Exhibit 99.3
Tollgrade Communications, Inc.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On August 1, 2007, Tollgrade Communications, Inc. (hereafter “Tollgrade” or the “Company”) completed its acquisition of the assets of the Teradyne Broadband Test Systems (“Broadband Test Systems”). Broadband Test Systems was a division of Teradyne, Inc. (the “Teradyne”). Under the terms of the purchase agreement, Tollgrade paid $11.3 million in cash to Teradyne plus the assumption of specific liabilities. Additional cash payments of approximately $0.4 million were made for transaction costs.
The acquisition was recorded under the purchase method of accounting in accordance with the provisions of SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and other Intangible Assets.” The preliminary allocation of purchase price used in the unaudited pro forma condensed combined financial statements is based on management’s estimates of the fair market value of the assets acquired and liabilities assumed. These estimates are subject to change upon the final valuation of the Broadband Test Systems acquired assets and liabilities.
The unaudited pro forma condensed combined Balance Sheet of Tollgrade and Broadband Test Systems as of June 30, 2007 is presented as if the Broadband Test Systems acquisition and related cash payments occurred on June 30, 2007.
The unaudited pro forma condensed combined Statement of Operations of Tollgrade and Broadband Test Systems for the year ended December 31, 2006 and the six months ended June 30, 2007 are presented as if the Broadband Test Systems acquisition and related cash payment had taken place on January 1, 2006.
The unaudited pro forma condensed combined financial statements are based on the historical financial statements of Tollgrade and Broadband Test Systems after giving effect to cash payments to finance the acquisition, as well as the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements are not intended to represent or be indicative of the consolidated results of operations or financial position of the Company that would have been reported had the acquisition and cash payments been completed as of the dates presented, and should not be taken as representative of the future results of operations or financial position of the Company. This information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma statements of operations do not reflect any operating efficiencies and cost savings that the Company may achieve with respect to the combined companies.
The unaudited pro forma condensed combined financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes of Tollgrade’s annual reported filed on Form 10-K for the year ended December 31, 2006 and quarterly reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.
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Tollgrade Communications, Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2007
(In thousands)
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2007
(In thousands)
Broadband Test | ||||||||||||||||
Tollgrade | Systems | Pro Forma | Pro Forma | |||||||||||||
ASSETS | Historical | Historical | Adjustments | Combined | ||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 54,171 | $ | — | $ | (11,700 | )(A) | $ | 42,471 | |||||||
Short-term investments | 12,761 | 12,761 | ||||||||||||||
Accounts receivable: | ||||||||||||||||
Trade, net of allowance for doubtful accounts of $447 in 2007 | 9,994 | 4,921 | 14,915 | |||||||||||||
Other | 1,460 | 1,460 | ||||||||||||||
Inventories | 11,888 | 500 | 249 | (B) | 12,637 | |||||||||||
Prepaid expenses and deposits | 958 | 267 | 1,225 | |||||||||||||
Receivable from officer | 145 | 145 | ||||||||||||||
