 

(C)

 

65

 

Additional paid-in capital

 

155,149

 

435

 

(435

)

(B)

 

177,394

 

 

 

 

 

 

 

22,245

 

(C)

 

 

 

Treasury stock, at cost

 

(37,522

)

 

 

 

 

(37,522

)

Retained earnings (deficit)

 

34,463

 

(39,938

)

39,938

 

(B)

 

34,463

 

Total stockholders’ equity (deficit)

 

152,152

 

(39,503

)

61,751

 

 

 

174,400

 

Total liabilities and stockholders’ equity

 

$

182,787

 

$

11,089

 

$

18,654

 

 

 

$

212,530

 

 


(1)       See Note 4 and applicable subsection.

 

See Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

4



 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

(in thousands, except share and per share information)

 

Note 1.  Basis of Presentation

 

On April 30, 2009, Acme Packet, Inc., a Delaware corporation, (the Company) announced the acquisition of Covergence Inc., a Delaware corporation, (Covergence) pursuant to the Agreement and Plan of Merger (the Merger Agreement) dated as of April 29, 2009 by and among (i) the Company, (ii) PAIC Midco Corp., a Delaware corporation and a wholly owned subsidiary of the Company (Midco), (iii) CIAP Merger Corp., a Delaware corporation and a wholly owned subsidiary of Midco, (iv) Covergence and (v) Andrew P. Goldfarb as the stockholder representative, pursuant to which Covergence became an indirect subsidiary of the Company. The accompanying unaudited pro forma condensed combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of the Company and Covergence, after giving effect to the acquisition of Covergence and adjustments described in these footnotes, and are intended to reflect the impact of the acquisition on the Company.

 

The accompanying unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of the operations of the Company and Covergence.

 

The unaudited pro forma condensed combined balance sheet as of March 31, 2009 combines the unaudited condensed balance sheet of the Company and the unaudited condensed balance sheet of Covergence as of March 31, 2009 and reflects the acquisition of Covergence as if it was completed on March 31, 2009, including any adjustments to fair value required.  The unaudited pro forma condensed combined statements of income for the three months ended March 31, 2009 and the twelve months ended December 31, 2008, combines the historical results of the Company for the three and twelve months ended March 31, 2009 and December 31, 2008, respectively, and the unaudited historical results of Covergence for the three and twelve months ended March 31, 2009 and December 31, 2008, respectively, and reflects the acquisition of Covergence as if it was completed on January 1, 2008.

 

The unaudited pro forma condensed combined financial information was prepared using the purchase method of accounting, whereby the Company is treated as the acquiring entity. In the unaudited pro forma condensed combined balance sheet, the Company’s cost to acquire Covergence has been allocated to the assets acquired and liabilities assumed based upon management’s preliminary estimate of their respective fair values as of the date of the merger. The amounts allocated to acquired assets and assumed liabilities in the unaudited pro forma condensed combined financial statements are based on management’s preliminary internal valuation estimates. Definitive allocations are being performed and finalized based on certain valuations and other studies performed by the Company with the services of outside valuation specialists. Accordingly, the purchase price allocation adjustments and related amortization reflected in the foregoing unaudited pro forma condensed combined financial statements are preliminary, have been made solely for the purpose of preparing these statements and are subject to revision based on a final determination of fair value.

 

Note 2.  Purchase Price

 

The following is a preliminary estimate of the purchase price for Covergence:

 

Number of shares of common stock of the Company issued to Covergence stockholders

 

2,874,383

 

 

 

Multiplied by the price per share of common stock of the Company (a)

 

$

7.74

 

$

22,248

 

Cash paid to Covergence stockholders based on consideration

 

 

 

20

 

Cash paid for withholding taxes due (b)

 

 

 

578

 

Estimated purchase price

 

 

 

$

22,846

 

 

For purposes of this pro forma analysis, the above purchase price has been allocated based on a preliminary estimate of the fair value of net assets acquired.

 

Purchase Price Allocation

 

Book value of net assets acquired (c)

 

$

6,606

 

Allocation:

 

 

 

Increase inventory to fair value

 

387

 

Decrease deferred revenue to fair value

 

2,330

 

Decrease deferred product costs within inventory to fair value

 

(370

)

Identifiable intangible assets at fair value

 

8,447

 

Acquired in process research and development at fair value

 

2,838

 

Deferred tax liability (d)

 

(4,764

)

Deferred tax asset (e)

 

7,372

 

Estimated purchase price

 

$

22,846

 

 

5



 


(a)

Represents the closing stock price of the Company’s common stock as reported on the Nasdaq Global Market on April 29, 2009, the date of the completion of the acquisition of Covergence pursuant to the Merger Agreement.

(b)

Represents withholding taxes due for James Moran, the former Chief Executive Officer of Covergence.

