EXHIBIT 99.2
Pro Forma Condensed Combined Financial Information for Standard Microsystems Corporation and Subsidiaries (SMSC) and BridgeCo, Inc. (BridgeCo)
Index - Unaudited Pro Forma Condensed Combined Financial Information
Basis of Presentation
The unaudited pro forma condensed combined financial information is based on the assumptions set forth in the notes to such information. The unaudited pro forma adjustments made in the compilation of the unaudited pro forma financial information are based upon available information and assumptions that the Company considers to be reasonable, and have been made solely for purposes of
developing such unaudited pro forma financial information for illustrative purposes in compliance with the disclosure requirements of the Securities and Exchange Commission. The unaudited pro forma condensed combined financial information does not purport to be indicative of the results of operations for future periods or the combined financial position or the operating results that would have occurred had the transaction occurred on the dates assumed. The actual operating results for BridgeCo have been consolidated with the Company's
operating results for all periods subsequent to the acquisition date of May 19, 2011.
The unaudited pro forma condensed combined statement of operations included herein does not reflect any potential cost savings or other operating efficiencies that could result from the transaction.
Under the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 350, “Intangibles — Goodwill and Other” (“ASC 350”), goodwill and intangible assets deemed to have indefinite lives are not amortized but are subject to annual or event-based impairment tests. Intangible assets with finite lives are amortized over their estimated useful lives.
The Company did not present a May 31, 2011 unaudited pro forma condensed combined balance sheet as BridgeCo was included within SMSC’s unaudited condensed consolidated balance sheet as of May 31, 2011 as reported in the Company’s Form 10-Q filed on June 30, 2011.
The unaudited pro forma condensed combined statement of operations of SMSC for the three months ended May 31, 2011 and the fiscal year ended February 28, 2011 and BridgeCo for the three months ended March 31, 2011 and the fiscal year ended December 31, 2010 gives effect to the acquisition of BridgeCo by SMSC as if it had occurred effective March 1, 2010. These operating results for different fiscal year and three-month periods may be appropriately combined for pro forma purposes, since the fiscal year-end and three-month periods are within 93 days of each other, in accordance with Securities and Exchange Commission guidance contained within Regulation S-X.
This unaudited pro forma condensed combined financial information should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 28, 2011 filed on April 19, 2011, as well as the Company’s Quarterly Report on Form 10-Q for the three month periods ended May 31, 2011 filed on June 30, 2011 and the audited and unaudited consolidated financial statements and notes thereto of BridgeCo included in this report.
Standard Microsystems Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
(In thousands, except per share data)
SMSC For the Year Ended February 28, 2011 | BridgeCo, Inc. For the Year Ended December 31, 2010 | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||
Sales and Revenues | 409,479 | 6,234 | - | 415,713 | ||||||||||||
Cost of goods sold | 194,585 | 4,245 | 1,844 | (a)(b) | 200,674 | |||||||||||
Gross profit | 214,894 | 1,989 | (1,844 | ) | 215,039 | |||||||||||
Operating expenses (income): | ||||||||||||||||
Research and development | 96,370 | 2,750 | - | 99,120 | ||||||||||||
Selling, general and administrative | 100,661 | 3,040 | 310 | (a) | 104,011 | |||||||||||
Acquisition termination fee | (7,700 | ) | - | - | (7,700 | ) | ||||||||||
Restructuring Charges | 4,703 | - | - | 4,703 | ||||||||||||
Impairment loss on equity investment (Symwave) | 3,208 | - | - | 3,208 | ||||||||||||
Gain on equity investment (Canesta) | (320 | ) | - | - | (320 | ) | ||||||||||
Revaluation of contingent consideration | (4,206 | ) | - | - | (4,206 | ) | ||||||||||
Impairment loss on intangible assets | 3,531 | - | - | 3,531 | ||||||||||||
Income (loss) from operations | 18,647 | (3,801 | ) | (2,154 | ) | 12,692 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 659 | - | 659 | |||||||||||||
Interest expense | (153 | ) | (281 | ) | 263 | (d) | (171 | ) | ||||||||
Change in fair value of warrants | - | (36 | ) | - | (36 | ) | ||||||||||
Other income (expense), net | (248 | ) | 7 | - | (241 | ) | ||||||||||
Income (loss) before income taxes | 18,905 | (4,111 | ) | (1,891 | ) | 12,903 | ||||||||||
Provision for (benefit from) income taxes | 8,278 | 16 | (681 | ) (e) | 7,613 | |||||||||||
Net income (loss) | $ | 10,627 | $ | (4,127 | ) | $ | (1,210 | ) | $ | 5,290 | ||||||
Basic net income (loss) per share: | $ | 0.47 | $ | 0.23 | ||||||||||||
Diluted net income (loss) per share: | $ | 0.46 | $ | 0.23 | ||||||||||||
Shares Used in the Calculation of Net Income (Loss) Per Share: | ||||||||||||||||
Basic | 22,667 | 22,667 | ||||||||||||||
Diluted | 23,108 | 23,108 |
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial Statements.