Deferred and refundable income taxes | 2,262 | 2,262 | ||||||||||||||
Assets held for sale | 589 | 4,273 | (4,273 | )(C) | 589 | |||||||||||
Total current assets | 94,228 | 9,961 | (15,724 | ) | 88,465 | |||||||||||
Property and equipment, net | 3,209 | 723 | (9 | )(N) | 3,923 | |||||||||||
Deferred tax assets | — | 264 | (264 | )(D) | - | |||||||||||
Intangibles | 40,400 | 8,549 | (E) | 48,949 | ||||||||||||
(101 | )(N) | (101 | ) | |||||||||||||
Goodwill | 23,836 | — | (N) | 23,836 | ||||||||||||
Other assets | 664 | 55 | (55 | )(F) | 664 | |||||||||||
Total assets | $ | 162,337 | $ | 11,003 | $ | (7,604 | ) | $ | 165,736 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,215 | 240 | 1,455 | ||||||||||||
Accrued warranty | 2,040 | 2,040 | ||||||||||||||
Accrued expenses | 1,308 | 796 | 462 | (M) | 2,566 | |||||||||||
Accrued salaries and wages | 428 | 1,008 | (1,008 | )(F) | 428 | |||||||||||
Accrued royalties payable | 305 | 305 | ||||||||||||||
Deferred revenue and customer advances | 2,984 | 1,260 | (101 | ) (G) | 4,143 | |||||||||||
Total current liabilities | 8,280 | 3,304 | (647 | ) | 10,937 | |||||||||||
Deferred tax liabilities | 3,386 | 3,386 | ||||||||||||||
Retirement plans liabilities | — | — | 742 | (H) | 742 | |||||||||||
Total liabilities | 11,666 | 3,304 | 95 | 15,065 | ||||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ equity/Parent Company equity | 150,671 | 7,699 | (7,699 | ) (I) | 150,671 | |||||||||||
Total liabilities and shareholders’ equity | $ | 162,337 | $ | 11,003 | $ | (7,604 | ) | $ | 165,736 | |||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
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Tollgrade Communications, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 2006
(In thousands, except per share data)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the year ended December 31, 2006
(In thousands, except per share data)
Broadband Test | ||||||||||||||||
Tollgrade | Systems | Pro Forma | Pro Forma | |||||||||||||
Historical | Historical | Adjustments | Combined | |||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 52,358 | $ | 6,145 | $ | — | $ | 58,503 | ||||||||
Services | 13,036 | 14,743 | 27,779 | |||||||||||||
65,394 | 20,888 | 86,282 | ||||||||||||||
Cost of sales: | ||||||||||||||||
Products | 25,277 | 5,176 | 30,453 | |||||||||||||
Services | 4,543 | 6,996 | 11,539 | |||||||||||||
Amortization | 3,419 | 1,777 | (J)(E) | 5,196 | ||||||||||||
Inventory write-down | 4,308 | 4,308 | ||||||||||||||
37,547 | 12,172 | 1,777 | 51,496 | |||||||||||||
Gross profit | 27,847 | 8,716 | (1,777 | ) | 34,786 | |||||||||||
Operating expenses: | ||||||||||||||||
Selling and marketing | 10,552 | 4,914 | 15,466 | |||||||||||||
General and administrative | 7,981 | 2,981 | 10,962 | |||||||||||||
Research and development | 13,276 | 6,267 | 19,543 | |||||||||||||
Restructuring expense | 1,840 | 1,924 | 3,764 | |||||||||||||
Total operating expense | 33,649 | 16,086 | 49,735 | |||||||||||||
Loss from operations | (5,802 | ) | (7,370 | ) | (1,777 | ) | (14,949 | ) | ||||||||
Other income: | ||||||||||||||||
Interest income | 2,755 | — | (590 | )(K) | 2,165 | |||||||||||
Total other income | 2,755 | — | (590 | ) | 2,165 | |||||||||||
Loss before income taxes | (3,047 | ) | (7,370 | ) | (2,367 | ) | (12,784 | ) | ||||||||
Benefit for income taxes | (1,213 | ) | (108 | ) | — | (L) | (1,321 | ) | ||||||||
Net loss | $ | (1,834 | ) | $ | (7,262 | ) | $ | (2,367 | ) | $ | (11,463 | ) | ||||
EARNINGS PER SHARE INFORMATION: | ||||||||||||||||
Weighted average shares of common stock and equivalents: | ||||||||||||||||
Basic | 13,239 | — | — | 13,239 | ||||||||||||
Diluted | 13,239 | — | — | 13,239 | ||||||||||||
