EXHIBIT 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information gives effect to the merger using the purchase method of
accounting after giving effect to the pro forma adjustments described in the
accompanying notes. The unaudited pro forma condensed combined financial
information should be read in conjunction with the audited historical
financial statements and related notes of Sonus and TTI which appear
elsewhere in this proxy statement/prospectus.
Pursuant to the terms of the merger agreement, a wholly-owned
subsidiary of Sonus will merge with and into TTI and the shareholders of TTI
will be entitled to receive up to an aggregate of 15,000,000 shares of Sonus
common stock. Of these shares, 9,600,000 will be issued to the TTI
shareholders on the closing date and an aggregate of up to 1,200,000 of
escrowed shares that may be released to Sonus in satisfaction of
indemnification claims that may be made by Sonus under the merger agreement.
The remaining 4,200,000 shares will be held in escrow for release to the
former TTI shareholders if certain agreed upon specified business expansion
and product development performance milestones are achieved by TTI on or
prior to specified dates prior to December 31, 2002.
Sonus has also agreed under the merger agreement to make contingent
awards of up to 3,000,000 shares of common stock to certain employees of TTI
who will become employees of Sonus as a result of the merger under the Sonus
2000 Retention Plan. These awards will vest in equal installments on each of
October 31, 2002, November 30, 2002, January 31, 2003 and February 28, 2003,
if (1) the recipients do not voluntarily terminate employment with TTI or
Sonus prior to such vesting dates, and (2) the business expansion and product
development escrow release conditions are satisfied in whole or in part. The
portion of the total number of shares of Sonus common stock awarded to each
employee that will be deemed vested on each vesting date will not exceed the
proportion of all of the shares escrowed in the merger subject to the
satisfaction of the business expansion and product development escrow release
conditions that have been released prior to such vesting date. Generally, any
awards forfeited by employees who terminate employment with TTI, other than a
termination by Sonus or TTI without cause, prior to the date on which they
would otherwise vest, may be reallocated to remaining TTI employees, awarded
to replacement hires or returned to Sonus as provided by the terms of this
plan. The value of the 3,000,000 shares awarded under the retention plan is
expected to be expensed ratably over the approximate two year vesting period
based upon the closing price of Sonus common stock on the date the merger is
consummated (estimated to be $40.88 per share in the unaudited pro forma
condensed combined financial statements) as adjusted for the change in the
fair value on the date the specific escrow release conditions are satisfied.
The merger will be accounted for using the purchase method of
accounting in accordance with Accounting Principles Board (APB) No. 16.
Accordingly, the total purchase price will be allocated to the assets
acquired and liabilities assumed based upon their estimated fair values. The
purchase price will be determined by using the average market value of Sonus
common stock for the period from two days before to two days after the
announcement of the TTI merger ($41.61 per share) to value the 10,800,000
Sonus common shares deemed to be issued to the TTI shareholders at the
closing date, comprised of the 9,600,000 shares issuable at the closing and
the 1,200,000 indemnity escrowed shares, and adding the fair value of
liabilities assumed and expenses of the merger. The estimate of the purchase
price which has been used for the unaudited pro forma condensed combined
financial information is as follows, in thousands:
Fair market value of shares to be issued.................. $450,000
Estimated liabilities to be assumed....................... 16,000
Estimated merger expenses................................. 11,000
-----------
$477,000
===========
1
The actual purchase price will be determined at closing and will
reflect the actual closing balance sheet of TTI and in accordance with APB
No. 16, with the assistance of valuation experts, the purchase price will be
allocated to the tangible and intangible assets acquired based upon their
fair values. Based upon preliminary appraisals, the purchase price allocation
which has been used for the unaudited proforma condensed combined financial
information is as follows, in thousands:
Tangible assets......................................... $13,000
Intangible assets:
Workforce............................................ 2,700
Developed technology................................. 8,400
Customer list........................................ 15,400
In-process research and development.................. 40,000
Prepaid compensation related to unvested options..... 22,600
Goodwill............................................. 374,900
-------------
$477,000
=============
The final purchase price allocation will be determined in 2001, after
the closing, and will reflect the final purchase price calculation and the
final appraisals of the tangible and intangible assets acquired. In addition,
to the extent that any of the 4,200,000 escrowed shares are released to the
former TTI shareholders, the purchase price and goodwill will be increased by
the value of such shares on the date the relevant escrow release condition is
satisfied.