Standard Microsystems Corporation and Subsidiaries
Unaudited Pro Forma Condensed Combined Statement of Operations
(In thousands, except per share data)
SMSC For the Three Months Ended May 31, 2011 | BridgeCo, Inc. For the Three Months Ended March 31, 2011 | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||
Sales and Revenues | $ | 103,495 | $ | 2,235 | - | 105,730 | ||||||||||
Cost of goods sold | 47,710 | 1,468 | 122 | (a)(b) | 49,300 | |||||||||||
Gross profit | 55,785 | 767 | (122 | ) | 56,430 | |||||||||||
Operating expenses (income): | ||||||||||||||||
Research and development | 24,527 | 1,135 | - | 25,662 | ||||||||||||
Selling, general and administrative | 23,246 | 1,046 | (45 | ) (a)(c ) | 24,247 | |||||||||||
Restructuring Charges | 343 | - | - | 343 | ||||||||||||
Income (loss) from operations | 7,669 | (1,414 | ) | (77 | ) | 6,178 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 118 | - | - | 118 | ||||||||||||
Interest expense | (38 | ) | (52 | ) | 52 | (d) | (38 | ) | ||||||||
Change in fair value of warrants | - | (413 | ) | - | (413 | ) | ||||||||||
Other income (expense), net | 142 | (26 | ) | - | 116 | |||||||||||
Income (loss) before income taxes | 7,891 | (1,905 | ) | (25 | ) | 5,961 | ||||||||||
Provision for (benefit from) income taxes | 1,714 | - | (9 | ) (e) | 1,705 | |||||||||||
Net income (loss) | $ | 6,177 | $ | (1,905 | ) | $ | (16 | ) | $ | 4,256 | ||||||
Basic net income per share: | $ | 0.27 | $ | 0.18 | ||||||||||||
Diluted net income per share: | $ | 0.26 | $ | 0.18 | ||||||||||||
Shares Used in the Calculation of Net Income (Loss) Per Share | : | |||||||||||||||
Basic | 23,059 | 23,059 | ||||||||||||||
Diluted | 23,557 | 23,557 |
See accompanying notes to Unaudited Pro Forma Condensed Combined Financial Statements.
Standard Microsystems Corporation and Subsidiaries
Notes to Unaudited Pro Forma Condensed Combined Financial Information
1. Summary of Transaction
On May 19, 2011 SMSC completed the acquisition of BridgeCo, Inc. (“BridgeCo”), a leader in wireless networked audio technologies. BridgeCo's JukeBlox(TM) technology connects tablets, smartphones, PCs, Macs and other consumer electronics products by enabling consumers to access their local or cloud-based music library from any device and from any room in the home. Its JukeBlox software platform, with integrated WiFi® support, enables music streaming to virtually all home audio equipment including home theater systems, A/V receivers, radios, wireless speakers and portable music player docking stations. BridgeCo's technology has been adopted by some of the largest consumer electronics brands in the world including Pioneer, Philips, Denon, Marantz, JBL, B&W and Harmon/Kardon.
The majority of BridgeCo’s assets are located in the United States. BridgeCo also has operations in India and Japan. The functional currency of BridgeCo’s operations in India is the Indian Rupee and in Japan, the Japanese Yen.
SMSC made an initial investment of $41.0 million in cash (net of cash acquired). The terms of the purchase agreement provide for potential earnout payments of up to $5 million in 2012 and up to $22.5 million in 2013 to former BridgeCo shareholders, dependent on BridgeCo reaching certain revenue goals in calendar years 2011 and 2012. The Company performs a quarterly revaluation of contingent consideration and records the change as a component of operating income.