Net loss per common share: | ||||||||||||||||
Basic | $ | (0.14 | ) | — | — | $ | (0.87 | ) | ||||||||
Diluted | $ | (0.14 | ) | — | — | $ | (0.87 | ) | ||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
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Tollgrade Communications, Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended June 30, 2007
(In thousands, except per share data)
Unaudited Pro Forma Condensed Combined Statement of Operations
For the six months ended June 30, 2007
(In thousands, except per share data)
Broadband Test | ||||||||||||||||
Tollgrade | Systems | Pro Forma | Pro Forma | |||||||||||||
Historical | Historical | Adjustments | Combined | |||||||||||||
Revenues: | ||||||||||||||||
Products | $ | 21,449 | $ | 2,714 | $ | — | $ | 24,163 | ||||||||
Services | 5,774 | 7,510 | 13,284 | |||||||||||||
27,223 | 10,224 | 37,447 | ||||||||||||||
Cost of sales: | ||||||||||||||||
Products | 9,503 | 1,241 | (59 | )(O) | 10,685 | |||||||||||
Services | 1,760 | 3,899 | (183 | )(O) | 5,476 | |||||||||||
Amortization | 1,138 | — | 889 | (J)(E) | 2,027 | |||||||||||
12,401 | 5,140 | 647 | 18,188 | |||||||||||||
Gross profit | 14,822 | 5,084 | (647 | ) | 19,259 | |||||||||||
Operating expenses: | ||||||||||||||||
Selling and marketing | 4,510 | 1,344 | (28 | )(O) | 5,826 | |||||||||||
General and administrative | 4,448 | 1,233 | (33 | )(O) | 5,648 | |||||||||||
Research and development | 5,945 | 1,751 | (145 | )(O) | 7,551 | |||||||||||
Restructuring expense | 594 | 170 | — | 764 | ||||||||||||
Total operating expense | 15,497 | 4,498 | (206 | ) | 19,789 | |||||||||||
(Loss) income from operations | (675 | ) | 586 | (441 | ) | (530 | ) | |||||||||
Other income: | ||||||||||||||||
Interest income | 1,516 | — | (295 | )(K) | 1,221 | |||||||||||
Total other income | 1,516 | — | (295 | ) | 1,221 | |||||||||||
Income (loss) before income taxes | 841 | 586 | (736 | ) | 691 | |||||||||||
Provision (benefit) for income taxes | 280 | 194 | (287 | )(L) | 187 | |||||||||||
Net income (loss) | $ | 561 | $ | 392 | $ | (449 | ) | $ | 504 | |||||||
EARNINGS PER SHARE INFORMATION: | ||||||||||||||||
Weighted average shares of common stock and equivalents: | ||||||||||||||||
Basic | 13,257 | — | — | 13,257 | ||||||||||||
Diluted | 13,480 | — | — | 13,480 | ||||||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.04 | — | — | $ | 0.04 | ||||||||||
Diluted | $ | 0.04 | — | — | $ | 0.04 | ||||||||||
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
TOLLGRADE COMMUNICATIONS, INC.
TOLLGRADE COMMUNICATIONS, INC.
1. Acquisition of the business of Broadband Test Systems of Teradyne, Inc.
On August 1, 2007, Tollgrade Communications, Inc. (hereafter “Tollgrade” or the “Company”) completed its acquisition of the business of Teradyne Broadband Test Systems (“Broadband Test Systems”). Broadband Test Systems was a division of Teradyne, Inc. (“Teradyne”). Under the terms of the purchase agreement, Tollgrade paid $11.3 million in cash to Teradyne plus the assumption of specific liabilities. Additional cash payments of approximately $0.4 million were made for transaction costs.
Preliminary Purchase Price
The total preliminary purchase price is estimated at $11.7 million and consists of $11.3 million paid to Teradyne and cash paid of $0.4 million for transaction costs. We do not foresee any additional cash payments to Teradyne as a result of the finalization of the net assets acquired.
The total preliminary purchase price is estimated at $11.7 million and consists of $11.3 million paid to Teradyne and cash paid of $0.4 million for transaction costs. We do not foresee any additional cash payments to Teradyne as a result of the finalization of the net assets acquired.