Sonus has engaged third party appraisers to conduct a valuation of
the intangible assets and to assist in the determination of useful lives for
such assets. Based on the preliminary appraisal, $40,000,000 has been
allocated to in-process research and development which will be expensed in
the period the merger is consummated. The amounts allocated to developed
technology, customer list, assembled workforce and goodwill will be amortized
over their estimated useful lives of 3 to 4 years. Prepaid compensation was
computed based on the intrinsic value of the unvested TTI options assumed by
Sonus and will be expensed over the remaining vesting period of approximately
3 years.
The valuation of in-process research and development was determined
using the income method. Revenue and expense projections for the in-process
development project were prepared by the management of Sonus through 2008 and
the present value was computed using a discount rate of 22.5%. The in-process
project is not expected to reach technological feasibility until the end of
2001, at an estimated cost to complete of approximately $5.0 million. In the
event that the project is not completed and technological feasibility is not
achieved, there is no alternative future use for the in-process technology.
The assumptions used for the valuation of in-process research and development
are the responsibility of management and are subject to change.
The unaudited proforma condensed combined financial information does
not purport to represent what the consolidated financial position or results
of operations actually will be upon closing or at the beginning of the
periods presented or to project the results of operations or financial
position for any future period or at a future date. The unaudited pro forma
financial information does not give effect to any cost savings and other
synergies that may result from the merger. Sonus is developing plans for
integration of TTI and has not determined if there will be any cost savings.
2
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(in thousands)
HISTORICAL
---------------------- Pro forma
Sonus TTI Adjustments combined
---------- ------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................... $152,685 $1,550 $(16,000)(G) $138,235
Accounts receivable, net of allowances ....... 7,617 1,824 -- 9,441
Inventories .................................. 14,388 2,558 -- 16,946
Other current assets ......................... 1,879 2,550 -- 4,429
---------- ------- ------------ ----------
TOTAL CURRENT ASSETS 176,569 8,482 (16,000) 169,051
Property and equipment, net ..................... 10,703 3,338 -- 14,041
Intangible assets ............................... -- -- 401,400 (E) 401,400
Other assets, net ............................... 911 1,004 -- 1,915
---------- ------- ------------ ----------
$188,183 $12,824 $385,400 $586,407
========== ======= ============ ==========
LIABILITIES, REDEEMABLE COMMON STOCK AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of capital lease obligations .. $ -- $ 310 $ -- $ 310
Note payable to bank .......................... -- 5,000 (5,000)(G) --
Accounts payable .............................. 11,800 1,350 -- 13,150
Accrued expenses .............................. 13,763 3,224 -- 16,987
Deferred revenue .............................. 12,264 4,438 -- 16,702
---------- ------- ------------ ----------
TOTAL CURRENT LIABILITIES ................ 37,827 14,322 (5,000) 47,149
Deferred income taxes ............................ -- 629 -- 629
Capital lease obligations, less current portion .. -- 930 -- 930
Redeemable common stock .......................... -- 31,752 (31,752)(F) --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock .................................. 184 1 (1)(F) 195
11 (F)
Capital in excess of par value ................ 268,165 7,742 (7,742)(F) 718,097
449,932 (F)
Accumulated deficit ........................... (77,688) (35,204) 35,204 (F) (117,688)
(40,000)(E)
Stock subscriptions receivable ................ (346) -- -- (346)
Deferred compensation ......................... (39,894) (7,348) 7,348 (F) (62,494)
(22,600)(E)
Treasury stock ................................ (65) -- -- (65)
---------- ------- ------------ ----------
Total stockholders' equity (deficit) ..... 150,356 (34,809) 422,152 537,699
---------- ------- ------------ ----------
$188,183 $12,824 $385,400 $586,407
========== ======= ============ ==========
See notes to unaudited pro forma condensed combined financial information.