(c)

Represents total stockholder’s deficit plus the outstanding redeemable convertible preferred stock and the refundable purchase price related to unvested shares of common stock of Covergence as of March 31, 2009.

(d)

Represents the deferred income tax liability at statutory tax rates related to acquired intangible assets for which the amortization is not deductible for tax purposes and certain fair value adjustments, where required for step-up in basis for book purposes.

(e)

Represents the net operating loss carryforwards of Covergence at 35%, the estimated statutory tax rate in effect as of March 31, 2009, to be recognized over a 20 year period.

 

Note 3.  Valuation of Intangibles Assets and Goodwill

 

The estimated purchase price for the acquisition of Covergence will be allocated to assets acquired and liabilities assumed based on their estimated fair values. The Company will then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including in process research and development, based upon a detailed valuation that uses information and assumptions provided by management, as further described below. Any excess purchase price, if any, over the fair value of the net tangible and intangible assets acquired is allocated to goodwill.

 

Identifiable Intangible Assets

 

As part of the preliminary purchase price allocation, Covergence’s identifiable intangible assets include developed technology, customer relationships, trademarks and trade names, and patents. Covergence’s developed technology relates to software-based session border controllers (SBCs) for delivering VoIP/IP telephony, Unified Communications and Service-Oriented Architecture (SOA) applications. Covergence’s customer relationship assets relate to the relationships that Covergence’s salesforce developed with existing customers. The trademarks and trade names relate to both the Covergence name as well as key product names, while the patents asset relates to applications that are currently pending approval.

 

The Company is using the excess earnings method to value the acquired intangible assets related to developed technology and customer relationships.  This method is an income approach that identifies the future cash flows specifically related to the individual assets.  The trademarks and patents were valued via a relief from royalty method.  This method identifies similar licensing transactions for trademarks and patents and then applies those rates to the acquired assets.

 

In estimating the useful life of the acquired intangible assets, the Company considered paragraph 11 of SFAS No. 142, Goodwill and Other Intangible Assets, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors included a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company expects to amortize these intangible assets over their estimated useful lives using a method that is based on the estimated time-weighted average of future undiscounted, debt-free net cash flows as the Company believes this will approximate the pattern in which the economic benefits of the assets will be utilized.

 

Acquired In-Process Research and Development

 

As part of the preliminary purchase price allocation for Covergence, approximately $2,838 of the purchase price has been allocated to acquired in-process research and development projects. The amount allocated to acquired in-process research and development represents the estimated value based on risk-adjusted cash flows related to in-process projects that have not yet reached technological feasibility and have no alternative future uses as of the date of the acquisition. The fair value attributable to these in-process projects will be amortized over the estimated useful life of the assets beginning upon completion of the project(s).

 

6



 

Note 4.  Pro Forma Adjustments

 

The following pro forma adjustments are based on preliminary estimates, which may change as additional information is obtained:

 

(A)

 

To adjust Covergence’s inventory and deferred revenue to their estimated fair value. The effects of the write-up of inventory to fair value of $387 and the reduction of deferred revenue of $2,330 for amounts that would not represent a legal obligation at the close of the merger, have been excluded from the pro forma condensed combined statements of income as they are non-recurring items which are anticipated to be included in the income statement of Acme Packet within the 12 months succeeding the transaction.

(B)

 

To eliminate the historical redeemable convertible preferred stock and stockholders’ deficit accounts of Covergence.

(C)

 

To record the issuance of 2,874,383 shares of the Company’s common stock, $20 in cash consideration as well as $578 cash to be paid for withholding taxes due to certain former Covergence stockholders.

(D)

 

To record tax provision (benefit) on the pro forma income (loss) before provision for income taxes, to reflect the effective statutory tax rate of 35% and 33% as of March 31, 2009 and December 31, 2008, respectively.

(E)

 

To reflect the issuance of 2,874,383 shares of the Company’s common stock as consideration for the acquisition of Covergence on the estimated weighted average basic and diluted shares expected to be outstanding as of the close of the merger.

(F)

 

To record $2,838 of acquired in-process research and development, and $8,447 of acquired definite-lived intangible assets. The amortization expense related to the definite-lived intangible assets was estimated based on a weighted average expected life of 7 years. Based on the estimated value of these intangibles and their estimated useful lives, the Company anticipates recording amortization expense of approximately $1,207 per year, over the 7 years succeeding the close of the transaction.

(G)

 

To record deferred taxes related to identified intangible assets and fair value adjustments, where required for step-up in basis for book purposes, at 35%, the estimated statutory tax rate in effect as of March 31, 2009.

(H)

 

To record deferred tax assets related to the NOL’s of $7,372 at 35%, the estimated statutory tax rate in effect as of March 31, 2009.

(I)

 

To eliminate the deferred product costs within inventory relating to products delivered to customers but not yet recognized as revenue.

 

7