Preliminary Purchase Price Allocation
The total preliminary purchase price will be allocated to the Broadband Test Systems tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of June 30, 2007. Based upon a preliminary valuation, the total preliminary purchase price was allocated as follows (in thousands):
The total preliminary purchase price will be allocated to the Broadband Test Systems tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of June 30, 2007. Based upon a preliminary valuation, the total preliminary purchase price was allocated as follows (in thousands):
Net assets of Broadband Test Systems — historical basis | $ | 7,699 | ||
Adjustments for assets not acquired: | ||||
Assets held for sale | (4,273 | ) | ||
Deferred tax asset | (264 | ) | ||
Long-term other assets | (55 | ) | ||
Adjustments for liabilities not assumed: | ||||
Accrued salaries and wages | 1,008 | |||
Retirement plan liability assumed | (742 | ) | ||
Net assets acquired by Tollgrade | 3,373 | |||
Adjustments to record net assets at fair value: | ||||
Fair value of inventories, net | 249 | |||
Fair value of intangible assets | 8,549 | |||
Fair value of deferred revenue | 101 | |||
Acquisition related reserves | (462 | ) | ||
Fair value of net assets acquired | 11,810 | |||
Purchase price | 11,700 | |||
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Excess fair value of acquired assets over costs | $ | (110 | )(N) | |
The preliminary allocation of the purchase price is based upon a preliminary valuation, as described below, and Tollgrade’s estimates and assumptions are subject to change upon final valuation.
Tangible Assets:
Tangible assets were recorded at their respective carrying amounts, except for inventory. Tollgrade increased Broadband Test Systems’ historical net carrying value of certain inventory by $249,000 in the pro forma condensed
Tangible assets were recorded at their respective carrying amounts, except for inventory. Tollgrade increased Broadband Test Systems’ historical net carrying value of certain inventory by $249,000 in the pro forma condensed
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combined pro forma Balance Sheet to reflect its fair market value. The property and equipment, net are recorded at carrying value, which the Company believes approximates fair value.
Identifiable Intangible Assets:
Identifiable intangible assets acquired include post warrant service agreements, technology, trade name and patents. Maintenance contracts represent the underlying relationships and agreements with customers of Broadband Test Systems’ installed base.
Identifiable intangible assets acquired include post warrant service agreements, technology, trade name and patents. Maintenance contracts represent the underlying relationships and agreements with customers of Broadband Test Systems’ installed base.
The fair value of intangible assets was based on a preliminary valuation using either the discounted cash flow method or the relief from royalty method as well as discussions with Broadband Test Systems management and a review of certain transaction-related documents and forecasts. The rate utilized to discount net cash flows to their present values ranged from 18% to 24%. This discount rate was determined after consideration of similar companies’ required rates of return, utilizing Capital Asset Pricing Model.
Estimated useful lives were based on historical experience with technology life cycles, product roadmaps, branding strategy, historical and projected maintenance renewal rates, historical treatment of Tollgrade’s acquisition-related intangible assets and Tollgrade’s intended future use of the intangible assets.
Deferred Revenue:
Tollgrade reduced the Broadband Test Systems’ historical deferred revenue carrying value by $101,000 in the unaudited pro forma condensed combined balance sheet to reflect its fair market value.
Tollgrade reduced the Broadband Test Systems’ historical deferred revenue carrying value by $101,000 in the unaudited pro forma condensed combined balance sheet to reflect its fair market value.
Pension Obligation:
Tollgrade acquired the pension obligation of three employees based in Germany (the “Pension Plan”). Tollgrade determined the pension obligation in accordance with Statement of Financial Accounting Standards No. 158 (“SFAS 158”)- Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The Pension Plan is unfunded.
Tollgrade acquired the pension obligation of three employees based in Germany (the “Pension Plan”). Tollgrade determined the pension obligation in accordance with Statement of Financial Accounting Standards No. 158 (“SFAS 158”)- Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. The Pension Plan is unfunded.