3
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands, except per share data)
HISTORICAL
---------------------- Pro forma
Sonus TTI Adjustments combined
---------- ------- ------------ ----------
REVENUES ................................... $ -- $ 19,332 $ -- $ 19,332
Manufacturing, product and service costs ... 1,861 11,637 -- 13,498
---------- ------- ------------ ----------
GROSS PROFIT (LOSS) ........................ (1,861) 7,695 -- 5,834
OPERATING EXPENSES:
Research and development ................ 10,780 7,486 -- 18,266
Sales and marketing ..................... 5,606 3,287 -- 8,893
General and administrative .............. 1,723 1,960 -- 3,683
Amortization of intangibles ............. -- -- 102,558 (A) 102,558
Stock-based compensation ................ 4,404 -- 68,216 (B) 72,620
---------- ------- ------------ ----------
Total operating expenses ............. 22,513 12,733 170,774 206,020
---------- ------- ------------ ----------
LOSS FROM OPERATIONS ....................... (24,374) (5,038) (170,774) (200,186)
Sale of product line ....................... -- 5,500 -- 5,500
Other income (expense), net ................ 487 741 -- 1,228
---------- ------- ------------ ----------
INCOME (LOSS) BEFORE INCOME TAXES .......... (23,887) 1,203 (170,774)(D) (193,458)
Provision for income taxes ................. -- 336 (336) --
---------- ------- ------------ ----------
NET INCOME (LOSS) .......................... (23,887) 867 (170,438) (193,458)
Beneficial conversion feature of Series C
preferred stock .......................... (2,500) -- -- (2,500)
---------- ------- ------------ ----------
NET INCOME (LOSS) APPLICABLE TO COMMON
STOCKHOLDERS ............................. $(26,387) $ 867 $ (170,438) $(195,958)
========== ======= ============ ===========
NET INCOME (LOSS) PER SHARE:
Basic and diluted ....................... $ (1.84) $ 0.01 $ (7.80)
========== ======== ==========
Pro forma basic and diluted $ (0.25) $ 0.01 $ (1.81)
========== ======== ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic and diluted ....................... 14,324 100,000 10,800 25,124
========== ======== ====== ==========
Pro forma basic and diluted 96,188 100,000 10,800 106,988
========== ======== ====== ==========
See notes to unaudited pro forma condensed combined financial information.
4
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands, except per share data)
HISTORICAL
---------------------- Pro forma
Sonus TTI Adjustments combined
---------- ------- ------------ ----------
REVENUES $ 23,171 $ 19,968 $ -- $ 43,139
Manufacturing, product and service costs 14,846 10,324 -- 25,170
---------- ------- ------------ ----------
GROSS PROFIT 8,325 9,644 -- 17,969
OPERATING EXPENSES:
Research and development 18,231 8,523 -- 26,754
Sales and marketing 13,576 3,113 -- 16,689
General and administrative 3,750 2,289 (150)(C) 5,889
Amortization of intangibles -- -- 76,919 (A) 76,919
Stock-based compensation 20,347 394 51,162 (B) 71,903
---------- ------- ------------ ----------
Total operating expenses 55,904 14,319 127,931 198,154
---------- ------- ------------ ----------
LOSS FROM OPERATIONS (47,579) (4,675) (127,931) (180,185)
Other income (expense) 3,813 (189) -- 3,624
---------- ------- ------------ ----------
NET LOSS $ (43,766) $ (4,864) $ (127,931) $ (176,561)
========== ======= ============ ==========
NET LOSS PER SHARE:
Basic and diluted $ (0.57) $ (0.05) $ (2.00)
========== ======= ===========
Pro forma basic and diluted $ (0.34) $ (0.05) $ (1.25)
========== ======= ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic and diluted 77,448 100,000 10,800 88,248
========== ======= ============ ===========
Pro forma basic and diluted 130,291 100,000 10,800 141,091
========== ======= ============ ===========
See notes to unaudited pro forma condensed combined financial information.
5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations
for the year ended December 31, 1999 and the nine months ended September 30,
2000 gives effect to the merger as if the transaction had occurred at the
beginning of the period presented. The unaudited pro forma condensed combined
balance sheet as of September 30, 2000 gives effect to the merger as if the
transaction had occurred on September 30, 2000. The unaudited pro forma
condensed combined financial information is based upon a preliminary
calculation of the purchase price and a preliminary purchase price
allocation. This unaudited information will change based upon the actual
closing.
