EXHIBIT 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
gives effect to the acquisition of TTI by Sonus 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
consolidated financial statements and related notes of Sonus and TTI.
Pursuant to the terms of the merger agreement, a wholly owned subsidiary of
Sonus merged into TTI and the stockholders of TTI were entitled to receive up to
an aggregate of 15,000,000 shares of Sonus common stock. Of these shares,
9,600,000 were issued to the TTI stockholders on January 18, 2001 and an
aggregate of up to 1,200,000 escrowed shares 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 are held in escrow for release
to the former TTI stockholders if certain agreed upon specified business
expansion and product development performance milestones are achieved by TTI
from time to time prior to December 31, 2002.
Sonus has issued contingent awards of 3,000,000 shares of common stock to
certain employees of TTI who became employees of Sonus as a result of the merger
under the 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 being
expensed ratably over the approximate two-year vesting period based upon the
closing price of Sonus common stock on the date the merger was consummated, as
adjusted for the change in the fair value of Sonus common stock on the date the
specific escrow release conditions are satisfied.
The acquisition was accounted for using the purchase method of accounting in
accordance with Accounting Principles Board (APB) No. 16. Accordingly, the total
purchase price has been allocated to the assets acquired and liabilities assumed
based upon their estimated fair values. The purchase price has been 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 issued
on January 18, 2001 and the 1,200,000 indemnity escrowed shares, and the fair
value of the portion of the 4,200,000 escrow shares earned for accounting
purposes, the fair value of liabilities assumed and expenses of the merger. 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 issued.......................... $498,619
Liabilities assumed......................................... 21,184
Acquisition expenses........................................ 6,327
--------
$526,130
========
F-1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)
With the assistance of valuation experts, the purchase price has been
allocated to the tangible and intangible assets acquired based upon their fair
values. Based upon these appraisals, the purchase price allocation is as
follows, in thousands:
Tangible assets............................................. $ 6,312
Intangible assets:
Workforce, developed technology and customer list......... 32,300
In-process research and development....................... 40,000
Deferred compensation related to unvested options......... 22,600
Goodwill.................................................. 424,918
--------
$526,130
========
To the extent that any of the 4,200,000 escrowed shares are earned for
accounting purposes, the purchase price and goodwill will be adjusted by the
value of such shares on the date the relevant escrow release condition is
satisfied.
Sonus 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 appraisal, $40,000,000 has been allocated to in-process
research and development which was expensed in the first quarter of 2001. The
amounts allocated to developed technology, customer list, assembled workforce
and goodwill is being amortized over their estimated useful lives of 3 years.
Deferred compensation was computed based on the value for accounting purposes of
the unvested TTI options assumed by Sonus and will be expensed over the
remaining vesting period of up to 4 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 $5,000,000. 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 pro forma condensed combined financial information does not
purport to represent what the consolidated results of operations actually will
be at the beginning of the periods presented or to project the results of
operations for any future period or at a future date. For example, over our next
several quarters the sources from which TTI has historically derived revenue are
expected to decline significantly as we accelerate our shift in focus to the
development and deployment of the INtelligentIP softswitch product. In addition,
as a result of TTI's sale of its network testing software product line, revenues
related to these products will decline or cease in 2001. 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.
F-2
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
-------------------- PRO FORMA PRO FORMA
SONUS TTI ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
REVENUES...................................... $ 51,770 $ 28,631 $ -- $ 80,401
Manufacturing, product and service costs...... 27,848 14,381 -- 42,229
-------- --------- --------- ---------
GROSS PROFIT.................................. 23,922 14,250 -- 38,172
OPERATING EXPENSES:
Research and development.................... 26,430 14,735 -- 41,165
Sales and marketing......................... 21,569 5,090 -- 26,659
General and administrative.................. 5,477 3,586 -- 9,063
Amortization of intangibles................. -- -- 148,354(A) 148,354
Stock-based compensation.................... 26,729 1,947 50,489(B) 79,165
-------- --------- --------- ---------
Total operating expenses................ 80,205 25,358 198,843 304,406
-------- --------- --------- ---------
LOSS FROM OPERATIONS.......................... (56,283) (11,108) (198,843) (266,234)
Other income (expense), net................... 6,245 (346) -- 5,899
-------- --------- --------- ---------