3. Pro Forma Adjustments
The following pro forma adjustments are included in the unaudited pro forma condensed combined Balance Sheet and Statements of Operations for the respective periods ended December 31, 2006 and June 30, 2007:
(A) | To record the cash paid to Teradyne of $11.3 million and cash paid of $0.4 million for transaction costs. | ||
(B) | To increase the carrying value of inventories to estimated selling prices less the cost of disposal and selling effort. | ||
(C) | To remove assets that are classified as held for sale but were not part of the acquisition by Tollgrade. The assets held for sale represent the former Broadband Test Systems corporate headquarters and operations facility owned by Teradyne. Tollgrade did not purchase the corporate headquarters and operations facility. | ||
(D) | The transaction is an acquisition of assets, therefore historical tax basis does not transfer to Tollgrade and as such, deferred taxes must be eliminated. | ||
(E) | To record the difference between the preliminary fair value and the historical amount of intangible assets (in thousands): |
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Historical | Preliminary | Estimated | ||||||||||||||||||||||
Amount | Fair | Annual | Six Months | Useful | ||||||||||||||||||||
-Net- | Value | Increase | Amortization | Amortization | Life | |||||||||||||||||||
Post warranty service agreements | $ | — | $ | 6,250 | $ | 6,250 | $ | 1,323 | $ | 662 | 3-48 years | |||||||||||||
Technology | — | 920 | 920 | 89 | 45 | 10 years | ||||||||||||||||||
Customer relationships | — | 576 | 576 | 130 | 65 | 10 years | ||||||||||||||||||
Other | — | 803 | 803 | 235 | 117 | 3-10 years | ||||||||||||||||||
Total identifiable intangible assets | — | $ | 8,549 | $ | 8,549 | $ | 1,777 | $ | 889 | |||||||||||||||
Broadband Test Systems historical amortization | — | — | ||||||||||||||||||||||
Net increase in amortization | $ | 1,777 | $ | 889 | ||||||||||||||||||||
The annual amortization is the estimated expense for the first 12 months. The amortization expense will change in subsequent years as the expense is being calculated based on the usage of the asset which differs from straight-line amortization. Refer to (J).
(F) | To eliminate other long-term assets and accrued salaries and wages that were excluded from the asset purchase agreement. | ||
(G) | To adjust the historical carrying value of deferred revenue to fair market value. | ||
(H) | To record the obligation associated with the German Pension Plan. This obligation was assumed by Tollgrade. | ||
(I) | To eliminate Broadband Test Systems’ historical parent company equity. | ||
(J) | To record amortization expense related to intangible assets acquired. | ||
Amortization expense was estimated for finited lived intangible asset using an accelerated amortization expense which reflects the pattern in which the economic benefits of the assets are consumed or otherwise used. Software-related intangible assets are amortized based on the greater of the amount computed using the ratio that current gross revenues bear to the total of current and anticipated future gross revenues for that product, or straight-line method over the remaining estimated economic life. All amortization of intangible assets is recorded in cost of goods sold. | |||
(K) | This adjustment represent interest income foregone at a weighted-average rate of 5.0% due to cash paid for the acquisition and transaction costs. | ||
(L) | This adjustment represents the income tax benefit related to pro forma adjustments recorded in the unaudited condensed combined statements of operations assuming a statutory rate of 39%. We also establish a 100% valuation allowance for the tax benefit recorded as of December 31, 2006 as we do not believe that the tax benefit would be realized. | ||
(M) | In connection with the acquisition, Tollgrade established a plan to relocate employees and to close or relocate certain facilities consisting of $0.2 million for employee relocation and $0.3 million for lease termination costs. |
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(N) | Based on our preliminary allocation of purchase price, the net assets acquired exceeded the total purchase price of $11.7 million. The excess fair value was allocated on a pro rata basis reducing the value assigned to property and equipment, net and intangible assets. |
Excess Fair Value of Acquired Assets Over Costs Allocation (in thousands):
Broadband Test | ||||||||||||||||
Systems | Pro Forma | Excess FV | Pro Forma | |||||||||||||
Historical Basis | Adjustment | Allocation | Combined | |||||||||||||
Property and equipment, net | $ | 723 | $ | — | $ | (9 | ) | $ | 714 | |||||||
Intangible assets | — | 8,549 | (101 | ) | 8,448 | |||||||||||
Total | $ | 723 | $ | 8,549 | $ | (110 | ) | $ | 9,162 | |||||||
(O) | To remove occupancy and other related costs associated with assets that are classified as held for sale but were not part of the acquisition by Tollgrade. These costs are included in the historical June 30, 2007 unaudited condensed combined statement of operations of Broadband Test Systems. |
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