Below is a table of the preliminary purchase price allocation, which
reflects the total purchase price of $477,000,000 consisting of the
10,800,000 shares of Sonus common stock to be issued at closing, composed of
the 9,600,000 shares issuable at the closing and the 1,200,000 indemnity
escrow shares, which have been valued at $450,000,000, merger related fees
and expenses of $11,000,000 and assumed liabilities of $16,000,000, in
thousands:
Tangible assets acquired............................... $ 13,000
Assembled workforce.................................... 2,700
Acquired technology.................................... 8,400
Customer lists......................................... 15,400
In-process research and development.................... 40,000
Prepaid compensation related to unvested options....... 22,600
Goodwill............................................... 374,900
--------
TOTAL ................................................. $477,000
========
PRO FORMA ADJUSTMENTS
Adjustments to record amortization of intangibles in the unaudited
pro forma condensed combined balance sheet and statements of operations, in
thousands:
Estimated
useful life Year ended Nine months ended
in years December 31, 1999 September 30, 2000
------------- --------------------- ----------------------
(A) Amortization of intangibles:
Assembled workforce 3 $ 900 $ 675
Acquired technology 3 2,800 2,100
Customer lists 3 5,133 3,850
Goodwill 4 93,725 70,294
------------ -----------
Total $102,558 $76,919
============ ===========
6
PRO FORMA ADJUSTMENTS (CONTINUED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
Year ended Nine months ended
December 31, 1999 September 30, 2000
-------------------- ----------------------
(B) Stock based compensation: $61,320 $45,990
To record stock based compensation related to
3,000,000 shares of Sonus common stock reserved
for employee retention incentives based upon an
estimated common stock price of $40.88 per share,
for purposes of the unaudited pro forma information.
These shares are issuable to employees of TTI in
equal installments on each of October 31, 2002,
November 30, 2002, January 31, 2003 and February
28, 2003 who maintain employment each of such
dates, and if TTI achieves certain business
expansion and product development milestones.
To record amortization of prepaid compensation 6,896 5,172
----------- ----------
Total $68,216 $51,162
=========== ==========
(C) To reverse TTI's merger related expenses $ -- $ (150)
=========== ==========
(D) To reverse tax provision related to TTI $ (336) $ --
=========== ==========
At September 30,
2000
-----------------
(E) Preliminary allocation of purchase price:
Assembled workforce $ 2,700
Acquired technology 8,400
Customer lists 15,400
Goodwill 374,900
-----------------
Total goodwill and intangible assets $ 401,400
=================
Deferred compensation (prepaid compensation
related to unvested options) $ (22,600)
=================
Accumulated deficit (in process research and
development charge) $ (40,000)
=================
(F) Exchange of all outstanding stock of TTI
in exchange for 10,800,000 shares of
Sonus common stock:
Sonus common stock $ 11
Sonus capital in excess of par value 449,932
TTI redeemable common stock (31,752)
TTI common stock (1)
TTI capital in excess of par value (7,742)
TTI accumulated deficit 35,204
TTI deferred compensation 7,348
(G) Payment of merger related fees and expenses $(11,000)
Payment of note payable to bank (5,000)
-----------------
Total change in cash $(16,000)
=================
7
NET INCOME (LOSS) PER SHARE ON A PRO FORMA BASIS
The unaudited basic and diluted net income (loss) per share is based
on the weighted average number of Sonus unrestricted common shares
outstanding prior to the merger plus the 10,800,000 shares of Sonus common
stock issued upon the closing of the merger, composed of the 9,600,000 shares
issuable at the closing and the 1,200,000 indemnity escrow shares as if they
were issued on the first day of the period. The unaudited pro forma basic and
diluted net income (loss) per share reflects the conversion of all
outstanding shares of Sonus Series A, B, C and D redeemable convertible
preferred stock into an aggregate of 96,957,222 shares of common stock upon
the consummation of the Sonus IPO in May 2000, as if such conversion occurred
at the date of original issuance. Options outstanding and the shares to be
issued under the Sonus Retention Plan have not been included in the
computation of the basic and diluted net income (loss) per share for the
periods reported because their effect would not be dilutive.
8