NET LOSS...................................... $(50,038) $ (11,454) $(198,843) $(260,335)
======== ========= ========= =========
NET LOSS PER SHARE:
Basic and diluted........................... $ (0.52) $ (0.11) $ (2.44)
======== ========= =========
Pro forma basic and diluted................. $ (0.37) $ (0.11) $ (1.78)
======== ========= =========
SHARES USED IN COMPUTING NET LOSS PER SHARE:
Basic and diluted........................... 95,877 100,000 10,800 106,677
======== ========= ========= =========
Pro forma basic and diluted................. 135,057 100,000 10,800 145,857
======== ========= ========= =========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-3
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
---------------------------------
THREE MONTHS
ENDED 18 DAYS ENDED
MARCH 31, 2001 JANUARY 18, 2001
-------------- ---------------- PRO FORMA PRO FORMA
SONUS TTI ADJUSTMENTS COMBINED
-------------- ---------------- ----------- ---------
REVENUES.............................. $ 41,499 $ 335 $ -- $ 41,834
Manufacturing, product and service
costs............................... 18,011 124 -- 18,135
--------- --------- ---------- ---------
GROSS PROFIT.......................... 23,488 211 -- 23,699
OPERATING EXPENSES:
Research and development............ 13,919 1,155 -- 15,074
Sales and marketing................. 8,488 152 -- 8,640
General and administrative.......... 2,663 2,182 (2,008)(D) 2,837
Stock-based compensation............ 15,423 96 2,419 (B) 17,938
Amortization of intangibles......... 27,207 -- 6,802 (A) 34,009
In-process research and
development....................... 40,000 -- (40,000)(C) --
--------- --------- ---------- ---------
Total operating expenses........ 107,700 3,585 (32,787) 78,498
--------- --------- ---------- ---------
LOSS FROM OPERATIONS.................. (84,212) (3,374) 32,787 (54,799)
Other income (expense)................ 1,733 3 -- 1,736
--------- --------- ---------- ---------
NET LOSS.............................. $ (82,479) $ (3,371) $ 32,787 $ (53,063)
========= ========= ========== =========
PER SHARE INFORMATION:
Basic and diluted net loss per
share............................. $ (0.51) $ (0.03) $ (0.32)
========= ========= =========
Shares used in computation.......... 162,091 100,000 2,160 164,251
========= ========= ========== =========
SEE NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.
F-4
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, 2000 and the three months ended March 31, 2001 give
effect to the acquisition as if the transaction had occurred at the beginning of
each period presented.
Below is a table of the purchase price allocation, which reflects the total
purchase price of $526,130,000, consisting of the 10,800,000 shares of Sonus
common stock issued on January 18, 2001, composed of the 9,600,000 shares and
the 1,200,000 indemnity escrow shares, which have been valued at $450,000,000,
the fair value of the portion of the 4,200,000 escrow shares earned for
accounting purposes as of March 31, 2001 of $48,619,000, acquisition related
fees and expenses of $6,327,000 and assumed liabilities of $21,184,000, in
thousands:
Tangible assets acquired.................................... $ 6,312
Intangible assets acquired:
Workforce, developed technology and customer list......... 32,300
In-process research and development....................... 40,000
Deferred compensation related to unvested options......... 22,600
Goodwill.................................................. 424,918
--------
$526,130
========
PRO FORMA ADJUSTMENTS
Adjustments to record amortization of intangibles in the unaudited pro forma
condensed combined statements of operations, in thousands:
THREE
YEAR ENDED MONTHS ENDED
ESTIMATED DECEMBER 31, MARCH 31,
USEFUL LIFE 2000 2001
----------- ------------ ------------
(A) Amortization of intangibles:
Workforce, developed
technology and customer list................. 3 years $ 10,767 $ 539
Goodwill..................................... 3 years 137,587 6,263
-------- --------
$148,354 $ 6,802
======== ========
F-5
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(CONTINUED)
PRO FORMA ADJUSTMENTS (CONTINUED)
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
2000 2001
---------------- -----------------
(IN THOUSANDS)
(B) Stock based compensation:
To record stock-based compensation related to 3,000,000 $ 37,563 $ 2,194
shares of Sonus common stock awarded under the 2000
Retention Plan. These shares vest in equal installments
on each of October 31, 2002, November 30, 2002,
January 31, 2003 and February 28, 2003, if the
recipients maintain employment through each of such
dates, and if TTI achieves certain business expansion
and product development milestones.
To record amortization of deferred compensation related
to unvested options..................................... 12,926 225
-------- --------
Total................................................... $ 50,489 $ 2,419
======== ========
(C) To reverse in-process research and development charge... $ -- $(40,000)
======== ========
(D) To reverse TTI's acquisition related expenses........... $ -- $ (2,008)
======== ========
NET LOSS PER SHARE
The unaudited basic and diluted net loss per share is based on the weighted
average number of Sonus unrestricted common shares outstanding prior to the
acquisition plus the 10,800,000 shares of Sonus common stock issued upon the
closing of the acquisition. The unaudited pro forma basic and diluted net 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 2000 Retention Plan have not
been included in the computation of the basic and diluted net loss per share for
the periods reported because their effect would not be dilutive.
F-6