In addition, employee severance and retention bonus plans were established as part of the merger agreement, as well as an earnout bonus plan in which a portion of the earnout payment due to shareholders was apportioned to employees contingent upon continuous future employment as of the specified payout dates established by the plan. This portion of the earnout was not included as part of the contingent consideration liability but is being charged to earnings over the required service period as earned. These charges have been excluded from the pro forma results and will result in additional charges of $1.3 million and $1.5 million in fiscal years 2012 and 2013, respectively.
2. Consideration Paid, Assets Acquired and Liabilities Assumed
The following table summarizes the components of the purchase price at fair value (in thousands): | ||||
Cash acquired | $ | (374 | ) | |
Cash consideration paid | 41,342 | |||
Liability for contingent consideration | 8,800 | |||
Total consideration | $ | 49,768 | ||
The following table summarizes the allocation of the purchase price at fair value (in thousands): | ||||
Receivables | $ | 601 | ||
Inventories | 950 | |||
Other current assets | 629 | |||
Property, plant and equipment | 442 | |||
Intangible assets | 9,370 | |||
Goodwill (all non-deductible for tax purposes) | 40,304 | |||
Deferred tax assets | 306 | |||
Other non current assets | 258 | |||
Non-interest bearing liabilities | (2,402 | ) | ||
Deferred tax liabilities | (690 | ) | ||
Net assets | $ | 49,768 |
BridgeCo’s finished goods inventory has been valued at estimated selling prices less the costs of disposal and a reasonable profit allowance for the related selling effort; These values initially exceed BridgeCo’s historical cost by approximately $0.4 million. This value was recorded as an increase to the carrying value of inventory, and then will be recorded as a component of cost of goods sold as the underlying inventory is sold.
3. Intangible Assets
The amounts allocated to acquired identifiable intangible assets consists of the following (in thousands): | ||||
Developed technologies | $ | 7,400 | ||
Customer relationships | 1,900 | |||
Trade name | 70 | |||
$ | 9,370 |
The estimated fair value attributed to existing technologies was determined based upon a discounted forecast of the estimated net future cash flows to be generated from the technologies using a discount rate of 17%. The estimated fair value of existing technologies will be amortized over a period of 5 years ($123 thousand per month) on a straight-line basis, which approximates the pattern in which the economic benefits of the existing technologies are expected to be realized.
The estimated fair value attributed to customer relationships was determined based on a discounted forecast of the estimated net future cash flows to be generated from the relationships discounted at a rate of 15%. The estimated fair value of the customer relationships will be amortized over a period of 8 years ($20 thousand per month)on a straight-line basis, which approximates the pattern in which the economic benefits of the customer relationships are expected to be realized.
The estimated fair value of the trade name will be amortized over a period of 1 year on a straight-line basis, which approximates the pattern in which the economic benefits of the customer relationships are expected to be realized.
Goodwill represents the excess of the purchase price over the fair values of the net tangible and intangible assets. In accordance with the provisions of ASC 350, goodwill is not amortized but will be tested for impairment at least annually.
4. Pro Forma Adjustments
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows:
Unaudited Pro Forma Condensed Combined Statement of Operations:
a) To reflect amortization expense related to the acquired identifiable intangible assets, calculated over the estimated useful lives on a straight-line basis (See Note 3 – Intangible Assets), less related amortization expense included within the operating results of the Company for the period in which BridgeCo’s results of operations were included in the Company’s results of operations (May 31, 2011). There was no amortization of intangibles included in BridgeCo’s results of operations.
b) To reflect amortization of inventory step-up of $368 thousand (See Note 2 - Consideration Paid, Assets Acquired and Liabilities Assumed) for the fiscal year ended February 28, 2011, less related amortization of inventory step-up included within the operating results of the Company for the period in which BridgeCo’s results of operations were included in the Company’s results of operations (May 31, 2011).
c) To eliminate employee severance and retention bonus plans established as part of the merger agreement (See Note 1 – Summary of Transaction) included within the operating results of the Company. d) To eliminate interest expense on long term debt extinguished as part of the acquisition.
e) To adjust for taxes at the statutory rate of 36%.